W16: Jurisdiction of IIA Tribunals II

Question 1

Subject Matter of the Dispute:

Jurisdiction Ratione Materiae

Answer 1

Existence of a legal dispute concerning an investment is a jurisdictional requirement in investment arbitration.

ICSID Convention Art. 25(1) - Test: ‘Legal dispute arising directly out of an investment’

ELEMENTS (raise jurisdictional Qs):

1. Existence of dispute
2. Legal Nature of dispute
3. Directness of dispute
4. Existence of an investment

Question 2

Subject Matter: The Dispute

Answer 2

1. ICJ:
   i) a disagreement on a point of law/fact, a conflict of legal views/interests b/w parties
   ii) a situation in which the 2 sides held clearly opposite views concerning the Q of the performance/non-performance of certain treaty obligations
   * Texaco v Libya: present divergence of interests and opposition of legal views
2. ICSID:
   * RDC v Guatamala: a conflict of views on points of law/fact which requires sufficient communication b/w the parties for each to know the other’s views and oppose them

Question 3

Subject Matter: Legal Nature of Dispute

Answer 3

Concern the existence or scope of a legal right/obligation, or
the nature/extent of the reparation to be made for breach of a legal obligation

It is sometimes argued that tribunal lacked jurisdiction b/c dispute NOT legal, but = political/economic nature. Tribunals invariably REJECT these, since claims presented in LEGAL terms.
*Suez v Argentina

Question 4

Subject Matter: Directness of Dispute wrt Investment

Answer 4

Element of directness applies to the dispute wrt the investment, NOT to investment.
*Fedax v Venezuela: jurisdiction can exist even wrt investments that are NOT direct, so long as the dispute arises directly from such transaction

Investment Operation involves no. of ANCILLARY TRANSACTIONS and LEGAL CONTRACTS:

1. Financing
2. Lease of Property
3. Purchase of Various Goods
4. Marketing of Produced Goods
5. Tax Liabilities
   - Economic terms = linked to the investment
   - BUT, whether they directly arise out of an investment (for ICSID purposes) = UNCLEAR, decided on case-by-case basis.
   * CSOB v Slovakia:
   i) Tribunal rejected Slovakia’s argument (that claims did not arise directly out of the loan, therefore outside Tribunal’s jurisdiction)
   ii) Slovakia’s obligation closely related to the loan by CSOB = part of the overall operation consolidating CSOB and developing its banking activity in Slovak Republic
   iii) THEREFORE, dispute arose directly out of investment

Other tribunals also: endorsed idea of general unity of the investment operation

Measures for National Welfare (general nature), not specifically directed @ particular investor’s operation: Rejected
*CMS v Argentina: a host state cannot rely on the general policy nature of measures taken by it, if these measures had a concrete effect on the investment and violated specific commitments and obligations. These commitments may arise from legislation, a contract, or a treaty

Question 5

Subject Matter: The Investment

Answer 5

Existence: Cornerstone of ICSID’s jurisdiction

Definition: will be defined in objective terms which cannot be substituted
by agreement of the parties

ICSID Art. 25: List of Descriptors Typical for Investments

1. Substantial Commitment
2. Certain Duration
3. Element of Risk
4. Significance for Host State’s Development

Question 6

Parties to the Dispute:

Jurisidiction Ratione Personae

Answer 6

Investment arbitration is mixed, i.e., it involves a sovereign state (host state) on one side, and a pvt. foreign investor on the other.

