Arbitrating Investment Disputes
Francisco Orrego Vicuña
Investment arbitration has become one of the central features of contemporary
legal practice for counsel, government officials and arbitrators. It has also meant the
development of specialized institutions, such as ICSID, or the growing utilization for
the settlement of investment disputes of other arbitration institutions, such as the LCIA,
the ICC and the Stockholm Centre, just as it has meant an increasing utilization of
UNCITRAL rules in this context.
This contribution has been organized not so much on the procedural aspects of
such arbitration, which are in many respects similar to those of any other arbitration and
are very competently explained in other sections of this book. It will rather look at a
number of issues concerning jurisdiction which need to be considered by counsel in
respect of many disputes that are likely to end in some form of international arbitration
or indeed at the time they are brought to arbitration.
A shared privilege
It is many times thought that arbitrating investment disputes is the privilege of
capital exporting countries, particularly in connection with investment in Eastern
Europe or the developing world. This view, however, sometimes overlooks the fact that
developing countries, including to this effect China, have not only signed numerous
bilateral investment treaties but have done so both with developed countries and among
themselves. Not few arbitration proceedings have been initiated by companies and
individuals from developing countries against other developing countries, as well as
against developed countries. Bilateral investment treaties, on the other hand, are just a
part of the broad legal framework governing investments, which is also supplemented
by various multilateral treaties dealing wholly or in part with investments and
2
sometimes having only developing countries as parties to them, as is the case of the
MERCOSUR Protocols1
, the ASEAN Investment Agreement21
or some Free Trade
Agreements.3
Another question that is important to note is that investment arbitration is not
purely an alternative open to investors. It is also open to states. Under the ICSID
Convention or other arbitration arrangements not only an investor can bring a State to
court but also a host State can initiate proceedings against an investor, provided a
written consent to arbitration has been given by both, as is often the case under direct
investment agreements and occasionally under investment contracts. States have seldom
used this alternative and it seems that awareness about its existence is not widespread.4
There is also of course the possibility of counterclaims in a proceeding initiated by an
investor.
A related aspect is still more significant. For many years developed countries
appeared to believe that bilateral investment treaties were a one way street allowing for
claims against developing host States. Much to the surprise of a few OECD countries,
investors from developing countries have initiated proceedings against them, thus
evidencing that bilateral treaties are a two-way street.5
Again this is likely to see
important developments in the near future as a consequence of the globalization of
investments and of the fact that there are many countries today exporting capital and
entering into various forms of business ventures.
This complex legal framework has been interpreted and reinterpreted by
numerous international tribunals and increasingly by domestic courts too. Along this
process, which is not long in time, a number of issues have been clarified, either in
3
terms of the consideration of new approaches or understandings or of the placing of
limits to some such developments.
In spite of occasional critical perceptions that tend to see in arbitration a tool for
protecting foreign investors to the detriment of governments,6
the end result of such a
process has advanced thus far the balance between the right of host States to undertake
regulatory functions in the public interest and the right of foreign investors to carry on
their business without arbitrary or unlawful interference.
Intricacies of consent
Practitioners may wish to look first into the jurisdictional issues that will often
be found in arbitration. The first such issue is that a State Party to the ICSID
Convention or some other arbitration arrangement that is brought to court by an investor
is likely to raise the question that it has not expressly consented to the submission of
that particular dispute to arbitration. In that point of view, commitment to arbitration
under a bilateral investment treaty requires a specific “compromis” in which both
parties will agree to that submission and its modalities. True enough this was the
traditional modality of inter-State arbitration in the early part of the twentieth century.
States agreed to the arbitration of disputes under a treaty, but this was regarded only as a
“pactum de contrahendo” the implementation of which required an additional and
specific “compromis”.
This is, however, one question that has fundamentally changed in the context of
arbitrating investment disputes. Interestingly enough this is not the result of the ICSID
Convention that only requires the parties to consent in writing to the submission of the
dispute to the Centre.7
It is rather the result of the network of bilateral investment
treaties that have provided for the overall expression of consent by States parties in
4
respect of disputes that might arise with foreign investors. This same result can be
obtained by a general offer of submission to ICSID arbitration in domestic law.
As these investors are not a party to the treaty but are the beneficiaries of rights
bestowed directly upon them under international law, or under domestic law, their own
expression of consent might come later in time or under separate instruments. This
happens typically when consent by the investor is given in a direct agreement with the
State concerned or simply by resorting to such a choice in writing, or even by instituting
proceedings in the Centre.
ICSID and other tribunals have had no difficulty in finding that the offer by the
State to submit to arbitration, followed by acceptance, is a definite binding legal
obligation without further steps needed to establish jurisdiction.8
Yet, as a recent case
has shown, enormous complexities can be found when this reasoning is applied in
conjunction with questions of change of nationality and particularly whether the
expression of consent to arbitration given by a foreign national who made the
investment at the time he was a national of the defendant State can satisfy the
requirement of jurisdiction.9
ICSID tribunals have on occasions shown concern about this matter by not
accepting modalities that are far remote from a proper consent. In Cable TV v. St. Kitts
and Nevis, for example, the tribunal ruled that references to an ICSID clause in
domestic proceedings did not amount to consent to arbitration.10
On the other hand,
however, tribunals have also been strict in not allowing a Sate that has expressed its
consent to elude its obligations in respect of the foreign investor. So happened in CSOB
v. Slovakia, where the Tribunal found that an ICSID clause included in a BIT not yet in
force had been embodied by the parties in a direct agreement and upheld jurisdiction on
this basis.11
5
In this same case, although the pertinent treaty provided that upon the agreement
of both parties the dispute would be submitted to the Centre, it was held that this did not
mean, as alleged, that submission had to be made jointly as this would imply the need
for an additional agreement to put into practice the consent expressed by the State in the
treaty.12
The “pactum de contrahendo” approach was thus expressly ruled out.
