5
Investment
Rule 22: The legal materialisation of an investment is the acquisition
of a bundle of rights in property that has the characteristics of
one or more of the categories of an investment defined by the
applicable investment treaty where such property is situated in
the territory of the host state or is recognised by the rules of the
host state’s private international law to be situated in the host state
or is created by the municipal law of the host state.
Rule 23: The economic materialisation of an investment requires
the commitment of resources to the economy of the host state by
the claimant entailing the assumption of risk in expectation of a
commercial return.
Rule 24: Where the claimant relies upon a contract to establish an
investment pursuant to Rule 22 and Rule 23, the tribunal should
differentiate between rights in personam as between the contracting
parties and rights in rem that are memorialised by the contract.
The rights in personam do not generally qualify as an investment
independently of the rights in rem.
A . I N T R O D U C T I O N TO T H E C O N C E P T
O F A N I N V E S T M E N T
(i) The quid pro quo of investment treaty arbitration
335. The notion of a quid pro quo between a foreign investor and the host state is
the cornerstone for the system of investment treaty arbitration. In exchange for
contributing to the flow of capital into the economy of the host contracting state,
the nationals of the other contracting state (or states in the case of a multilateral
investment treaty) are given the right to bring international arbitration proceedings
against the host contracting state and to invoke the international minimum
standards of treatment contained in the applicable investment treaty. The conferral
of this right reduces the sovereign risk attaching to the investment in the host
state and hence investment treaties in this way can positively influence the
161
decision making process for investments. This quid pro quo is implicit in the
preamble of most investment treaties; the USA Model BIT (2004) is representative
in this respect:
Desiring to promote greater economic cooperation between them with
respect to investment by nationals and enterprises of one Party in the
territory of the other Party;
Recognizing that agreement on the treatment to be accorded such investment
will stimulate the flow of private capital and the economic development
of the Parties […]1
336. The quid pro quo moves from an abstract expression in the preamble of
investment treaties to a specific prerequisite for the national’s reliance upon the
substantive obligations of investment protection and the possibility of recourse to
the dispute resolution mechanism against the host state. Such a requirement
is normally expressed within the definition of the types of disputes that may
be submitted to international arbitration in accordance with the investor/state
dispute resolution mechanism. Quite simply, the contracting state parties consent
to the arbitration of ‘investment disputes’ or ‘disputes arising out of an investment’
or ‘an investment agreement’ or ‘an investment authorisation’. Hence the existence
of a covered investment is fundamental to the procedural right of recourse
conferred upon nationals (individuals and legal entities) by the investment treaty.
This is perhaps a trite observation but its significance is apparent in any consideration
of the other jurisdictional requirements. Given that the stated objective
of investment treaties is to stimulate flows of private capital into the economies
of the contracting states, the claimant must have contributed to this objective in
order to attain the rights created by the investment treaty. This contribution must
be clearly ascertained by the tribunal if its existence is challenged by the host
state; for otherwise the procedural privilege conferred by the investment treaty
might be utilised by a claimant who has not fulfilled its side of the bargain.
337. So long as the existence of a covered investment is established, the national
identity of the investor is less important to the objective of stimulating inward
flows of private capital to the economy of one of the contracting states. The
national contracting state of the claimant has only a marginal interest in the
investor/state arbitration proceedings: whilst some economic activity might
have been generated by expatriated profits (and the taxation thereof), the claimant’s
national contracting state has not benefited directly from the investment
in the same way as the host contracting state, and, save for some rare excep-
tions,2
the national contracting state has no procedural right to participate in
the arbitration proceedings. Hence a purposive interpretation of the nationality
1
See Appendix 11.
2
E.g. NAFTA, Art. 1128. See Appendix 3.
162 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
requirements in investment treaties would not operate to disqualify a claimant
from investment treaty protection on the basis of the quality of its links with its
national contracting state, if the investment treaty is silent on the matter, so long
as the claimant has contributed resources to the economy of the host state (see
Rule 23).
338. So unlike human rights that are vested and enjoyed simply by virtue of
one’s being born into the human race, the vesting and enjoyment of investment
treaty rights is contingent upon the putative investor taking certain positive
steps. These positive steps are codified in Rule 23 and their fulfilment is a sine
qua non for establishing the tribunal’s jurisdiction.3
339. There are a small number of investment treaties that offer limited protection
to qualified ‘investors’ with respect to the acquisition and establishment of
investments and thus could be said to operate, at least to some to some extent, in
personam (i.e. in relation to ‘investors’ rather than ‘investments’). The most
notable examples of such pre-investment protection are NAFTA and the USA
Model BIT (2004), which accord most-favoured-nation and national treatment
to putative investors in relation to the acquisition and establishment of their
investments. This exception to Rule 21 and Rule 23 is dealt with in Chapter 4.
(ii) The legal and economic materialisation of an investment
340. A central thesis of this chapter is that an investment, in order to qualify for
investment treaty protection, must incorporate certain legal and economic characteristics.
The economic characteristics derive from the common economic
conception of foreign direct investment.4
In Rule 23 they are codified as the
transfer of resources into the economy of the host state and the assumption of
risk in expectation of a commercial return. The legal characteristics derive from
the non-exhaustive examples of an ‘asset’ that constitute ‘investments’ in investment
treaties, and this forms the basis of Rule 22, which generalises the requirement
as the acquisition of property rights in the host state. It is essential that an
investment have both the requisite legal and economic characteristics. If, by way
of illustration, the legal characteristics of an investment were to be considered
in isolation from the common sense economic meaning of that term, then,
pursuant to some investment treaty definitions of an investment, a metro ticket
might qualify as a ‘claim to money or to any performance under contract, having a
financial value’ and thus as an investment.
3
S.D. Myers v Canada (Damages) 8 ICSID Rep 124, 148/102 (‘The fact that an entity was treated in
a manner contrary to Chapter 11 does not itself trigger a right to compensation. The existence of an
investment is a threshold to maintaining a Chapter 11 claim’).
4
See e.g.: A. Adhar, Economic Development Institute of the World Bank, Terms Used in Investment
Decisionmaking: A Glossary (1996) 46; J. Downes and J. Goodman, Dictionary of Finance and
Investment Terms (6th edn, 2003) 350; F. Perry, A Dictionary of Banking (1983) 127; G. Bannock
and W. Manser, The Penguin International Dictionary of Finance (3rd edn, 1999) 145.
I N V E S T M E N T 163
341. In its attempt at a comprehensive review of investment treaty precedents on
the definition of an investment, the tribunal in Malaysian Salvors v Malaysia
distinguished between a ‘typical characteristics approach’ and a ‘jurisdictional
approach’.5
For the purposes of this dichotomy, the former was said to reflect
the characteristics of an investment articulated in Salini v Morocco,6
whereas
the latter reveals a strict adherence to the terms of the definition of an investment
supplied by the investment treaty. This dichotomy may or may not accurately
reflect the different interpretations of an investment adopted by investment
treaty tribunals; but in any event it is likely to mislead if each approach is
considered in a relationship of opposition. It is submitted that the proper
definition of an investment, as reflected in Rule 22 and Rule 23, must incorporate
both certain ‘economic’ characteristics and certain ‘legal’ characteristics.
(iii) The relationship between an ‘investment’ in Article 25 of the
ICSID Convention and in an investment treaty
342. There is no definition of an ‘investment’ in the ICSID Convention and it
was envisaged by the drafters that the parties would have a wide margin of
discretion in settling upon a definition in each instrument recording their
consent to ICSID arbitration.7
The term ‘investment’, however, is a term of
art: its ordinary meaning cannot be extended to bring any rights having an
economic value within its scope, for otherwise violence would be done to that
ordinary meaning, in contradiction to Article 31 of the Vienna Convention on
the Law of Treaties. The right to performance embodied in a metro ticket cannot
qualify as an investment.
343. Precisely the same considerations apply to the use of the term of art
‘investment’ in the first article of investment treaties. The standard formulation
in investment treaties is to define an investment as ‘any asset’ and then provide a
non-exhaustive list of assets that might qualify as an investment. The proprietary
nature of the examples of assets or rights over assets listed in investment
treaties serves as a means to distinguish, for example, the rights to performance
arising out of a concession contract and rights to performance embodied in a
metro ticket. Furthermore, the open-textured nature of the standard formulation
in investment treaties preserves the ordinary meaning of the term ‘investment’
and therefore its consistency with the characteristics that must be attributed to
the same term as employed in Article 25 of the ICSID Convention.
344. It is difficult to conceive of a hypothetical conflict between the conceptions
of an investment in Article 25 of the ICSID Convention and an investment
5
Malaysian Salvors v Malaysia (Preliminary Objections) para. 70.
6
(Preliminary Objections) 6 ICSID Rep 400, 413/52.
7
C. Schreuer, The ICSID Convention: A Commentary (2001) 121–6.
164 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
treaty because the use of the term ‘investment’ in both instruments imports the
same basic economic attributes of an investment derived from the ordinary
meaning of that term, which are codified in Rule 23. But suppose an investment
treaty defined an investment as an asset, and listed a metro ticket as an example
of such an asset. In this case there would be a conflict between the definition of
an investment in an investment treaty and Article 25 of the ICSID Convention
because the state contracting parties in the former instance have transcended
the frontier of the ordinary meaning of the term ‘investment’. A bilateral act of
this kind cannot produce effects in relation to a multilateral treaty (the ICSID
Convention) and hence, if ICSID arbitration proceedings were to be commenced,
the tribunal would be compelled to decline jurisdiction.
(iv) The significance of an investment for each phase of an investment
treaty arbitration
345. Questions relating to the existence or scope of an investment are fundamental
to each phase of an investment treaty dispute. The attribution of jurisdiction
to the tribunal is contingent upon the claimant having made an
investment in the host state, and thus satisfying the quid pro quo for the host
state’s consent to investment treaty arbitration.8
The boundaries of the tribunal’s
ratione materiae jurisdiction are shaped by the nexus between the claims and
the investment.9
The tribunal’s ratione personae jurisdiction extends to a
claimant with control over the investment at the time of the alleged breach10
and its ratione temporis jurisdiction depends upon the timing of the claimant’s
acquisition of the investment.11
The tribunal’s examination of the question
of the host state’s liability is intertwined with an assessment of whether the
prejudice alleged by the claimant can be properly linked to the rights that
comprise the investment. A host state cannot, for instance, expropriate something
that the claimant does not have – whether it be leasehold rights over a
hotel12
or a right to the automatic renewal of a licence to process waste.13
Finally, if the host state is found to be liable in damages, then the quantification
of such damages will depend upon a careful assessment of the income
generated by the whole or part of the investment that was subjected to unlawful
interference.
346. Some of these interrelationships are illustrated in the following analysis of
the awards in Feldman v Mexico and TECMED v Mexico.
8
See Chapter 5.
9
See Chapter 6.
10
See Chapter 7.
11
See Chapter 8.
12
A fundamental point that escaped the tribunal in: Wena v Egypt (Merits) 6 ICSID Rep 89.
13
E.g. Tecmed v Mexico (Merits) 10 ICSID Rep 134.
I N V E S T M E N T 165
346C(1). Marvin Feldman v Mexico14
A US national, Feldman, owned a Mexican exporting business ‘CEMSA’.15
A
significant part of CEMSA’s business consisted of the purchase of cigarettes in
Mexico from bulk suppliers for resale in third countries. Mexico imposed a tax
on the production and sale of cigarettes in the domestic market, but in some
circumstances a zero tax rate was applied to cigarettes that were exported.16
In 1991, Mexico passed new legislation to ensure that only the exports of
producers of cigarettes in Mexico qualified for the zero tax rate, rather than
the exports of resellers such as CEMSA.17
This legislation was challenged as
contravening the principle of ‘equity of taxpayers’,18
and was then amended
to apply the zero tax rate to all exporters of cigarettes.19
The amended tax
legislation remained unchanged between 1992 and 1997, which was the
relevant period for the claims advanced by Feldman (the ‘Tax Legislation’).
The zero tax rate operated as a tax rebate to be claimed by the exporters of
cigarettes. The 85% tax on production was initially paid by the cigarette
producers, and this was passed on to the purchasers in the sales price for the
cigarettes.20
The Tax Legislation provided that, in order for exporters to
claim the tax rebate, the tax on production on the cigarettes must be stated
‘separately and expressly on their invoices’.21
The effect of this invoice
requirement, which was a feature of the Tax Legislation from its incep-
tion,22
was to discriminate between the exports of cigarette producers and
those resellers, despite the amendments to the legislation in 1992.
Nevertheless, tax discrimination on this basis is consistent with international
practice; and the tribunal noted that it was a ‘rational tax policy and a
reasonable legal requirement’23
and thus could not constitute a violation
of international law per se.24
Insofar as CEMSA purchased its cigarettes from volume retailers rather
than producers, at a price that included the tax on production, the tax was
not itemised separately on the invoice.25
Therefore, in accordance with the
tax regime prescribed by the Tax Legislation, CEMSA was not entitled to
claim the tax rebate. Nevertheless, CEMSA was granted the tax rebates for a
total of sixteen months between 1996 to 1997.26
14
(Merits) 7 ICSID Rep 341.
15
The acronym for Corporación de Exportaciones Mexicanas, S.A. de C.V. Ibid. 342/1.
16
Ibid. 343/7.
17
Ibid. 344/10.
18
Ibid. 344/11.
19
Ibid. 344–5/12.
20
Ibid. 345/15.
21
Ibid.
22
And four years before Feldman established CEMSA in Mexico, ibid. 377/128.
23
Ibid. 377–8/129.
24
Ibid. 373/118.
25
Ibid. 345/15.
26
Ibid. 345–6/19.
166 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
Feldman claimed that Mexico’s denial of tax rebates on cigarettes exported
by CEMSA constituted an expropriation under Article 1110 of NAFTA. In
its analysis of this claim, the tribunal reasoned that the Tax Legislation
never afforded CEMSA a right to export cigarettes and neither customary
international law nor NAFTA required Mexico to do so.27
Furthermore,
according to the tribunal, Feldman’s investment, which consisted of the
exporting business CEMSA, remained under the complete control of
Feldman.28
Finally, the tribunal noted that the profitability of Feldman’s
‘gray market’ export business (CEMSA was not an authorised reseller of
cigarettes in Mexico)29
was wholly dependent upon obtaining the tax
rebate, because otherwise the combined cost to CEMSA of the Mexican
tax on production and the excise taxes imposed by the importing country
would price CEMSA out of the market.30
The claim for expropriation was
dismissed by the tribunal.31
Feldman also advanced a claim based upon the national treatment obligation
in Article 1102 of NAFTA by pleading that certain Mexican owned
resellers of cigarettes had received the tax rebates from the Mexican
authorities at various times when CEMSA was denied the rebate, despite
the invoice requirements of the Tax Legislation, and that this constituted a
failure by Mexico to accord CEMSA national treatment.32
The tribunal found that: (i) there was one Mexican-owned company in like
circumstances to CEMSA for the purposes of the national treatment analysis
(the ‘Poblano Group’);33
(ii) the Poblano Group was granted the tax rebates
during a period when CEMSA was denied them;34
(iii) CEMSA had been
audited by the Mexican tax authorities and ordered to repay the tax rebates
that it had received, whereas there was no clear evidence about the status of
a similar audit of the Poblano Group;35
and (iv) this discrimination was the
result of Feldman’s US nationality.36
The majority of the tribunal concluded
that Mexico had violated Article 1102 of NAFTA.37
The main focus of the dissenting opinion rendered in Marvin Feldman v
Mexico38
was that the majority’s finding of discrimination was unsupported
by the evidence.39
This controversy will be left aside. Instead the analysis
that follows concentrates on a contradiction between the tribunal’s findings
27
Ibid. 370/111.
28
Ibid.
29
Ibid. 371–2/115.
30
Ibid. 372–3/117.
31
Ibid. 385/153.
32
Ibid. 385–6/154.
33
Ibid. 390–1/172.
34
Ibid. 391/173.
35
Ibid. 391/174.
36
Ibid. 394–5/182.
37
Ibid. 396–7/188.
38
Feldman v Mexico (Merits: Dissenting Opinion) 7 ICSID Rep 407.
39
Ibid. 409.
I N V E S T M E N T 167
on the nature of the investment in its consideration of Feldman’s expropriation
claim and the majority’s conclusion on national treatment.
In relation to Feldman’s investment, the tribunal held:
[T]he only significant asset of the investment, the enterprise known
as CEMSA, is its alleged right to receive … tax rebates upon exportation
of cigarettes, and to profit from that business.40
However, the tribunal found:
[T]he Claimant never really possessed a ‘right’ to obtain tax rebates
upon exportation of cigarettes.41
Hence the right to obtain tax rebates upon the exportation of cigarettes did
not feature among the bundle of rights that made up Feldman’s investment
in CEMSA in accordance with Mexican law. As Mexico could not expropriate
something that never belonged to the investor, the tribunal correctly
dismissed Feldman’s Article 1110 claim. The tribunal’s analysis of the
nature of Feldman’s investment should not, however, have been discarded
by the majority when it came to deal with national treatment under Article
1102. The essence of Feldman’s complaint was that its investment, CEMSA,
had been accorded less favourable treatment than that which Mexico
accorded to investments of its own investors.42
If Feldman’s investment in CEMSA did not include the right to a tax rebate,
and yet the receipt of the rebate was essential to the commercial viability of
CEMSA’s cigarette export activities (and indeed the sole alleged ‘asset’ of
CEMSA), it is difficult to fathom how Mexico’s sporadic conferral of tax
rebates on a Mexican-owned cigarette reseller constituted discrimination
with respect to Feldman’s investment.
Another cause for concern is the majority’s assessment of the damages
flowing from its finding of discrimination. The majority held that
Feldman through CEMSA was entitled to certain tax rebates that it had
been denied.43
If this finding were to be generalised, the resulting proposition
would be that where a tax authority has improperly assessed the tax
liability of X, with the effect that a benefit is conferred upon X, then Y, a
competitor of X, is able to claim damages based on non-receipt of the same
benefit to itself. The effect of the majority’s decision is thus to compel
Mexico to breach its own legislation (legislation held by the tribunal to be
unimpeachable) and confer an unlawful benefit upon a foreign investor.
If Feldman did have an investment in Mexico (i.e. a business whose viability
did not rest upon the misapplication of Mexican legislation) and Mexico
40
(Merits) 7 ICSID Rep 341, 394/181.
41
Ibid. 373/118.
42
Ibid. 386/155.
43
Ibid. 400–1/202-5.
168 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
were found to have derogated from its own legislation in favour of
Feldman’s Mexican competitors in like circumstances, then damages
should have been assessed on the basis of the harm caused to Feldman’s
business by such derogation. This might, for instance, include damages
representing a loss of market share due to the competitive advantage
obtained by Feldman’s competitors.
346C(2). Te´cnicas Medioambientales Tecmed SA v United Mexican
States44
The claimant, Te´cnicas Medioambientales Tecmed SA, was the Spanish
parent company of the Mexican company ‘Tecmed’, which in turn owned
another Mexican company ‘Cytrar’.45
At an auction of public utilities by the
Mexican municipal agency ‘Promotora’,46
Tecmed purchased rights to a
landfill for hazardous industrial waste.47
These rights were later transferred
from Tecmed to Cytrar with the consent of the relevant Mexican
authority ‘INE’.48
When a new operating licence for the landfill was issued
by INE in Cytrar’s name, it was expressed to be valid only for a year and
renewable thereafter on an annual basis.49
This was in contrast with the
operating licence that was originally granted to Tecmed for an unlimited
duration. Cytrar’s licence was renewed after the first year. INE refused to
grant any further renewals thereafter.50
The claimant’s principal claim was that the failure to renew Cytrar’s operating
licence amounted to an expropriation of its investment under the
Spain/Mexico BIT as it brought Cytrar’s exploitation of the landfill facility
to an end.51
If the claimant (through Tecmed and Cytrar) had acquired its investment
fully cognisant of a Mexican law to the effect that operating licences are
issued for one year and may be terminated by the Mexican authorities at
will thereafter, it is difficult to conceive how Mexico’s exercise of its regulatory
authority could amount to an expropriation.52
If, however, the claimant
had acquired, along with the tangible property interest in the landfill,
certain intangible property rights including the right to the requisite
44
(Merits) 10 ICSID Rep 134.
45
Ibid. 135–6/4.
46
Promotora Inmobiliaria del Ayuntamiento de Hermosillo, a decentralised municipal agency of
the Municipality of Hermosillo located in the State of Sonora, Mexico (ibid. 139/35).
47
Ibid.
48
Ibid. 140/38. ‘INE’ is an acronym for the Hazardous Materials, Waste and Activities Division of
the National Ecology Institute of Mexico, an agency of the Federal Government of the United
Mexican States within the Ministry of the Environment (ibid. 139-40/36).
49
Ibid. 140/38.
50
Ibid. 140/39.