ELEMENTS:

1. The Host State
2. The Investor
3. The Investor’s Nationality
4. The Significance of ICSID Additional Facility

Question 7

Parties: Host State

Answer 7

• ICSID Jurisdiction: extends to contracting states, i.e., parties to the ICSID Convention
• Evidence: List of Contracting States and Other Signatories of the Convention, maintained by the Centre
• Critical Time for the Status of a State: Date of Registration for Request for Arbitration by ICSID’s Secy. Gen.
• State may give consent to submit to Centre’s jurisdiction before becoming a contracting state, but effective only once the state satisfies requirements of a contracting state (State not a contracting state at time of request for arb. will NOT be sub: Centre’s jurisdiction even if it gives consent)
• May deal w foreign investors either thru
  i) a central state organ (e.g. govt. ministry), or
  ii) a separate entity (e.g. territorial, i.e. province/municipality)
  iii) specialised govt. agency (e.g. investment board/privatisation agency)
• Acts in violation of int’l law will be attributed to the central govt. even if committed by a sub-entity (of host state)

INT’L LAW OF RESPONSIBILITY: The state is responsible for all its organs, incl. those of a territorial unit, and state entities exercising elements of a govt. authority.

ICSID Art. 25 - Possible for a sub-entity of the host state to appear in proceedings:
A contracting state or any of its constituent subdivisions/agencies designated to the Centre (ICSID) by that State
- CONSTITUENT SUBDIVISIONS: any territorial entity below the level of the state, e.g. province/state/municipality
- AGENCY: an entity of the host state

RELEVANCE: it performs public functions on behalf of the contracting state (ltd. relevance irl)

DESIGNATION: assures an investor that the particular agency/entity with which it is dealing has been properly authorised by the state
- ICSID Art. 25(3): the constituent subdivision/agency’s consent to the Centre’s jurisdiction be approved by the state to which it belongs

*Cable Television v St Kitts and Nevis
i) Nevis Island Admin. (NIA) = Constituent Subdivision of the Federation of St. Kitts and Nevis (a sovereign state and party to ICSID)
ii) NOT designated as a constituent subdivision/agency u/Art. 25(3)
iii) NOT a party to the contract containing consent to ICSID jurisdiction
HELD: No Jurisdiction

Question 8

Parties: The Investor

Answer 8

1. Judicial Persons: Corps (most common)
2. Natural Persons: Individuals

IIA Designed for protection of pvt. investors
- ICSID Convention Preamble: specifically speaks of role of pvt. int’l investment
Indicates: Investor must be a pvt. individual or corp.
BUT, State-owned corps and entities may be accepted as investors if they act in PVT. COMMERCIAL CAPACITY

*CSOB v Slovakia
HELD:
i) Access to arbitration did not depend upon whether the Co. was partially/wholly owned by the Govt.
ii) Decisive Test: whether the Co. was discharging essentially govt. functions
- banking activities had to be judged by their NATURE and NOT by their PURPOSE and, hence, were commercial

Arbitral Proceedings are open to more than 1 claimant in one and the same case - ICSID practice shows numerous proceedings w more than 1 party on the claimants’ side - same case may even involve several BITs, and may be conducted u/more than one set of procedural rules

i) >1 claimant
ii) >1 BIT
iii) >1 Set of Procedural Rules

*Abaclat et al v Argentina: Any adaptations of the standard procedure u/ICSID that may become necessary were w/in the Tribunal’s powers. The claims were SUFFICIENTLY HOMOGENOUS for the claimants to be treated as a group and to justify a simplification of the procedure

CONSOLIDATION OF CLAIMS:

1. Claimants start separate proceedings, closely related - arise from the same facts.
2. May be based on agreement of parties
3. EXCEPTIONALLY, claims arising from same overall transaction BUT sub: several jurisdictional instruments
   - NAFTA Art. 1126: Foresee consolidation of closely related proceedings
   - ALTERNATIVELY: to coordinate closely related separate claims (arise from same facts) - creation of tribunals that are formally separate but identically composed.

Question 9

Parties: Investor’s Nationality

Answer 9

RELEVANCE:

1. Gain access to dispute settlement u/ICSID Art. 25
   - Positive and Negative Nationality Requirement:
   a) Investor is reqd. to be a ‘national of another Contracting State’
   b) Investor must not be a national of the host state

RELIANCE ON JURISDICTION CLAUSE IN A TREATY: S/he must also have the nationality of one of the state parties to treaty

BIT: Investor must demonstrate it is a national of the other party

Question 10

Investor’s Nationality: Natural Persons (Individuals)

Answer 10

Nationality of the contracting state to the ICSID Convention must exist at 2 separate dates - individual investor has to be a national of a contracting state:
i) at the time parties submit to Centre’s jurisdiction
ii) on the date the request for arb./conciliation is regd. by Centre
PLUS, individual investor must NOT be a national of the Host State on the ^ dates.