“Arbitration without privity” is here to stay, as evidenced not only by a variety
of bilateral investment treaties but also by multilateral arrangements.13
The NAFTA, in
the context of the operation of the ICSID Additional Facility, like the Energy Charter
Treaty, contain forms of unconditional consent to ICSID or UNCITRAL arbitration.
Unsuccessful efforts at bypassing consent
A rather different view was put forth by a defendant State in the context of the
registration in ICSID of an investor’s request for arbitration under a bilateral investment
treaty.14
Because there had been diplomatic demarches by the State of the investor’s
nationality in support of the investor’s right to take the dispute to arbitration, the
defendant State made the argument that there was a State to State dispute that had to be
settled first through the operation of the ad-hoc arbitration that investment treaties
normally provide for disputes between States parties. It should be noted that diplomatic
exchanges directed to facilitate the settlement of the dispute are not normally considered
a form of diplomatic protection under Article 27(2) of the Convention.
That view, if accepted, could have meant that recourse to ICSID arbitration by a
private investor and the Centre’s jurisdiction would be paralysed until a different
arbitration finalizes. As diplomatic exchanges not amounting to diplomatic protection
regularly take place when there is an investment dispute, it would be easy for any
defendant State to elude its obligations toward the investor by claiming the existence of
an inter-State dispute. This situation would entangle ICSID’s jurisdiction for long
6
periods of time to the disadvantage of the investor. Moreover, it is quite evident that the
kind of disputes between States parties to which the inter-State procedures could apply
are very different from those affecting the investor’s rights under a bilateral treaty, a
situation somewhat paralleled by Article 64 of the Convention and its negotiation
history. The tribunal in that case refused to grant a stay of the proceeding while interState
arbitration was resorted to by the defendant State, an initiative that ultimately did
not materialize.
Intergovernmental treaties and the expanding individuals’ right of action
It might also be of interest for counsel to note in this respect the recent decisions
of English courts in the context of the doctrine of non-justiciability as argued in respect
of an investment dispute decided by an UNCITRAL tribunal whose award had been
challenged before those courts. The courts held that the right of the individual to resort
to arbitration under inter-State treaties, including the eventual challenge of the award by
the defendant State, was quite independent from the intergovernmental nature of
investment treaties and the fact that a treaty is concluded between States cannot result in
the derogation of rights that belong to private Parties.15
A different recent development that has influenced some decisions on
jurisdiction in cases concerning investment disputes needs to be eventually considered
by counsel. Ever since the very outset of the protection of foreign traders by means of
treaties of commerce and navigation, the most-favoured-nation clause had a crucial role
to play in terms of the material conditions in which trade was developed. This very
trend continued unabated under the modern system of protecting the rights of foreign
investors. The possibility of applying the clause to procedural matters had arisen but
had never been decided, as the well known Ambatielos case evidences.16
This was to
change too in the light of recent decisions, albeit not in all.
7
An Argentine investor proceeding against Spain applied directly to the Centre
not taking his claim first to Spanish courts, which had an eighteen-month period to
decide the dispute as provided for in the Argentine-Spain investment treaty. The
justification for this application was that under the Chile-Spain investment treaty direct
recourse to the Centre was allowed, what was argued meant a more favourable
treatment to Chilean investors in Spain and hence should be extended under the clause
to the Argentine investor.
The ICSID Tribunal, after carefully examining the treaty practice of both
Argentina and Spain, concluded that the eighteen-month period did not amount to a
requirement of exhaustion of local remedies, which can be made under the ICSID
Convention. On that basis, it decided that the clause was applicable to this procedural
question and hence affirmed jurisdiction.17
It should be noted, however, that the
Tribunal was also careful in explaining that such a clause cannot be used in highly
institutionalized dispute settlement arrangements where procedural aspects have been
built as an essential requirement of jurisdiction and admissibility or in other situations
where the parties have specifically agreed to more limited arrangements. The wording
of the treaty was also crucial as it applied the clause to all matters under that treaty.
While other decisions have expounded on the concept,18
there have also been
cases where the applicability of the clause to procedural questions has not been
accepted.19
This too has been the express understanding of some recent treaties.20
The
parties to such arrangements are of course at liberty to narrow down the extent of the
clause to some specific matters, but where the contrary intent is evident the clause might
perform a useful role in providing for the harmonization of treatment of foreign
investors and in avoiding discrimination in this context.
8
Keeping time
The question of time in connection with investment arbitration is another
decisive aspect to be taken into account. This aspect plays of course a most important
role in affirming or dismissing jurisdiction in a given case. In Tradex v. Albania, for
example, the tribunal rejected jurisdiction on the basis that an investment treaty had not
yet entered into force.21
In Holiday Inns v. Morocco, however, the Tribunal faced a
more complex situation. At the time of the investment agreement containing the consent
to arbitration the pertinent States had not yet ratified the ICSID Convention, but these
requirements were satisfied before proceedings were actually instituted. The tribunal
concluded that it was the date when conditions were satisfied that should be deemed to
constitute the date of consent and, accordingly, affirmed jurisdiction as the request for
arbitration was made after this date.22
Also time is of the essence of most bilateral investment treaties in that they
usually allow for submission to arbitration of those disputes that arise after the treaty
has entered into force. The investment in most cases might have been made earlier.
