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�Chapter 2 �Investment Treaty/ Contract

Introduction to International Investment Law

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Risks & Investment

  • Businesses and risks
  • Cross-country Investments
    • Long term
    • Substantial
  • Legal risks
  • Political risks
  • Investment Agreements address these risks
  • Evolution of IIL doctrines to address risks

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What is Investment?

  • Dictionary: The act of putting money, effort, time, etc. into something to make a profit or get an advantage.
  • Economic point of view Investment connotes:
    • Allocation and transfer of funds
    • Longer term of the project for which funds are allocated
    • Expectation of returns/ regular income from the project
    • Participation of the entity/ person allocating and transferring funds in the management of the project; and
    • Involvement of business/ commercial risk.
  • Important feature of Direct Investment as opposed to Portfolio investment: participation of the person allocating and transferring those funds for the project in the project management

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BITs on Investment

  • Wide definition of Investment
  • India- UAE BIT, 2013- based on India’s 2003 Model BIT
  • Two parts
  • First Part: “every kind of asset invested by the Investors of one Contracting Party in the territory of the other Contracting Party in accordance with the laws, and regulations of the Contracting Party in whose territory the Investment is made…”
  • Definition is wide and is based on assets invested.
  • change of the form in which assets are invested or reinvested does not affect character
  • Second part: Non-exhaustive list of what amounts to investment

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India UAE BIT on Investment

  • Investment includes:
  • movable and immovable property as well as any other property rights in rem such as mortgages, liens, pledges, or usufruct;
  • shares, stocks, bonds, debentures and any other similar forms of participation in a company and other debts and loans and securities issued by an Investor of a Contracting Party and returns retained for the purpose of reinvestment;
  • rights or claims to money or to any performance under contract having financial or economic value;
  • intellectual property rights, goodwill, technical processes, know-how, copyrights, trademarks, trade names and patents in accordance with the relevant laws of the respective Contracting Parties;
  • any right conferred by law or by virtue of any licenses or permits granted pursuant to law, excluding any right conferred in respect of hydrocarbons.

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Brazil India BIT 2020

  • Based on India’s Model BIT 2016
  • Three parts
  • First part: “an enterprise, including a participation therein, in the territory of a Party, that an investor of the other Party owns or controls, directly or indirectly, or over which it exerts a significant degree of influence, that has the characteristics of an investment, including the commitment of capital, the objective of establishing a lasting interest, the expectation of gain or profit and the assumption of risk.”
  • Enterprise based as opposed asset based. Enterprise means:
    • legal entity constituted, organized and operated in compliance with the law of a Party,- includes company, corporation, LLP, JV, etc.
    • branch of any such entity established in the territory of a Party in accordance with its law and carrying out business activities there.

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Brazil India BIT 2020 (2)

  • Third part: What does not include investment:
  • an order or judgment sought or entered in any judicial, administrative or arbitral proceeding;
  • debt securities issued by a Party or loans granted from a Party to the other Party, bonds, debentures, loans or other debt instruments of-a State-owned enterprise of a Party that is considered to be public debt under the law of that Party;
  • any expenditure incurred prior to the obtainment of all necessary licenses, permissions, clearances and permits required under the law of a Party;
  • portfolio investments of the enterprise or in another enterprise;
  • claims to money that arise solely from commercial contracts for the sale of goods or services by a national or an enterprise in the territory of a Party to an enterprise in the territory of another Party;
  • goodwill, brand value, market share or similar intangible rights;
  • claims to money that arise solely from the extension of credit in connection with any commercial transaction; and
  • any other claims to money that do not involve the kind of interests or operations as set out in the definition of investment in this Treaty.

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Brazil India BIT 2020(3)

  • Second part: Non-exhaustive list of what includes investment
  • shares, stocks and other forms of equity instruments of the enterprise or in another enterprise;
  • debt instruments or securities of another enterprise;
  • licenses, authorizations, permits, concessions or similar rights conferred in accordance with the law of a Party;
  • loans to another enterprise;
  • intellectual property rights as defined or referenced to in the Trade-Related Aspects of Intellectual Property Rights of the World Trade Organization {TRIPS); and
  • movable or immovable property and related rights.

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Analysis

  • 98% of BITs contain a definition of investment.
  • majority of the BITs use the asset based definition
  • Enterprise based definition is narrower than asset based and is becoming popular, of late
  • Recent BITs require assets to exhibit certain characteristics, such as a certain duration, assumption of risk and commitment of capital in order to qualify as an investment
  • Threshold question

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References

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Investment under ICSID Convention

  • Article 25(1) of the ICSID Convention states: “(1) The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment…”
  • Threshold question- jurisdiction of ICSID attracted if there is “investment”
  • Parties cannot waive this requirement by consent.
  • Article 25 to be satisfied independent of definition of “investment” under the relevant investment treaty.
  • ICSID Convention does not define “investment”
  • 1985: Secretary General of ICSID refused reference in dispute emanating out of Sale of Goods: Asian express v. Greater Colombo Economic Commission (1985) ICSID Annual Report 6.
  • Salini Test

