ABOUT INVESTMENT

1. ABOUT INVESTMENT ARBITRATION

When investors from different cultures invest in an environment where political, legal, and economic factors are changing and considerable amounts of investments are at stake, investors seek security and protection of their investments. Investment protection treaties between the host state of the investment and the home state of the investor provide investors with protection against arbitrary, discretionary and egregious acts of the host state. Such investment protection treaties may be concluded in the form of bilateral investment protection treaties (BITs) or multilateral investment protection treaties (e.g. Energy Charter Treaty). Even though investment treaty protection has been discussed in various fora, there is one institution that made an indispensable contribution to development of the subject. That is the International Centre for Settlement of Investment Disputes (ICSID), established by the ICSID Convention in 1966.

In this article, we will examine some selected and debated jurisdictional issues of arbitration against states or state controlled entities under investment protection treaties.

The Issue of Nationality in Investment Arbitration

As a matter of principle, the host state’s consent to arbitration contained in an investment protection treaty is available exclusively to investors who are nationals of the other contracting state to the BIT. Individuals that hold the nationality of the state that is the opposing party in the dispute cannot avail themselves of the protections under investment protection treaties. Even though this issue may appear to be rather straight- forward, there are many situations in which the distinctions are not so obvious, including those of investors holding two or more nationalities, including the nationality of the state party to the dispute.

Most investment treaties define a national as an individual who was formally accorded citizenship by one of the contracting states to the treaty, less frequently, the residence of the investor is decisive.1 Legal entities are considered as nationals of a particular state if they are incorporated under the laws of that state or have their seat of administration in the territory of such state. Some treaties even extend the nationality element to companies incorporated in third-party states, provided that the companies are controlled by individuals who possess the nationality of one contracting state.

The issue of the standing of a dual national under a given bilateral investment treaty was tested for the first time in Garcia Armas v. Venezuela2, a pending UNCITRAL arbitration proceeding initiated against Venezuela by two Spanish nationals, who also held Venezuelan nationality. The tribunal upheld jurisdiction on the ground that the bilateral investment treaty applicable to the dispute did not exclude dual nationals from protection. The tribunal denied the application of the test of “dominant and effective nationality” applied in customary international law in the field of diplomatic protection which considers as foreign dual nationals who have a stronger tie with the nationality of their adopted country. The tribunal held that such principle is not applicable in the context of investment treaties.3

In the more recent example of proceedings initiated by dual nationals, Dawood Rawat v. the Republic of Mauritious filed on 9 November 2015 by a French Mauritian dual national under the France-Mauritius BIT, the tribunal took the opposite view. There, by interpretation of the particular parts of the France-Mauritius BIT, the tribunal concluded that the contracting states “implicitly, but necessarily, excluded French- Mauritian dual nationals from the scope of application of the BIT”.4

It remains to be seen which approach international tribunals will be taking in deciding claims by dual nationals. While abuse of rights conferred under investment protection treaties must be prevented, potential effects of denying investment treaty protection to immigrants, who acquired their wealth elsewhere and could potentially invest into their country of origin, must be taken into account.

Definition of Investment: Broad or Narrow Construction

The definition of investment has always been a controversial issue since there is no common definition of investment and every investment protection treaty may have different definitions depending on many factors. For instance, one of the discussion items is whether the definition of investment should be limited to foreign direct investment (FDI) which involves significant long-term investment with control over management or rather be broader to include other types of investments, such as portfolio investment with hardly any control over a company (e.g. investments made through a stock market). In practice, the definition of investment in the majority of investment protection treaties allows for the broad asset-based definition of investment, including all assets, tangible as well as intangible, in the host country owned by the investors of the other country which is party to the applicable investment protection.

The definition of investment set forth in the applicable investment protection treaty is particularly important for the viability of the investment treaty claims filed pursuant to the ICISD Convention. Article 25(1) of the ICSID Convention states that jurisdiction of the Centre extends only to legal disputes arising directly out of an investment between a contracting state and a national of another contracting sate. The ICSID Convention lacks, however, any definition of investment.

The directness set forth in Article 25(1) of the ICSID Convention was clarified in Fedax v. Venezuela.5 The issue in this case was whether promissory notes could be considered investments. Venezuela argued that since there was no direct foreign investment and the notes did not involve a long-term flow of capital resources, there was no foreign investment. The tribunal rejected Venezuela’s argument and held that the “directness” set forth in Article 25(1) of the ICSID Convention is not related to investment but to the fact that the dispute must arise directly out of an investment made. In other words it is immaterial whether the foreign investment is direct or indirect; bringing a portfolio investment within the ambit of investment as understood by the ICSID Convention.