51
Ibid. 141/41.
52
A claimant was denied a remedy under Article 1 of Protocol 1 of the European Convention on
Human Rights on this basis: Gudmunsson v Iceland 21 EHRR CD 89.
I N V E S T M E N T 169
licences to operate the landfill, the subsequent interference with the claimant’s
intangible rights might also be protected. The claimant advanced its
case on this basis and the tribunal decided to consider the ‘price and scope
of the acquisition by Cytrar and Tecmed of assets relating to the Las Vı´boras
landfill’ as a ‘preliminary matter’.53
What then followed was a meticulous
examination by the tribunal of all the transactional documents relating to
the acquisition of the landfill to ascertain whether part of the consideration
provided by Tecmed was for intangible property rights of the type alleged.
This question was ultimately decided in the affirmative,54
and the tribunal
went on to rule in a separate section of the award dealing with the merits
that Mexico had used its regulatory power to revoke Cytrar’s licence
(thereby depriving Cytrar of its right thereto) in a manner inconsistent
with its obligations under the investment treaty.55
The tribunal was, therefore, clearly cognisant of the importance of ascertaining
the scope of the rights comprising the investment before considering the
acts of the host state alleged to have caused prejudice to that investment.
Rule 22. The legal materialisation of an investment is the acquisition
of a bundle of rights in property that has the characteristics
of one or more of the categories of an investment defined
by the applicable investment treaty where such property is
situated in the territory of the host state56
or is recognised by
the rules of the host state’s private international law to be
situated in the host state or is created by the municipal law of
the host state.57
A . A P P L I C A B L E L AW S
347. The first article of the vast majority of investment treaties supplies a definition
of an investment, usually in the form of a non-exclusive list of paradigmatic
examples of investments, such as shares in a company and real property. The list
of examples is invariably introduced by a formulation of the type: ‘“investment” of
a national or company means every kind of investment owned or controlled directly
or indirectly by that national or company’. This standard formulation is infected
53
(Merits) 10 ICSID Rep 134, 145/52.
54
Ibid. 164–5/91.
55
Ibid. 191–2/151.
56
UPS v Canada (Preliminary Objections) 7 ICSID Rep 288, 314/121; Ethyl v Canada (Preliminary
Objections) 7 ICSID Rep 12, 35–6/70,72; SGS v Philippines (Preliminary Objections) 8 ICSID Rep
518, 547/105; Zhinvali v Georgia (Preliminary Objections) 10 ICSID Rep 3, 90/381; Mitchell v
Congo (Annulment) paras. 42, 46; Mytilineos v Serbia (Preliminary Objections) para. 131;
Canadian Cattlemen v USA (Preliminary Objections) para. 112.
57
EnCana v Ecuador (Merits) 12 ICSID 427, 476/184.
170 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
by a tautology – ‘an “investment” is an investment’ – that is perhaps responsible
for a great deal of confusion about the object of investment treaty protection.
348. An investment treaty does not establish a legal regime for the creation,
possession, use or disposal of investments by foreign nationals. This is hardly
surprising: municipal laws governing these acts or rights with respect to real
property, for instance, are necessarily voluminous and intricate and cannot be
swept away by the stroke of a drafter’s pen for the benefit of a certain class of
investors. The municipal law of the host state continues to apply to questions
pertaining to the creation, possession, and disposal of investments by foreign
nationals who qualify for treaty protection (Rule 4) but it is the treaty that
determines whether the investment qualifies for international protection (Rule 5).
B . T H E T E R R I T O R I A L C O N N E C T I O N
W I T H T H E H O S T S TAT E
349. The importance of the territorial connection with the host state is recognised
in Rule 22. There must be a territorial connection to the respondent host
state so that the investment is within the domestic jurisdiction of the host state.
This cardinal feature of the investment treaty regime has consequences for the
economic materialisation of an investment in Rule 23 as well, and the investment
treaty jurisprudence concerned with the territorial requirement is examined
in that context.
(i) Tangible property
350. If the investment consists of rights over tangible property then, in order
to satisfy the territorial requirement, it is obvious that the situs of the property
in question must be the host state. The situs of tangible property, for these purposes,
is a straightforward question of fact as it is for the municipal courts in the context
of applying the ubiquitous lex situs choice of law rule in private international law.58
(ii) Intangible property
351. Localising something that is intangible is a more complex problem. Resort
must be had to the rules of private international law of the host state which,
in respect of some forms of intangible property, may supply a fictitious situs.
A debt may have its situs at the place of domicile of the debtor;59
shares – at the
58
Dicey, Morris & Collins on the Conflict of Laws (2006, 14th edn by L. Collins et al.) 1116.
59
Ibid., 1116–30; E. Rabel, The Conflict of Laws: A Comparative Study (Vol. III, 1958) 3–8, 14–16;
Cheshire and North’s Private International Law (1999, 13th edn by P. North and J. Fawcett) 955–6.
I N V E S T M E N T 171
place where the company’s share register is maintained.60
In each case, if the
host state’s rules of private international law locate the intangible property rights
in the host state, then the territorial requirement is satisfied with respect to a
putative investment in that form of intangible property.
352. In relation to other forms of intangible property for which private international
law does not confer a fictitious situs, such as intellectual property rights,
the solution is to inquire of the host state’s substantive law directly as to whether
such rights have a basis under that law. An investment treaty does not compel
the recognition of new forms of intangible property by the contracting state
parties, hence a renvoi to the host state’s substantive law is the proper foundation
for establishing the necessary territorial link to the host state. The test for
such recognition in the temporal sense is the time at which the investment was
made. Subsequent changes to the law of the host state cannot affect the
characterisation of intangible property rights as an investment, for this would
give the host state a simple device for avoiding the substantive obligations of
investment protection in the investment treaty.61
C . ‘ A B U N D L E O F R I G H T S I N P R O P E RT Y ’
(i) Introduction
353. Rule 22 identifies rights in property as the common denominator of all
the categories of ‘investments’ enumerated in investment treaties. The OECD
Draft Convention on the Protection of Foreign Property of 1967, which is the
inspiration for the modern investment treaty, made reference to ‘foreign property’
rather than ‘investments’, which was defined as ‘all property, rights and interests,
whether held directly or indirectly, including the interest which a member of a
company is deemed to have in the property of the company’.62
The introduction
of the concept of ‘investment’ in the evolution of investment treaties has not
diminished the importance of identifying a proprietary foundation for the investor’s
commercial interests in the host state. The attributes of property are essential
to the functioning of the investment protection mechanism encapsulated in the
treaty, for the reasons elaborated in the discussion of Rule 24.
354. In the next section, the standard categories of investments will be analysed in
some detail by reference to two model BITs and Chapter 11 of NAFTA. The USA
Model BIT (2004) is a substantial revision of the previous USA Model BIT
(1994) and is likely to influence the drafting of the next generation of BITs. Many
of the new provisions of the USA Model BIT (2004) were designed to eliminate
60
Cheshire and North’s Private International Law, 969–73.
61
See the commentary to Rule 5 above.
62
Available at: www.oecd.org/dataoecd/35/4/39286571.pdf.
172 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
certain ambiguities common to most of the existing BITs and reflect the interpretive
practice of investment treaty tribunals in the past decade. The second is
the Germany Model BIT (2005), which, as the revised model of the first BIT
concluded with Pakistan in 1959, is representative of the majority of BITs in force
today. It will also be instructive to compare and contrast these model BITs from
the two major legal traditions and determine whether common law or civilian
conceptions of property are reflected in the treaty texts.
355. In order to enhance the clarity of the analysis that follows, the definitions
of investments in each of the BITs and Chapter 11 of NAFTAwill now be set out
in full.
USA Model BIT (2004)
‘investment’ means every asset that an investor owns or controls, directly
or indirectly, that has the characteristics of an investment, including such
characteristics as the commitment of capital or other resources, the expectation
of gain or profit, or the assumption of risk. Forms that an investment
may take include:
(a) an enterprise;
(b) shares, stock, and other forms of equity participation in an enterprise;
(c) bonds, debentures, other debt instruments, and loans;
(d) futures, options, and other derivatives;
(e) turnkey, construction, management, production, concession,
revenue-sharing, and other similar contracts;
(f) intellectual property rights;
(g) licenses, authorizations, permits, and similar rights conferred pursuant
to domestic law; and
(h) other tangible or intangible, movable or immovable property, and
related property rights, such as leases, mortgages, liens, and pledges.
Germany Model BIT (2005)
[T]he term ‘investments’ comprises every kind of asset which is directly
or indirectly invested by investors of one Contracting State in the territory
of the other Contracting State. The investments include, in particular:
(a) movable and immovable property as well as any other rights in rem,
such as mortgages, liens and pledges;
(b) shares of companies and other kinds of interest in companies;
(c) claims to money which has been used to create an economic value or
claims to any performance having an economic value;
(d) intellectual property rights, in particular copyrights and related
rights, patents, utility-model patents, industrial designs, trademarks,
plant variety rights;
(e) trade-names, trade and business secrets, technical processes, knowhow,
and good-will;
(f) business concessions under public law, including concessions to
search for, extract or exploit natural resources […].
I N V E S T M E N T 173
NAFTA Chapter 11: Definitions
investment means:
(a) an enterprise;
(b) an equity security of an enterprise;
(c) a debt security of an enterprise
(i) where the enterprise is an affiliate of the investor, or
(ii) where the original maturity of the debt security is at least three
years, but does not include a debt security, regardless of original
maturity, of a state enterprise;
(d) a loan to an enterprise
(i) where the enterprise is an affiliate of the investor, or
(ii) where the original maturity of the loan is at least three years, but
does not include a loan, regardless of original maturity, to a state
enterprise;
(e) an interest in an enterprise that entitles the owner to share in income
or profits of the enterprise;
(f) an interest in an enterprise that entitles the owner to share in the
assets of that enterprise on dissolution, other than a debt security or a
loan excluded from subparagraph (c) or (d);
(g) real estate or other property, tangible or intangible, acquired in the
expectation or used for the purpose of economic benefit or other
business purposes; and
(h) interests arising from the commitment of capital or other resources
in the territory of a Party to economic activity in such territory, such
as under
(i) contracts involving the presence of an investor’s property in
the territory of the Party, including turnkey or construction contracts,
or concessions, or
(ii) contracts where remuneration depends substantially on the
production, revenues or profits of an enterprise;
but investment does not mean,
(i) claims to money that arise solely from
(i) commercial contracts for the sale of goods or services by a
national or enterprise in the territory of a Party to an enterprise
in the territory of another Party, or
(ii) the extension of credit in connection with a commercial transaction,
such as trade financing, other than a loan covered by
subparagraph (d); or
(j) any other claims to money, that do not involve the kinds of interests
set out in subparagraphs (a) through (h)[.]
356. Both the provisions in the model BITs provide a non-exhaustive list of various
categories of investments and hence it is within the prerogative of treaty tribunals
to recognise other types of investments as warranting treaty protection if they meet
the criteria examined hereinafter. In contradistinction, the definition of an investment
in Chapter 11 of NAFTA is drafted as an exclusive list of covered investments.
174 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
357. The USA Model BIT (1994) contained a hopeless tautology, viz. ‘an “investment”
is an investment’.63
The USA Model BIT (2004) is not much of an improvement
in this respect: ‘[an] “investment”… that has the characteristics of an
investment’. Nevertheless, the use of the word ‘asset’,64
like in the German
Model BIT, does clarify the proprietary foundation of investments covered by the
treaty.65
Furthermore, the reference to ownership and control with respect to the
relationship between the investor and the investment in the USA Model BIT
confirms the necessary proprietary nature of the investor’s interest in an investment.
D . T H E C AT E G O R I E S O F I N V E S T M E N T S
(i) Tangible property
358. Both model BITs employ, in the same breath, the two different notions
of property as either things or rights over things – the reified entity or the bundle
of rights in that entity.66
‘Movable or immovable property’ designates a thing,
whereas ‘related property rights’ or ‘rights in rem’ denotes rights over things.
A mortgage, for example, is not a ‘related property right’ to movable or immovable
property because movable or immovable property are not rights but things.
A mortgage is instead a right in rem over movable or immovable property.
359. The USA Model BIT (2004) is a significant improvement over its predecessor
in its use of property concepts and classifications. Article I(d)(iv) of the
USA Model BIT (1994) had included within the definition of an investment:
Tangible property, including real property; and intangible property, including
rights, such as leases, mortgages, liens and pledges.67
360. The inference here is that ‘rights, such as leases, mortgages, liens and pledges’
falls within the category of ‘intangible property’, which is manifestly incorrect.
Leases, mortgages, liens and pledges are rights in rem over tangible property; they
63
UNCTAD Compendium (Vol. VI, 2002) 502.
64
See, e.g., the definition of an ‘asset’ in Black’s Law Dictionary (1999, 7th edn) 112: ‘1. An item
that is owned and has value. 2. The entries on a balance sheet showing the items of property
owned, including cash, inventory, equipment, real estate, accounts receivable, and goodwill. 3.
All the property of a person (esp. a bankrupt or deceased person) available for paying debts.’ See
also: Deardorff’s Glossary of International Economics, available at: www-personal.umich.edu/
~alandear/glossary/ (‘An item of property, such as land, capital, money, a share in ownership, or a
claim on others for future payment, such as a bond or a bank deposit’).
65
Petrobart v Kyrgyz Republic (Merits) para. 71.
66
The perceived confusion from this dual usage provoked the ire of no less than Jeremy Bentham:
‘It is to be observed, that in common speech, in the phrase the object of a man’s property, the
words the object of are commonly left out; and by an ellipsis, which, violent as it is, is now
become more familiar than the phrase at length, they have made that part of it which consists of
the words a man’s property perform the office of the whole.’ J. Bentham, An Introduction to the
Principles of Morals and Legislation (J. Burns and H. Hart, eds. 1970) 211 at note 12.
67
USA Model BIT (1994), Art. I(d)(iv), UNCTAD Compendium (Vol. III, 1996) 196.
I N V E S T M E N T 175
do not constitute ‘intangible property’. An example of intangible property that
generally falls within the definition of an investment is intellectual property.
361. A precise formulation of this investment category would recognise that
both an investor’s ownership of tangible property such as land (including
permanent fixtures thereupon) and goods (personal chattels) constitutes an
investment, together with other rights in rem over such tangible property,
such as mortgages, liens, pledges and leases.
362. The distinction between movable and immovable property found in
both model BITs is a civil law concept that is similar to, but not identical
with,68
the common law distinction between real and personal property.69
It is
thus interesting that it features in the USA Model BIT (1994,70
2004)71
and
UK Model BIT (1991).72
The further distinction employed by the USA Model
BIT in clause (h) between tangible and intangible property (and in clause (g) of
Chapter 11 of NAFTA) is used by the common law but sits uneasily alongside
the distinction between movable and immovable property. Tangible property
can be either movable or immovable property, whereas that distinction is
obviously meaningless for intangible property. Save for the ubiquitous reference
to movable and immovable property in investment treaties, and the
reference to ‘real estate or other [tangible] property’ in Chapter 11 of NAFTA,
all the other categories of investments relate to intangible property.
363. Many BITs, but in particular those based upon a model BIT from a
common law jurisdiction, contain a reference to leases as one of the rights in
rem that qualify as an investment. There is a divergence in the treatment of
leases in common law and civil law jurisdictions. The former recognise a
proprietary foundation for the leasehold so that the lessee has a better right to
possession of the leased property than anyone else excepting the owner. The
lease in civil law jurisdictions does not generally confer a right in rem upon
the lessee over the property in question because a leasehold does not feature
in the closed list of proprietary rights (the principle of numerus clausus) in the
civil code. Hence in civil jurisdictions it is more akin to a contractual right but
which attracts special legislative protection so that, in substance, a lessee has a
right to possession akin to the right in rem in common law jurisdictions.73
68
B. Rudden, ‘Things as Things and Things as Wealth’ (1994) 14 Oxford J of Legal Studies 81.
69
‘Real property’ means interests in land except leases; ‘personal property’ means everything else.
Tangible personal property is called a ‘chattel’.
70
UNCTAD Compendium (Vol. VI, 2002) 502.
71
See Appendix 11.
72
UNCTAD Compendium (Vol. III, 1996) 185. The same is true for the UK Model BIT (2005). See
Appendix 10.
73
See: § 571 BGB (German Civil Code); § 1599 C.c. (Italian Civil Code). In Germany, the right of a
tenant to live in a rented apartment, for instance, has been classified as ‘property’ for the purposes
of the constitutional protection afforded to property in Art. 14(1) of the Constitution. In
particular, a tenant is protected against the termination of a rental contract that is not founded
upon a legitimate interest of the landlord and specified in the contract itself. D. Kommers, The
176 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
364. The USA Model BIT (2004) refers to a lease in clause (h) in the context
of ‘other property rights’. In contrast, the Germany Model BIT (2005) makes
no mention of leases as one of the ‘any other rights in rem’ in clause (a). Hence
the dichotomy in the treatment of leases is preserved by the two model BITs
under consideration from each of the two major legal traditions.
365. An inevitable problem will arise if, by way of example, the USA concludes
a BIT based upon its own model BITwith a civil law country because there will
be a lack of symmetry in the categories of qualified investments in the two
contracting states.
366. In Wena v Egypt,74
Wena, an English company, had an investment in the
form of two lease agreements with the public sector corporation ‘Egyptian
Hotels Company’ with respect to separate hotels. In terms substantially identical
to the Germany Model BIT (2005) under consideration, the UK/Egypt BIT
defines an investment to include ‘movable and immovable property and any
other property rights such as mortgages, liens and pledges’. The tribunal ruled
that the lease agreements qualified as an investment pursuant to the aforementioned
clause.75
As leases are not specifically mentioned by the clause, the
tribunal must have relied upon the words ‘other property rights’. This is
problematic because Egypt is a civil law jurisdiction and the civilian conception
of a leasehold does not embody a property right.76
In would appear that neither
party raised this point in the jurisdictional phase of the proceedings.77
(ii) Security interests
367. Security interests in property, such as mortgages, liens and pledges, are
generally included in the definition of an investment. The USA Model BIT
(2004)78
and the Germany Model BIT (2005)79
are no exception. Chapter 11 of
NAFTA does not make express reference to security interests in this sense, but
Constitutional Jurisprudence of the Federal Republic of Germany (1997, 2nd edn) 255. A lease
was described as an ‘interest in real estate’ by an international tribunal in: Rio Grande Irrigation &
Land Company Ltd (UK v USA) 6 RIAA 131, 136–7 (1923). The European Court of Human Rights
has also considered the proprietary nature of leases in the context of Art. 1 of Protocol 1 of the
European Convention on Human Rights: Pentidis v Greece (Case 23238/94) Comm. Rep. 27.2.96;
Panikian v Bulguria (Case 29583/96, 10 July 1997); JLS v Spain (Case 41917/98, 27 April 1999);
Blečić v Croatia (Case 59532/00, 29 July 2004).
74
(Preliminary Objections) 6 ICSID Rep 74.
75
Ibid. 85. There is precious little discussion of the nature or scope of Wena’s investment in the
tribunal’s award, whereas the ad hoc committee’s decision simply notes that: ‘This Committee
cannot ignore of course that there is a connection between the leases and the [BIT] since the
former were designed to operate under the protection of the [BIT] as the materialization of the
investment.’ (Annulment) 6 ICSID Rep 129, 137/35.
76
U. Mattei, Basic Principles of Property Law: A Comparative Legal and Economic Introduction
(2000) 81.
77
(Preliminary Objections) 6 ICSID Rep 74, 85.
78
Clause (h) of the definition of ‘investment’. See Appendix 11.
79
Clause (a) of the definition of ‘investment’. See Appendix 7.
I N V E S T M E N T 177
clause (f) includes ‘an interest in an enterprise that entitles the owner to share in
the assets of that enterprise on dissolution’ within the definition of an investment.
A mortgage, lien or pledge over the property of an enterprise in the host
state would thus satisfy this definition.
368. For a security interest to qualify as an investment it is clear that it must
be a form of consensual security rather than a security interest arising by the
operation of law. The latter would not address the requirements of an investment
in Rule 22 because there would be no commitment of resources to the economy
of the host state. A maritime lien over a ship and her cargo for damage caused by
the ship would not, for example, constitute an investment.
369. A security interest should not be confused with investment securities such as
shares and bonds. Investment securities also qualify as an investment but are
treated separately below. A security interest in the present sense is often referred
to as ‘collateral’ and is a contingent claim on an asset that permits the holder of the
interest to take physical possession of the asset and sell it to a third party upon the
non-payment of a debt. A security interest thus gives the secured creditor two
basic rights in rem: (i) the right to follow its asset into the hands of any third party,
and (ii) the right to satisfy its debt in priority to the claims of other creditors upon
the bankruptcy of the debtor.80
For security interests to meet the other requirements
in Rule 23 for an investment, the funds transferred against the pledged asset
must be employed for a commercial use in the economy of the host state and a rate
of interest must be charged so as to entail a commercial return.