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Salini Test

  • Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco, (ICSID Case No. ARB/00/4)
  • Decision on jurisdiction dt. 23.07.2001.
  • Morocco raised jurisdictional objection that there was no investment as per ICSID Convention
  • Salini Test
    • contributions,
    • a certain duration of performance of the contract and
    • a participation in the risks of the transaction
    • “contribution to the economic development of the host State (if Preamble of ICSID Convention is accounted for”.
  • Interdependence of elements and global assessment
  • Based on above criteria, Tribunal held there was investment

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Post-Salini Developments

  • Some Tribunals have followed the Salini Test
  • Some Tribunals have increased the threshold of the economic development criteria by stating that there must be a significant contribution to the economic development of the host state: Joy Mining v. Egypt
  • At times, tribunals have removed the economic development criteria: Quiborax v. Bolivia; Electrabel S.A. v. The Republic of Hungary; LESI SpA v Algeria
  • Tribunals have at times added other criteria. Phoenix Action v. Czech Republic: additional criteria that the assets must be invested in the host state in a bona fide manner.
  • There are also instances where tribunals have rejected the Salini test.
  • Non-ICSID Tribunals have also applied the Salini test

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References

  • Brigitte Stern, The Contours of the Notion of Protected Investment, ICSID Review - Foreign Investment Law Journal, Volume 24, Issue 2, Fall 2009, Pages 534–551
  • Céline Lévesque, Abaclat and Others v Argentine Republic: The Definition of Investment, ICSID Review - Foreign Investment Law Journal, Volume 27, Issue 2, Fall 2012, Pages 247–254
  • Chapter 1 - Definition of Investor and Investment in International Investment Agreements, of OECD in OECD’s International Investment Law: Understanding Concepts and Tracking Innovations (2008)
  • Can Yeginsu and Ceyda Knoebel, Chapter I: Covered Investment, in Barton Legum (ed.), The Investment Treaty Arbitration Review (3rd ed. 2018)

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Who is an Investor?

  • Threshold question- importance
  • Evolution of international law on nationality
  • Who is an Investor” is answered from:
    • relevant BIT and
    • from ICSID Convention
  • India-UAE BIT, 2013: “"Investor" means any national, company or government of a Contracting Party.”
    • Exhaustive definition a “national”, perhaps a reference to natural persons,
    • “company”, and
    • Government of a Contracting Party.

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Who is an Investor? (2)

  • Brazil India BIT 2020
  • “"Investor" means: a) any natural person of a Party that makes an investment in the territory of the other Party; or b) any enterprise constituted and organized in accordance with the law of a Party, other than a branch, that has substantial business activities in the territory of that Party and that makes an investment in the territory of the other Party.”
  • “Enterprise” means “a) any legal entity constituted, organized and operated in compliance with the law of a Party, including any company, corporation, limited liability partnership or a joint venture; and b) a branch of any such entity established in the territory of a Party in accordance with its law and carrying out business activities there. Nothing in this Treaty shall be construed to require any Party to authorize the provision of financial services by branches.”

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Natural Persons as Investors

  • Nationality
  • As per laws of the country whose nationality is claimed.
  • Soufraki v. UAE (ICSID Case No. ARB/02/7)
  • Dominant and effective nationality test
    • the state of habitual residence;
    • the circumstances in which the second nationality was acquired;
    • the individual’s personal attachment to a particular country; and
    • the centre of the person’s economic, social and family life.
  • Serafin García Armas v. Venezuela Tribunal (PCA Case No. 2013-3)
  • Specific Exclusion- Article 1(5) of the Columbia-Turkey BIT, 2014 and Article 1(3) of the the Egyptian-Mauritius BIT, 2014

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ICSID Convention on Dual Nationals

  • Article 25(2)(a) of the ICSID Convention
  • "National of another Contracting State" means:
    • any natural person who had the nationality of a Contracting State other than the State party to the dispute on the date on which the parties consented to submit such dispute to conciliation or arbitration as well as on the date on which the request was registered
    • but does not include any person who on either date also had the nationality of the Contracting State party to the dispute;

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Nationality of Legal Persons

  • Tests for determining nationality of juridical persons
    • Place of Incorporation- Article 1(b)(i)- Netherlands–Benin BIT, 2001
    • Seat/ Head office- Article 8.4(a) of the Germany–Bangladesh BIT
    • Control/ Substantial Business Activities
  • Brazil India BIT 2020
  • ICSID Practice: Article 25(2)(b)
  • Article 25(2)(b) does not include unincorporated JVs-
    • LESI-DIPENTA v. Algeria, Award, 10 January 2005, paras. 37–41;
    • Impregilo v. Pakistan, Decision on Jurisdiction, 22 April 2005, paras. 131–139

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Treaty Shopping

  • A person not ordinarily entitled to benefits under a treaty, takes certain actions so as to obtain those benefits.
  • International Investment Law does not prohibit Treaty shopping. Tokios Tokeles v. Ukraine [(ARB/02/18), award on jurisdiction dated 29 April 2004].
  • But regards treaty shopping post-dispute : Banro v. Democratic Republic of the Congo (ARB/98/07), Award dt. 1 September 2000
  • Reason: Abuse of process: Violation of international public policy

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Denial of Benefits Clause (DoB)

  • Host state may deny benefits. E.g., Article 9.15(1) of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership:

“A Party may deny the benefits of this Chapter to an investor of another Party that is an enterprise of that other Party and to investments of that investor if the enterprise:

(a) is owned or controlled by a person of a non-Party or of the denying Party; and

(b) has no substantial business activities in the territory of any Party other than the denying Party.”