Given the fact that discussions and disagreements between investors and host States
might extend for a long period of time, tribunals occasionally have to decide on the time
the dispute arose and whether it is under its jurisdiction. The test was explained in
Maffezini where it was held that disagreements and difference of views might extend for
a period of time, even before the entry into force of the treaty, but what matters is the
moment in which there is a claim with a legal meaning in respect of rights and
obligations of the parties concerning the investment. In Lucchetti, however, the tribunal
was of the view that a dispute that arose between the parties before the entry into force
of the Treaty concerning construction permits was the same as an expropriation dispute
9
that arose after the Treaty had entered into force, considering that one was just the
continuation of the other, thus declining jurisdiction on this understanding.
Resorting to safeguards
Counsel for governments and government officials might also wish to look into
the question of safeguards. A number of safeguards available to the parties of bilateral
investment treaties are not always resorted to and the very existence of which many
times appear not to be particularly noted. States, for example, can exclude from
investment treaties given classes of disputes. The extent of this exclusion might
eventually be more limited than it appears at first sight. In fact, although under Article
24(4) of the Convention a Contracting State can notify the Centre of classes of disputes
it would or would not consider submitting to arbitration, it is usually considered that
such a notification does not constitute consent under the Convention nor does it change
any consent given in other instruments. Yet, it is a useful tool to guide prospective
investors about what they might expect in terms of dispute resolution.
Most treaties, however, include broad expressions of consent. On occasions
more limited expressions of consent are made in national legislation or in investment
agreements, but then these may not be quite relevant if the dispute arises under the
terms of a broadly defined treaty.
It is well known that the Convention did not define “investment” as there was no
agreement on this point.23
Many examples of investment were given during the
negotiation of the Convention. The precise definition of investment was therefore left to
the consent of the parties in bilateral investment treaties or other agreements and
contracts. This is not to say that these treaties are entirely free to define investment as
the parties may please. The definition has to be compatible with the meaning of the
Convention and not go beyond what can reasonably be regarded as an investment.
10
In most cases the dispute will relate to an investment on which there will be no
doubt. In a few instances, however, doubt has arisen and ICSID’s Secretary-General has
refused registration because the case is manifestly outside the jurisdiction of the Centre.
So too an ICSID tribunal can refuse to accept jurisdiction on this ground. As ICSID
jurisprudence develops, a number of cases have clarified whether a particular activity is
or not an investment under the relevant treaty. Taxation inconsistent with mining
contracts,24
the development of a timber concession,25
construction contracts26
and other
activities have been identified as a pertinent investment under the relevant treaties. On
the other hand, for example, in Mihaly v. Sri Lanka negotiations on a construction
project that had not materialized in a contract were held not to constitute an
investment.27
A different kind of situation arose in another recent case where the dispute
concerned in essence a bank guarantee relating to the sale of mining machinery.28
The
tribunal held that the contract in question and the equipment envisaged related to a
purely commercial operation, just as the guarantee was a normal commercial
instrument, and thus that it could not qualify as investment for the purpose of the
Convention.
The exhaustion of local remedies is another available safeguard. This is a rather
common feature of traditional international claims that found its way into Article 26 of
the ICSID Convention. As noted in the Annulment Decision in Amco v. Indonesia, this
requirement must be made in an express manner and certainly before consent is
perfected.29
Also, as noted in Maffezini, other procedural provisions, such as a
submission to local courts for a certain period of time, are not equivalent to a
requirement to exhaust local remedies.
11
Attempting to negotiate
The issue of time for negotiation has also become rather common in investment
arbitration. Most bilateral investment treaties provide for a period of time in which
amicable settlement must be attempted, often a six-month period. While occasionally
the investor will not follow this requirement or do so rather casually, it is more often
that the government concerned will ignore the communications from the investor to this
effect. The view has also been held that such is just a procedural step and not a
jurisdictional requirement, and that what matters is to afford the government an
opportunity to engage in such settlement which if not taken might open the way to
arbitration even before the period in question has lapsed.30
Two aspects appear relevant to find an answer to this question. The first is that,
as noted in Tradex v. Albania, when the investor repeatedly requests the government to
enter into discussions and this is ignored over a period of time, then on completion of
the six-month period the request for arbitration may be introduced and such efforts will
be considered enough to satisfy the amicable settlement requirement.
The second aspect is whether ICSID’s Secretary-General could register a request
that has not complied with the six-month amicable settlement requirement. The answer
to this is that probably it will find difficulty to do so. In this light the issue does not
appear to be purely procedural but might concern an important question of jurisdiction.
Just as the investor cannot pretend registration and ultimately jurisdiction if amicable
settlement has not been attempted, so too the State cannot object to registration and
ultimately to jurisdiction if it has not reacted to the pertinent invitations to this effect
during the established period of time.
12
Who is who
Who may be a party to proceedings before the Centre is one difficult issue that
counsel is likely to find before ICSID tribunals at the time of examining jurisdiction of
the Centre and their own competence. This is in part connected with the interpretation
of Article 25 of the Convention, but it is also connected with the extent of investment
agreements and investment treaties.