370. A pledge involves the creditor taking possession of the debtor’s asset as
security until payment of the debt. Assets that are capable of being physically
pledged can therefore be the object of a pledge and thus include tangible assets
(e.g. machinery) and also documentary intangibles (e.g. negotiable bills of
exchange) but not pure intangibles (e.g. simple debts). The possession of the
asset gives the pledgee the legal title to that asset.
371. A mortgage entails the transfer of ownership of an asset to the creditor as
security but subject to the condition that the debtor shall regain ownership when
the funds provided by the creditor against the secured asset have been paid. In
most legal systems it is unnecessary for the creditor to take possession of the
asset; indeed the major benefit of this form of security is that the debtor retains
the ability to use the asset productively. Insofar as possession is not required, a
mortgage can be taken over all classes of assets, whether tangible or intangible.
372. One can envisage how a creditor, in acquiring a security interest in the form
of a pledge or a mortgage, might comply with the requirements for an investment
in Rule 23: the property is situated or registered in the host state;
80
R. Goode, Commercial Law (2004, 3rd edn) 623.
178 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
funds move from the creditor (a national of a contracting state) to the debtor
(a national of another contracting state) to be employed for a commercial
purpose; a commercial return is generated by the rate of interest; and the creditor
assumes the risk that the debtor might default in its repayments. More difficult,
however, is the case of a lien.
373. A lien is generally a right given to a creditor under a contract to detain goods
of the debtor to secure payment or performance of some other obligation. Unlike a
pledge, a lien does not import an implied power of sale upon the debtor’s default.
It is possible to conceive how a lien could be part of the investor’s bundle of rights
acquired over time as a result of its investment activities in the host state. For
instance, an investment agreement with a public authority might grant the
investor a lien in case of default of payment over minerals extracted and in the
possession of the investor but in relation to which title had passed to the public
authority under the agreement. If the host state later nationalises the investor’s
mining operation, then the right over the minerals covered by the lien would be
one of the expropriated rights in rem that would attract compensation. But it is
difficult to see how a lien in and of itself could constitute an investment at the time
of entry and fulfil the requirements of Rule 23 independently.
374. The issue of whether a security interest has been acquired by the putative
investor is governed by the municipal law of the host state. If the property is
tangible property, then this is by virtue of the lex situs rule. If it is intangible
property, then the rights in question (such as intellectual property rights) must be
recognised (i.e. by registration) in accordance with the law of the host state. The
conditions that need to be satisfied in order for a consensual security interest to
attach to an asset are complex in any legal system and divergences are likely to
exist. Nonetheless, the following conditions adapted from Goode’s analysis of
security interests from a common law perspective81
do at least illustrate the
types of questions that might arise for the tribunal to resolve if the existence of
the security interest is contested by the host state:
(a) There must be an agreement for security conforming to the formalities
prescribed by the municipal law of the host state. If the security agreement
itself is to be relied upon as producing attachment, without the
transfer of ownership or possession, then the agreement must be valid
and enforceable as a contract in accordance with its governing law.
(b) The asset to be given in security must be identifiable as falling within
the scope of the agreement.
(c) The debtor must have power to give the asset in security.
(d) There must be a current obligation of the debtor to the creditor which
the asset is designed to secure. Money must be transferred from the
creditor to the debtor.
81
Ibid. 627–37.
I N V E S T M E N T 179
(e) Any contractual conditions for the attachment must have been fulfilled.
(f) In the case of pledge, actual or constructive possession must be given
to the creditor.
(iii) Investment securities
375. Investment securities are issued by corporations or governments and create
property in debt or in equity. They fall within a broad category of intangible
assets that are, at base, claims to money, as opposed to those intangible assets
that are not, such as intellectual property rights.
376. Investment securities in equity include shares, stock or other interests in the
risk-bearing part of an enterprise’s capital. These are the most common form of
investments revealed by the corpus of investment treaty awards and are covered
by clause (c) of the USA Model BIT (2004), clause (b) of the Germany Model
BIT (2005) and clauses (b) and (e) of the definition in Chapter 11 of NAFTA. It
is appropriate to classify an ‘enterprise’ or ‘company’ under this category, for
this investment is equivalent to the investor owning all the shares or stock in the
enterprise in question. This covers clause (a) of the USA Model BIT (2004) and
clause (a) of Chapter 11 of NAFTA.
377. Investment securities in debt include bonds, loan notes and debentures and
are covered by clause (c) of the USA Model BIT (2004) and clause (c) of
NAFTA. Clause (c) of the Germany Model BIT (2005) reads ‘claims to money
which has been used to create an economic value or claims to any performance
having an economic value’. This clause is wide enough to cover both investment
securities and receivables.
378. Investment securities in debt issued by private companies, state enterprises
and governments are generally negotiable instruments. A common example is a
promissory note, which is an unconditional promise made in writing by one
person to another signed by the issuer, engaging to pay, on demand or a fixed or
determinable future time, a sum certain in money, to, or to the order of, a
specified person or to bearer.82
A promissory note is a document of title to
money; it is the physical embodiment of the payment obligation to the holder.
As such it is a negotiable instrument and thus the question arises whether the
subsequent indorsement of a promissory note (like other negotiable instruments)
would constitute an investment in view of the requirements in Rule
23. The problem is the nexus between the funds transferred as consideration for
the negotiable instrument and the employment of those funds for commercial
purposes in the economy of the host state. At one end of the spectrum, it seems
clear that trading on the short-term money market in negotiable certificates of
deposit or treasury and commercial bills cannot constitute an investment
82
See: Bills of Exchange Act (England), s 83(1).
180 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
because this nexus is too weak.83
But the answer is not necessarily provided by
reference to the duration for the commitment of funds. Speculative trading on
the long-term capital market in Eurodollar bonds, for instance, is no more likely
to satisfy the requirements of Rule 23 either. The nexus between the funds
transferred as consideration for the negotiable instrument and the employment
of such funds for an investment purpose in the host state requires a certain
degree of transparency in the transaction that invariably will only be present as
between the issuer and the first holder. Hence, subsequent indorsements of the
instrument will not generally satisfy the requirements in Rule 23, save in
exceptional circumstances, such as where there is contractual documentation
making the nexus explicit.
378C. Fedax NV v Republic of Venezuela84
Fedax, a Dutch company, was the endorsee of certain debt instruments
(promissory notes) issued by the Government of Venezuela to a
Venezuelan corporation for services provided by the latter to the former.85
The tribunal reasoned that, if Fedax had been the entity providing the
services to the Government, then that transaction would have constituted
an investment.86
The subsequent endorsements of the promissory notes
did not, according to the tribunal, change the character of the underlying
transaction as an investment:
[A]lthough the identity of the investor will change with every
endorsement, the investment itself will remain constant, while the
issuer will enjoy a continuous credit benefit until the time the notes
become due. To the extent that this credit is provided by a foreign
holder of the notes, it constitutes a foreign investment which in this
case is encompassed by the terms of the [ICSID] Convention and the
[Netherlands/Venezuela BIT].87
The difficulty with this reasoning is that the tribunal has aggregated
certain aspects of the underlying transaction with certain aspects of the
endorsement in order to justify the existence of an investment. The
original contract for the provision of services by a Venezuelan company
to the Venezuelan Government may have evidenced the necessary
attributes of an investment but Fedax was not privy to that arrangement
and hence cannot rely upon those attributes to establish its investment in
Venezuela. It is difficult to accept that those attributes can be invoked by
one of the subsequent endorsees to the promissory notes issued by the
83
Fedax v Venezuela (Preliminary Objections) 5 ICSID Rep 183, 199/43.
84
(Preliminary Objections) 5 ICSID Rep 183; (Merits) 5 ICSID Rep 200; African Holding Co. v
Congo (Preliminary Objections) para. 81 (the tribunal appeared to adopted the same reasoning as
in Fedax).
85
(Preliminary Objections) 5 ICSID Rep 183, 197/37.
86
Ibid. 197/38.
87
Ibid. 198/40.
I N V E S T M E N T 181
Government to the Venezuelan company in the event that the endorsee
has the requisite foreign nationality to benefit from the protection of an
investment treaty.
379. In view of the difficulties arising in Fedax, clause (c) of the definition in
Chapter 11 of NAFTA strikes a sensible balance in defining the types of debt
securities that qualify as an investment as those issued by an enterprise which is
an affiliate of the investor and for which the original maturity of the debt
security is at least three years. Debt securities in state enterprises do not in
any circumstances qualify as an investment.
380. The key to distinguishing covered investment securities from other interests
in stocks and shares that do not attract investment treaty protection is the
proprietary nature of the interest. Mere contractual rights to units in investment
funds would not, for instance, fall within the definition of an investment. This
was an issue before the tribunal in Gruslin v Malaysia.
380C. Philippe Gruslin v Malaysia88
A Belgian investor, Gruslin, purchased some USD 2.3 million in securities
listed on the Kuala Lumpur Stock Exchange (‘KLSE’) through a mutual
fund known as the Emerging Asian Markets Equity Citiportfolio (the
‘EAMEC fund’) registered in Luxembourg and managed by Citiportfolios
S.A.89
Gruslin claimed that he suffered losses of his entire interest in the
EAMEC fund due to exchange controls imposed by Malaysia in September
1998.90
Malaysia contended that Gruslin had made no investment in the
KLSE securities because, as a holder of units in the EAMEC fund, he had no
severable individual property right to the investments made by that fund in
Malaysia.91
(The tribunal had correctly ruled that the territorial requirement
for a covered investment necessitated that Gruslin had rights to the
securities listed on the KLSE in Malaysia in addition to rights in the EAMEC
fund in Luxembourg.)92
Instead, all Gruslin had acquired as a unit holder
were contractual rights to the proper administration of the mutual fund.93
In the event, the tribunal upheld Malaysia’s objection to jurisdiction on a
different ground and thus declined to rule on Malaysia’s submission with
respect to the necessity of a proprietary interest in the securities.94
It is
submitted, however, that if Gruslin’s interest in the EAMEC fund was
88
(Preliminary Objections) 5 ICSID Rep 484.
89
A Luxembourg company. Ibid. 487/8.1.
90
Ibid. 487–8/8.3.
91
Ibid. 489/10.3, 496/15.6.
92
Ibid. 493/13.8–13.11.
93
Ibid. 496/15.6.
94
The Intergovernmental Agreement between the Belgo-Luxembourg Economic Union and
Malaysia (1979) included a proviso that, to fulfil the requirements of a covered investment, the
assets ‘are invested in a project classified as an “approved project” by the appropriate Ministry in
Malaysia, in accordance with the legislation and the administrative practice, based thereon.’ The
182 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
limited to a contractual right in relation to the proper management of the
fund, in accordance with Luxembourg law, this would have provided the
tribunal with another basis to decline jurisdiction for the absence of an
investment.
(iv) Credit
381. The provision of credit by the investor to an entrepreneur or enterprise
engaged in commercial activities in the host state qualifies as an investment.
The investor acquires rights to a debt, which can be assigned and thus has the
feature of a right in rem. Credit can take the form of a loan, be part of a sales
transaction, or be provided by finance leasing.
382. A loan is the payment of money by the investor to the debtor (an
entrepreneur or enterprise engaged in commercial activities in the host state)
upon terms that the sum advanced, with any stipulated interest, must be repaid
by the debtor in due course.95
A loan as a form of an investment is expressly
mentioned in clause (c) of the USA Model BIT (2004). Clause (c) of the
Germany Model BIT (2005) refers to ‘claims to money which has been used
to create an economic value’ and thus covers a loan. Clause (d) of the Chapter 11
definition in NAFTA expressly refers to a ‘loan to an enterprise’ but restricts the
definition to loans to an enterprise which is an affiliate of the investor or where
the original maturity of the loan is at least three years. Moreover, clause (d) of
NAFTA carves out loans to a state enterprise from the definition of an
investment.
383. A loan is the form of credit that features most prominently as an investment
in the corpus of investment treaty precedents. Other types of credit that might be
extended by an investor include sale credit, which involves the purchaser’s
deferment of the payment of the price upon the sale or supply of land, services
or facilities by the investor, and finance leasing, which envisages the lease of
equipment where the legal title remains with the investor (lessor) but the
economic benefits of ownership belong to the lessee. The rent payable to the
investor is calculated to ensure that the investor is reimbursed for its capital
outlay and achieves a desired return on the capital.
384. It is to be expected that the extension of credit by an investor to an
entrepreneur or commercial entity in the host state will in most cases be backed
by the acquisition of rights over the debtor’s assets to secure the payment of the
debt. In other words, the extension of credit will be a form of secured financing
and thus the investor will not simply compete with other creditors pari passu
tribunal held that no such approval had been granted by the appropriate Ministry in Malaysia in
the case of Gruslin’s putative investment and hence the tribunal did not have jurisdiction to hear
the claim (ibid. 507–8/25.5–25.7).
95
R. Goode, Commercial Law (2004, 3rd edn) 578–81.
I N V E S T M E N T 183
upon the bankruptcy of the debtor. Thus it will be common for the extension of
credit to be accompanied by the acquisition of a consensual security in the form
of a pledge, lien, mortgage or charge, which independently qualify as investments
pursuant to the definition in most investment treaties.
(v) Rights to future income/claim to money
385. Of all the investment categories considered thus far, it is a ‘claim to
money’96
or ‘right to future income’ or ‘claim to performance’ which generates
the most controversy in practice. There is clearly a significant degree of overlap
between each of these rights and an analysis of them must grapple with an
additional problem of distinguishing between rights in rem capable of constituting
an investment pursuant to Rule 22 and simple contractual rights that are
not. The problem is the subject of a separate Rule 24 and much of the discussion
accompanying it is directly relevant to the investment category now under
consideration. Investment securities confer a right in rem to a ‘claim for
money’ and therefore are capable of being an ‘investment’ pursuant to Rule
22. The category of ‘rights to money or future income’ tends to feature in BITs
where there is no separate reference to investment securities, such as the
Germany Model BIT. Insofar as the category under consideration is introduced
in the Germany Model BITas an ‘asset’, it would seem to follow that there must
be a proprietary foundation for any alleged investment in the form of a ‘claim to
money or future income’.
386. The USA Model BIT (2004) makes no reference to the rights in this
investment category.97
The Germany Model BIT in clause (c) does contain a
reference – ‘claims to money which has been used to create an economic value
or claims to any performance having an economic value’ – which is among the
widest formulations in existence. By contrast, clause (i) of the definition in
Chapter 11 of NAFTA expressly carves out certain types of ‘claims to money’
arising out of sale of goods contracts and credit contracts and any other claim to
money which does not memorialise a right in rem mentioned in the proceeding
clauses (a) to (h) of the NAFTA definition.
387. The essential difficulty with this investment category is where to draw the
line; a lottery ticket is capable of being described as a ‘claim to money’ and a
metro ticket as a ‘claim to performance’. These examples demonstrate the
importance of incorporating both legal and economic elements in the definition
of a covered investment, as reflected in Rule 22 and Rule 23. If, in order to
96
EnCana v Ecuador (Merits) 12 ICSID 427, 475–6/182–4, 477/188 (accrued entitlement to a VAT
refund as a ‘claim to money’).
97
Nor does the previous version of 1994: UNCTAD Compendium (Vol. VI, 2002) 502.
184 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
qualify for investment treaty protection, it were sufficient for the claimant to
have secured a legal right to claim money, then one must inevitably determine
that a winning lottery ticket bought in the host state is an investment. But such a
conclusion obviously does violence to the ordinary meaning of the term ‘investment’
and this is avoided if the economic characteristics of an investment are
considered in tandem with the legal rights that are enumerated by the investment
treaty as examples of investments. Applying those economic characteristics in
Rule 23, it is manifest that a lottery ticket cannot constitute an investment.
388. In PSEG v Turkey98
the claimant asserted that an option was capable of
meeting the definition of a ‘a claim to money or a claim to performance having
economic value, and associated with an investment’ for the purposes of Article
1(c)(iii) of the USA/Turkey BIT. The tribunal rejected this argument but without
providing reasons.99
It is clear that an option cannot satisfy the requirements for
the economic materialisation of an investment in Rule 23. Even if the claimant
has an undisputed legal right to the option and thus a ‘claim to performance
having economic value’, the existence of such a right does not necessarily entail
a ‘transfer of resources into the economy of the host state by the claimant
entailing the assumption of risk in expectation of a commercial return’ pursuant
to Rule 23.
389. The tribunal in Saipem v Bangladesh100
‘left open’ the possibility that an
arbitral award rendered in a commercial arbitration could amount to an investment
as ‘credit for sums of money or any right for pledges or services having an
economic value connected with investments, as well as reinvested income’ for
the purposes of Article 1(c) of the Italy/Bangladesh BIT. Whether or not an ICC
award is capable of meeting this definition101
must be secondary to the more
obvious impediment to recognising an award or judgment as an investment by
reference to the economic test in Rule 23.
(vi) Public licences and other public acts
390. Public licences and other public acts can generate rights in rem for the
holder in accordance wirth the municipal law of the host state and such rights
are capable of constituting an investment. For instance, ‘intangible property’ in
the English Theft Act 1968 includes ‘assignable export quotas’ granted by the
government. Such quotas can therefore be stolen.102
98
(Preliminary Objections) 11 ICSID Rep 434.
99
Ibid. 469/189–190.
100
(Preliminary Objections).
101
The tribunal stated that ‘the rights arising out of the ICC Award arise only indirectly from the
investment’ and hence could not satisfy the test in Article 25(1) of the ICSID Convention in any
case: ibid. para. 113.
102
S. 4(1). Attorney-General of Hong Kong v Nai-Keung [1988] Cr LR 125.
I N V E S T M E N T 185
391. The USA Model BIT (2004) includes a note to make explicit the link
between the rights arising under the public act and the existence of an
investment:
Whether a particular type of license, authorization, permit, or similar
instrument (including a concession, to the extent that it has the nature of
such an instrument) has the characteristics of an investment depends on
such factors as the nature and extent of the rights that the holder has under
the law of the Party. Among the licenses, authorizations, permits, and
similar instruments that do not have the characteristics of an investment
are those that do not create any rights protected under domestic law.103
392. This proviso is nothing more than a confirmation of the choice of law
principle in Rule 4.
393. There are limited examples in the investment treaty jurisprudence of public
acts being found to constitute an investment but such examples do exist. In Pope
& Talbot v Canada,104
the tribunal found that a permit giving ‘access to the US
market is a property interest subject to protection’.105
In Generation Ukraine v
Ukraine,106
certain public acts such as an ‘Order on Land Allocation’107
and a
construction permit108
were found to be part of the covered investment in
Ukraine.
(vii) Intellectual property
394. There are two broad categories of intellectual property rights. The first is
legal protection of ideas or their expression and include copyrights, patents for
inventions, industrial design rights, database rights, plant variety rights, and so
on. The second category relates to the protection of distinguishing signs that are
used for the marketing and distribution of goods and services.
395. Intellectual property rights have frequently been the object of international
reclamations109
and there is no conceptual problem in recognising such rights as
investments. It is, nonetheless, important to emphasise the territorial nature of
intellectual property rights and the role of the law of the host state pursuant to
Rule 4.
103
See Appendix 11.
104
(First Merits) 7 ICSID Rep 69.
105
Ibid. 85/96.
106
(Merits) 10 ICSID Rep 240.
107
Ibid. 278–9/18.22.
108
Ibid. 283/18.46.
109
E.g. Chorzów Factory (Germany v Poland) (1928) PCIJ (Ser. A) No. 17 (Merits). Intellectual
property rights have been recognised as ‘possessions’ for the purposes of Art. 1 Protocol 1 of the
European Convention on Human Rights: Smith Kline and French Laboratories v Netherlands
(1990) 66 DR 70, 79; Lenzing AG v United Kingdom [1999] EHRLR 132 (patents).
186 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
396. An intellectual property right does not vest the holder with a property right
in an idea (patent) or an expression (copyright) or in any other intangible subject
matter. An inventor of an industrial process does not need to register a patent in
order to exploit that process; rather, he needs a patent to prevent others from
exploiting it. An intellectual property right is therefore negative in character: it
is a right to exclude others and corresponds to an obligation in rem by which all
subjects of the legal system have a negative duty to refrain from exploiting an
invention or representing one’s business or its products by a certain name or
symbol and so on.110
Hence intellectual property rights are ‘monopolies defined
in terms of ideas and expressions and symbols’.111
397. The legal monopoly represented by an intellectual property right is territorial
in the sense that it only creates duties for those subject to the legal system
that has created that monopoly. Where intellectual property rights are asserted to
be part of a covered investment in an investment treaty dispute, it is, therefore,
critical to ensure that such rights are recognised by the municipal law of the host
state. This issue is considered in the commentary to Rule 4. It is certainly true
that the Agreement in Trade-Related Aspects of Intellectual Property Rights
(‘TRIPS’), within the conspectus of the World Trade Organisation, is having the
effect of harmonising the municipal laws of states on the substantive and
procedural rules for recognising intellectual property rights. But this does not
absolve a tribunal from the task of applying the municipal law of the host state to
resolve any dispute about the existence of intellectual property rights as part of a
covered investment.
