Transboundary Harm Under the ICSID Convention
William Alexander Smith-Burnand
Email: wasburnand@outlook.com Student Number:12287253
Course: LLM International and European Law Track: International Trade and Investment Supervisor: Professor Dr Stephan W Schill Submission date: 6January 2020
Abstract
International Investment Law is in an odd state of innovation and stagnation. Investors and investments are getting ever more technical and complex, questioning the very boundaries and foundations of the system. While at the same time states and stakeholders are devoting ever more time to the overhaul of the entire system, a reality that seems to be far away from our own. The technological and legal innovations, combined with the general empowerment of states in the international legal sphere, offers the plausible outcome that there will be an arbitral claim regarding the issue of transboundary harm. This would be where a state acts outside of its sovereign territorial jurisdiction in a way that directly harms a foreign investment. The possibilities range from the destruction of a satellite or spacecraft; the interference with deep-sea infrastructure, a cyber-related attack or even a simple extraterritorial act in another state. In recent years we have seen many cases, not necessarily relating to investments and investment law, where States have acted in the territory of another State. It is not beyond the realm of possibility that in the near future such action could be for economic reasons, and harm a foreign investment.
This paper seeks to answer the question could a case of transboundary harm be arbitrable
under the ICSID Convention?
It does so by using a fictitious dispute between Turkey and a Dutch investor, over the bombing of a factory in Bulgaria. It assesses the Convention through the lens of the VCLT Article 31 and 32, looking for an answer as to whether such actions are prohibited or allowed. Such analysis is inconclusive, but nothing in the Convention or the travaux préparatoires suggests that such action is prohibited. It then goes on to assess the claim against the arbitral treatment of the related territorial requirements of ‘national of another Contracting State’ and ‘investment made in the host state’; both of which offer a very expansive interpretation and deference to the agreement of the parties.
The answer to the question posed is that it appears as though the notion of transboundary harm is not prohibited by the Convention, and a liberal minded tribunal that focuses on the wishes of the parties could very well find that it has jurisdiction over such a claim.
Table of Abbreviations
BIT Bilateral Investment Treaty
ECHR European Convention on Human Rights
ECT Energy Charter Treaty
EFTA European Free Trade Association
EU European Union
ICSID International Centre for Settlement of
Investment Disputes
IEL International Economic Law
IIA International Investment Agreement
IIL International Investment Law
ISDS Investor State Dispute Settlement
NAFTA North American Free Trade Agreement
Chapter I: Introduction ... 5
Chapter II: The Scenario ... 7
Chapter III: The Convention ... 8
3.1 Article 25 ... 8
3.1.1 Objective Requirement of ‘Investment’ ... 9
3.1.2 Implicit in Article 25 ... 10 3.1.3 Conclusion ... 11 3.2 Article 1(2) ... 11 3.3 Article 69 ... 11 3.4 Article 70 ... 12 3.4.1 Tribunal Practice ... 12 3.4.2 Attribution ... 13 3.4.3 History of ICSID ... 13 3.4.4 Conclusion ... 14 3.5 Preamble ... 15 3.5.1 Economic Development ... 16
3.5.2 Disputes May Arise ... 18
3.5.3 Subject to National Legal Processes ... 18
3.5.4 Importance of Consent ... 19
3.5.5 Conclusion ... 20
3.6 Conclusion ... 20
Chapter IV: Travaux Préparatoires ... 21
4.1 History of the ICSID Convention ... 21
4.2 Report of the Executive Directors ... 22
4.2.1 Investment Flows ... 24
4.2.2 Mutual Interest ... 25
4.3.3 Conclusion ... 26
4.3 Conclusion ... 26
Chapter V: Arbitral Treatment of Other Territorial Requirements ... 26
5.1 In the Territory of the Host State ... 27
5.1.1 Host State Benefit ... 28
5.1.2 Future Investments ... 29
5.1.3 Indivisibility of the Investment ... 30
5.2 National of Another Contracting State ... 31
5.2.1 Focusing on the BIT ... 32
5.2.2 Procedural not substantive ... 33