INDIVIDUAL NATIONALITY:
- Determined irrespective of an agreement b/w the host state and investor.
Such agreement may specifically state the investor’s nationality - creates a presumption but may not be conclusive; i.e, cannot create a nationality that does not objectively exist
- Individual investors who hold nationality of the Host State are BARRED from bringing claims before the Centre - BECAUSE: purpose of ICSID is to encourage settlement of disputes that involve states and pvt. foreign investors
- ALSO APPLIES TO: individuals w/dual nationality (where on is that of the host state, even if not the effective one)

Question 11

Investor’s Nationality: Legal Persons (Corps)

Answer 11

Must have nationality of a State Party to ICSID only on the day the parties consented to submit to ICSID Jurisdiction

QUALIFICATION: Thru place of incorporation/seat of business

EVIDENCE: agreement on the nationality of the investor between the host state and a corporate investor - carries weight but CANNOT create a nationality that does not exist

HOWEVER: may possess host state’s nationality and STILL qualify as a national of another contracting state u/EXCEPTION contained in Art. 25(2)(b)

Prevalence of IIA based on Treaties has led to decline in imp. of this possibility for locally incorporated Co’s. u/foreign control to institute ICSID arb.

• Incl. shareholding/participation in Co’s. in their definition of investment
• Allows for foreign shareholders in the locally incorporated Co. to pursue claim internationally

Question 12

Parties: Significance of the Additional Facility

Answer 12

ICSID Art. 25(1): the host state and the investor’s state of nationality must be contracting states. If one or the other of these states is not a party to the Convention, the requirements ratione personae are not fulfilled and there is no jurisdiction.

If only one of the two states is a party to the ICSID Convention, the Additional Facility offers a method of dispute settlement.

Additional Facility: enables a non-contracting state/its national to participate in
dispute settlement proceedings administered by ICSID.
- If neither state is a party, not even the Additional Facility is available.

RULES:

1. If both states are parties to the Convention, the parties must use the procedure under the Convention
2. May not use the Additional Facility.
3. There must be a separate submission to dispute settlement under the Additional Facility

Question 13

Investors

Answer 13

1. Pvt. foreign investors
2. Nationality of Individuals
3. Nationality of Corps
4. ICSID Art. 25(2)(b): Agreement to treat a local co. as a foreign national b/c of foreign control
5. Nationality planning
6. Denial of Benefits
7. Shareholders as investors

Question 14

Investments

Answer 14

1. Terminology and Concept
2. Investments as complex, interrelated operations
3. Definitions in investment protection treaties
4. ICSID Art. 25: ‘Investment’
5. Case Law
6. Towards a new synthesis?

Question 15

Investors: Pvt. Foreign Investors

Answer 15

1. Int’l investment law designed to promote and protect activities of pvt. foreign investors
2. Does not necessarily exclude protection of govt.-controlled entities, as long as acting in commercial NOT govt. capacity
   - Whether NFP Orgs. may be regarded as investors will depend on nature of their activities
3. Investors = Individuals (natural persons)/companies (juridical persons)
4. Foreignness: Determined by investor’s nationality
   - Origin of the investment (esp. Capital) is NOT decisive for the Q. of existence of foreign investment

INVESTOR’S NATIONALITY: Determines from which treaties it may benefit. If relying on:

i. BIT - must show it has nationality of one of the 2 state parties
ii. Regional Treaty (e.g., NAFTA/ECT) - must show it has nationality of one of the state parties
iii. ICSID - must show it has nationality of one of the state parties to the Convention
- RELEVANCE:
a) Substantive standards guaranteed in a treaty will only apply to respective nationals
b) Jurisdiction of an int’l tribunal determined by claimant’s nationality