(viii) ‘Pre-investment expenditures’
398. The problem of whether ‘pre-investment expenditures’ constitute an ‘investment’
within the terms of the investment treaty or the ICSID Convention only
arises by usage of the vacuous term ‘pre-investment expenditures’. If expenditures
in the host state lead to the acquisition of a property right pursuant to Rule 22
and the economic characteristics of an investment have materialised for the
purposes of Rule 23, then there is an investment in the host state and the
protection of the treaty is engaged. If expenditures in the host state do not result
in the acquisition of a property right cognisable as an investment and the
economic characteristics are not present, then there is no investment. The sole
question is whether the claimant has made an investment in the host state; the
notion of a ‘pre-investment’ is meaningless.112
110
J. Penner, The Idea of Property (1997) 119.
111
Ibid.
112
It is conceptually on par with new parents insisting that their child should be deemed to have
been born at the start of their ante-natal classes.
I N V E S T M E N T 187
398C(1). Mihaly International Corporation v Democratic Socialist
Republic of Sri Lanka113
The claimant successfully participated in a tender process for the construction
of an electricity power generating facility in Sri Lanka. Negotiations
with the Sri Lankan Government ensued, but no agreement was ultimately
concluded. The claimant brought an investment treaty claim to recover its
substantial preparatory costs.
The tribunal’s reasoning in dismissing the objection to its jurisdiction is
not persuasive. The problem started with the tribunal’s characterisation of
the issue as whether the definition of ‘investment’ covered ‘pre-investment
expenditures’.114
As previously noted, this formulation of the issue simply
begs the question as to when an investment is consummated.
The issue before the tribunal, properly defined, was whether various transactional
documents concluded between the claimant and the Sri Lankan
authorities memorialised a right under Sri Lankan law that was cognisable
as an ‘investment’ pursuant to Article I of the USA/Sri Lanka BIT. More
specifically, did the transactional documents in accordance with their governing
law vest the claimant with ‘any right conferred by law or contract’ for
the purposes of Article I(1)(a)(v) of the USA/Sri Lanka BIT? The relevant
transactional documents were analysed by the tribunal and the conclusion was
that ‘there was never any contract entered into between the Claimant and the
Respondent for the building, ownership and operation of the power sta-
tion’.115
This conclusion should have been dispositive for the absence of an
investment pursuant to the definition in the USA/Sri Lanka BIT, which was
not quoted or analysed in the tribunal’s decision. Instead, the tribunal purported
to survey the ‘sources of international law’116
to determine whether
‘pre-investment and development expenditures in the circumstances of the
present case could automatically be admitted as an “investment”’.117
398C(2). Zhinvali Development Limited v Republic of Georgia118
The consent to ICSID arbitration in Zhinvali was not recorded in an investment
treaty but rather in the national investment law. The claimant sought
compensation for its ‘pre-investment expenditures’ and the tribunal defined
113
(Preliminary Objections) 6 ICSID Rep 310.
114
Ibid. 317/34.
115
Ibid. 319/47.
116
Ibid. 322/60.
117
Ibid. The tribunal probably came to the correct result in upholding the jurisdictional objection
because it had found that the three relevant transactional documents (the Letter of Intent, Letter
of Agreement and Letter of Extension) did not create any contractual obligations with respect to
the building, ownership and operation of the power station (ibid. 319/48). This conclusion
appears to be correct due to the stipulations in the instruments that they were subject to a final
contract.
118
(Preliminary Objections) 10 ICSID Rep 3.
188 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
the issue as ‘whether the Claimant’s purported expenditures qualify as an
“investment” under the 1996 Georgian Investment Law’,119
which supplied
the operative definition of an ‘investment’ for the purposes of Article 25(1) of
the ICSID Convention.120
It is not, however, expenditures that might qualify
as an investment, but rather it is the product of those expenditures. Unlike in
Mihaly, however, the tribunal did confront squarely the issue as to whether the
claimant had acquired a property right within the relevant definition of an
investment. Thus, in particular, the tribunal considered whether, pursuant to
the Georgian Investment Law, the claimant had obtained ‘intellectual property’
by virtue of its expenditure on preparatory studies and feasibility reports
in respect of a proposed project for the rehabilitation of a hydroelectric power
plant and its tailrace tunnel. The tribunal was not satisfied that the claimant
had acquired such a right.121
The tribunal went on to consider, following the
example of Mihaly, whether the claimant’s ‘development costs’ independently
qualified as an investment.122
The question posed by the tribunal was whether
Georgia had consented to the treatment of ‘development costs’ as an investment
for the purposes of Article 25(1) of the ICSID Convention independently
of the definition of an investment in the 1996 Investment Law.
Unsurprisingly, the tribunal found no evidence of such consent on the
record.123
Rule 23. The economic materialisation of an investment requires the
commitment of resources to the economy of the host state
by the claimant entailing the assumption of risk in expectation
of a commercial return.124
119
Ibid. 88/375.
120
And was also the enactment containing Georgia’s offer to submit investment disputes to ICSID
arbitration.
121
Ibid. 93/333.
122
The tribunal’s choice of words in its actual formulation was unfortunate but produced no
mischief in its ultimate decision on the point: ‘In keeping with the learning of the Mihaly
Case award, we must, in divining the presence or absence of an Article 25(1) “investment” in
this case, determine whether Georgia assumed State responsibility for the Claimant’s “development
costs”’ (ibid. 98/406). The reference to ‘State responsibility’ in this context is difficult to
fathom.
123
Ibid. 102/415.
124
The requirements of commitment of resources and assumption of risk are confirmed in: Salini v
Morocco (Preliminary Objections) 6 ICSID Rep 400, 413/52; LESI (Dipenti) v Algeria
(Preliminary Objections) para. 13(iv); LESI (Astaldi) v Algeria (Preliminary Objections) para.
72(iv); Bayindir v Pakistan (Preliminary Objections) paras. 104–38; Jan de Nul v Egypt
(Preliminary Objections); Saipem v Bangladesh (Preliminary Objections) para. 99; USA
Model BIT (2004), Definition of an ‘Investment’ (‘every asset that an investor owns or controls,
directly or indirectly, that has the characteristics of an investment, including such characteristics
as the commitment of capital or other resources, the expectation of gain or profit, or the
assumption of risk’), see Appendix 11; OECD, Negotiating Group on the Multilateral
Agreement on Investment (MAI), ‘Definition of Investment and Investor’ (DAFFE/MAI(97)
7, 7 February 1997). The definition of the economic materialisation of the investment is very
close to the submission of the Slovak Republic in CSOB v Slovak Republic (Preliminary
I N V E S T M E N T 189
A . T H E I M P O RTA N C E O F C E RTA I N T Y
399. Of all the provisions of an investment treaty, legal certainty about the
proper scope of the term ‘investment’ is perhaps most critical if the treaty is to
achieve its objective of attracting foreign investment. A putative investor is
entitled to structure its investment to benefit from the protection of an investment
treaty and the concomitant reduction of sovereign risk attaching to the
investment (see Rule 51) – a putative investor fashioning its conduct in this way
is an example, par excellence, of the investment treaty fulfilling its proclaimed
objective. As noted in Bayview v Mexico:125
When the investment is made in a different country which has concluded
an investment protection treaty covering that investment, the investor is
entitled to rely upon the fact that the State Parties to the treaty have decided
to commit themselves to give a minimum level of legal protection to such
foreign investments.126
400. For that reason, the putative investor must be in a position to know whether
or not its investment project will qualify for investment protection at the time
the decision is made to commit capital in the host state.
401. If the fundamental objective of an investment treaty is to attract foreign
capital, then the concept of an investment cannot be one in search of meaning in
the pleadings submitted to an investment treaty tribunal that is established years,
perhaps decades, after the decision to commit capital to the host state was made.
It is for this reason that the approach advocated in Salini v Morocco, which
combines inchoate ‘typical’ investment characteristics with a wide margin of
appreciation in the tribunal, cannot be endorsed without significant refinement.
According to the Salini test, the following elements typically characterise an
investment: (a) a contribution of money or other assets of economic value; (b) a
certain duration; (c) an expectation of profit; (d) an element of risk; and, (e) a
contribution to the host state’s development.127
The nature of the inquiry was
recently described in the following terms:
Objections) 5 ICSID Rep 335, 353–4/78 (‘the acquisition of property or assets through the
expenditure of resources by one party (the “investor”) in the territory of a foreign country (the
“host State”), which is expected to produce a benefit on both sides and to offer a return in
the future, subject to the uncertainties of the risk involved’). According to the Slovak Republic,
CSOB’s loan did not constitute an investment. The tribunal acknowledged that ‘CSOB’s loan
did not cause any funds to be moved or transferred from CSOB to the Slovak Collection
Company in the territory of the Slovak Republic’ (ibid.) but nevertheless ‘the basic and ultimate
goal of the Consolidation Agreement was to ensure a continuing and expanding activity of
CSOB in both Republics’ and hence CSOB qualified as an investor (ibid. 356/88).
125
Bayview v Mexico (Preliminary Objections).
126
Ibid. para. 99.
127
Salini v Morocco (Preliminary Objections) 6 ICSID Rep 400, 413/52; C. Schreuer, The ICSID
Convention: A Commentary (2001) 140. For a critique of the Salini criteria: Biwater v Tanzania
(Merits) paras. 312 et seq.
190 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
The classical Salini hallmarks are not a punch list of items which, if
completely checked off, will automatically lead to a conclusion that
there is an ‘investment.’ If any of these hallmarks are absent, the tribunal
will hesitate (and probably decline) to make a finding of ‘investment.’
However, even if they are all present, a tribunal will still examine the
nature and degree of their presence in order to determine whether, on a
holistic assessment, it is satisfied that there is an ICSID ‘investment.’128
402. There is a premium for precision in defining a protected investment and
hence the subjectivity inherent is this test, and reflected in this quotation, makes
it unfit for the purpose.
403. Rule 23 retains only three of the Salini characteristics of an investment in
modified form; namely: (i) commitment of resources to the economy of the host
state, (ii) assumption of risk, and (iii) expectation of a commercial return. It is
these elements that are capable of generating an objective test and the necessary
level of certainty for putative investors. It is also these three characteristics that
featured in the draft definition of an investment in the Multilateral Agreement
on Investment.129
B . ‘ C O M M I T M E N T O F R E S O U R C E S TO T H E E C O N O M Y
O F T H E H O S T S TAT E ’
(i) The requisite territorial connection
404. The requisite territorial connection has already been analysed in terms of
the law applicable to an issue relating to the existence or scope of property rights
comprising the investment (Rule 4) and the situs of the bundle of rights in
property for the purposes of the legal materialisation of an investment (Rule 22).
The territorial nexus between the claimant’s contribution of capital and
the economy of the host state is also a fundamental aspect of the economic
materialisation of the investment; indeed it is the realisation of the prime
objective for the contracting state parties to enter into an investment treaty in
the first place. It is self-evident that this aspect of the economic rationalisation of
the investment must be interpreted strictly to ensure that the claimant has
fulfilled its side of the quid pro quo before resorting to arbitration with the
host state. In other words, the territorial connection between the claimant’s
contribution of capital and an investment enterprise in the host state must be
direct rather than indirect or consequential.
128
Malaysian Salvors v Malaysia (Preliminary Objections) para. 106(e).
129
OECD, Negotiating Group on the Multilateral Agreement on Investment (MAI), ‘Definition of
Investment and Investor’ (DAFFE/MAI(97)7, 7 February 1997).
I N V E S T M E N T 191
405. Among the cases considered below, the first two – Bayview v Mexico and
Petrobart v Kyrgyz Republic – provide unambiguous illustrations of the absence
of the requisite territorial connection, albeit that the point was wrongly decided
in the latter case. Much closer to the borderline for the requisite territorial
connection are the SGS v Pakistan and SGS v Philippines cases, which are
examined thereafter.
405C(1). Bayview Irrigation District et al v United Mexican
States130
The US claimant alleged that it had a right to take a certain amount of water
from the Rio Bravo/Rio Grande River in Texas pursuant to Texan law and
that this right had been interfered with upstream and across the border by
acts attributable to the Mexican Government. The tribunal was prepared to
find that the right to water established under Texan law falls within the
definition of ‘property’ in Article 1139(g) of NAFTA:131
[R]eal estate or other property, tangible or intangible, acquired in the
expectation or used for the purpose of economic benefit or other
business purposes[.]
The fatal flaw in the claimant’s attempt to establish a protected investment
under NAFTA was that its right to water did not satisfy the
territorial nexus requirement in Rule 22 and Rule 23 . The claimant
did not have a property right situated in Mexico and recognised by
Mexican law:
[T]he holder of a right granted by the State of Texas to take a certain
amount of water from the Rio Bravo/Rio Grande does not ‘own’, does
not ‘possess property rights in’ a particular volume of water as it
descends through Mexican streams and rivers towards the Rio
Bravo/Rio Grande and finds its way into the right-holders irrigation
pipes. While the water is in Mexico, it belongs to Mexico, even though
Mexico may be obliged to deliver a certain amount of it into the Rio
Bravo/Rio Grande for taking by US nationals.132
Mexico’s obligation referred to in this passage stems from a bilateral
treaty between the USA and Mexico concerning the utilisation of the
waters of the rivers in question. The tribunal noted that that bilateral
treaty does not create property rights for the benefit of private
130
(Preliminary Objections).
131
Ibid. para. 111.
132
Ibid. para. 116. The US Supreme Court would have decided the case the same way in an action
invoking the Fifth Amendment: United States v Willow River Power Co., 324 US 499 (1945)
(the claimant had no property interest in the head of water in a river).
192 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
individuals or entities that are capable of constituting an investment for
the purposes of NAFTA.133
405C(2). Petrobart Limited v Kyrgyz Republic134
The alleged investment was a debt arising out of a ‘Goods Supply Contract’
for gas condensate between between Petrobart (a Gibraltar company) and
KGM,135
a company owned by the Kyrgyz Republic.136
Petrobart relied
upon Article 1(6)(f) of the ECT, which provides:
(6) ‘Investment’ means every kind of asset, owned or controlled
directly or indirectly by an Investor and includes:
[…]
(f) any right conferred by law or contract or by virtue of any licences
and permits granted pursuant to law to undertake any Economic
Activity in the Energy Sector.
The drafting in the ECT leaves much to be desired and the definitional
section in Article 1 is no exception. The tribunal failed to appreciate that
there must be territorial connection between the investment and the
host state respondent and thus Article 1(6)(f) should be interpreted as a
right to ‘undertake any Economic Activity in the Energy Sector’ of the
particular Contracting Party whose acts are alleged to have caused
prejudice to the investment. In the ECT, the requisite territorial connection
is made explicit in Article 26(1), which circumscribes the ratione
materiae jurisdiction of the tribunal:
Disputes between a Contracting Party and an Investor of another
Contracting Party relating to an Investment of the latter in the Area
of the former, which concern an alleged breach of an obligation of the
former under Part III…137
If Article 26(1) determines the scope of the tribunal’s jurisdiction, and
that provision refers to a territorial nexus between the respondent host
state and the investment, then the tribunal was bound to satisfy itself of
that territorial nexus before upholding its jurisdiction.
An analysis of other provisions of the ECT confirms the requirement of a
territorial nexus. The definition of ‘Economic Activity in the Energy Sector’
in Article 1(5) of the ECT extends to ‘economic activity concerning the
133
Ibid. para. 121.
134
(Merits).
135
Kyrgyzgazmunaizat.
136
Ibid. para. 4.
137
Art. 26(1) of the ECT. See Appendix 4.
I N V E S T M E N T 193
exploration, extraction, refining, production, storage, land transport,
transmission, distribution, trade, marketing, or sale of Energy Materials
and Products’. From this the tribunal inferred that the Goods Supply
Contract conferred a right ‘to undertake an economic activity concerning
the sale of gas condensate’ and, therefore, constituted an investment. But
it is tolerably clear from the ‘Understandings’ accompanying the Final Act
of the European Energy Charter Conference,138
that ‘sale’ in this context
means the right to sell Energy Materials and Products on the territory of the
host state by means of some kind of permanent establishment. The relevant
section of the ‘Understandings’ reads:
The following activities are illustrative of Economic Activity in the
Energy Sector:
(i) prospecting and exploration for, and extraction of, e.g., oil, gas,
coal and uranium;
(ii) construction and operation of power generation facilities, including
those powered by wind and other renewable energy sources;
(iii) land transportation, distribution, storage and supply of Energy
Materials and Products, e.g., by way of transmission and distribution
grids and pipelines or dedicated rail lines, and construction of facilities
for such, including the laying of oil, gas, and coal-slurry pipelines;
(iv) removal and disposal of wastes from energy related facilities such
as power stations, including radioactive wastes from nuclear power
stations;
(v) decommissioning of energy related facilities, including oil rigs, oil
refineries and power generating plants;
(vi) marketing and sale of, and trade in Energy Materials and Products, e.g.,
retail sales of gasoline; and
(vii) research, consulting, planning, management and design activities
related to the activities mentioned above, including those aimed at
Improving Energy Efficiency.139
No problems would arise in the identification of the territorial connection
between a ‘right … to undertake any Economic Activity in the
Energy Sector’ and the respondent Contracting Party in examples (i)
to (v) because the natural resources listed in (i) and the ‘facilities’ listed in
(ii) to (v) have an obvious situs. Example (vi), which is particularly
relevant to the case under discussion, mentions ‘retail sales of gasoline’.
The retail sale of Energy Materials and Products must obviously be
carried out through a business established in a Contracting Party and
hence, once again, the situs is readily identified. Suppose Petrobart was
engaged in retail sales of gasoline through an established retail network
in Gibraltar and its supplier, the Kyrgyz Republic, failed to make a
138
To which reference is made by a footnote to Article 1(5) of the ECT. See Appendix 4.
139
Final Act of the European Energy Charter Conference, Understandings, IV/2/b, 25 (emphasis
added).
194 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
delivery. Does Petrobart have the right to pursue a claim against the
Kyrgyz Republic under Article 26 of the ECT? Clearly not, because
Petrobart does not have an asset in the energy sector of the Kyrgyz
Republic. Would the situation change if Petrobart is the supplier and it
is the Kyrgyz Republic which is engaged in retail sales within its own
territory?
405C(3). Socie´te´ Ge´ne´rale de Surveillance SA v Pakistan140
and
Socie´te´ Ge´ne´rale de Surveillance SA v Republic of the Philippines141
In both cases, Socie´te´ Ge´ne´rale de Surveillance SA (‘SGS’) had concluded
contracts with the host states to provide ‘pre-shipment inspection’ services
(a ‘PSI Agreement’)142
with respect to goods to be exported from certain
countries to the host states. By providing this inspection service, SGS
ensured that the goods were properly classified for the imposition of duties
by the host states, thus increasing the efficiency of customs revenue collection.
In each case, the host state objected to the jurisdiction of the tribunals
on the basis that SGS had not made an investment in the territory of the host
state as required by the BIT, and the ICSID Convention.
The tribunal in SGS v Pakistan approached the question by referring exclusively
to the definition of an investment in the Switzerland/Pakistan BIT.
According to the tribunal, the PSI Agreement between SGS and Pakistan
constituted a ‘concession under public law’ and gave rise to ‘claims to
money’ and ‘rights given by law’ and ‘by contract’; hence there was an
investment pursuant to the definition in the BIT.143
The tribunal did not,
however, consider the independent territorial requirement for the investment
to qualify for protection under the BIT, save for its observation that
SGS had to make certain ‘relatively small’ expenditures in the territory of
Pakistan in order to perform its obligations under the PSI Agreement.144
There is no doubt that the substantial part of SGS’s performance of the PSI
Agreement had taken place outside Pakistan. The locus for pre-shipment
inspections is naturally outside the country of destination for the goods. It is
true that SGS had established two liaison offices in Pakistan and funded
these offices to assist in the performance of its obligations under the PSI
Agreement; however, the liaison offices did not engage in any commercial
activities and thus did not generate any revenues.145
All that could be said in
relation to the territorial requirement was that there was an expenditure of
140
(Preliminary Objections) 8 ICSID Rep 406.
141
(Preliminary Objections) 8 ICSID Rep 518.
142
This is the term used in SGS v Pakistan. In SGS v Philippines the contract was for the ‘provision
of comprehensive import supervision services’ (‘CISS Agreement’). The tribunal in SGS v
Philippines noted that the agreement in SGS v Pakistan was ‘for analogous services to those in
the present case’ (ibid. 543/94).
143
Ibid. 433/135.
144
Ibid. 433/136.