5.2.3 Reading a Term into the BIT ... 34
5.2.4 Abuse of Process ... 35
5.2.5 Conclusion ... 35
5.3 Conclusion ... 35
Chapter VI: Transboundary Harm v Transboundary Consequences ... 36
Chapter VII: Conclusion ... 37
Chapter I: Introduction
International Investment Law is going through a well-documented ‘legitimacy crisis’,1 and there are attempts to revolutionise the system of how disputes between investors and states are settled.2 While these proposals and reforms are consuming a substantial amount of the academic commentary, the present system is still continuing as it was before, with 56 cases registered at ICSID in 2018 and another 22 in the first half of 2019.3
This steady increase in the volume of cases is mirrored by another trend, the increasing complexity of the structure and method of both investments and legal arguments. There have been claims relating to streaming of sports matches,4 the impact of a Court decision as persuasive authority in other jurisdictions,5 and cases brought against Russia in response to the incorporation of Crimea.6
The Centre and the Convention fulfil a useful role in the IIL system, as a more stable and secure method of settling disputes, with an effective enforcement and recognition mechanism.7 With
1 Thomas Dietz, Marius Dotzauer and Edward S. Cohen, ‘The Legitimacy Crisis of Investor-State Arbitration
and the New EU Investment Court System’ (2019) 26 Review of International Political Economy; 749
2 Lee M Caplan, ‘ISDS Reform and the Proposal for a Multilateral Investment Court’ (2019) 46 Ecology 53 3 The ICSID Caseload Statistics, 2019-2
<https://icsid.worldbank.org/en/Documents/ICSID_Web_Stats_2019-2_(English).pdf> accessed 4 January 2020
4 beIN Corporation v. Kingdom of Saudi Arabia, UNCITRAL, Notice of Arbitration, 1 October 2018 5 Bridgestone Licensing Services, Inc. and Bridgestone Americas, Inc. v. Republic of Panama, Decision on
Expedited Objections, 13 December 2017
6 Patrick Dumberry, ‘Requiem for Crimea: Why Tribunals Should Have Declined Jurisdiction over the Claims
of Ukrainian Investors against Russian under the Ukraine–Russia BIT’ (2018) 9 JIDS 506
7 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, Articles
that being said, the Convention was written for a very different world, where consent agreements came in contracts and investments were more static.8
One area that has yet to be properly discussed, either in academic literature or by a tribunal is the notion of transboundary harm. States can act outside of their sovereign territorial jurisdiction and impact upon the investment of a foreign investor. The proposition has historically been treated with some contempt, with a general body of opinion that in one way or another the ICSID Convention would prohibit such a claim.9 This attitude has also been fuelled by the fact that the vast majority of IIAs have a requirement that would prevent such a claim.10
In recent years the academic treatment of the proposition has warmed, with an understanding that there are large swathes of the world in which investments are without protection: deep sea cables, the increase in private investment into the space sector, how we regulate internet investments and even extra-territorial actions.11
With this rapid technological increase, the increasing hostility towards globalisation and the stagnation of reform efforts, it appears plausible that a case of transboundary harm will be brought before an investment tribunal in the next few years. As we know the tribunal practice on an issue can have long term effects for how the objective requirements are understood in the future.12 Therefore, it would be advantageous for the entire field of IIL if the issue were
given some prior consideration, discussion and clarification before such a case is brought. This paper seeks to fire the starting pistol on such a discussion, and ask the question: could a
case of transboundary harm be arbitrable under the ICSID Convention? It will answer the
question via the use of two sub-questions: Does there exist a requirement in the Convention
that the investment and harm must be located in the State accused of such harm? And if so, how rigid or flexible should that requirement be interpreted?