  • Gran Colombia Gold Corp v. Republic of Columbia (ICSID Case No. ARB/18/23), Decision on the Bifurcated Jurisdictional Issue (23 November 2020)

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Threshold Issues

  • Ratione personae: the dispute must oppose a Contracting State and a national of another Contracting State; −
  • Ratione materiae: the dispute must be a legal dispute arising directly out of an investment; −
  • Ratione voluntatis: i.e. the Contracting State and the investor must consent in writing that the dispute be settled through Dispute resolution under BIT/ ICSID arbitration; −
  • Ratione temporis: the BIT/ ICSID Convention must have been applicable at the relevant time.

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References

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Shareholders as Investors

  • Traditional view: Shareholders were not entitled to protection> reliance on diplomatic protection
  • Shareholders are protected under International Investment law. Expansive definition of assets include shareholding.
  • Need to satisfy the threshold tests
  • Settled position: CMS Gas Transmission Company v The Republic of Argentina, ICSID Case No ARB/01/8, Decision of the Tribunal on Objections to Jurisdiction (17 July 2003) paras 36-65:
  • “48. The Tribunal therefore finds no bar in current international law to the concept of allowing claims by shareholders independently from those of the corporation concerned, not even if those shareholders are minority or non-controlling shareholders. Although it is true, as argued by the Republic of Argentina, that this is mostly the result of lex specialis and specific treaty arrangements that have so allowed, the fact is that lex specialis in this respect is so prevalent that it can now be considered the general rule, certainly in respect of foreign investments and increasingly in respect of other matters.”

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What about Minority Shareholders?

  • No distinction between majority and minority shareholders
  • Minority shareholders not excluded in treaty> no requirement of control
  • Entitled to protection
  • Lanco International Inc v The Argentine Republic, ICSID Case No ARB/97/6, Decision on Jurisdiction (8 December 1998), Para 10

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References

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Elements of an Investment Treaty

  • Multilateral, Bilateral, Regional or subject-specific Treaties
  • Elements:
    • Investors entitled to protection under the treaty
    • Investments protected by the treaty
    • Substantive commitments by host State to protect investments & investors.
    • Enforcement mechanisms
  • Investment (lectures 7 and 8) and Investor (lectures 9 to 13) have already been dealt with.
  • India-UAE and Brazil India BITs are used as models

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Substantive Protections

  • Non-contingent protections
    • Right to fair and equitable treatment: Article 5(1) of the India UAE BIT states: “Each Contracting Party shall, at all times, ensure Investments made in its territory by Investors of the other Contracting Party, fair and equitable treatment.”
    • right to receive full protection and security of investment: Article 4(1) says among other things: “Investments by Investors of either Contracting Party shall enjoy full protection and security in the territory of the other Contracting Party in a manner consistent with the provisions of domestic laws of the host Contracting Party, this Agreement and applicable rules of international law.”
    • right to have the investment not subjected to unreasonable or discriminatory behavior: Article 4(1) of India UAE BIT: “Neither Contracting Party shall in any way impair by arbitrary or discriminatory Measures, the management, maintenance, use, enjoyment, or disposal of Investments.”

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Substantive Provisions (2)

  • Contingent protections
    • National treatment
    • Most Favoured Nation
    • Article 5(1) India-UAE BIT states: “Such [fair and equitable treatment of investments] [] shall not be less favorable than that which it accords to Investments of its own investors or investors of any third Party, whichever is the most favorable.”
  • Protection against Expropriation
    • Direct and Indirect
    • Near Universal
  • Umbrella Clause Protection
  • Observance of all commitments: Article X(2) of the Switzerland-Philippines BIT, : “Each Contracting Party shall observe any obligation it has assumed with regard to specific investments in its territory by investors of the other Contracting Party.”

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Enforcement Provisions

  • Traditional: India-UAE BIT, 2013
    • Amicable settlement- 6 months
    • Arbitration- Articles 10 and 11
    • Options
      • ICSID
      • Ad hoc tribunal with UNCITRAL Arbitration Rules
      • Competent courts of host State
  • Latest: Brazil- India BIT, 2020
    • Joint Committee- Article 13
    • Dispute resolution by Joint Committee
  • Other features
    • Investor obligations or responsibilities
    • Code of Conduct for Arbitrators

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References