145
Ibid. 421/77. There was no dispute between the parties on this point: ibid.
I N V E S T M E N T 195
funds in Pakistan that was incidental to SGS’s performance of its primary
obligations abroad. The tribunal instead reinforced its conclusion that SGS
had made a covered investment by noting that the functions delegated to
SGS were of a jure imperii character.146
But this must be irrelevant to the
question. Although unlikely to happen in practice, suppose Pakistan had
delegated part of its consular services by employing a private company in a
third state to process visas for travel to Pakistan. This is undoubtedly a
delegation of a jure imperii function, but the private firm’s commitment of
resources in the third state could hardly satisfy the territorial requirement
for an investment in Pakistan.147
Another unsatisfactory feature of the tribunal’s reasoning on the question
of the existence of an investment in SGS v Pakistan was its failure to acknowledge,
let alone consider, the prior decision of the Supreme Court of
Pakistan on this point.148
Of course the tribunal was not bound by the
Supreme Court’s judgment in ruling upon its own jurisdiction, but considerations
of judicial comity might have persuaded the tribunal to engage
with the matters debated by the parties before this forum. The Supreme
Court had concluded that there was no investment because, pursuant to the
PSI Agreement, ‘mere services had been acquired for evaluation of the
goods mostly in foreign countries and there is no element of laying
money by [SGS] for acquisition of any species of property’.149
In SGS v Philippines, the tribunal recognised explicitly that there is a
requirement that the investment is made in the territory of the host state.
The Philippines argued that there was no investment in its territory because
‘the place of substantial performance’ of SGS’s obligations under the PSI
Agreement was in the countries of export;150
moreover, SGS was not tax
resident in the Philippines despite its establishment of a liaison office in
Manila.151
The tribunal acknowledged that ‘the bulk of the cost of providing
the service was incurred outside the Philippines’152
but nevertheless ‘a
substantial and non-severable aspect of the overall service was provided in
the Philippines’153
and that ‘SGS’s entitlement to be paid was contingent on
that aspect’.154
The ‘substance’ test proposed by the Philippines was thus
rejected. This conclusion can be supported: there is no reason in principle
to search for the ‘centre of gravity’ of the investment, so long as there is a
146
Ibid. 434/139.
147
In SGS v Philippines, the tribunal cited the examples of the construction of an embassy in a third
state or the provision of security services to the embassy as instances where there would be no
investment in the territory of the state whose embassy it was: (Preliminary Objections) 8 ICSID
Rep 518, 545/100.
148
(Judgment of Munir A. Sheikh J, 3 July 2002) 8 ICSID Rep 356.
149
Ibid. 371/38.
150
(Preliminary Objections) 8 ICSID Rep 518, 532–3/58.
151
Ibid. 547/104.
152
Ibid. 546/106.
153
Ibid. 546/102.
154
Ibid.
196 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
commitment of resources into the economy of the host state which has
resulted in the acquisition of some form of proprietary interest cognisable
as an investment. The tribunal found on the evidence that this was the case,
due to the substantial expenditure incurred by SGS in running the Manila
office, which was essential to the inspection operation abroad and which
rendered the inspection certificates to the Government.155
(ii) The provision of services does not entail a ‘commitment of resources’
406. The ICSID annulment proceedings in Mitchell v Congo156
were concerned
first and foremost with the question of whether the provision of legal services
might constitute an investment pursuant to the definition of such in Article I of
the USA/Congo BIT. In the absence of a cognisable investment the tribunal
would not have had jurisdiction, and thus a decision to the contrary would entail
that the tribunal had manifestly exceeded its powers for the purposes of Article
52(1)(b) of the ICSID Convention. The problem raised in this case illustrates the
importance of testing the existence of an investment by reference to the requirements
for both the legal and economic materialisation of the investment.
406C. Patrick Mitchell v Democratic Republic of Congo157
The key finding of the tribunal that became the focus of the annulment
proceedings is reproduced below:
The Tribunal finds that in respect of items of Mr. Mitchell’s property
seized during the intervention of the military forces on March 5,
1999, the requirement listed under Article I(c)(i) of the BIT is met.
This concerns movable property and any documents, like files,
records and similar items. It further appears from the text of the
provision as quoted that the investor’s right to ‘know-how’ and ‘goodwill’
(iv) as well as the right to exercise its activities (vi) are elements
which are stated as being covered by the protection of investments
under the BIT. This concerns also the payments registered on the
accounts of Mr. Mitchell in the United States to which Claimant refers
in order to demonstrate his activity within the DRC. Indeed, these
payments are based on bills for fees referring to legal consultations
provided by Mr. Mitchell and his employees through the office
‘Mitchell & Associates’ within the DRC.158
The claimant, Mr Mitchell, no doubt owned certain property (documents,
files, etc.) in the host state as this passage of the award recognises.
Furthermore, the claimant also employed his know-how in providing
legal advice. These items do feature in the list of property rights that may
155
Ibid. 547/105.
156
(Annulment).
157
(Annulment).
158
Ibid. para. 48.
I N V E S T M E N T 197
comprise an investment in Article I of the BIT; but is that dispositive of the
matter? The question is whether the acquisition and use of those items of
property capable of satisfying the requirements for the legal materialisation
of the investment in Rule 22, also resulted in the economic materialisation
of the investment pursuant to Rule 23. The answer must be no: there is no
expectation of profit and assumption of risk in the acquisition of ‘documents
and files’.
The reference to know-how in some investment treaties surely envisages a
formal contribution of know-how to the charter capital of an enterprise
where its value is assessed and its existence is registered. The know-how
represented by a manufacturing process which is contributed to a manufacturing
plant in the host state by the claimant might, therefore, qualify as an
investment. By contrast, the know-how deployed in the practice of one’s
profession is not assignable and does not have the characteristics of property.
The tribunal’s reasoning would have been more coherent if the asset constituting
the investment in the Congo had been described as the legal
services firm. There is no difficulty in describing the legal services firm as
an investment according to the criteria in Rule 23. The annulment committee
was wrong to fixate upon the items of property owned by the claimant in
the host state that were incidental to the provision of legal services and hold
that there was no investment in the ‘economic sense’.159
C . E L E M E N T S O F T H E S A L I N I T E S T N O T R E TA I N E D
I N R U L E 2 3
407. Certain of the ‘Salini hallmarks’ of an investment are not retained in Rule
23 – the reason being that their inclusion generates too much subjectivity where
precision is essential for the investment treaty to fulfil its stated object and
purpose. The difficulties attending these discarded elements of the Salini test are
exposed in the following critique of the award in Malaysian Salvors v Malaysia.
407C. Malaysian Historical Salvors Sdn, Bhd v Government
of Malaysia160
The alleged investment concerned the claimant’s location and salvage of the
cargo of a British vessel that sank off the coast of Malacca in 1817 pursuant
to a contract concluded with the Government.161
The claimant’s remuneration
under the contract was wholly contingent upon its success in locating
the vessel.162
The vessel was in fact located and its cargo was salvaged and a
159
Ibid. para. 38.
160
(Preliminary Objections).
161
Ibid. para. 7.
162
Ibid. para. 10.
198 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
dispute arose concerning the parties’ respective entitlements upon the
subsequent sale of the cargo.163
The claimant commenced proceedings
pursuant to the arbitration clause in the contract to recover certain amounts
from the Government which it alleged were due. The seat of the arbitration
was Kuala Lumpur. The claimant’s claims were dismissed by the arbitral
tribunal and the claimant alleged that it suffered a denial of justice in the
Malaysian High Court in seeking to have the award set aside.164
The claimant
then commenced ICSID proceedings based on Malaysia’s consent to
arbitration in the Malaysia/UK BIT.
The claimant asserted that its performance under the salvage contract
constituted an investment pursuant to the following provisions of the
Malaysia/UK BIT:
Article 1 Definition
For the purposes of this Agreement:
(1) (a) “investment” means every kind of asset and in particular,
though not exclusively, includes:
[…]
(iii) claims to money or to any performance under contract, having a
financial value;
[…]
(v) business concessions conferred by the law or under contract,
including concessions to search for, cultivate, extract or exploit natural
resources.
The tribunal formulated the question to be resolved as ‘whether there is an
“investment” within the meaning of that term as found in the Malaysia-UK
BIT as well as in Article 25(1) of the ICSID Convention’.165
It answered
this question by an analysis of five ‘characteristics of an investment’.
First: ‘the regularity of profits and returns’.166
The tribunal noted that
there was no regularity of profits and returns on the present facts but
found that this criterion ‘is not always critical’ or ‘determinative’ or a
‘classical hallmark of “investment”’. If all these descriptors are accurate,
then it is difficult to fathom the utility of the criterion as one of the limbs
of an important judicial test.
Second: ‘contributions’.167
The tribunal found that ‘the Claimant has
expended its own funds, whether in the form of equipment, know-how
163
Ibid. paras 11–14.
164
Ibid. para. 16.
165
Ibid. para. 42.
166
Ibid. para. 108.
167
Ibid. para. 109.
I N V E S T M E N T 199
or personnel, or in the performance of the Contract in its entirety’.168
This requirement bears semblance to the first element of Rule 23: ‘the
commitment of resources to the economy of the host state’. But the
semblance is superficial because Rule 23 includes a territorial element
insofar as the commitment of resources must be to the economy of the
host state. In the present case, it is difficult to ascertain how the claimant
would have satisfied that requirement by expending resources on its
salvage efforts.
Third: ‘duration of the contract’.169
The tribunal found that the contract
had required four years to complete, and, therefore, ‘complied with the
minimum length of time of two to five years’ in Salini.170
It is very
doubtful that a tribunal could legislate for a specific minimum duration
for an investment in such a manner that would have preclusive effect in
subsequent cases. The tribunal then noted that the contract had in fact
been for an initial term of 18 months but had been extended by mutual
consent. There was, according to the tribunal, an element of ‘fortuity’ in
this extension because it was a function of whether or not the claimant
found the vessel. The tribunal then concluded that ‘although the
Claimant satisfies the duration characteristic in the quantitative sense,
it fails to do so in the qualitative sense’.171
The significance of this
distinction is by no means clear. Finally, similar to the first criterion,
the tribunal held that ‘such failure does not, by itself, mean that the
project was not an “investment”… since a holistic assessment of all the
hallmarks still needs to be made’.172
Once again, the ‘duration’ requirement
cannot provide concrete guidance as to what constitutes an investment
if it is susceptible to being waived by the tribunal.
Fourth: ‘risks assumed under the contract’.173
The tribunal noted that ‘all
risks of the Contract were borne by the claimant’ but that most salvage
contracts entail risk because they are on a ‘no-finds-no-pay’ basis and
thus if risk were the solitary criterion then all salvage contracts would
be investments.174
The tribunal classified these contractual risks as
‘anything other than normal commercial risks’ and that ‘an ordinary
commercial contract cannot be considered as an investment’.175
The
tribunal appears to conflate two elements of the concept of an investment
here. The ‘assumption of risk’ is a factor included in Rule 23: the
assumption of risk must have accompanied the commitment of resources
to the host state. It is thus a condition precedent for an investment
168
Ibid.
169
Ibid. para. 110–11.
170
Ibid. para. 110.
171
Ibid. para. 111.
172
Ibid.
173
Ibid. para. 112.
174
Ibid.
175
Ibid.
200 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
pursuant to Rule 23 but it does not feature as part of the test in isolation
because otherwise, as the tribunal experienced in the present case, it is
devoid of utility. To the extent that an ‘ordinary commercial contract’
might not be an investment, that is because there might not be an
acquisition of a property right in the host state memorialised by the
contract, or because it does not entail the commitment of resources to
the host state. But to disqualify an ‘ordinary commercial contract’ on the
basis of a distinction between ‘normal commercial risks’ and some other
category of risks (not defined by the tribunal) is highly problematic.
Fifth: ‘economic development of host state’.176
As previously noted, in
the absence of specific criteria set out in the investment treaty or the
ICSID Convention, this requirement compels a tribunal to make a
highly subjective and possibly invidious distinction between investments
that make a ‘significant contribution to the host state’s economy’ and
those that do not. The tribunal’s assessment of this requirement in the
present case illustrates the difficulties:
Unlike the Construction Contract in Salini which, when completed,
constituted an infrastructure that would benefit the
Moroccan economy and serve the Moroccan public interest, the
Tribunal finds that the Contract did not benefit the Malaysian
public interest in a material way or serve to benefit the Malaysian
economy in the sense developed by ICSID jurisprudence, namely
that the contributions were significant.
… To the extent that the claimant had provided gainful employment
to [approximately 40] Malaysians, the Tribunal accepts that
the Contract did benefit the Malaysian public interest and economy
to some extent. However, this benefit is not of the same quality or
quantity envisaged in previous ICSID jurisprudence. The benefits
which the Contract brought to the Respondent are largely cultural
and historical. These benefits, and any other direct financial benefits
to the Respondent, have not been shown to have led to significant
contributions to the Respondent’s economy in the sense envisaged
in ICSID jurisprudence.177
The tribunal’s ultimate conclusion on the existence of an investment was
that ‘while the Contract did provide some benefit to Malaysia, they did
not make a sufficient contribution to Malaysia’s economic development
to qualify as an “investment” for the purposes of Article 25(1) or Article 1
(a) of the BIT’.178
176
Ibid. paras 113–45.
177
Ibid. paras 131–2.
178
Ibid. para. 143.
I N V E S T M E N T 201
408. In Mitchell v Congo,179
the ad hoc annulment committee ruled that the
provision of legal services did not qualify as an investment. Central to that
conclusion was the finding that ‘the existence of a contribution to the economic
development of the host State as an essential – although not sufficient –
characteristic or unquestionable criterion of the investment’.180
It is submitted
that this is an unworkable criterion for the existence of an investment because
of its subjective nature;181
whether or not a commitment of capital or resources
ultimately proves to have contributed to the economic development of the host
state can often be a matter of appreciation and generate a wide spectrum of
reasonable opinion. The ad hoc committee’s caveats to this criterion illustrate
its weakness; for in the words of the committee ‘[it] does not mean that this
contribution must always be sizable or successful’ and ‘this concept of economic
development is, in any event, extremely broad but also variable depending
on the case’.182
Such an elastic concept is hardly conducive of legal certainty and
a prospective investor is entitled to know with a degree of certitude whether or
not its commitment of capital attracts the protection of an investment treaty and/or
the ICSID Convention.183
Rule 24. Where the claimant relies upon a contract to establish an
investment pursuant to Rule 22 and Rule 23, the tribunal
should differentiate between rights in personam as between
the contracting parties and rights in rem that are memorialised
by the contract.184
The rights in personam do not generally
qualify as an investment independently of the rights in rem.
A . T H E I M P O RTA N C E O F D I S T I N G U I S H I N G R I G H T S
I N R E M A N D R I G H T S I N P E R S O N A M
409. In this chapter we are concerned with the essential characteristics of
an investment, the existence of which is the gateway to the substantive and
procedural protection afforded by the investment treaty. This question is distinct
from the scope of the tribunal’s ratione materiae jurisdiction. The tribunal
may have jurisdiction over contractual claims arising in connection with the
investment depending upon the particular provision in the treaty that defines
the types of disputes capable of being submitted to investment treaty arbitration.
179
(Annulment).
180
Ibid. para. 33.
181
It was rejected as a criterion essentially for this reason in: LESI (Dipenti) v Algeria (Preliminary
Objections) para. 13(iv); LESI (Astaldi) v Algeria (Preliminary Objections) para. 72(iv).
182
Ibid.
183
Casado v Chile (Merits) para. 232.
184
(Semble) Mytilineos v Serbia (Preliminary Objections) paras. 124–5.
202 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
But whether or not contractual rights per se can constitute an investment
is a different matter; it is a question that arises before the inquiry into the
scope of the tribunal’s ratione materiae jurisdiction because the tribunal’s
adjudicative power is predicated upon the existence of a qualifying investment.
410. This distinction is manifest in the USA Model BIT (2004) in the definition
of an ‘investment agreement’. Article 24 of the Model BITallows the investor or
the investment to bring a claim based upon an investment agreement and thus the
scope of the tribunal’s ratione materiae jurisdiction extends to contractual claims.
But this does not mean that an ‘investment agreement’ constitutes an investment
per se; rather, it is defined as ‘a written agreement between a national authority
of a Party and a covered investment or an investor of the other Party, on which the
covered investment or the investor relies in establishing or acquiring a covered
investment other than the written agreement itself’.185
Thus, a covered investment
is memorialised by an investment agreement but these concepts are distinct.
411. The principle reflected in Rule 24 is that it is generally rights in rem that
constitute an investment. This section probes the principle further by defining
the circumstances where a contractual relationship can generate property rights.
Contractual rights arising out of a contract for the supply of goods and services,
for instance, would not satisfy the requirements for the economic materialisation
of the investment in Rule 23 because the claimant would be unable to
establish a territorial nexus with the host state. On the other hand, a more
complex contractual arrangement may evidence the claimant’s contribution of
resources to the economy of the host state in return for property rights within the
host state’s legal order.
412. The essential distinction between property and contract in general international
law on the protection of the rights of foreign nationals, and the numerous
international treaties with the same objective, is justified by reference to the core
principles of each legal institution. A right in rem is a right in respect of a thing
(a res) whereas a right in personam is a right in the conduct of someone. A right
in rem binds the whole world, whereas a right in personam binds only specific
individuals or legal entities.
413. Rights in rem have a special significance in every legal system. According
to Penner:
Norms in rem establish the general, impersonal practices upon which
modern societies largely depend. They allow strangers to interact with
each other in a rule-governed way, though their dealings are not personal
in any significant respect.186
185
See Appendix 11.
186
J. Penner, The Idea of Property (1997) 30. See also: J. Waldron, The Right to Private Property
(1988) 42–3.
I N V E S T M E N T 203
414. As a result of this special significance, property law and contract law
operate very differently:
Contract law typically permits free customization of the rights and duties
of the respective parties to any contractual agreement; in other words,
contract rules are generally default rules. Property law, in contrast, requires
that the parties adopt one of a limited number of standard forms that define
the legal dimensions of their relationship; generally speaking, these are
mandatory rules that may not be modified by mutual agreement.187
415. The unique characteristics of a right in rem are distilled by Hohfeld
in his classic study ‘Fundamental Legal Conceptions as Applied in Judicial
Reasoning’:188
(1) in rem rights are characterized by both an indefinite class of dutyholders
and by large numbers of dutyholders; (2) in rem rights are not simply
aggregations of in personam rights but are qualitatively different in that
they attach to persons through their relationship to particular things rather
than as persons; (3) in rem rights are numerous and indefinite in two
directions – not only does each in rem right give rise to a large and
indefinite number of duty holders, but also each dutyholder holds such
duties to a large and indefinite number of rightholders; (4) in rem rights are
always claims to abstentions by others as opposed to claims to performances
on the part of others.189
416. Due to the possible impact of rights in rem upon third parties, all national
legal systems limit property rights to a small number of well-defined types. This
is most conspicuous in civilian countries in accordance with the numerus
clausus principle. Systems of registration are established for the more valuable
property rights in a legal system to facilitate actual notice of those rights and to
ensure that a doctrine of constructive notice operates fairly and justly.
417. A state, like all individuals or entities within its jurisdiction, has actual or
constructive notice of rights over property because such rights bind everyone in
187
T. Merrill and H. Smith, ‘The Property/Contract Interface’ (2001) 101 Columbia LR 773, 776;
T. Merrill and H. Smith, ‘Optimal Standardization in the Law of Property: The Numerus Clausus
Principle’ (2000) 110 Yale LJ 1, 9–24. For a critique of this approach: H. Hansmann and
R. Kraakman, ‘Property, Contract, and Verification: The Numerus Clausus Problem and the
Divisibility of Rights’ (2002) 31 J of Legal Studies 373.
188
(1917) 107 Yale LJ 710.
189
This definition of a right in rem is an adaption from Hohfeld’s study by Merrill and Smith:
T. Merrill and H. Smith, ‘The Property/Contract Interface’ (2001) 101 Columbia LR 773, 789.
See also: A. Honoré, ‘Rights of Exclusion and Immunities Against Divesting’ (1960) 34 Tulane
LR 453. English law contains no settled definition of a right in rem but there are some judicial
pronouncements of interest: National Provincial Bank v Ainsworth [1965] AC 1175, 1247–8 per
Lord Wilberforce (‘Before a right or interest can be admitted into the category of property, or of a
right affecting property, it must be definable, identifiable by third parties, capable in its nature of
assumption by third parties, and have some degree of permanence or stability’).
204 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
the jurisdiction. By virtue of this actual or constructive notice, it is fair and just
to impose international obligations upon the state with respect to the protection
of property rights. Conversely, in relation to contracts between private parties,
the state is obviously not privy to the rights and obligations generated therein
and cannot be held to be on notice of their existence. The value of the rights and
obligations under a contract is directly linked to the ‘personality’ or ‘individuality’
of the specified persons or legal entities who are bound by the contract,
rather than the ability of the right holder to exclude all others from use of the
thing over which the right is asserted. Insofar as value for contractual rights and
obligations is inexorably tied to the identity of free agents (individuals or legal
entities), it is neither fair nor just to superimpose a form of international
responsibility upon states for the disappointment of expectations within private
contractual relationships.