8 J. Christopher Thomas and Harpreet Kaur Dhillon, ‘The Foundations of Investment Treaty Arbitration: The
ICSID Convention, Investment Treaties and the Review of Arbitration Awards’ (2017) 32 ICSID Review 459; 469
9 Zachary Douglas, The International Law of Investment Claims (CUP, 2009); p164
10 Peter Tzeng, 'Investment Protection in Disputed Maritime Areas' (2018) 19 Journal of World Investment &
Trade 828
11 Christopher Greenwood, ‘Oceans and Space: Some New Frontiers for International Investment Law’ (2018)
19 The Journal of World Investment & Trade 775; Markos Karavias, 'Submarine Cables and Pipelines: The Protection of Investors Under International Law' (2018) 19 The Journal of World Investment & Trade 860
The paper seeks to answer these questions by conducting an analysis of the existing ICSID framework and seeking to apply it to the question of transboundary harm using a fictious case study.
It begins in Chapter II by explaining the case study, and how it relates to the question at hand, before going on in Chapter III to a textual analysis of the relevant provisions of the Convention. Chapter IV follows Article 32 of the VCLT and assesses the travaux préparatoires of the Convention in search of clarification. Chapter V then conducts a comparative analysis of the arbitral practice regarding two similar territorial requirements, applying their reasoning to the present question. Finally, Chapter VI offers some analysis of a potential distinction between transboundary harm and transboundary consequences as a way to close the proverbial floodgates.
Chapter II: The Scenario
The question being asked is a very abstract one, and in order to ground this in material facts, it is useful to offer a scenario so that the questions does not stray too far away from the practical application it is intended for.
In our scenario we have three relevant countries, The Netherlands, Bulgaria and Turkey, with the latter two sharing a border.
Our Dutch investor has opened a factory in Bulgaria, near the border with Turkey; for the purpose of this exercise both investor and investment meet all the relevant criteria to be considered as such under the Convention.
The Dutch investor is in the business of publishing books and magazines, some of which are critical of Turkey’s leaders and President. During a period of turmoil, a unit of the Turkish Army, acting on instructions, send a rocket from the Turkish side of the border to the factory on the Bulgarian side.
While nobody was injured, the investor suffered millions of euros of losses, and there was no possibility of an insurance pay-out.
There was international uproar, with a great deal of pressure put on Turkey to resolve the dispute at hand. The Turkish government offered a compromise, that it would consent to submit the dispute to ICSID for arbitration, where both parties would be on an equal footing.
The investor agrees to this suggestion, and they begin proceedings at the Centre. At the jurisdictional phase the tribunal, exercising its power under Article 41 to assess whether or not the tribunal has the jurisdiction to hear the case.
This is what will be considered throughout. The parties have both consented and it is a pure assessment of the objective requirement of the Convention.
Chapter III: The Convention
The starting point for any analysis of the potential objective requirements of the Convention, should be Article 31 of the VCLT, which states that:
A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. 13
We shall assess the claim by first looking at the jurisdictional requirements of the Convention, which are found in Article 25, before going on to assess the rest of the Convention to look at the context, and then the preamble to ascertain the object and purpose.
3.1 Article 25
The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State, which the parties
to the dispute consent in writing to submit to the Centre. When the parties have given their consent, no party may withdraw its consent unilaterally.14
There is no mention of territory in the text,15 the requirement is that there must be a legal
dispute, this legal dispute must have arisen directly, as opposed to indirectly, out of an investment. The legal dispute must be either between a Contracting State and a national of another Contracting State, or between a constituent subdivision or agency of a Contracting State that has been designated to the Centre and a national of another Contracting State. Finally, the parties must have both consented to arbitration. It has been suggested that the requirement
13 Vienna Convention on the Law of Treaties 1969, Article 31(1)
14 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, Article
25(1)
is found either in the term ‘investment’ or implicit in the text of Article 25, each of these suggestions shall be examined in turn.