A first question that has given place to growing confusion relates to the status of
a constituent division or agency of a State as parties to an ICSID proceeding. Under the
Convention, the participation of such division or agency requires the approval of the
State or else that the State notifies that no such approval is necessary. Seldom has this
been done. But when proceedings are instituted against the State because of acts or
omissions of such divisions or agencies then often the argument is made that no
approval has been given to the effect of their participation.
One thing, however, is the participation of a division or agency in its own right
and quite another is the responsibility of the State for the conduct of its organs, whether
they are a part of the central government or entirely decentralized, including provinces,
municipalities and other entities that exercise public functions. The designation
envisaged in the Convention relates to the first aspect only, that is when an investment
agreement has been entered into with a given subdivision or agency and then such entity
is authorized by the State to participate in an ICSID proceeding. It was thus held in
Cable Television v. St. Kitts and Nevis that an investment agreement made with a
constituent subdivision of that State that included an ICSID clause could not determine
the jurisdiction of the Centre as that entity had not been designated by the State in
accordance with Article 25.
13
But if the dispute arises under a bilateral or multilateral investment treaty to
which the State is a party and concerns an investment agreed to with a given subdivision
or agency, even if such entity has not been designated to participate in ICSID
proceedings the State is still accountable for responsibility under international law.
Article 4 of the Draft Articles on State Responsibility adopted by the International Law
Commission, which on this point unequivocally reflects customary international law, is
very precise in establishing the responsibility of the State for acts or omissions of its
organs.31
This question was specifically discussed and decided in the case of Compagnie
Générale des Eaux (or Vivendi) v. Argentina, where the existence of a concession
contract with an Argentine province and the fact that that province had not been
designated to participate in ICSID proceedings, did not prevent the Centre’s jurisdiction
under a bilateral investment treaty between Argentina and France whose provisions
governed the rights and obligations of the Republic of Argentina and foreign investors
in its territory.32
Closing loopholes in nationality
Traditionally, counsel might not have expected difficulty in respect of the
participation of natural persons as claimants in ICSID cases as on this point the
applicable rules of international law on questions of nationality are generally well
established, including the test of effectiveness of nationality in case of disputed facts as
decided by the International Court of Justice in the Nottebohm case.33
Yet, new issues
have arisen in recent cases, concerning mostly issues of dual nationality or change of
nationality.
In spite that the determination of nationality is normally left to domestic law, in
case of dispute it has been held that it is for the tribunal to decide on the matter and that
14
certificates of nationality originating in a State are only prima facie evidence of such
nationality.34
So too, it has been held that if the defendant State nationality is invoked
by the claimant for purposes of the investment and later argues having a different
nationality, jurisdiction will be rejected on the ground of dual nationality of the
claimant.35
More troublesome was a question of alleged change of nationality in Siag, where
the claimant argued that because he had acquired Lebanese nationality he had lost his
Egyptian nationality and having also alleged that he had acquired Italian nationality
because of marriage he could claim on this basis under a Treaty between Egypt and
Italy. Hence it was also argued that jurisdiction could not be excluded on the ground of
dual nationality. While the Tribunal upheld jurisdiction on such argument, a separate
opinion took the contrary view noting that the claimant was a national of the defendant
State at the time the investment was made, continued to benefit from that nationality
and the later expression of consent to arbitration by such claimant could not abrogate
the fact that he was a national of that State at the time the latter expressed is own
consent in the treaty.36
Functional nature
Different, however, appears to be the situation concerning juridical persons. The
very complexity of corporate structures and investment consortia offers fertile ground
for divergent views about who can or cannot claim before ICSID or other arbitration
mechanisms.
The private or public nature of the functions of a corporate entity has recently
given place to important clarifications as far as the determination of jurisdiction is
concerned. The Convention envisaged allowing for claims by private entities against a
State, but not by public entities against another State, although this alternative was not
15
entirely ruled out in the negotiations. In CSOB v. Slovakia the claimant was a State
agency of the Czech Republic that initiated proceedings against Slovakia, what
prompted an objection to jurisdiction on this basis. Interestingly enough, the Tribunal
found that jurisdiction could be upheld as that particular entity, although owned by the
State, was engaged in banking activities that had been privatized and were essentially
commercial by nature. The test thus became not governmental control but the essence of
the activities performed. The same test was later applied in Maffezini to establish
whether some activities of an agency of the Spanish State were of a public or private
nature and hence engaged or not the responsibility of the State, but here the public
nature of such activities prevailed and thus was held as justifying jurisdiction to hear a
claim against that State.
Agreement of the parties on the question of corporate nationality will of course
be most influential on a finding of jurisdiction by a tribunal. So happened, for example,
in MINE v. Guinea where an agreement of the parties establishing that a corporation
had Swiss nationality prevailed over the fact that technically the nationality was
different.37
Issues relating to the real interest behind the investment and control of a
corporation are relevant to this effect.
The ICSID Convention facilitates this more flexible approach. In particular,
Article 25(2)(b) refers to the situation of a corporate entity that has the nationality of the
defendant State, but because of foreign control the parties have agreed it should be
treated as a national of the other relevant State party, and thus can claim against the
defendant State. It is not unusual that bilateral investment treaties and investment
agreements will contain clauses to this effect.
ICSID tribunals have occasionally found that certain arbitration clauses and
other provisions might result in an implied agreement to treat a locally incorporated
16
company as a foreign investor, as evidenced in Amco v. Indonesia38
and Klöckner v.
Cameroon.39
It should be noted that this same result can be achieved by means of the
definition of investment, which if broad enough, as is usually the case, might not need
an agreement on nationality or control.