Question 16

Investors: Nationality of Individuals

Answer 16

1. Individuals nationality is determined primarily by law of the country whose nationality is at issue
2. Certificate of nationality, issued by competent authorities of a state = strong evidence, but NOT necessarily conclusive

• Soufraki v UAE (BIT: Italy-UAE; Claimant NOW Canadian National): HELD - No Jurisdiction
• Olguín v Paraguay (BIT: Paraguay-Peru; Claimant had dual citizenship of Peru and US): HELD - both nationalities effective.
• Micula v Romania: HELD - cannot be read to allow/require that a State disregard an individual’s single nationality on the basis of tft s/he has not resided in country on nationality for a period of time.
• Fakes v Turkey (BIT: Netherlands-Turkey; Claimant dual citizen of Netherlands and Jordan): HELD - ‘Genuine Link’ Rules u/DP inapplicable. Possibility open for applying effective nationality test (dominant/effective nationality) in exceptional circumstances, e.g. Nationality of Convenience; or Inherited Nationality

ICSID Art. 25(2)(a): Explicitly excluded dual nationals if one of their nationalities = Host State
*Champion Trading v Egypt

BUT:

• Feldman v Mexico: HELD - Claimant only US National, even if permanent resident in Host State
• Siag v Egypt: HELD - Italian nationality = uncontested. Residence and business in Egypt after losing nationality was irrelevant

Question 17

Investors: Nationality of Corporations

Answer 17

1. Nationality - presupposed legal personality. THUS, unincorporated entities will NOT generally enjoy legal protection (altho a treaty may provide otherwise)
2. Corporate nationality is more complex than individual nationality. No. of determining criteria:

i. Incorporation (siège social):
* Tokios Tokelės v Ukraine
* Saluka v Czech Republic

ii. Seat of Business

iii. Combination of Incorporation and Seat
* Yaung Chi Oo v Myanmar

iv. Bond of economic substance b/w corporate investor and state whose nationality it claims
- May consist of effective control of the corporation by nationals of the state
- May consist of genuine economic activity of the company in the state

v. Controlling interests if nationals in a Co. sufficient to est. corporate nationality
* Mobil v Venezuela: Venezuela Holdings (Netherlands) owns 100% Share Capital of its 2 American Subsidiaries, who in-turn own 100% of its 2 Bahamas subsidiaries

vi. Combination of Seat and ‘Predominant Interest of Investor’

vii. Multilateral Investment Guarantee Agency (MIGA) Convention: Art. 13(a)(ii) - Requires incorporation and seat/control
* Champion Trading v Egypt
* Aguas del Tunari v Bolivia

Question 18

Investors: ICSID Art. 25(2)(b) - Agreement to Treat a Local Co. as a Foreign National b/c of Foreign Control

Answer 18

1. Host States sometimes require that investments are made thru locally incorporated Co.’s
2. Normally, won’t qualify as foreign investors - NOT enjoy ICSID protection
3. Art. 25(2)(b): deal w corporations incorporated in the Host State but controlled by foreign nationals.
4. To be treated as foreign nationals on basis of agreement
5. Agreement may be contained in a contract b/w Host State and Investor
   - Tribunals flexible on form; e.g., insertion of ICSID Arbitration Clause
6. Proviso in treaty to this effect = treatment as foreign national - when offer accepted by investor, proviso becomes part of consent agreement
   * Micula v Romania: HELD - to be treated as Swedish nationals
7. Agreement u/Art. 25(2)(b) must be supported by ACTUAL foreign control - agreement alone not enough (control - national of state that is party to ICSID)
   * Vacuum Salt v Ghana: HELD - Tribunal had to examine foreign control as separate requirement = no foreign control
8. Participation in Co.’s Capital Stock/Share is NOT only indicator of control
9. Existence of Foreign Control requires examination of several factors:
   i. Equity Participation
   ii. Voting Rights
   iii. Management