3.1.1 Objective Requirement of ‘Investment’
The notion that there are objective requirements to the Convention is uncontroversial, it has been confirmed by the Report of the Executive Directors,16 academic commentary,17 and tribunal practice.18 The most cited example is that of the term investment, with it generally being referred to as the double-keyhole or double-barrelled test, where an investment is needed to be found under both the Convention and the BIT.19
It has been suggested that this objective requirement contains a requirement that the investment must be located in the host state.20 While this is one interpretation based upon a reading of the ordinary meaning of the term ‘investment’, it ignores the context and purpose of the Convention. Furthermore, it is not a view that is represented in tribunal practice. The most well-known understanding of the objective criteria was found in Salini, where the tribunal agreed with the criteria set out in Fedax:21 (1) a contribution of money or assets (2) a certain
duration (3) an element of risk and (4) a contribution to the economic development of the host state. After Salini it has been debated as to whether the fourth leg is actually part of the Convention, as will be discussed further below.22 There have also been suggestions that there should be additional criteria, mainly that the investment was made in accordance with the law of the host state and it was made in good faith.23 None of these requirements inherently
preclude the acceptance of transboundary harm by the tribunal.
16 ICSID, ‘Report of the Executive Directors on the Convention on the Settlement of Investment Disputes
between States and Nationals of Other States’ ICSID Doc 2 (18 March 1965) para 25
17 Berk Demirkol. "The Notion of Investment in International Investment Law." Turk. Com. L. Rev. 1 (2015):
41.
18 Quiborax S.A., Non-Metallic Minerals S.A. and Allan Fosk Kaplún v Plurinational State of Bolivia, Decision
on Jurisdiction, 27 September 2012; Libananco Holdings Co. Limited v Republic of Turkey, Award, 2 September 2011; Teinver S.A., Transportes de Cercanías S.A. and Autobuses Urbanos del Sur S.A. v. The Argentine Republic, Decision on Jurisdiction, 21 December 2012; Autopista Concesionada de Venezuela, C.A. v. Bolivarian Republic of Venezuela, Decision on Jurisdiction, 27 September 2001; Phoenix Action, Ltd. v. The Czech Republic, Award, 6 April 2007
19 Pierre Dupont, 'The Notion of ICSID Investment: Ongoing Confusion or Emerging Synthesis.' (2011) 12(2) J
World Investment & Trade 245; 247
20 Michael Waibel, Sovereign Defaults before International Courts and Tribunals (Cambridge University Press,
2011), p238
21 Fedax N.V. v. The Republic of Venezuela, Decision of the Tribunal on Objections to Jurisdiction, 11 July
1997
22 Saba Fakes v. Republic of Turkey, Award (14 July 2010) para 111
Quiborax v. Bolivia, Decision on Jurisdiction (27 September 2012), para. 212.
3.1.2 Implicit in Article 25
This is an argument that is based on an interpretation of the provision in its entirety, and has often focused on the object and purpose of the Convention.24 This is a debate about whether or not there is an implied requirement within the text of Article 25, to help conceptualise the problem it is useful to add into the text the required implication.
The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment (that is located in the territory of the Contracting State party), between a Contracting State….and a national of another contracting party.
This would be the assertion put forward by those that support the view that the investment must be made within the territory of the host state. The alternative view, is that this clause is not implied within the text, and its absence is illustrative of its relevance to the clause. For ease, it is useful to theorise the potential inverse of this implied clause.
There are four different possibilities: (1) the territorial scope is unlimited; (2) the territorial scope is limited to investments made in any Contracting State; (3) the territorial scope is limited to anywhere outside of the home Contracting State; or (4) the territorial scope is limited to any Contracting State other than the home Contracting State. For the purposes of this argument, we will focus on the narrowest option, the final one; and for the same reasons as above, it would be useful to see the text with the implied clause.
The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment (that is located in the territory of any Contracting State party, other
than the Contracting state party he is a national of), between a Contracting
State….and a national of another contracting party.
The absence of either of these clauses within the text should not be read as neutral when interpreting the provisions. The former clause is a limiting clause, and its absence gives rise to a presumption that it was not to be intended and the latter is the more accurate reflection of the state of play.