Barcelona Traction on the side track
The decision of the International Court of Justice in the Barcelona Traction
case40
has been many times considered as expressing customary international law in
respect of corporate nationality and diplomatic protection.41
As it is well known, this
decision ruled out the protection of shareholders by their State of nationality when the
corporate entity was incorporated in a different country, except in very limited
circumstances. This understanding, however, was not always shared and appears to be
changing in recent years, at least in the context of investment disputes.
In point of fact, the very International Court of Justice in the Elettronica Sicula
decision accepted, some years later, the protection of shareholders of a corporation by
the State of their nationality in spite of the fact that the affected corporation had a
corporate personality under the defendant State’s legislation.42
Moreover, the very role
of diplomatic protection underlining these decisions has been changing in current
international law, as the State of nationality is no longer considered to be protecting its
own interest in the claim but that of the individual affected.43
This reality becomes
particularly evident in the context of arrangements allowing for the direct right of action
by individuals. Notwithstanding this evolution, occasionally features arising from the
classic law of international claims tend to reappear rather unexpectedly, as was the case
with the rule of continuous nationality in the Loewen case.44
Recent State practice also appears to support the meaning of this changing
scenario. Besides accepting the protection of shareholders and other forms of
17
participation in corporations and partnerships, the concept of limiting it to majority or
controlling participations has given place to a more flexible threshold in this respect.
Minority and non-controlling participations have thus been included in the protection
granted or have been admitted to claim in their own right. Contemporary practice
relating to lump-sum agreements, the decisions of the Iran-United States Tribunal45
and
the rules and decisions of the United Nations Compensation Commission,46
among
other examples, evidence increasing flexibility in the handling of international claims.
These trends have gathered momentum in ICSID decisions. This is evidenced
first by the discussion of who actually controls a corporation. In SOABI v. Senegal, an
ICSID tribunal went quite far in searching for the controlling entity of a locally
incorporated company.47
The immediate controller was a Panamanian company, but
Panama was not a party to the Convention; beyond that company, Belgian nationals
were in control and Belgium was a State party. The tribunal ultimately accepted this last
control. In Amco v. Indonesia, however, the tribunal refused to go beyond the control
exercised by the immediate parent company of a locally incorporated company.
While questions of control have generally been handled with flexibility, difficult
issues may arise in connection with associated problems of nationality and the origin of
capital. In Tokios, for example, while the tribunal accepted that there was no origin of
capital requirement and that the fact of the claimant being a foreign corporation was
enough to establish jurisdiction, a dissenting opinion emphasized that the investors were
nationals of the defendant State and were only channelling domestic capital through a
foreign entity, a situation which should have resulted in the rejection of jurisdiction.48
A related issue that counsel will often find in investment arbitration is whether a
foreign investor is allowed to claim for damages affecting a corporate entity only when
such investor has a controlling interest or can do so even if it is a minority shareholder.
18
In Vaccum Salt Products Ltd. v. Ghana an ICSID Tribunal held that foreign control was
an objective test and found out that this test was not met by an investor holding a 20%
of a Ghanaian corporation.49
However, in various cases other elements have been
considered as evidence of control, such as voting power and managerial control.50
This
can be an important question when investment consortia participate in locally
incorporated companies because of legal requirements of the host State.
A number of ICSID and other cases have discussed this question, in particular
AAPL v. Sri Lanka,51
AMT v. Zaire,52
Antoine Goetz et consorts v. Republique du
Burundi,53
Maffezini v. Spain,54
Lanco v. Argentina,55
Genin v. Estonia,56
the Aguas
Award57
and Vivendi Annulment58
and CME v. Czech Republic,59
CMS,60
Enron61
and
other cases. These cases have dealt with different situations, involving both majority
shareholders and on occasion minority shareholders. On occasions too the investor has
been directly affected while in other situations the affected entity has been the
corporation as such. But it appears again that the substantive interest associated to the
investment is becoming the object of protection.
In Goetz the tribunal found in favour of the real interest underlining the
investment in the following terms:
“...le Tribunal observe que la jurisprudence antérieure du CIARDI ne limite
pas la qualité pour agir aux seules personnes morales directement visées par
les mesures litigieuses mais l’étend aux actionnaires de ces personnes, qui
sont les véritables investisseurs.”62
Similarly, the Committee on Annulment in the Compañía de Aguas del
Aconquija or Vivendi, held in this connection:
19
“Moreover it cannot be argued that CGE did not have an “investment” in
CAA from the date of the conclusion of the Concession Contract, or that it
was not an “investor” in respect of its own shareholding, whether or not it
had overall control of CAA. Whatever the extent of its investment may have
been, it was entitled to invoke the BIT in respect of conduct alleged to
constitute a breach of Articles 3 or 5”.63
In Lanco it was specifically held that an 18.3% investment in a domestic
corporation qualified for protection in the circumstances of the case. In Enron the
investor’s interest in a locally incorporated company was 35.5%. Yet, the possibility of
minority shareholders claiming for indirect interests cannot be unlimited because, as the
Government of Argentina rightly pointed out in Enron (Stamp Tax),64
there would be an
endless chain of claims originating in shareholders in a company that invests in another
company and another and another. The Tribunal in that case held that the limit was
established by the consent to arbitration, which will only cover the specific investors
envisaged and not other that might lie beyond.