Another benchmark case on the issue of the definition of investment, highlighting the basic features of investment, is Salini Costruttori S.p.A. v. Morocco.6 One of the main jurisdictional issues in Salini v. Morocco was whether a contract for the construction of a highway was an “investment”. The tribunal made it clear that the understanding of “investment” is to be derived from not just the bilateral investment treaty forming the basis of the dispute but also on the basis of the ICSID Convention. The tribunal, then, went on to set out the characteristics of an investment under Article 25(1) of the ICSID Convention, which later became known as the Salini test, and stated that investment infers contributions to the economic development of the host state, a certain duration of performance of the contract, and participation in the risks of the transaction. In another case, Joy Mining v. Egypt,7 the issue of whether bank guarantees could be considered an investment was discussed. The tribunal held that bank guarantees were not investments because they were contingent liabilities and merely supported a contract of sale.

Effect of Umbrella Clauses

Disputes, in particular in the context of concessions, privatizations and energy investments, often arise out of contractual agreements concluded between the investor and the state or a state entity and are subject to national laws. These agreements are commonly referred to as investment contracts.

Disputes arising out of investment contracts can raise complex issues also with regard to treaty-based investment arbitrations. When an investor alleges a violation of an investment contract in an investment treaty arbitration, the arbitral tribunal must not only decide whether there was a breach of the investment contract itself, but it must also determine whether such breach amounts to a violation of the applicable investment protection treaty. This is possible if the applicable investment treaty contains a so-called “umbrella clause”. By way of example, the Energy Charter Treaty contains the following umbrella clause, which elevates contractual breaches to the level of treaty breach:

“Each Contracting Party shall observe any obligations it has entered into with an Investor or an Investment of an Investor of any other Contracting Party”

There is an evolving jurisprudence of investment treaty tribunals on the interpretation of umbrella clauses. While review of such jurisdiction is out of the scope of this analysis, one should note that this is often an important jurisdictional issue discussed in length by the investment treaty tribunals based upon contract and treaty interpretation. The following cases illustrate an example of the approach of investment treaty tribunals:

• In Société Générale de Surveillance S.A. (SGS) v. Islamic Republic of Pakistan (SGS v. Pakistan)8  the investment treaty tribunal adopted a narrow interpretation and rejected its jurisdiction over purely contractual claims on the grounds that the consequences of interpretation of the clause by the claimant would be “so burdensome” that “clear and convincing evidence that such was indeed the shared intent of the Contracting Parties to the Swiss-Pakistan Investment Protection Treaty in incorporating Article 11 in the BIT must be adduced by the claimant”.

• In SGS v. Republic of the Philippines,9 the tribunal disagreed with the approach adopted by the SGS v. Pakistan tribunal. Instead, it considered that the consent to arbitration in the bilateral investment treaty between the Philippines and Switzerland allowed the investor to raise contractual claims under an investment treaty, unless the contract in question had an exclusive forum clause. If there were such a clause, the investor’s choice would be restricted to the dispute resolution mechanism in the contract. Subsequent cases have tended to adopt one or the other of those approaches.

• In a more recent case, SGS v Republic of Paraguay,10 the investment treaty tribunal adopted the approach of the tribunal in SGS v the Philippines and rejected the respondent’s arguments that the forum selection clause (which was not an exclusive jurisdiction clause) in the investment contract precluded the jurisdiction of investment treaty arbitration and that an abuse of sovereign authority was necessary to prove a violation of the umbrella clause.

It is important to keep in mind that there is no system of precedents in ICSID and the interpretations made by the tribunals are not binding on future tribunals. Nevertheless, the tribunals’ interpretations are important as they constitute an important body of judicial decisions for other investment treaty tribunals to refer to.

Acts of State Controlled Entities Attributable to States

Often, the acts or omissions, which investors allege to be in breach of the investment contract or the applicable investment protection treaty, are not committed directly by the state or its organs. Rather, these violations are committed by a state controlled entity. To establish a treaty claim in these circumstances, the investor needs to prove that a treaty violation as such has occurred and that it is actually the state that is responsible for the wrongful act.

Principles on the Responsibility of States for Internationally Wrongful Acts (ILC Articles) adopted by the UN General Assembly shed light on the current state of customary international law on attribution of conduct to a state. Under the ILC Articles, a state can be held responsible for a breach of an investment treaty commitment by an individual or a separate entity in, at least, three circumstances:

• if the individual or the entity is a state organ (Article 4);

• if the person or entity is not an organ of the state but is empowered by the law of that state to exercise elements of governmental authority and is acting in that capacity (Article 5); or

• if the entity or individual committed the act in question on the instructions, or under the direction or control of the state (Article 8).