24 Michael Waibel, Sovereign Defaults before International Courts and Tribunals (Cambridge University Press,
3.1.3 Conclusion
The only thing that can be truly accepted from a reading of Article 25 is that there is no explicit prohibition on the arbitrability of transboundary harm under the Convention. It is possible that the wording, implies such a prohibition, or it is contained within the objective requirement of ‘investment’; but that is not clear. The Article and the term ‘investment’ are to be interpreted according to their ordinary meanings, but in their context and in light of their object and purpose, and as such the rest of the Convention should be assessed.
3.2 Article 1(2)
The purpose of the Centre shall be to provide facilities for conciliation and arbitration of investment disputes between Contracting States and nationals of other Contracting States in
accordance with the provisions of this Convention.25
The first Article that gives context to our question and to Article 25, is Article 1(2) which sets out the purpose of the Centre. While it is obviously not conclusive in any way, it does offer some context as the text itself does not rule out the possibility of a tribunal finding jurisdiction regarding a case of transboundary harm. Were there to be an implicit rejection of that idea, the purpose of the convention would be a helpful place to locate it. This Article does nothing to limit the tribunal’s jurisdiction over our claim.
3.3 Article 69
Each Contracting State shall take such legislative or other measures as may be necessary for making the provisions of this Convention effective in its territories.26
The purpose of this Article is to ensure that each state ensures through its domestic legal processes that the treaty is effective within its legal system. This has no bearing on whether or not transboundary harm is barred by the ICSID Convention or not, and has mainly been analysed in the context of whether the State in question has exempted ICSID awards from review by local courts.27
25 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, Article
1(2)
26 Ibid, Article 69
27 Ron Fuchs v. Georgia, Decision of the ad hoc Committee on the Stay of Enforcement of the Award, 12
November 2010, para 31; an example of such act is the Convention on the Settlement of Investment Disputes Act of 1966 from the United States.
3.4 Article 70
This Convention shall apply to all territories for whose international relations a Contracting State is responsible, except those which are excluded by such State by written notice to the depositary of this
Convention either at the time of ratification, acceptance or approval or subsequently.28
Article 70 appears to be the most compelling case for the existence of a prohibition on submitting transboundary harm disputes to the Centre. It was included for the European States to be able to include their colonies and overseas territories within the framework of the Centre.29 It directly relates to the application of the Convention, and specifically mentions a
territorial requirement.
There are two potential interpretations of Article 70: either it is a territorial requirement and suggests that a tribunal convened under the auspices of the Centre will only have jurisdiction when the investment was made in the territory of the host state where the Convention is to apply. The alternative is that Article 70 sets the boundaries as to where the Convention will apply as a whole, setting out where the state wishes to be included in its territorial definition, but adding nothing else to the existing architecture of the Convention. The text itself is unclear, and can reasonably be read in both respects, the treatment and interpretation of this clause has focused on the latter, rather than the former.
3.4.1 Tribunal Practice
The tribunal practice regarding Article 70 has been very sparse, in fact it has only been mentioned in four cases, and only two in a relevant manner.30 The two cases at hand both involved investors from Hong Kong that wished to gain access to the Centre via the nationality of their ‘parent state’.31 In the first, the investor tried to utilise Article 70 to claim British
nationality for a claim against Egypt;32 and in the second the investor tried to use the provision
to claim Chinese nationality against Peru.33
28 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, Article 70 29Christoph H Schreuer, The ICSID Convention: a Commentary. (Cambridge University Press, 2009) p1276 30 In the other two, it was discussed in reference to withdrawal from the Convention: Fábrica de Vidrios Los
Andes, C.A. and Owens-Illinois de Venezuela, C.A. v. Bolivarian Republic of Venezuela, Award, 13 November 2017, para 274; Blue Bank International & Trust (Barbados) Ltd. v. Bolivarian Republic of Venezuela, Separate Opinion of Christer Söderlund, 26 April 2017, para 14
31 One of the cases was pre-handover in 1997 and the other was post-handover. 32 SPP v Egypt, Decision on Jurisdiction I, 27 November 1985, para 46
In both cases the tribunals were satisfied that they qualified as nationals ‘of another Contracting State’ for the purposes of the Convention, given the fact that neither the UK nor China had excluded such application under Article 70. It has also been cited by claimants as to the reason they are covered by the ICSID Convention when filing claims.34
This interpretation ensures that, for the purposes of the Convention, it is clear which territories are to be regarded as being part of the Contracting state, and which are not; so that the acts of regional governments are to be included if desired, and the investors in those territories are able to utilise the Centre to assert their rights. It does not agree with the claim that Article 70 brings in a territorial requirement that the investment and the harm must take place within the territory of the Contracting state.