Contract and treaties, circular roads
Counsel will no doubt be familiar with the question that because of the various
forms that an investment can today adopt, there has also been a growing distinction
between contracts made with the host State and the rights of the investors under the
applicable bilateral investment treaty. Many times these are parallel arrangements that
occasionally entail different dispute settlement mechanisms. This situation has become
characteristic of concession contracts or license agreements made by a foreign investor
with the host government while at the same time the investment qualifies for protection
under a bilateral investment treaty.
20
It should be noted that not always do investment treaties include this kind of
clause but still concession agreements are usually embodied in the definition of
investment thus again posing the issue of the dual role of domestic and international law
and their respective dispute settlement provisions. The Annulment Committee in the
Vivendi case contributed to the clarification of this question by looking at whether the
basis of the claim related to the terms of a contract or to those of the treaty and holding
that the protection granted under the treaty could not be barred by a contract containing
an exclusive jurisdiction clause. So too, the distinction between ordinary breaches of
contract and breaches that arise from the exercise of the sovereign authority of the State
has been helpful to this clarification.65
This discussion is also related to the question of the “fork in the road”. Article
26 of the Convention provided that consent to ICSID jurisdiction is to the exclusion of
any other remedy. The Tribunal in Lanco, for example, found that when the parties give
their consent to ICSID arbitration, they lose their right to seek to settle the dispute in
any other forum, domestic or international.66
In that same case it was held that the
provisions of an investment treaty could not be diminished by the submission of a
dispute to a domestic court to which a concession agreement remitted.67
The ICSID
tribunal in Compañía de Aguas del Aconquija was of the view that jurisdiction could be
affirmed as the claims were not based on a concession contract referring disputes to
domestic courts but in the alleged violation of the investor’s rights under the ArgentinaFrance
bilateral investment treaty.68
An ICSID Annulment Committee in Wena also clarified the connection between
contracts and the investment treaty, with particular reference to dispute settlement
arrangements:
21
“The Committee cannot ignore of course that there is a connection between
the leases and the IPPA since the former were designed to operate under the
protection of the IPPA as the materialization of the investment. But this is
simply a condition precedent to the operation of the IPPA. It does not
involve an amalgamation of different legal instruments and dispute
settlement arrangements.(...) [T]he acts or failures to act of the State cannot
be considered a question connected to the performance of the parties under
the leases. The private and public functions of these various instruments are
thus kept separate and distinct”.69
Singing in the rain, under the “umbrella clause”
The interpretation of the extent of the “umbrella clause” has also been a difficult
issue often arising in investment arbitration. The two main schools of thought have been
thus far the restricted interpretation of the SGS v Pakistan70
and the more open one of
SGS v Philippine,71
where both the domestic court concerned and the arbitral tribunal
were recognized roles in adjudicating different aspects of the dispute submitted. While
interpretations seeking to attach a broad meaning to the clause that would allow any
contract breach claim to be brought to arbitration are often advocated, this has not been
normally accepted unless the claim can be recognized as in some way included under
the protection of the treaty.72
Here, however, the issue becomes inextricably linked to
the merits.
In any event, it is important to keep in mind that the Convention also requires
the dispute to be a legal dispute and to arise directly from the investment. In Amco v.
Indonesia, a dispute concerning general tax obligations under domestic law invoked in a
counter-claim was held not to qualify as an investment as it did not arise directly from
the investment made.73
In Joy the tribunal found that a bank guarantee relating to a sale
22
contract did not qualify as an investment under the Convention, declining on this basis
to exercise jurisdiction. Occasionally, however, there is some confusion between a
dispute arising directly from an investment and the question of the investment being a
direct and not an indirect one. The point was also discussed in Fedax v. Venezuela,
where the tribunal held:
“However, the text of Article 25 (1) establishes that the “jurisdiction of the
Centre shall extend to any legal dispute arising directly out of an
investment”. It is apparent that the term “directly” relates in this Article to
the “dispute” and not the “investment”. It follows that jurisdiction can exist
even in respect of investments that are not direct, so long as the dispute
arises directly from such transaction. This interpretation is also consistent
with the broad reach that the term “investment” must be given in light of the
negotiating history of the Convention”.74
As noted above, the definition of investment agreed to in treaties is usually very
broad and encompasses movable and immovable property, shares and other forms of
participation in a company, claims to money and other contracts of financial value,
intellectual property, business concessions and other matters. This broad definition is at
the very heart of the difficulties that ICSID and other tribunals have found in respect of
the interpretation of treaties.
It might be important for governments and investors to be as precise as possible
on the investments they intend to protect as this may avoid many disputes and
misunderstandings and might also avoid ancillary claims and counterclaims that further
complicate disputes submitted to arbitration.
23
New trade winds
Two new situations are important to keep in sight. The first concerns investment
for trade development, a matter which is likely to be highly relevant for the purpose of
both WTO and investment arbitration. In two NAFTA cases the question has been
decided. In Pope & Talbot, Inc. v. Canada, Canada argued that the dispute did not
concern investment but trade and hence the tribunal lacked jurisdiction; the tribunal,
however, found that the two questions were not “wholly divorced from each other”.75
The tribunal in S. D. Myres, Inc. v. Canada faced similar arguments and decided that
the questioned measures concerning goods “can relate to those who are involved in the
trade of those goods and who have made investments concerning them”.76
The
connection between trade and investment was thus central to these decisions.
The second development relates to financial instruments. Although not typically
an investment of the traditional kind, financial instruments have become a crucial
source for government financing and heavy investments are made in them worldwide.