Question 19

Investor: Nationality Planning AKA Treaty Shopping

Answer 19

1. A prudent investor may organise its investment in a way that affords maximum protection u/existing treaties
2. Usually done thru est. of a Co. in a state that has favourable treaty relations w/Host State, and accepts incorporation as a basis for corporate nationality
3. That Co. will then be used as a conduit for investment
4. Treaty shopping is NOT illegal/unethical - BUT practice demonstrates that there are limits
5. Additionally, States may regard corp. structure for purpose of obtaining advantages from treaties as undesirable and take apt. measures against it
   * Aguas del Tunari v Bolivia: HELD - Strategic changes in corp. structure to obtain protection of BIT did NOT amount to fraud/abuse of corp. form.
   * Mobil v Venezuela
6. Not every attempt at nationality planning/treaty shopping will succeed
   * Banro v Congo: HELD - transfer from Canada (non-ICSID party) to US (ICSID party) made after dispute had arisen and only days before institution of proceedings = obvious purpose of obtaining access to ICSID - Tribunal refused to accept jurisidiction
   * Phoenix v Czech Republic
   * Cementownia v Turkey
7. PROSPECTIVE PLANNING: accepted by tribunals; i.e., BEFORE dispute arose

Question 20

Investor: Denial of Benefits

Answer 20

1. States have devised methods to counteract abusive nationality planning/treaty shopping strategies
2. Methods:
   i. Require a bond of economic substance b/w corp. and state
   ii. Insertion of so-called ‘Denial of Benefits’ clause providing consent to jurisdiction
   - States reserve the right to deny benefits of treaty to a Co. incorporated in a state but w no economic connection w that state
   - Economic Connection: substantial business activities in the state of incorporation/ownership or control by a national of a state party to treaty; e.g. ECT Art 17(1)

CASE LAW:

i. Plama v Bulgaria: HELD - Right to exercise ‘denial of benefits’ can only be made prospectively and NOT retroactively after investment has been made
ii. AMTO v Ukraine: HELD - AMTO had substantial business activity in Latvia - no need to make a determination on ownership and control

Question 21

Investors: Shareholders

Answer 21

1. Investments often take place thru acquisition of shares in a Co. that has a nationality diff. from that of investor
2. Issue of shareholder protection is acute where investments are made thru Co.’s incorporated in the Host State, and local Co. is immediate investor (may states require a locally incorporated Co. as a precondition for the investment
3. NAFTA: an investor that owns/controls a Co. regd. in another state party may submit a claim to arb. on behalf of that Co. This provision requires control over Co. in Q. THUS, do not offer comfort to minority shareholder.
4. Most investment treaties offer a solution that gives independent standing to shareholders - include shareholding/participation in a Co. in treaty definition of ‘investment’
   - Not the locally incorporated Co. teated as a foreign investor BUT the participation in the Co. becomes the investment
   - Even if local Co. unable to pursue claim internationally, foreign shareholder may pursue it in its own name
   * Genin v Estonia
   - Minority shareholders have also been accepted as claimants and granted protection u/respective treaties
   * CMS v Argentina
   - Extended to indirect shareholding thru an intermediate Co. (some treaties exclude certain forms of indirect investments explicitly/by implication)
   - Shareholder protection not restricted to ownership in shares - extends to assets of the Co.
   * GAMI v Mexico

CASE LAW:

i. Barcelona Traction case: ICJ HELD - exclusion of shareholders rights against a Host State inflicting damage on a Co. would not necessarily apply if Co. in Q. was incorporated in Host State
ii. Diallo case: In contemporary int’l law, protection of shareholders is governed by bilateral and multilateral treaties, and contracts b/w states and foreign investors. HOWVER, a ‘protection by substitution’, in favour of shareholder rather than Co. is NOT discernible u/customary int’l law