3.4.2 Attribution
The interpretation offered so far is similar to the notion of attribution under the International Law, and in that sense, there is no other mechanism built into the Convention for a State to carve out the actions of its devolved organs that it may not exercise control over. It may be erroneously claimed that Article 25 gives states such a limitation power by allowing states to designate subdivisions or agencies to the Centre.
This provision, however, allows states to empower subdivisions or agencies to act in ICSID proceedings in their own right, by giving them the power to conclude contracts with investors, that give recourse to the Centre to resolve disputes.35 It is not unreasonable to suggest that States may wish to condition their consent to jurisdiction on actions by organs of the state that they have control over.
3.4.3 History of ICSID
In the drafting of the Convention, Broches remarked that Article 70 would not be frozen in time, and that Contracting States would be able to update the lists of territories that would be excluded over time. In fact, the example given was that a state may wish to ratify the Convention and exclude a dependent Country pending consultation with that host country’s legislature.36
34 Emmis v Hungary, Request for Arbitration, 28 October 2011, Para 18
35 East Kalimantan v PT Kaltim, Award on Jurisdiction, 28 December 2009, para 191; Niko v Bangladesh,
Decision on Jurisdiction, 19 August 2013, para 286
This example does not lend itself to an interpretation of Article 70 that is about the location of the investments; there would be no reason for a Contracting State to consult with the legislature of a dependent country about whether or not acts attributable to the Contracting State that took place in that dependent territory were to be covered by the ICSID Convention.
In fact, such an example makes perfect sense if Article 70 is to be read as merely clarifying what is meant as a Contracting State’s territory for the purposes of the Convention, without adding any more requirements.
This is backed up by discussions held in the Canadian Parliament, involving the now secretary general of the Centre, on the topic of Canadian ratification of the Convention. Such ratification is held up by the unique federal structure of Canada, and the reluctance of the provinces and regions to sign up to the treaty. The discussions had raised the possibility of Canada ratifying the Convention and then excluding those territories that did not want to be included through the procedure in Article 70.37
If the first interpretation is to be correct, and Canada ratifies the Convention but excludes Manitoba, and the Canadian Federal Government nationalises the Canadian Pacific Railway, which operates in Manitoba, there would be no recourse for foreign investors with regard to that section of the line as Manitoba was excluded. This would be an odd provision to include in the Convention, and appears to be against the object and purpose of the Convention. If the second interpretation was to be used then it would be covered by the Convention, as the Federal Government was the one that expropriated the property, so long as the other requirements of Article 25 are covered. It would only be excluded, however, if it were the actions of the Manitoba government that were the subject of the claim. This seems to be more in keeping with the object and purpose of the Convention, as compared to the alternative.
3.4.4 Conclusion
Overall, it is clear that Article 70 does not add a jurisdictional requirement that the investment to be made, and the infraction to be located, in the host state; and instead operates to add a limitation clause to the territory that is defined as the territory of the Contracting State for the existing purposes of the Convention.