In Fedax v. Venezuela the tribunal had to deal with promissory notes issued by the
government that had circulated internationally and Fedax, a foreign financial institution,
had invested in them. The tribunal decided that the promissory notes were a means by
which loans and credit benefiting the State had been made available and their purchase
qualified as an investment under the investment treaty. Also in CSOB v. Slovakia, the
tribunal held that loans in the circumstance of a large banking operation qualified as an
investment. In both cases it was held that the resources made available to the State did
not need to be physically transferred across borders to qualify as an investment.
Financial developments cannot of course extend indefinitely as a covered
dispute and the circumstances will provide clear limits to this end. In the Gruslin case, a
Belgian investor who had bought a participation in an international asset fund claimed
24
against Malaysia on the ground that general economic measures adopted by this country
had diminished the value of his portfolio.77
The claim failed on jurisdictional grounds.
A global globalization
The arbitration of investment disputes is the product of globalization as a
consequence of the liberalization of capital movements and related new corporate
arrangements, structures and ventures. This same reality also underlies other economic
activities, particularly trade. As investment in trade development becomes more
common, the link between trade and investment will be strengthened. Access of private
parties to trade dispute settlement is also a common feature of many contemporary
arrangements, and not in a too distant future it will permeate the WTO dispute
settlement procedures.
Globalization will not end there. It might well happen that in the long term these
unfolding arrangements will also apply to a variety of aspects that today appear more
closely related to domestic law and jurisdictions.An increasing number of activities will
follow the same path as investments and trade. To the extent that such activities might
be linked to investment, or even on their own, arbitration will become the most likely
dispute settlement arrangement available. Current practice and legal developments are
just the beginning. Counsel might expect many new opportunities arising from these
trends, just as they may expect many new challenges ahead.
25
1
MERCOSUR, 1994 Colonia and Buenos Aires Investment Protocols.
2
ASEAN Agreement for the Promotion and Protection of Investments, 1988.
3
See, for example, the 1994 Free Trade Agreement between Colombia, Mexico and Venezuela.
4
Gabon v. Societé Serete S. A., ICSID Case No. ARB/76/1, and discussion in Ibrahim F. I. Shihata and
Antonio R. Parra: “The Experience of the International Centre for Settlement of Investment Disputes”,
ICSID Review-Foreign Investment Law Journal, Vol. 14, 1999, 299-361, at 316.
5
Maffezini v. Spain, ICSID Award of November 13, 2000.
6
See generally M. Sornarajah: The Settlement of Foreign Investment Disputes, 2000.
7
ICSID Convention, Article 25.
8
Francisco Orrego Vicuña and Christopher Pinto: “Peaceful Settlement of Disputes, Prospects for the 21st
Century”, Report Prepared for the Centennial of the First International Peace Conference, in Frits
Kalshoven: The Centennial of the First International Peace Conference, Reports and Conclusions, 2000,
261-418, at 286.
9
Waguih Elie George Siag and Clorinda Vecchi v. The Arab Republic of Egypt (Jurisdiction), 2007.
10
Cable TV v. St. Kitts and Nevis, ICSID Award of January 13, 1997.
11
CSOB v. Slovakia, ICSID Decision on Jurisdiction of May 24, 1999.
12
Ibid.
13
J. Paulsson: “Arbitration without Privity”, ICSID Review, Foreign Investment Law Journal, Vol. 10,
1995, 232.
14
Empresas Lucchetti SA and Lucchetti Peru SA v. Peru, 2005.
15
High Court of Justice, Queens Bench Division, Commercial Court, Case No. 2004 Folio 656, April 29,
2005, par. 85.
16
Ambiatelos Case, United Nations, Reports of International Arbitral Awards, 1963, p. 107. The case was
discussed both by the International Court of Justice and a Commission of Arbitration.
17
Maffezini, Emilio A. v. Kingdom of Spain (Jurisdiction), 2000.
18
Siemens AG v. Argentine Republic (Jurisdiction), ICSID Case No. ARB/02/8, 2004; Técnicas
Medioambientales Tecmed SA v. United Mexican States (Award), 2004.
19
Salini Costruttori SpA & Italstrade SpA v. Hashemite Kingdom of Jordan (Jurisdiction), 2005; Plama
Consortium Ltd. v. Republic of Bulgaria (Jurisdiction), 2005.
20
Ruth Teitelbaum: “Whose Afraid of Maffezini? Recent Developments in the Interpretation of Most
Favored Nation Clauses”, Journal of International Arbitration, Vol. 22, 2005, 225-238, at 228-229.
21
Tradex v. Albania, ICSID Decision on Jurisdiction of December 24, 1996.
22
Holiday Inns v. Morocco, Unpublished, Reported in Lalive: “The First ‘World Bank’ Arbitration”,
British Year Book of International Law, Vol. 51, 1980, at 123.
23
See Fedax v. Venezuela, Decision of the ICSID Tribunal on Objections to Jurisdiction, July 11, 1997,
pars. 21-26, with citations to the relevant cases and literature.
24
LETCO v. Liberia, ICSID Award of March 31, 1986.
25
SOABI v. Senegal, ICSID Award of February 25, 1988.
26
Salini v. Morocco, ICSID Decision on Jurisdiction of July 23, 2001.
27
Mihaly International Corporation v. Sri Lanka, ICSID Award of March 15, 2002.
28
Joy Mining Machinery Ltd. v. Arab Republic of Egypt (Jurisdiction), 2004.
29
Amco v. Indonesia, ICSID Annulment Committee, ICSID Reports, Vol. 1, at 526.