418. The distinction between property and contract is thus fundamental as a
matter of legal principle. But it is also important as a matter of economics.
Merrill and Smith elaborate upon the distinction in the following terms:
On the one hand, contract rights are in personam; that is, they bind only the
parties to the contract. The contracting parties are in the best position to
evaluate the costs and benefits of adopting novel legal terms to govern
their relationship, and in the typical bilateral contract there are no significant
third-party effects associated with the adoption of idiosyncratic terms.
Property rights, on the other hand, are in rem – they bind ‘the rest of the
world’. Thus, the adoption of novel forms of property has implications not
only for the immediate parties to the transaction but also for third parties,
who must incur additional costs of gathering information in order to avoid
violating novel property rights or to decide whether to seek to acquire
these rights. Indeed, even if third parties want nothing to do with novel
property rights, the very possibility that such rights exist would require
them to engage in more scrutiny of the property rights they encounter in
order to make sure they are not infected with unwanted novelty. Thus, free
customization of property forms would create an information-cost externality;
mandatory standardization is the legal system’s way of reducing
these external costs to an acceptable level.190
419. This insight provides the critical reason why investment treaty protection
cannot extend to simple contractual rights as between private parties: governments
would be priced out of their regulatory function. The cost of performing
due diligence on the potential ramifications of any regulatory action upon
private contractual relationships would be so prohibitive that governments
would be rendered impotent to perform their essential role.
190
Merrill and Smith, ‘The Property/Contract Interface’, 776–7.
I N V E S T M E N T 205
420. The American jurisprudence on the Takings Clause of the Fifth
Amendment to the Constitution provides many illustrations of this distinction
between rights in rem and rights in personam informing the scope of protection.
In Pro-Eco, Inc v Board of Commissioners of Jay County, Indiana,191
the Court
of Appeal of the Seventh Circuit considered a claim by Pro-Eco that the Board,
when it acted ultra vires by issuing an ordinance to prohibit the operation of a
landfill, took Pro-Eco’s property within the meaning of the Fifth Amendment.
Pro-Eco did not own the land in question; instead it had an option to buy the
land. Pro-Eco argued that this option amounted to a compensable property
interest.192
421. The Court of Appeal found that, under the relevant state law of Indiana, an
option to buy property does not create any interest in rem in that property.
Nevertheless, Pro-Eco asserted that the rights under the option contract itself
constituted property for the purposes of the Takings Clause. This argument was
rejected:
If local governments had to pay compensation for every contract they
frustrated when enacting ordinances within their substantive powers,
localities would eventually lose their abilities to govern themselves.
422. At least since its landmark decision in Board of Regents v Roth,193
the US
Supreme Court has been careful to insist that claimants invoking the Due
Process Clause and the Takings Clause of the Fifth Amendment of the
Constitution must establish that their economic interests constitute ‘property’.
Contract rights have not been regarded as property, at least in respect of the
Takings Clause. The relevant principle is stated by Merrill:
Contract rights are not property for takings purposes insofar as they reflect
nothing more than a bilateral agreement; as contract rights break free from
the initial contracting parties and enter into general circulation as investments
or money, they become property.194
423. This distinction applies with equal force to the investment treaty context.195
191
57 F.3d 505.
192
Ibid. 509.
193
408 US 564 (1972).
194
T. Merrill, ‘The Landscape of Constitutional Property’ (2000) 86 Virginia LR 885, 993–4.
195
The ECHR has taken a similar line in relation to Art. 1 of Protocol 1: Gustafsson v Sweden (Case
18/1995/524/610, 28 March 1996) para. 60 (‘Admittedly, the State may be responsible under
Article 1 (P1-1) for interferences with peaceful enjoyment of possessions resulting from transactions
between private individuals (see the James and Others v the United Kingdom judgment
of 21 February 1986, Series A no. 98, pp. 28–9, paras. 35–6). In the present case, however, not
only were the facts complained of not the product of an exercise of governmental authority, but
they concerned exclusively relationships of a contractual nature between private individuals,
namely the applicant and his suppliers or deliverers. In the Court’s opinion, such repercussions
as the stop in deliveries had on the applicant’s restaurant were not such as to bring Article 1 of
Protocol No. 1 (P1-1) into play.’).
206 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
B . C O N S E Q U E N T I A L E R R O R S P R O D U C E D B Y A
FA I L U R E T O C H A R A C T E R I S E I N V E S T M E N T R I G H T S
424. International law, including investment treaties, has a set of substantive
obligations that address the state’s interference with property rights. Conversely,
it has no system of contract law capable of answering even the most basic
questions that arise within a contractual relationship, such as the circumstances
when a party may rescind the contract on the basis of its counterparty’s breach.
If the distinction between contract and property is blurred in respect of the
threshold question of whether a qualifying investment has been made by the
claimant, the consequential error will be the tribunal’s application of the substantive
international obligations of investment protection to a contractual dispute
involving the host state or one of its emanations. The result of this mismatch will
be a decision applying the wrong law or no law at all with varying layers of
specious reasoning, as demonstrated by an analysis of the frequently cited award
in Revere Copper v OPIC.
424C. Revere Copper and Brass, Inc v Overseas Private Investment
Corporation196
The Overseas Private Investment Corporation (‘OPIC’) had insured the
investment of Revere Copper and Brass, Inc197
(‘Revere’) in the construction
and operation of a bauxite plant in Jamaica through its wholly owned
subsidiary Revere Jamaica Alumina198
(‘RJA’). The investment was made
pursuant to an agreement between the Government of Jamaica and RJA
of 10 March 1967 which had a term of 25 years (the ‘1967 Agreement’).
A change of political leadership in Jamaica brought Michael Manley into
power for the People’s National Party, who commenced a review of the
bauxite and alumina industry soon after the elections.199
This review led to
the adoption of a policy with four objectives:
(1) a drastic increase in revenues from bauxite mining and alumina
production;
(2) recovery of bauxite ore leased to the mining companies;
(3) reacquisition of all lands owned by such companies; and
(4) national majority ownership and control of the bauxite industry.200
In furtherance of these objectives, the Bauxite (Production Levy) Act 1974
was enacted, which imposed a tax on bauxite at an initial rate of 7.5 per cent
on the minimum quarterly quantities of bauxite that each producer was
196
(Award, 24 August 1978) AAA Case No. 16/10/0137/76, 17 ILM 1321.
197
A Maryland corporation. Ibid. 1322.
198
Also a Maryland corporation. Ibid. 1322.
199
Ibid. 1324.
200
Ibid. 1324–5.
I N V E S T M E N T 207
deemed to have produced during that quarter.201
The impact of the levy
could be severe if the production fell below the prescribed minimum.202
In
addition, the Mining Act was amended to increase the rate of royalty under
the bauxite leases to 50 cents per ton.203
As a result of these measures, RJA reported losses of USD 1.5 to 2 million in
each of the first four months in 1975.204
Operations at the plant ceased on
19 August 1975. OPIC refused to indemnify Revere for its losses and the
latter instituted international arbitration proceedings in accordance with
the dispute resolution clause in the OPIC Contract.
The tribunal defined the question of liability under the terms of the OPIC
insurance contract as:
[W]hether any action of the Government of Jamaica directly resulted
in preventing RJA for a period of one year ‘from exercising effective
control over the use or disposition of a substantial portion of its
property or from constructing the Project or operating the same’.205
Revere contended that the state measures in question effectively abrogated
the 1967 Agreement.206
The tribunal recognised that ‘a mere breach of contract does not trigger
the compensation provisions of the OPIC Contract’.207
But the consensus
among the members of the tribunal ended there. The majority found that:
[T]he actions taken by the Government of Jamaica, having effectively
put an end to the 1967 Agreement, directly prevented RJA
from exercising effective control over the use or disposition of its
property.208
The first issue the majority grappled with was the relevance of Jamaican
law. The 1967 Agreement had no express governing law clause, but
Jamaican law would have been applicable in accordance with the general
choice of law approach. The majority’s initial statement on the relationship
between Jamaican law and international law appears to be consistent with
the choice of law approach advocated in Chapter 2:
[W]e accept Jamaican law for all ordinary purposes of the Agreement,
but we do not consider that its applicability for some purposes precludes
201
Ibid. 1327.
202
Ibid. The Supreme Court of Jamaica had ruled that Revere Copper was not liable to pay the levy
for periods where its production ceased altogether (ibid).
203
Ibid. 1328.
204
Ibid.
205
Ibid. 1329. The text in quotation marks comes from Section 1.15(d) of the OPIC Contract.
206
Ibid.
207
Ibid. 1330.
208
Ibid.
208 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
the application of principles of public international law which govern
the responsibility of States for injuries to aliens.209
This statement appears to suggest that the municipal law governing the
contract applies to any issues arising out of the contractual relationship, but
where the issue is an alleged abuse of regulatory power in relation to
foreign property, it is international law that is applicable. Unfortunately,
the majority then proceeded to undermine the coherency of this initial
proposition by resorting to the theory of the ‘internationalisation’ of ‘long
term economic development agreements’:
[The majority] has concluded that the 1967 Agreement falls within
this category of a long term economic development agreement and
that principles of public international law apply to it insofar as the
government party is concerned and that the question of breach by
such party cannot be determined solely by municipal law.210
This approach rests upon pure sophistry. It operates by identifying the
elements of the agreement in question that suggest an international dimension
to the contractual relationship. The identification of such elements,
which have never been defined in any normative document, invariably
elevates the particular agreement to the status of a ‘long term economic
development agreement’ with the effect that international law supersedes
the otherwise applicable municipal law for the purposes of determining
whether or not the agreement has been breached. At that point, the adjudicators
concede that international law has no rules of contract law to
determine that question, so the amorphous maxim of pacta sunt servunda is
deployed to fill the void. The principle of pacta sunt servunda cannot possibly
mean that all contractual obligations must be performed in any circumstances;
indeed this is refuted by the maxim on the other side of the
conceptual coin – rebus sic stantibus.
This ‘internationalisation’ approach is completely unnecessary. Within
the contractual relationship, the host state may be liable by reason of its
non-performance or it may not be. It will depend upon the precise manner
by which the risks of non-performance have been allocated under the
contract in accordance with the applicable law. Perhaps the state measure
that underpins the host state’s non-performance constitutes a force majeure
event under the terms of that clause. The host state cannot, in such a case,
be liable under the contract. Perhaps the host state has enacted legislation
that purports to cancel certain obligations under the contract. If the
governing law is the law of the host state, then the host state is not liable
under the contract. But none of these conclusions within the contractual
relationship prejudice the examination of the host state’s sovereign acts
outside it. International law has always been concerned with the legitimacy
209
Ibid. 1331.
210
Ibid.
I N V E S T M E N T 209
of sovereign acts vis-a`-vis foreign nationals. This is a domain where rules
and principles of international law are relatively sophisticated and do provide
solutions to concrete problems.
The majority in Revere Copper did not need to force the questions relating to
the legitimacy of Jamaica’s sovereign acts into a contractual box and then
give that box another label – ‘long term economic development agreement’
– in order to resolve those questions with the assistance of international
law. In fact by characterising the issues as relating to the breach of the
1967 Agreement, rather than the international legitimacy of Jamaica’s
sovereign acts, the majority deprived itself of the real guidance that international
law could provide and instead found itself in a barren area where
there are no international principles or rules at all. It is very instructive to
follow their reasoning on these points.
First it was concluded that the 1967 Agreement was an ‘internationalized
contract’.211
Secondly, a study of the applicable principles of international law was
undertaken. The principle extracted from the review of authorities was
that:
Under international law the commitments made in favour of foreign
nationals are binding notwithstanding the power of Parliament and
other governmental organs under the domestic Constitution to override
or nullify such commitments.212
This principle is of course derived from the maxim pacta sunt servunda
but does not take the analysis very far. The assertion that such commitments
are ‘binding’ does not somehow deprive the state from the means to override
or nullify contractual commitments; all it can signify is that in certain
circumstances the state may be obliged by international law to pay compensation.
The majority in Revere Copper acknowledged this:
We find that the commitments made by the Government were internationally
binding, although they may not, as in the Shufeldt case,
have prevented the legislature, acting under its Constitutional
powers, from enacting legislation contrary to their provisions.
Action contrary to them, however, constituted a breach.213
Whether or not compensation is due depends upon the nature of the
sovereign act in question and the assertion that the commitments are binding
within the contractual relationship does not assist this inquiry. In fact it
211
Ibid. 1338.
212
Ibid. 1342–3.
213
Ibid. 1345. The majority further stated: ‘Admittedly Parliament could at any time legislate with
respect to taxes and thus override contracts with private parties. It could not, however, deprive
such parties of compensation, if the circumstances justified the payment of compensation under
international law principles’ (ibid. 1344).
210 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
merely obfuscates the issue. A state can nullify a contractual commitment
without attracting international liability if, for instance, the exercise of that
power was in a situation of an emergency affecting public health and
safety.214
Whether or not the doctrine of police powers can be invoked in
such an instance cannot be answered from within the contractual relationship
and thus the designation of the state measure as a breach or otherwise
is irrelevant. Rather, the liability of the state under international law
depends upon the circumstances extrinsic to the contract relating to the
exercise of sovereign authority.
Thirdly, having concluded that the commitments were ‘internationally binding’,
the majority proceeded to determine whether Jamaica ‘repudiated its
obligations under the Agreement’.215
Having thrust the Agreement onto the
international plane, it then fell upon the majority to search for the relevant
principles of international law on the repudiation of contracts. Evidently that
search was in vain because it was the American Law Institute’s Restatement of
the Law on Contracts that was invoked to supply the test for ‘repudiation’.216
Hence the ultimate result of the ‘internationalisation’ of the Agreement was
the substitution of American law for Jamaican law. The majority found that
Jamaica had, by its acts, repudiated the Agreement in accordance with the
test propounded in the American Restatement.217
The dissenting arbitrator
came to the opposite conclusion.218
Finally, the majority then came to what they perceived to be the crux of
the matter, which was whether the repudiation constituted an expropria-
tion.219
The issue was formulated as follows:
This is not a claim against the Government of Jamaica for damages
for breach or repudiation of the Agreement on the ground that such
action constituted a violation of international law. The sole question
for decision here is whether the Government actions repudiating the
Agreement directly prevented RJA from exercising effective control over
the use or disposition of a substantial portion of its property or from operating
the property.220
214
The OPIC Contract itself provides: ‘Excluded [from the definition of “Expropriatory Action”] is
any action resulting from: (1) any law, a decree, regulation, or administrative action of the
Government of the Project Country which is not by its express terms for the purpose of
nationalization, confiscation, or expropriation (including but not limited to intervention, condemnation,
or other taking), is reasonably related to constitutionally sanctioned governmental
objectives, is not arbitrary, is based upon a reasonable classification of entities to which it applies
and does not violate generally accepted international law principles.’
215
Ibid. 1345.
216
Ibid.
217
Ibid. 1348.
218
Ibid. 1374.
219
Ibid. 1348.
220
Ibid.
I N V E S T M E N T 211
The italicised part of the ‘sole question’ is the verbatim reference to the test
for expropriation in the OPIC Contract, which broadly reflects the position
under general international law:
The term ‘Expropriatory Action’ means any action which is taken,
authorized, ratified or concerned by the Government of the Project
Country, commencing during the Guarantee Period, with or without
compensation therefore, and which for a period of one year directly
results in preventing: […] (d) the Foreign Enterprise from exercising
effective control over the use or disposition of a substantial portion
of its property or from constructing the Project or operating the
same.221
The majority’s formulation of the ‘sole question’ is very problematic.
Whether or not a state repudiates a contract with a foreign national
cannot provide an answer to the question of whether the foreign national
has been prevented from exercising effective control over the use or
disposition of its property. The issue of repudiation is one that must be
answered within the contractual relationship. In contrast, rights in rem
over property are enforceable against the whole world. Whether or not
the state has unlawfully interfered with those rights in rem by reference to
the standards of international law is an issue outside the contractual
relationship. The OPIC Contract itself left no doubt about the correct
principle:
The abrogation, impairment, repudiation or breach by the Government
of the Project Country of any undertaking, agreement or contract
relating to the Project shall be considered an Expropriatory Action
only if it constitutes Expropriatory Action in accordance with the criteria set
forth in this section.222
Thus, whatever the effect of the Jamaican Government’s measures on the
contractual relationship between the parties, these measures could only
constitute ‘Expropriatory Action’ if for a period of one year they prevented
RJA from ‘exercising effective control over the use or disposition
of a substantial portion of its property’. In answering this question, the
majority found itself in serious difficulty. Its ultimate conclusion was
that the repudiation of the 1967 Agreement left RJA without ‘effective
control’ because it could no longer make ‘rational decisions’ about its
property.223
The dissenting arbitrator, a judge of the New York Court of Appeals,
approaches this question in a rather more satisfactory way. Unlike the
221
Section 1.15(d) of the OPIC Contract. Ibid. 1322.
222
Ibid.
223
Ibid. 1350.
212 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
majority, his focus was upon the effects of the Jamaican Government’s
measure on the property of RJA, as was required by the OPIC Contract:
RJA remained in full control of its plant and of its business. The
Jamaican government did not prevent RJA from managing its
plant, or operating its business, or exporting alumina or by expropriation
or otherwise directly prevent it from effective control of a
substantial portion of its property.224
RJA’s central complaint was the imposition of the bauxite levy in breach of
the 1967 Agreement. The majority had concluded that the levy did not
amount to Expropriatory Action under the OPIC Contract.225
Thus,
according to the dissenter, it was not open to the majority to invoke the
breach of contract as a separately constituted Expropriatory Action in and
of itself.226
This is surely correct, both in accordance with the express terms
of the OPIC Contract and general international law. The dissenter concluded
that there had been no interference by the Jamaican government
with the property of RJA;227
the reason for the shutdown of the plant had
been Revere’s failure to obtain an extension of its labour contract due to
problems with the unions.228
425. This analysis of Revere Copper v OPIC does not exclude the possibility
that an investment treaty obligation may, by its own terms, purport to regulate
the host state’s conduct as a party to a contract with the investor. The obvious
contender is the ‘umbrella clause’. But even the adjudication of a claim based on
this type of susbstantive obligation is parasitical upon the application of a law of
contract at the first stage of any analysis.229
426. Investment treaty tribunals have made diverse and inconsistent findings in
relation to the significance of contractual rights as an investment or as an object of
an expropriation or breach of another substantive investment protection obligation.
As already noted, these issues are distinct but they are often conflated in the
awards. Once certain contractual rights are characterised as an investment, the
logical next step if the investor’s claim is upheld is to describe the object of
the expropriation or other form of state interference as the same contractual
rights.230
It is certainly true that this problem strays deep into the tribunal’s
224
Ibid. 1373.
225
Ibid. 1343–4. The dissenter noted that: ‘By any reasonable standard the bauxite levy which
Revere treats as expropriatory is within range of the proper taxing power of the Jamaica nation.
Neither Revere nor its subsidiary RJA paid any income tax to Jamaica. The bauxite levy
imposed in 1974 was measured by 7.5% of the average realized price of primary aluminium
produced from the bauxite extracted in Jamaica’ (ibid. 1376–7).
226
Ibid. 1374.
227
Ibid. 1376.
228
Ibid. 1380.
229
SGS v Philippines (Preliminary Objections) 8 ICSID Rep 518.
230
The fallacy of such an approach was explored by the tribunal in: RFCC v Morocco (Merits)
paras. 87–8 (‘Un manquement à l’exécution d’un contrat, de nature à léser les intérêts du
I N V E S T M E N T 213
adjudication of the merits. But in the present context it is important to justify the
appeal to analytical rigour embodied in Rule 24 by illustrating the consequential
errors that flow from a mischaracterisation of the investment rights. For this
purpose, it is instructive to revisit the leading international precedents that are
frequently cited for the proposition that contractual rights can be expropriated.
A careful analysis of these precedents reveals that when international tribunals
have made reference to the expropriation of a ‘contractual right’, the right in
question has actually been a form of intangible property – most commonly a right
over natural resources granted by a public act of the host state.
426C(1). Shufeldt Claim231
In the Shufeldt Claim, the contract related to a concession granted by the
Government of Guatemala to extract chicle from certain public lands in
Guatemala. A concession to exploit natural resources is a form of property,
so it is more accurate to say that the contract in question memorialised a right
in rem, and it was that right in rem that was expropriated, not a contractual right
per se. If any contractual rights could constitute property and thus become the
object of an expropriation, then it would have been pointless for the arbitrator
to have posited the question ‘did Shufeldt acquire any rights of property under
the contract’ and have come to the conclusion that ‘Shufeldt did … possess the
rights of property given to him under the contract.’232
Hence the Shufeldt
Claim is authority for the principle that a right to natural resources memorialized
by a contract is a right in rem that is capable of being expropriated.