37 Barry Leon; Andrew McDougall; and John Siwiec, (2011) "Canada and Investment Treaty Arbitration: Three
Prominent Issues - ICSID Ratification, Constituent Subdivisions, and Health and Environmental Regulation," South Carolina Journal of International Law and Business. 8(1)
Furthermore, comparisons could be made to the ECHR, which contains a similar provision. While not an investment treaty, or even an IEL treaty, the ECHR can be a useful guide for interpreting what is ostensibly similar wording.38 The jurisprudence of the ECHR has been clear that the clause does not exclude the possibility of a state being “responsible under the Convention for acts of its organs that have been committed outside its territory.”39
3.5 Preamble
Considering the need for international cooperation for economic development, and the role of private international investment there in;
Bearing in mind the possibility that from time to time disputes may arise in connection with such investment between Contracting States and nationals of other Contracting States; Recognizing that while such disputes would usually be subject to national legal processes,
international methods of settlement may be appropriate in certain cases;
Attaching particular importance to the availability of facilities for international conciliation or arbitration to which Contracting States and nationals of other Contracting States may
submit such disputes if they so desire;
Desiring to establish such facilities under the auspices of the Inter-national Bank for Reconstruction and Development;
Recognizing that mutual consent by the parties to submit such disputes to conciliation or to arbitration through such facilities constitutes a binding agreement which requires in particular that due consideration be given to any recommendation of conciliators, and that
any arbitral award be complied with; and
Declaring that no Contracting State shall by the mere fact of its ratification, acceptance or approval of this Convention and without its consent be deemed to be under any obligation to
submit any particular dispute to conciliation or arbitration,40
The text raises the presumption that the convention is designed for investments made within the host state, and has been cited as the reason for the prohibition on arbitrating cases of
38 Convention for the Protection of Human Rights and Fundamental Freedoms (1953) Article 63(1) 39 Chittharanjan Felix Amerasinghe, Jurisdiction of Specific International Tribunals (2008, Brill), p343
transboundary harm.41 There are four specific issues raised in the preamble that give will be
crucial in analysing whether or not the Convention applies to transboundary harm: economic development, nature of the dispute, the involvement of national legal processes and the non-obligatory nature of the Convention.
3.5.1 Economic Development
As the one of the purposes of the Convention is to further economic development, it could be inferred that there is such a requirement in the Convention that would prohibit transboundary disputes from the auspices of the Centre. This is an argument that has been made by some scholars that have addressed the issue in passing.42
Upon closer inspection, this argument falls apart on two grounds: there is no inherent economic development requirement in the Convention and that economic development is hindered by transboundary harm.
3.5.1.1 Economic Development is not a Requirement
There used to be a body of opinion and case law supporting the requirement after it was put forward in Fedax43 and refined by Salini44 as the fourth limb of the test. The arbitral practice since has divided in to two camps, one that accepts the ‘Salini criteria’ and potentially even adds extra requirements;45 and another that rejects the criterion of economic development.46 Their reasons are varied, and it is a discussion too broad for this project, but the lack of agreement underlines the confusion and lack of certainty around the notion that there is an economic development requirement built into the Convention. The academic treatment has
41 Zachary Douglas, ‘Property, Investment, and the Scope of Investment Protection Obligations’ in Zachary
Douglas, Joost Pauwelyn, and Jorge E. Viñuales, The Foundations of International Investment Law: Bringing
Theory into Practice (OUP, 2014)
42 Michael Waibel, Sovereign Defaults before International Courts and Tribunals (Cambridge University Press,
2011), p238
43 Fedax N.V. v. The Republic of Venezuela, Decision of the Tribunal on Objections to Jurisdiction, 11 July
1997
44 Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco, Decision on Jurisdiction (French
Original: 129 Journal du droit international 196 (2002)) (English translation: 42 ILM 609 (2003), 6 ICSID Rep. 400 (2004)) 31 July 2001
45 Joy Mining v. Egypt, Award (30 July 2004), para. 53
Bayindir v. Pakistan, Decision on Jurisdiction (14 November 2005), para. 130 Jan de Nul v. Egypt, Decision on Jurisdiction (16 June 2006), para. 91
Helnan v. Egypt, Decision on Objection to Jurisdiction (17 October 2006), para. 77 Millicom International v. Senegal, Decision on Jurisdiction (16 July 2010), para. 80
46 Saba Fakes v. Republic of Turkey, Award (14 July 2010) para 111
Quiborax v. Bolivia, Decision on Jurisdiction (27 September 2012), para. 212.