30
Lauder v. Czech Republic, Final UNCITRAL Award of September 2001, pars. 181-191; Ethyl
Corporation v. Canada, Award on Jurisdiction of June 24, 1998, pars. 74-88.
31
James Crawford: The International Law Commission’s Articles on State Responsibility, 2002,
Comments on Article 4, at 94-99.
32
Compañía de Aguas del Aconquija et al. v. Argentina, ICSID Award of November 21, 2000,
and Vivendi ICSID Annulment Decision, July 3, 2002.
33
Nottebohm Case (Second Phase), ICJ Reports, 1955.
34
Soufraki, Hussein Nuaman v. United Arab Emirates (Award), ICSID Case No. ARB/02/7, 2004, para.
55.
35
Champion Trading Co. and Ameritrade International Inc. v. Arab Republic of Egypt (Jurisdiction),
2004.
36
SIAG cit., Partial Dissenting Opinion of Professor Francisco Orrego Vicuña.
37
MINE v. Guinea, ICSID Award of January 6, 1988.
38
Amco v. Indonesia, ICSID Decision on Jurisdiction of September 25, 1983.
39
Klöckner v. Cameroon, ICSID Award of October 21, 1983.
26
40
Barcelona Traction, Light and Power Co. Ltd. (Belgium v. Spain), Judgment of February 5, 1970, ICJ
Reports 1970, 3.
41
M. Sornarajah: “The Scope and Definition of Foreign Investment”, APEC Workshop on Bilateral and
Regional Investment Rules/Agreements, 17-18 May 2002, 86-100, at 88.
42
Case Concerning the Elettronica Sicula S. p. A. (ELSI) (United States of America v. Italy), Judgment of
July 20, 1989, ICJ Reports 1989, 15.
43
International Law Commission: Preliminary Report on Diplomatic Protection, by Mohammed
Bennouna, Special Rapporteur, A/CN.4/484, 4 February 1998, at 5.
44
Loewen Group Inc. and Raymond L. Loewen v. United States of America (Award), 2003.
45
For the jurisprudence of the United States-Iran Claims Tribunal see generally George H. Aldrich: The
Jurisprudence of the Iran-United States Claims Tribunal, 1996; Charles N. Brower and Jason D.
Brueschke: The Iran-United States Claims Tribunal, 1998.
46
United Nations Compensation Commission, Decision of the Governing Council on Business Losses of
Individuals, S/AC.26/1191/4, 23 October 1991, par. F, and Decision 123 (2001).
47
SOABI v. Senegal, ICSID Decision on Jurisdiction, August 1, 1984.
48
Tokios Tokèles v. Ukraine (Jurisdiction), 2005, and Dissenting Opinion of Professor Prosper Weil.
49
Vaccum Salt Products Ltd. v. Ghana, ICSID Award of February 16, 1994.
50
See for example LETCO v. Liberia, ICSID Decision on Jurisdiction of October 24, 1984.
51
AAPL v. Sri Lanka, ICSID Award of June 27, 1990.
52
AMT v. Zaire, ICSID Award of February 21, 1997.
53
Antoine Goetz et consorts v. Republique du Burundi, Sentence du CIARDI du 10 Fevrier 1999.
54
Supra note 12.
55
Lanco v. Argentina, Preliminary Decision of the ICSID Tribunal of December 8, 1998.
56
Genin et al .v. Estonia, ICSID Award of June 25, 2001.
57
Aconquija Award cit.
58
Vivendi Annulment cit.
59
CME. v. Czech Republic, Partial Award of September 13, 2001.
60
CMS Gas Transmission Co. V. Republic of Argen tina (Jurisdiction), 2003.
61
Enron Corp. and Ponderosa Assets LP v. Argentine Republic (Jurisdiction: Ancillary Claim), 2004.
62
Goetz cit., par. 89.
63
Vivendi Annulment cit., par. 50.
64
Enron Corp. and Ponderosa Assets LP v. Argentine Republic (Jurisdiction), 2004, paras. 50-53. See
also Enron Corp. and Ponderosa Assets LP v. Argentine Republic (Jurisdiction: Ancillary Claim), 2004,
para. 20.
65
Impregilo SpA v. Islamic Republic of Pakistan (Jurisdiction), 2005.
66
Lanco cit., par. 36.
67
Lanco cit., par. 40.
68
Aconquija Award cit., pars.53-54.
69
Wena v. Egypt, Decision on Annulment of the ICSID Committee of February 5, 2002, par. 35. The
IPPA is the relevant Bilateral Investment Treaty between Egypt and the United Kingdom.
70
SGS Societé Générale de Surveillance SA v. Islamic Republic of Pakistan (Jurisdiction), 2003.
71
SGS Societé Générale de Surveillance SA v. Republic of the Philippines (Jurisdiction), 2004.
72
El Paso Energy International Co. v. Argentine Republic (Jurisdiction), 2006; Joy, cit., para. 81; CMS
cit., para. 303; Eureko BV v. Poland, 2005, para. 112; Enron cit., para. 274.
73
Amco v. Indonesia, Resubmitted Case, Decision on Jurisdiction of May 10, 1988.
74
Fedax, cit.
75
Pope & Talbot Inc. v. Canada, Award on Motion to Dismiss, January 26, 2000.
76
S. D. Myres, Inc. v. Canada, Partial Award of November 12, 2000.
77
Gruslin, Philippe v. Malaysia (Award), 2000.