426C(2). Norwegian Shipowners Claims233
The mixed claims tribunal found that the United States had deprived the
Norwegian shipowners of their contracts for the construction of vessels
upon the US Government’s requisition of the vessels for military use after
war was declared on Germany in 1917. The US Government had effectively
stepped into the shoes of the Norwegian shipowners in their contracts with
the shipbuilders. This is clear from the following instructions accompanying
the requisition order from the Government to the shipowners:
For the work of completion heretofore and herein ordered the [US
Government] will pay to you amounts equal to payments set forth in
cocontractant, ne peut s’analyser en une mesure d’expropriation. Une chose est de priver un
investisseur de ses droits contractuels reconnus par la seule force de l’autorité étatique, autre
chose est de contester la réalité ou l’étendue de ces droits par application du contrat. En l’espèce,
le litige repose sur des divergences quant à l’interprétation du contrat et quant à la responsabilité
contractuelle respective du maître de l’ouvrage ou de l’entrepreneur et ne dépasse par le
désaccord normal entre cocontractants. Il s’agit d’un pur contentieux du contrat, et non de
l’expropriation).
231
(USA v Guatemala) 28 RIAA 1080 (1930).
232
Ibid. 1097.
233
(Norway v USA) 8 RIAA 308 (1922).
214 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
the contract and not yet paid; provided that on acceptance in writing
of this order you agree that on final acceptance of the vessel to give a
bill of sale to the United States in satisfactory form conveying all your
rights, title, and interests in the vessel.234
The US Government’s intervention in the contractual relationship between
the Norwegian shipowners and the American shipbuilders constituted a
force majeure circumstance that relieved the shipbuilders of any liability to
the shipowners under the contract.235
Hence the claim on behalf of the
Norwegian shipowners was not for performance of the shipbuilding contracts
against either the shipbuilders or the US Government, or damages in
lieu thereof, because those contracts had effectively come to an end. The
tribunal thus noted that it ‘has not the power to modify, correct or improve
the contracts agreed between citizens of the two countries, nor modify their
consequences’236
and carefully pointed out that the juridical basis of the
claims on behalf of the Norwegian shipowners was not the contracts but the
interference with property rights evidenced by the contracts.237
It is important
to emphasise that the United States had defended the claims by characterising
the foundation of the claims as contractual and thus the nature
of the alleged loss as ‘consequential’, for which, according to the United
States, damages are not awarded under American law or international
law.238
This characterisation was expressly rejected by the tribunal,239
who focused on the rights in rem evidenced by the shipbuilding contracts
that were taken by the US Government, rather than whether its conduct
could be said to have breached those contracts:
It has been proven that the claimants lost the use and possession
of their property through an exercise by the United States of their
power of eminent domain. When, for instance, on October 6, 1917,
the [US Government] informed [the Norwegian negotiator] that the
United States had taken the ‘title’, the [US Government] implicitly
admitted that the ownership of all the liens, rights and equities set forth in the
fifteen shipbuilding contracts had been transformed to the United States
by operation of law.240
Thus it was not the contractual rights per se that were found to have been
taken by the United States, but the rights in rem (in particular a lien over
the vessel under construction) evidenced by the shipbuilding contracts.241
234
Ibid. 321.
235
Ibid. 323–4.
236
Ibid. 330.
237
Ibid. 333–4.
238
Ibid. 334.
239
Ibid.
240
Ibid. (emphasis added).
241
Ibid.
I N V E S T M E N T 215
426C(3). Certain German Interests in Polish Upper Silesia (the
Chorzo´w Factory case)242
The Chorzo´w factory was taken over by the Polish Government pursuant
to a general law of 1920 expropriating certain properties of German
nationals in Polish Upper Silesia. The Permanent Court of International
Justice addressed the issue of whether, by expropriating the factory, the
Polish Government had also expropriated the contractual rights of a
German company, Bayerische, in relation to the factory. The contract in
question was between Bayerische and the owner of the factory for the
former’s operational management of the factory on the latter’s behalf.243
But this was evidently more than just a service agreement, for Bayerische
used certain of its own patented techniques in the operation of the factory.
The language used by the Court in deciding this issue was imprecise, but it
is tolerably clear that it was not the contractual rights of Bayerische that were
found to have been expropriated, but Bayerische’s rights in rem evidenced
by the contract with the owner. The Court formulates the question thus:
The question is whether, by taking possession of the Chorzo´w factory
on July 3rd, 1922, and, by operating it, making use of the experiments,
patents, licences, etc. of the Bayerische, Poland has unlawfully expropriated
the contractual rights of that Company.244
There is a further elaboration of the particular rights of Bayerische that had
been prejudiced by Poland’s expropriation of the factory:
The length of the period for which the contract with the Company
[Bayerische] was signed proves that the intention was to establish the
conditions necessary to enable it to bring into the concern [Chorzo´w
factory] the patents, licences, etc. belonging to it, in spite of the fact
that the factory was not its property.245
The pronoun ‘it’ in the phrase ‘belonging to it’ refers to Bayerische and
suggests that the Court was concerned to differentiate between tangible
property (the factory) and intangible property (patents, licences, etc.)
rather than between property rights and contractual rights. This is further
confirmed in the Court’s conclusion on Poland’s liability:
[T]he rights of the Bayerische to the exploitation of the factory and
to the remuneration fixed by the contract for the management of the
exploitation and for the use of its patents, licences, experiments, etc.,
have been directly prejudiced by the taking over of the factory by
Poland.246
242
(Germany v Poland) 1926 PCIJ (Ser. A) No. 7 (Merits).
243
Ibid. 43.
244
Ibid. 44 (emphasis added).
245
Ibid.
246
Ibid.
216 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
Despite the Court’s use of the terms ‘contractual rights’ in its judgment, it is
clear from these passages that it was the rights in rem evidenced by the
contract that was the object of the expropriation. The right to the exploitation
of the factory could be characterised as a licence or a lease and the
reference to patents, licences and experiments are obviously to intellectual
property rights belonging to Bayerische.
426C(4). Landreau Claim247
Writers advocating the existence of an international delict in general international
law for a state’s interference with contractual rights struggle to find
authority for their position. Jennings concedes that ‘[i]t is not often that
one finds a claim in contract unassociated with a claim in property’248
and
cites the Landreau Claim as the only precedent that ‘comes near to it’.249
The contract that formed the basis of the Landreau Claim was between
Landreau250
and the Government of Peru for the payment of a royalty by
the Government for Landreau’s discovery of guano deposits.251
The
Government later repudiated the contract and Landreau accepted this repu-
diation.252
Landreau’s claim was not, therefore, founded upon the con-
tract253
but upon notions of ‘justice and fairness’.254
There is no reference
to any cause of action derived from international law in the award for the
simple reason that international law was not applicable in accordance with
the terms of the compromis.255
The tribunal characterised the claim as follows:
The principle on which the sum to be paid is to be computed is quite
different from that on which the sum should have been assessed if
[Landreau] was entitled to claim payment on the footing of that
247
(USA v Peru) 1 RIAA 347 (1922).
248
R. Jennings, ‘State Contracts in International Law’ (1961) 37 BYBIL 156, 169, note 2.
249
Ibid.
250
One of the confusing aspects of the award is that the claim was on behalf of John Célestin
Landreau, whereas the contract was entered into by his brother John Teophile Landreau. The
tribunal struggles with this issue considerably in its award due to contradictory representations
by the brothers before various judicial fora as to their respective rights and interests in the
contract. The tribunal’s ultimate finding, however, was that the contract had been repudiated by
the Government and that the claimant, John Célestin Landreau, had accepted that repudiation:
(USA v Peru) 1 RIAA 347, 363 (1922). Hence there is no need, for the present purposes, for
distinguishing between the two brothers.
251
Ibid. 354.
252
Ibid. 363.
253
Ibid.
254
Ibid. 364.
255
Article I of the ‘Protocol for Arbitration of the Landreau Claim against Peru’ read: ‘The
questions to be determined by the Arbitral Commission are: First. Whether the release granted
by the Peruvian Government in 1892 by John Teophile Landreau eliminated any claim which
John Celestin Landreau, the American citizen, may have had against the Peruvian Government,
and if all claims were not thereby extinguished then, second: what sum if any is equitably due the
heirs or assigns of John Célestin Landreau’ (ibid. 349, emphasis added). The tribunal interpreted
‘equitably’ to mean ‘in justice and fairness’ (ibid. 364).
I N V E S T M E N T 217
contract … The damage would have had to be assessed on the basis of
what would have been payable in respect of the percentages on sales
allowed by that contract. But as [Landreau] accepted the repudiation
by Peru of that contract, the question is very different and is this: what
was the fair value of the communication to Peru of the discoveries of
guano which had been made by [Landreau]?256
The claim was in essence akin to an action for breach of confidence in
common law jurisdictions.257
This is hardly authority for the proposition
that international law recognises a cause of action for the state’s interference
with simple contractual rights.
426C(5). Phillips Petroleum Company v Islamic Republic of Iran258
The tribunal’s award in Phillips Petroleum is perhaps the clearest authority
for the proposition that contractual rights can be the object of an expropriation
in the pre-investment treaty arbitration era. The reasoning employed
to achieve this result is, however, far from persuasive. Phillips Petroleum
Company brought two claims in the alternative: an expropriation claim
in respect of its rights under the 1965 contract with the National Iranian
Oil Company (‘NIOC’) for the exploitation of the petroleum resources in
a certain offshore area of the Persian Gulf, and a breach of contract claim in
relation to the same contractual rights.259
That these claims could be
brought in the alternative is very significant. In investment treaty arbitration,
it is often the case that the contractual counterparty is not the host
state itself or the tribunal does not have jurisdiction over contractual claims.
In the quest to seise the jurisdiction of an investment treaty tribunal, it has
therefore become commonplace to describe the object of the treaty claim as
a contractual right, but disavow the character of the dispute as contractual.
Here there was no reason for Philips Petroleum to resort to this form of
sophistry: it could state its claims in the alternative because there was no
doubt that the tribunal had jurisdiction in respect of both under the Claims
Settlement Declaration.260
It follows that, in the estimation of the claimant,
there was no difference in substance between the international delict and
the contractual claim.
The tribunal decided upon its own motion to adjudge the claim as one
of expropriation rather than breach of contract:
The Tribunal considers that the acts complained of appear more
closely suited to assessment of liability for the taking of foreign-owned
256
Ibid. 364.
257
See, e.g., the Canadian Supreme Court decision in: International Corona Resources Ltd v LAC
Minerals Ltd (1989) 61 DLR (4th) 14.
258
(Case 425-39-2, 29 June 1989) 21 Iran-US CTR 79.
259
Ibid. para. 1.
260
Art. II(1).
218 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
property under international law than to assessment of the contractual
aspects of the relationship, and so decides to consider the claim in this
light.261
This is a curious statement indeed. The claims were pleaded as identical
alternatives so no mischief could be done by addressing the expropriation
claim first. But the implication from this statement and the relevant section
of the award is that liability for the expropriation of contractual rights can
be determined in isolation from the ‘contractual aspects of the relationship’
simply by refashioning those rights as ‘foreign-owned property’. This is
little more than a device to absolve the tribunal from the tedium of having to
consider the detailed and complex architecture of the contractual relationship:
the specific contractual right invoked by the claimant can be extricated
from the contractual documentation by its designation as ‘property’,262
thereby liberating the tribunal to employ the abstractions of the law of
expropriation in disposing of the case.
The injustice that might have been caused by resorting to this device was
mitigated because the tribunal then proceded to consider NIOC’s defence
based upon the contractual force majeure clause.263
But this is hardly a
principled approach: once the claim is characterised as one for the international
delict of expropriation, it is difficult to fathom how a defence provided
by a contract governed by municipal law could defeat it. Indeed, this would
contradict a basic tenet of state responsibility: a state cannot rely upon its own
municipal law to absolve itself from international responsibility.264
In short, the tribunal would have been on much surer ground by awarding
damages for breach of contract.
426C(6). Flexi-Van Leasing, Inc v The Government of the Islamic
Republic of Iran265
Flexi-Van argued that its contractual rights under lease agreements with
two Iranian companies (Star Line and Iran Express) had been expropriated
261
(Case 425-39-2, 29 June 1989) 21 Iran-US CTR 79 at para. 75.
262
There was no analysis of how a contractual right metamorphoses into a property right: the
tribunal simply uses ‘contractual right’ and ‘property right’ interchangeably throught the award.
See, e.g. ibid. paras 76, 88, 89, 97, 98, 100, 105, 106.
263
Ibid. para. 77: ‘The principal defense of the Respondents is that the revolutionary changes which
took place in Iran totally frustrated the JSA due to conditions of force majeure, that is, conditions
created by forces outside the control of the Government which made performance of the JSA
impossible, thereby discharging the Parties’ respective obligations under that agreement and
relieving the Respondents of any liability for the acts complained of. This defense, while
generally associated with the contractual aspects of a relationship, is relevant to the expropriation
claim insofar as it relates to whether any contract rights remained to be taken following the
Revolution.’ The tribunal ultimately rejected the defence on the merits: ibid. para. 85.
264
ILC’s Articles on State Responsibility, Art. 3. Crawford, ILC’s Articles, 86.
265
(Case 259-36-1, 11 October 1986) 12 Iran-US CTR 335.
I N V E S T M E N T 219
following the Iranian Government’s assumption of control over those two
companies. In particular, Flexi-Van asserted that the Government had
caused Star Line and Iran Express ‘to breach and repudiate their lease
agreements’ which had resulted in the ‘expropriation’ of ‘rights to payment
of accounts receivable and future rentals, and its rights to the return of
leased equipment’.
The critical reason that this case is not a persuasive precedent for recognising
a contractual right as the object of an expropriation is that the claim was
dismissed. The tribunal noted that the two Iranian counterparties to FlexiVan’s
leases (Star Line and Iran Express) were not before the tribunal and
hence it was necessary to establish liability by reference to the Iranian
Government’s direct interference. Flexi-Van failed to do so for want of
evidence. The tribunal recognised that Flexi-Van would have had a perfectly
good claim for breach of contract against Star Line and Iran
Express.266
The tribunal’s dicta on the nature of the claim for expropriation of contractual
rights has been adopted by subsequent tribunals and thus must be
considered. It stated that, in order to prevail, the claimant must show that its
contractual rights were breached and that such breach resulted from the
‘orders, directives, recommendations or instructions’ of the state. But if a
party has breached a contract, what difference does it make if that party
acted upon ‘orders, directives, recommendations or instructions’ of the
state? Evidence of coercion from an alter ego does not supply a defence to
the contracting party for liability in damages. Liability for breach of contract
is strict rather than fault-based.
426C(7). Amoco International Finance Corporation v Government
of the Islamic Republic of Iran267
Amoco International Finance Corporation (‘AIFC’)’s wholly-owned
Swiss subsidiary ‘Amoco’ entered in to an agreement with the National
Petrochemical Company (‘NPC’, an Iranian state-owned company) to
establish a joint venture company, Khemco, for the purpose of building
and operating a plant for the production and marketing of gas.268
AIFC
indirectly held 50 per cent of the shares in Khemco through Amoco. In
January 1980, the Revolutionary Council of the Islamic Republic nationalised
the oil industry by, inter alia, annulling ‘all oil agreements’ designated
by the Ministry of Oil.
266
Even the Dissenting Opinion of Judge Holtzmann appears to award damages on a contractual
basis: ‘I therefore would have awarded Flexi-Van damages for the breaches of the lease agreements.’
The premise was that Star Line and Iran Express had been appropriated by the Iranian
Government and hence the latter was responsible for the former’s contractual arrangements.
267
(Award No. 310-56-3, 14 July 1987) 15 US-Iran CTR 189.
268
Ibid. para. 1.
220 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
AIFC advanced two claims on an alternative basis:
First, the Claimant argues that NPC and Khemco have materially
breached or repudiated the Khemco Agreement and that NIOC and
Iran are liable as well because of their control over NPC and Khemco.
The Claimant also argues that the record demonstrates that Iran has
expropriated Amoco’s rights under the Khemco Agreement or its
shares and shareholders’ rights in Khemco and that such expropriation
was wrongful.269
The first claim was rejected by the tribunal: only NPC was a party
to the Khemco Agreement and hence it was not possible for NIOC or
Iran to breach the Agreement.270
The second claim contains alternative
formulations of the object of the expropriation: either Amoco’s contractual
rights under the Khemco Agreement or AIFA’s shareholding in Khemco.
The tribunal’s discussion of this second claim addressed the alternative
formulations interchangeably throughout its award. The critical paragraph
reads:
Clearly the purpose of the second sentence of Article IV, paragraph 2
is to protect the property of the nationals of one party against expropriation
by the other party. Expropriation, which can be defined as a
compulsory transfer of property rights, may extend to any right
which can be the object of a commercial transaction, i.e., freely sold
and bought, and thus has a monetary value. The rights created by the
Khemco Agreement had such a monetary value as was expressly
recognized in the Khemco Agreement itself. Article 20 provides
that the shares of either party could be transferred under certain
conditions to any other company or companies and Article 24
granted NPC the right to purchase the shares of Amoco upon the
termination of the Khemco Agreement. It is because Amoco’s interests
under the Khemco Agreement have such an economic value that
the nullification of those interests by the Single Article Act can be
considered as a nationalization.271
The ‘rights created by the Khemco Agreement’ expressly envisaged by
the tribunal was Amoco’s shareholding in Khemco. A shareholding is intangible
property and is distinct from the bilateral rights and obligations
existing between Amoco and NPC under the Khemco Agreement. And
yet the tribunal conflated property rights and contractual rights in its
ultimate finding of liability: ‘Amoco’s rights and interests under the
Khemco Agreement, including its shares in Khemco, were lawfully expropriated
by Iran’.272
This reveals a conceptual misunderstanding on the part
269
Ibid. para. 78.
270
Ibid. para. 164.
271
Ibid. para. 108.
272
Ibid. para. 182.
I N V E S T M E N T 221
of the tribunal. The object of the expropriation was AIFC’s indirect ownership
of 50 per cent of the shares in Khemco, not Amoco’s contractual
rights to the performance of NPC as the counterparty to the Khemco
Agreement. An assessment of the value of Khemco as a going concern
(and therefore AIFC’s share of that going concern) would no doubt reflect
the contractual arrangements relating to Khemco’s operations. But these
are entirely separate things.
The tribunal appears to have finally recognised this distinction in its reasoning
on valuation:
In the instant Case the expropriation for which the Claimant seeks
compensation occurred or was completed by the Special Commission’s
decision nullifying the Khemco Agreement. Formally, therefore, the
Claimant was deprived of its contractual rights under the Khemco
Agreement, and the compensation due relates to these rights. It is
not disputed, however, that the value of such rights equals the value of
the shares owned by Amoco in the joint stock company incorporated
pursuant to the Khemco Agreement. The measure of the compensation
to be paid, therefore, is half the value of Khemco at the date of
valuation.273
426C(8). Southern Pacific Properties (Middle East) Limited v Arab
Republic of Egypt274
The structure of the investment was as follows. A joint venture company
ETDC was created for the development of a tourist complex on the
Pyramids Plateau. The Egyptian General Organisation for Tourism and
Hotels (‘EGOTH’) subscribed to 40 per cent of the shares of ETDC by
contributing its rights of usufruct over the lands in question ‘irrevocably’
and ‘without restriction of any kind’ for the life of the joint venture.275
The
investor, SPP, subscribed to 60 per cent of the shares by making a capital
contribution. The shareholding was held by SPP’s wholly-owned subsidiary,
SPP(ME).276
Construction began on the site in July 1977.277
Following Egypt’s ratification
of the UNESCO Convention and the designation of the Pyramids
Plateau as a world heritage site, the Egyptian Government converted the
land to public property and prohibited any private development in May
1978.278
The tribunal ruled that the SPP’s activities on the Pyramids Plateau
‘would have become internationally unlawful in 1979’279
and hence it
273
Ibid. para. 262.
274
(Merits) 3 ICSID Rep 189.
275
Ibid. 203/55.
276
Ibid. 200–1/42–6.
277
Ibid. 204/61.
278
Ibid. 204/64.
279
Ibid. 226/157.