Question 22

Investments: Terminology and Concept

Answer 22

1. Economic science assumes that a direct investment involves:
   i. transfer of funds
   ii. longer term project
   iii. purpose of regular income
   iv. participation of person transferring the funds (at least to some extent), in the mgmt of the project
   vi. business risk
   - These elements distinguish Foreign Direct Investment from a
   a) Portfolio Investment (no element of personal mgmt.)
   b) Ordinary Transaction for purposes of sale of a good/service (no mgmt., no continuous flow of income)
   c) Short-Term Financial Transaction
2. In legal terms, investment regimes need to define their scope (ratione materiae).
   - Contemporary Treaties do NOT as a rule reflect the classical formula ‘property, rights, and interests’ found in traditional FCN Treaties, Treaties to settle claims after hostilities, or in Human Rights documents.
   - Built on modern term ‘investment’
3. Complexity of current debate on term ‘investment’ arises out of its simple, non-defined use in the jurisdictional clause of the ICSID Convention (Art. 25):
   i. Approach #1: Oriented to definition in treaties
   ii. Approach #2: Oriented to understanding in economic literature

• Approach #2: Two separate examinations (‘double keyhole approach’):
  a) u/BIT
  b) u/Art. 25

The 2 approaches may lead to diff. results in individual cases, but also that variants of the 2 versions may turn out to yield v. similar/identical outcomes

Question 23

Investments: As Complex, Interrelated Operations

Answer 23

1. Tribunals have repeatedly emphasised - Investment consists of several interrelated economic activities, each should be views in isolation,
   * CSOB v Slovakia
2. Whether costs arising in course of unsuccessful negotiations for a contract = investment, depends on circumstances
   - In absence of specific treaty clause, current understanding is - when negotiations do NOT lead to a contract and no other type of investment is made, the potential investor is NOT in a position to raise claims u/BIT
   * Mihaly v Sri Lanka

Question 24

Investment: Definition in Investment Protection Treaties

[Incomplete]

Answer 24

1. Multilateral treaties typically define the term ‘investment’ and provide for ICSID jurisdiction; e.g., NAFTA (Art. 1139), ECT [Art.. 1(6)]
2. Most BITs contain a general phrase defining investment (e.g. ‘all assets’) and several groups of illustrative categories.
   - No special interpretation problems will arise if investment covered by one of the illustrative categories (BIT: Argentina-US)
   - Other treaties are worded more in line w economic usage
   (BIT: Ukraine-Denmark)
   - Some treaties rely on ‘characteristics of an investment (BIT: US-Chile)
   - FTAs b/w European Free Trade Association (EFTA) and Mexico emphasises exercise by investor of Effective Influence on Mgmt., thus implicitly distinguishing portfolio investment.

Question 25

Investment: ICSID Art. 25

Answer 25

Debate on ‘investment’ does not arise out of definitions in investment treaties, but out of the search for the proper understanding of the non-defined term found in ICSID

Art. 25 serves as jurisdictional gateway for access to ICSID - understanding of an investment has increasingly been at the forefront of jurisdictional arguments and tribunals have had to set forth their views in decisions on jurisdiction

Method of interpreting ‘investment’ must follow Vienna Convention Art. 31
- ‘Ordinary Meaning’: as starting point, earlier focused on economic, but w more treaties being concluded, now focus on legal

ICSID’s Travaux Préparatoires leaves it open to interpretation

Question 26

Investment: Case Law

[Incomplete]

Answer 26

1. Fedax v Venezuela (Economic Parlance)
   - Criteria approach. 5 criteria:
   i. *substantial commitment
   ii. *certain duration
   iii. *assumption of risk
   iv. *significance for host state’s development
   v. regularity of profit
2. Salini v Morocco (Legal Definition)
   - Salini criteria: i-iv from Fedax - cumulative mandatory requirements
   [Later designated ‘gross error gave rise to manifest failure to exercise jurisidiction]
3. Joy Mining v Egypt: Party autonomy finds limits in the general understanding of an ‘investment’ and denied its jurisidiction
4. Malaysian Historical Salvors v Malaysia: Salini criteria not for mere existence but for INTENSITY (quality) of their presence
5. Biwater Gauw v Tanzania: Open to interpretation - more flexible and pragmatic approach