In Tulip Real Estate and Development Netherlands B.V. v. Republic of Turkey,11 the investment treaty tribunal stated that the criterion to decide whether a “specific activity” by a state owned entity can be attributable to the state itself is that the acts and actions by such entity are a result of the exercise of sovereign power in order to achieve any particular state purpose, rather than the expression of ordinary control exercised by a majority shareholder acting in the company’s best commercial interest. This means that an act would be attributable to the state in case it can be proven that a company’s decision has not only been made in its best commercial interest, but rather as a vehicle directed towards achieving a particular result in a state’s sovereign interest. In EDF (Services) Limited v. Romania12, the investment treaty tribunal ruled that the fact that directions are given by the mandates to the members of the board of directors, a body that should decide in full autonomy in the company’s interest, is indicative of the compelling nature of the Ministry’s mandate system.

Discussions on the Compatibility of Investor State Dispute Settlement Procedures

with the EU Legal Order

The relationship between EU law and investment protection agreements signed between EU Member States has been heavily debated on an academic as well as on a political level. The European Commission repeatedly raised its concerns and has participated as amicus curiae in cases filed against EU Member States by investors from other Member States, arguing that the investment treaty tribunals have no jurisdiction over these, so-called, intra-EU investment arbitrations. Its stance has been, inter alia, that Article 344 of the Treaty on the Functioning of the European Union (TFEU)13 prohibits the application of EU law by arbitral tribunals in cases concerning Member States.

The European Commission's arguments were rejected by every investment tribunal that considered it. As an example, in Charanne and Construction Investments vs Spain14, the first of a series of cases arising from changes made in the favourable tariffs provided to the renewable energy sector in Spain, the tribunal remarked “[a] Member State can agree to submit a dispute that may involve issues of EU law to an arbitration. Finally, it is today universally accepted that an arbitral tribunal not only has the power but also the duty to apply EU law.”15 The tribunal concluded that Article 344 of the TFEU did not apply to investor state dispute settlement procedures. The position of the tribunal in Charanne vs Spain has been recently repeated in RREEF Infrastructure (G.P.) Limited and RREEF Pan-European Infrastructure Two Lux S.à r.l. v. Spain.16

The sudden change in tides happened on 6 March 2018, when the Court of Justice of the European Union (CJEU) issued a long awaited decision concerning the fate of arbitration provisions contained in the intra- EU BITs. In its most solemn sitting – the Grand Chamber - the CJEU ruled in the case of Slovak Republic v. Achmea BV that such provisions are not compatible with the EU law.17 While the Achmea Judgment does not seem to invalidate intra-EU BITs themselves, it is still uncertain what effects it has on pending and any future intra-EU investment arbitrations and how investment tribunals will deal with its effects. It is certain, however, that the Achmea Judgment will cause serious hurdles to all investors trying to enforce through local courts arbitral awards rendered in intra-EU investment arbitrations.

Conclusion

As a conclusion, investment treaty disputes can give rise to a number of questions regarding public international, domestic, and EU law, including – but not limited to – the questions briefly examined above. Even before the investment is made it is very important to consider the issues of investment planning and the most favourable legal regimes for routing the investments. On the other hand, once the disputes have arisen, it is crucial to analyse at the outset of the dispute various legal aspects in light of the underlying facts in order to decide the most suitable forum for the settlement of such a dispute. The choice of the correct forum is essential to reach the best outcome in the case in the most efficient way.

1Article 201 of NAFTA; Article 1(7) of the Energy Charter Treaty.

2UNCITRAL, PCA Case No. 2013-3.

3Javier Garcia Olmedo, “Claims by Dual Nationals under Investment Treaties: A New Form of Treaty Abuse?”.

4UNCITRAL, PCA Case No. 2016-20, 179.

5ICSID Case No. ARB/96/3.

6ICSID Case No. ARB/00/4.

7ICSID Case No. ARB/03/11.

8ICSID Case No. ARB/01/13.

9ICSID Case No. ARB/02/6.

10ICSID Case No. ARB/07/29.

11ICSID Case No. ARB/11/28.

12ICSID Case No. ARB/05/13.

13Article 344 TFEU stipulates that Member States undertake not to submit a dispute concerning the interpretation or application of the Treaty on European Union (TEU) and TFEU to any method of settlement other than those provided for therein.

14Arbitration No. 062/2012 .

15Charanne and Construction Investments vs Spain, Unofficial translation of the award by Mena Chambers, para. 443.

16ICISID Case No. ARB/13/30, Decision on Jurisdiction dated 6 June 2016.

17The Court of Justice of the European Union Case No. C-284/16.

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