222 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
ultimately decided that ‘any profits that might have resulted from such
activities are consequently non-compensable’.280
The tribunal upheld SPP’s expropriation claim based upon the prohibition
of expropriation in Egyptian Law No. 43 of 1974 concerning the Investment
of Arab and Foreign Funds and the Free Zones. In relation to the object of
the expropriation, the tribunal said the following:
[T]he Tribunal [cannot] accept the argument that the term ‘expropriation’
applies only to jus in rem. The Respondent’s cancellation of
the project had the effect of taking certain important rights and
interests of the Claimants. What was expropriated was not the land
nor the right of usufruct, but the rights that SPP(ME), as a shareholder
of ETDC, derived from EGOTH’S right of usufruct, which
had been ‘irrevocably’ transferred to ETDC by the State. Clearly,
those rights and interests were of a contractual rather than in rem
nature. However, there is considerable authority for the proposition
that contract rights are entitled to the protection of international law
and that the taking of such rights involves an obligation to make
compensation therefore.281
The authorities referred to were Certain Interests in Polish Upper Silesia,
Amoco International Finance Corp v Iran and Phillips Petroleum Co Iran v
Iran.282
If it was SPP(ME)’s contractual rights that had been expropriated, then one
would expect that the tribunal would have assessed the value of those rights
in its award of compensation. But the tribunal did no such thing:
The cardinal point to be borne in mind, then, in determining the
appropriate compensation is that, while the contracts could no longer
be performed, the Claimants are entitled to receive fair compensation
for what was expropriated rather than damages for breach of
contract.283
It is difficult to make sense of this statement. The ‘value’ of contractual
rights is generally assessed by the expected benefit that would have accrued
to the claimant had the contract been performed. That is the measure of
damages for a breach of contract and hence the contradistinction with ‘what
was expropriated’ is difficult to understand. Alternatively, the tribunal
might be taken to have distinguished the remedies available for a breach
of contract and for a frustrated contract: this would explain the words ‘while
the contracts could no longer be performed’. That would entail a restitutionary
remedy.
280
Ibid. 235/191.
281
Ibid. 228/164.
282
Ibid. 228–9/165–167.
283
Ibid. 233/183.
I N V E S T M E N T 223
In the event, the tribunal’s remedy for ‘what was expropriated’ is a combination
of expectation damages for breach of contract284
and restitution of
‘out-of-pocket expenses’.285
No authority was cited for this approach, which
rests upon the simultaneous existence and non-existence of SPP(ME)’s
contractual rights. The lack of coherency in the tribunal’s consideration of
remedies is the direct result of the conceptual difficulties attending the
concept of an expropriation of contractual rights.
427. Certain other precedents from the Iran/US Claims Tribunal are also
incorrectly relied upon for the proposition that contractual rights can be expropriated.
In SeaCo, Inc v Iran,286
SeaCo alleged the expropriation of certain
contractual rights under lease agreements with private companies by the
Government of Iran. The dicta from Flexi-Van were quoted by the tribunal
but the claim was dismissed for lack of evidence.287
In Foremost Tehran, Inc v
Iran,288
the expropriation claim in respect of Foremost’s shares in an Iranian
company, Pak Diary, was dismissed by the tribunal. Foremost also brought
several claims for breach of various contracts with Pak Diary. Those claims
were upheld; they were purely contractual claims and there is no reference at all
to the expropriation or other state interference with contractual rights.289
C . T H E P R O V I S I O N S O F I N V E S T M E N T T R E AT I E S
428. There are two broad categories of provisions in investment treaties that
require analysis in this chapter to complete the discussion of the principle in
Rule 24.
429. The first category of provisions identify certain types of contracts that
typically entail a significant commitment of resources by the foreign investor in
the economy of the host state. By way of example, the definition of an investment
in the USA Model BIT (2004) includes: ‘turnkey, construction, management,
production, concession, revenue-sharing, and other similar contracts’.290
This list of qualifying investments is predicated by a statement of the general
characteristics of an investment that are similar to those advocated in Rule 23.
Thus the investor’s execution of a ‘construction contract’ must have entailed the
284
Described as ‘the loss of opportunity to make a commercial success of the project’: ibid.
236/198.
285
Ibid.
286
(Case 531-260-2, 25 June 1992).
287
Ibid. paras. 45–6.
288
(Case 220-37/231-1, 10 April 1986) 10 Iran-US CTR 228.
289
The tribunal concluded in respect of these claims: ‘The Award in respect of Parts II and III of
Case No. 231 is based on contractual obligations for which Pak Dairy alone is liable. No award
is made against any other named Respondent [including the Government of Iran] in respect of
those claims.’
290
See Appendix 11.
224 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
commitment of resources in the host state with an expectation of a commercial
return. The covered investment in this case will be the rights in rem acquired by
the investor and evidenced by the construction contract rather than the bilateral
contractual relationship with the investor’s counterparty, which, in the absence
of limiting language in this provision of the USA Model BIT, might be a private
entity. This interpretation is reinforced by the inclusion of a separate definition
of an ‘investment agreement’ in the Model BIT, which expressly stipulates that
the counterparty must be the host state or its emanations. In relation to disputes
arising out of an ‘investment agreement’ so defined, the ratione materiae
jurisdiction of the tribunal extends to:
[A] claim for breach of an investment agreement only if the subject matter
of the claim and the claimed damages directly relate to the covered investment
that was established or acquired, or sought to be established or
acquired, in reliance on the relevant investment agreement.291
430. Moreover, the definition of an ‘investment agreement’ also indicates that it
is not the contractual rights per se that constitute a covered investment, but
instead it is the ‘investment agreement’ ‘on which the covered investment or the
investor relies in establishing or acquiring a covered investment other than the
written agreement itself, that grants rights to the covered investment or investor’
in respect of natural resources, the provision of public services or undertaking
public infrastracture projects. In these three domains, the particular ‘investment
agreement’ would be predicated by, or be evidence of, a public act conferring
certain rights upon the covered investment or investor.
431. The specific treatment of ‘investment agreements’ with the host state in the
USA Model BIT (2004) means that the inclusion of ‘turnkey, construction,
management, production, concession, revenue-sharing, and other similar contracts’
in the general definition of an ‘investment’ must have a restricted meaning
in accordance with the interpretive principle of effet utile. There would be
little utility, for instance, in defining a concession contract with the host state as
an ‘investment agreement’ and limiting the ratione materiae jurisdiction of the
tribunal to breaches of that agreement where the subject matter of the claim
directly relates to the covered investment that was acquired in reliance on that
agreement, while at the same time allowing the investor to rely upon the term
‘concession’ in the general definition of an ‘investment’ to bypass this limitation
altogether and to assert any contractual claims against the host state. The
reconciliation of these two provisions is achieved if one acknowledges that the
regime for ‘investment agreements’ is designed to confer a limited jurisidiction
over contractual claims upon the investment treaty tribunal, whereas no such
conferral is envisaged for contractual instruments that do not qualify as
291
Ibid. Art. 24(1).
I N V E S T M E N T 225
‘investment agreements’. That means that an investor seeking to establish that
it has a ‘concession’ in the general definition of an ‘investment’ in the Model
BIT must demonstrate that it has an ‘asset’ in the host state that is evidenced
by the concession which has entailed the commitment of resources in the host
state. The tribunal’s jurisdiction ratione materiae will accordingly be limited
to disputes relating to the host state’s alleged interference with the rights in
rem comprising that asset and will not extend to contractual disputes with the
host state.
432. The USA Model BIT (2004) regulates the problem of investment contracts
in greater detail than other investment treaties. Thus, for instance, the Germany
Model BIT (2005) simply includes ‘business concessions under public law,
including concessions to search for, extract and exploit natural resources’ under
the general definition of an investment.292
In the context of ascertaining the
existence of a covered investment, however, it is submitted that the approach is
the same as for the USA Model BIT; viz. the rights in rem constituting the asset
in the host state must be identified (the legal materialisation of the investment –
Rule 22) together with an assessment of whether there has been a transfer of
resources into the economy of the host state with an expectation of a commercial
return (the economic materialisation of the investment – Rule 23). In determing
the separate question of whether or not the tribunal has jurisdiction ratione
materiae over contractual claims relating to the investment, Article 11 refers to
‘divergencies concerning investments’293
and hence is wide enough to encompass
contractual claims.
433. The second category of provisions in investment treaties that require
further consideration are those general definitions of an investment that include
‘claims to money which has been used to create economic value’ or ‘claims to
any performance having an economic value’ and so on.294
434. The common denominator for all these enumerated rights is an entitlement
to a liquidated sum. Even in respect of a ‘right to performance having economic
value’, it is the value represented by that performance that is the economic
interest in question that may form the basis of an investment. It is certainly true
that these rights can originate as contractual rights, but in order to qualify as an
investment they must be more than rights in personam against a contractual
counterparty. To be an ‘asset’, the right must transmute into an entitlement to a
liquidated sum and thus constitute a debt in some form. For that transmutation to
occur, the right must have been adjudicated in accordance with its proper law so
that the monetary value of the right has been ascertained. Only at that point can a
292
See Appendix 7.
293
Ibid.
294
Ibid.
226 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
‘right to performance having economic value’, for instance, qualify as an
investment. This means that in practice such rights must be evidenced in a
court judgment or arbitral award.
435. This approach brings the operation of the substantive investment protection
obligations in investment treaties into line with general international
law. If a claimant asserts that it has certain contractual rights, then the correctness
of that assertion must be tested by reference to the proper law of the
contract. If the competent court or tribunal applying that proper law determines
that such rights exist and have been breached, then a ‘value’ is assigned
to those rights by means of a judgment or award of damages. If the claimant is
frustrated in realising that value by the enforcement of that judgment or award,
then international law provides a remedy. International law does not, however,
contain a code on contracts for determining the rights and obligations of
contracting parties; nor does it provide for contractual remedies under the
guise of expropriation or any other international delict. In this respect, the
substantive obligations of investment treaties do not go further than general
international law, but investment treaty tribunals are sometimes conferred
jurisdiction over contractual claims. The power of the tribunal to exercise
that jurisdiction is still contingent, however, upon the existence of an investment,
and hence a putative claimant cannot rely upon an unadjudicated ‘claim
to money’ without more as its qualifying investment and then invoke the
tribunal’s jurisdiction ratione materiae over contractual claims relating to an
investment to have that claim to money adjudicated in accordance with its
proper law. For jurisdiction to be vested in an investment treaty tribunal, the
economic characteristics of an investment pursuant to Rule 23 must have
materialised, and an unadjudicated ‘right to performance’ would not be
sufficient. The most likely reliance upon such rights once adjudicated would
be to supplement the other assets comprising the investment for it would be
very unusual for a claimant to rely upon a judgment or award by which the
value of a ‘right to performance’ has been ascertained as the sole asset
comprising an investment that satisfied the conditions in Rule 23.
436. This interpretation of ‘rights to money’ and similar rights listed in the
general definitions of investments in investment treaties is consistent with the
approach of the European Court of Human Rights in relation to Article 1 of
Protocol No.1 (‘A1P1’) of the European Convention, which reads:
Every natural or legal person is entitled to the peaceful enjoyment of his
possessions. No one shall be deprived of his possessions except in the
public interest and subject to the conditions provided for by law and by the
general principles of international law.
The preceding provisions shall not, however, in any way impair the right
of a State to enforce such laws as it deems necessary to control the use of
I N V E S T M E N T 227
property in accordance with the general interest or to secure the payment of
taxes or other contributions or penalties.
437. According to the European Court of Human Rights in Beshiri v Albania:295
Where the proprietary interest is in the nature of a claim it may be regarded
as an ‘asset’ only where it has a sufficient basis in national law, for
example where there is settled case-law of the domestic courts confirming
it or whether it takes the form of a final enforceable judgment in an
applicant’s favour.296
438. The possibility that a judgment or arbitral award could constitute a
‘possession’ was established in Stran Greek Refineries and Stratis Andreadis
v Greece.297
The European Court distinguished a judgment of the Athens Court
of First Instance, which was subject to appeal, and an arbitral award, which was
final and binding. Only the latter could constitute a ‘possession’ for the purposes
of A1P1 of the Convention:
Although the Athens Court of First Instance would appear to have accepted
the principle that the State owed a debt to the applicants … [t]he effect
of such a decision was merely to furnish the applicants with the hope that
they would secure recognition of the claim put forward. Whether the
resulting debt was enforceable would depend on any review by two
superior courts.
This is not the case with regard to the arbitration award, which clearly
recognised the State’s liability up to a maximum of specified amounts in
three different currencies …
According to its wording, the award was final and binding; it did not
require any further enforcement measure and no ordinary or special appeal
lay against it.298
439. The European Court has been very careful to point out in numerous cases
that A1P1 ‘does not guarantee the right to acquire property’.299
An investment
treaty works in the same way. It protects existing assets constituting an investment
but is not designed to establish a legal framework for their acquisition. The
substantive obligations of an investment treaty must therefore be interpreted in
the same way as A1P1 in this respect.
295
(Case 7352/03, 22 August 2006).
296
Ibid. para. 79. See also: Draon v France (Case 1513/03 [GC], 6 October 2005) para. 68; Burdov
v Russia (Case 59498/00) (2002-III) ECHR, para. 40.
297
(Case 13427/87, 9 December 1994).
298
Ibid. paras. 60–1. See further: Prodan v Moldova (Case 49806/99, 18 May 2004) paras. 59–60;
Užkurėlienė v Lithuania (Case 62988/00, 7 April 2005) para. 39.
299
Beshiri v Albania (Case 7352/03, 22 August 2006) para. 77 and cases cited therein.
228 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
440. Investment treaty precedents are inconsistent on the meaning of rights ‘to
money’ or ‘to performance having an economic value’ and the like,300
but there
are cases that confirm the interpretive approach adopted herein.
441. In Joy Mining v Egypt,301
a dispute arose under a contract between Joy
Mining (the investor) and the General Organization for Industrial and Mining
Projects of the Arab Republic of Egypt (‘IMC’) in relation to the supply of
mining machinery.302
The price for the machinery had been paid in full by
IMC by means of an irrevocable confirmed letter of credit.303
The dispute
related to Joy Mining’s right to have the bank guarantees associated with the
supply contract released.304
Joy Mining argued that the bank guarantees were
an asset and therefore an investment within the meaning of Article 1 of the
UK/Egypt BIT. The tribunal rejected this submission: a bank guarantee is
simply a contingent liability and ‘to conclude it is an asset under Article 1(a)
of the Treaty and hence a protected investment, would really go far beyond the
concept of an investment’.305
442. In some cases the claimant may succeed in establishing the criteria for
the legal materialisation of the investment pursuant to Rule 22 but fail in respect
of the economic criteria in Rule 23. Although the present terminology did not
of course feature in the award in Petrobart Limited v Kyrgyz Republic, the
tribunal’s finding is consistent with the approach advocated herein.
442C. Petrobart Limited v Kyrgyz Republic306
Petrobart (a Gibraltar company) concluded a ‘Goods Supply Contract’ for
gas condensate with KGM,307
a company owned by the Kyrgyz Republic.308
The contract contained a jurisdiction clause in favour of the Kyrgyz
courts.309
Petrobart supplied certain quantities of gas condensate to
KGM. KGM declined to pay for three of the five deliveries but did not
contest its obligation to do so.310
Petrobart succeeded in obtaining a judgment from the Bishkek Court
for the amounts owing from KGM under the Goods Supply Contract.
300
Such rights in the definition of an investment in the relavant treaty are considered in: Bayindir v
Pakistan (Preliminary Objections) paras. 10–12; Salini v Morocco (Preliminary Objections) 6
ICSID Rep 400, 411/45; Nagel v Czech Republic (Merits).
301
(Preliminary Objections).
302
Ibid. para. 15.
303
Ibid. para. 31.
304
Ibid. para. 41.
305
Ibid. paras. 44–5.
306
(Merits).
307
Kyrgyzgazmunaizat.
308
Ibid. p. 4.
309
Ibid.
310
Ibid. p. 5.
I N V E S T M E N T 229
Petrobart then obtained orders of execution from the Court against funds
held by KGM.311
The Vice Prime Minister of the Kyrgyz Republic then
wrote to the Chairman of the Bishkek Court requesting that the Court take
into account the difficult financial situation at KGM and thereby delay the
enforcement of the execution orders.312
The Court acceded to KGM’s
request for a stay of execution for three months.313
In the intervening months between KGM’s failure to pay the invoices raised
by Petrobart and the Court decisions, the President of the Kyrgyz Republic
had decreed that a new state company (‘Kyrgyzgaz’) would be established
on the basis of KGM’s assets.314
After the stay of execution had been
granted, certain assets of KGM were transferred to Kyrgyzgaz.315
KGM
then filed for bankruptcy and Petrobart became a creditor in those bankruptcy
proceedings.316
Petrobart then invoked the dispute resolution mechanism provided by the
Law of the Kyrgyz Republic on Foreign Investments (‘Foreign Investment
Law’) by filing an arbitration notice against the Kyrgyz Republic pursuant
to the UNCITRAL Arbitration Rules.317
The Kyrgyz Republic objected to
the jurisdiction of the UNCITRAL tribunal on the grounds that Petrobart
had not made a ‘foreign investment’ in the Kyrgyz Republic and thus could
not benefit from the substantive provisions of the Foreign Investment Law.
‘Investment’ was defined as ‘investments appearing as contributions of
foreign investors into objects of economic activity in the territory of the
Kyrgyz Republic to derive profit’.318
The tribunal upheld this objection and
declined its jurisdiction on the following basis:
Foreign investment is mostly defined as a transfer of tangible or
intangible property from one country to another for the purpose of
use in that country with a view to generating profit, or at least wealth,
under the control of the owner of the property. Such transfers are to
be distinguished from the much more frequent export transactions
where goods are sold by manufacturers, or owners, in one state to
traders or users in another state. Foreign investment involves a more
permanent relationship between the foreign investor and the host
state than is involved in the transitory international sales transaction.
[The Contract] falls unquestionably into the latter category.319
311
Ibid. p. 6.
312
Ibid. p. 7.
313
Ibid.
314
Ibid. p. 5.
315
Ibid. p. 7.
316
Ibid. p. 8.
317
Ibid. p. 9. Petrobart also had the option of arbitration under the auspices of the ICSID
Convention, the ICSID Additional Facility Rules or the Regulations of the Chamber of
Industry and Commerce of the Kyrgyz Republic.
318
Ibid. p. 8.
319
Ibid. p. 10.
230 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
Petrobart then commenced arbitration proceedings under the Energy
Charter Treaty.
The Energy Charter Treaty (‘ECT’) defines an investment in Article 1(6) as
follows:
(6) “Investment” means every kind of asset, owned or controlled directly
or indirectly by an Investor and includes:
(a) tangible and intangible, and movable and immovable, property, and
any property rights such as leases, mortgages, liens, and pledges;
(b) a company or business enterprise, or shares, stock, or other forms of
equity participation in a company or business enterprise, and bonds
and other debt of a company or business enterprise;
(c) claims to money and claims to performance pursuant to contract
having an economic value and associated with an Investment;
(d) Intellectual Property;
(e) Returns;
(f) any right conferred by law or contract or by virtue of any licences and
permits granted pursuant to law to undertake any Economic Activity
in the Energy Sector.
[…]
The tribunal constituted pursuant to the ECT defined the issue:
The Arbitral Tribunal further notes that the Contract did not involve
any transfer of money or property as capital in a business in the Kyrgyz
Republic but was a sales contract. It concerned the sale of goods at an
agreed price. The arbitral tribunal in the UNCITRAL Arbitration
found that this did not constitute a foreign investment under the
Foreign Investment Law. The question in the present arbitration
is whether it constitutes an investment according to the Treaty.320
In defining the issue in this way, the tribunal was essentially adjuding the
existence of the investment by reference to economic criteria consistent
with those stipulated in Rule 23. In applying those criteria, the tribunal
concluded that the Goods Supply Contract and the judgment of the
Bishkek Court did not constitute an investment pursuant to Article 1 of
the ECT. It is submitted, however, that the judgment would have satisfied
the criteria for the legal materialisation of the investment in Rule 22. The
claimant’s submission was, in effect, that the contract and the judgment
were ‘assets’ in accordance with the definition of an investment in Article 1
(6) of the ECT. The tribunal rejected this approach:
[A] correct legal analysis leads to the conclusion that the Contract
and the judgment are not in themselves assets but merely legal documents
or instruments which are bearers of legal rights, and these
320
Ibid. p. 69.
I N V E S T M E N T 231
legal rights, depending on their character, may or may not be considered
as assets. The relevant question which requires consideration
is therefore whether the rights provided for in the Contract and
confirmed in the judgment constituted assets and were therefore an
investment in the meaning of the Treaty. In other words, the question
is whether Petrobart’s right under the Contract to payment for
goods delivered under the Contract was an asset and constituted an
investment under the Treaty.321
In relation to the Contract, this analysis is entirely consistent with the
approach advocated herein. The Contract may provide evidence that
Petrobart has acquired a qualifying investment in the Kyrgyz Republic,
but it cannot constitute an investment in and of itself. In relation to the
judgment, this would satisfy the legal test for an investment pursuant to
Rule 22 but not the economic test in Rule 23. The conclusion in respect of
Article 1 of the ECT must be that there is no investment.
321
Ibid. p. 71.
232 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S