been similarly confusing, with different views put forward on the exact existence of such a requirement, in a way that confirms that it is not a certain requirement.47
3.5.1.2. Economic Development and Transboundary Harm
In our example we have a dispute between Dutch investors and Turkey over Turkey’s actions that took place in Bulgaria. This is a Dutch investment in Bulgaria, but to say that it only has the capacity to benefit Bulgaria and only has ramifications for the economic development of Bulgaria is both an outdated and oversimplified view of foreign investment.
It is first outdated as it views borders as a firm line, beyond which a state has no interest in or concern of. This is an inaccurate conception of what many borders actually look like in the modern world. Many people live and work on different sides of a border, with the EU terming them ‘cross-border workers’; in fact, there are nearly two million across the EU and EFTA.48 For a more specific example, about 50% of the entire workforce of Gibraltar cross the Gibraltar-Spain border every day.49
Second, it is an oversimplified view as it fails to take into account any of the complex benefits that a state may gain from a foreign investment, and the harms that may arise as a result of a transboundary harm dispute.
If Turkey interferes with a Dutch firm’s investment in Bulgaria, and that firm has operations in Turkey, there may be economic consequences for Turkey. The firm may pull out of Turkey, taking away jobs and investment, in the same way that it may pull out of Bulgaria if it were the actions of the Bulgarian government as the subject of the dispute. Other investors may be wary of doing business in both Bulgaria and Turkey in the future given the actions of the latter’s government. Depending on the nature of the infraction, the Dutch Government and its allies may implement economic sanctions or retaliate against Turkish investors.
This sort of response was demonstrated by the reaction to the killing of Jamal Khashoggi, when investors pulled out of key meetings and conferences in Saudi Arabia and firms even pulling
47 Alex Grabowski, "The Definition of Investment under the ICSID Convention: A Defense of Salini,"Chicago
Journal of International Law: Vol. 15: No. 1, Article 13. (2014);
Jeremy Marc Exelbert, "Consistently Inconsistent: What Is a Qualifying Investment under Article 25 of the ICSID Convention and Why the Debate Must End." Fordham L. Rev. 85 (2016): 1243.
48 Elena Fries-Tersch, Tugce Tugran, Agnieszka Markowska, Matthew Jones, 2018 Annual Report on intra-EU
Labour Mobility (European Commission, December 2018) p54
49 Preparing for a No Deal Brexit: Get Ready (HM Government of Gibraltar, 9 September 2019)
<www.gibraltar.gov.gi/uploads/documents/brexit/Final%20-%20Preparing%20for%20No%20Deal%20Brexit.p df> accessed 4 January 2020
out of deals with the Kingdom.50 This demonstrates that transboundary harm has economic
consequences for the country carrying out the harm, not just where the harm took place. It is clear that the references to economic development within the convention do not create an objective requirement in the Convention for the investment to be made within the host state. The question of whether or not the convention contains an economic development requirement has not yet been settled, and it is perfectly clear that a state can suffer economic harm as a result of actions it carries out in other jurisdictions.
3.5.2 Disputes May Arise
The Preamble refers to the fact that disputes may arise between Contracting States and nationals of other Contracting States in relation to such investments. While there may be a tendency to assume that this is a confirmation that there is a territorial requirement built into the Convention, this is not a compelling argument. In reality, this is merely a restatement of what is already contained within article 25 of the Convention, and offers no additional implicit requirement.
Disputes can arise between Contracting States and nationals of other Contracting States in relation to investments that were not located in the territory of the Contracting State party, as demonstrated by our example. It is in the interests of the international community and investors to have these disputes resolved in the same sense as for a normal investment arbitration case.
3.5.3 Subject to National Legal Processes
A qualification given to the point about disputes is that they would normally be subject to national legal processes, and that in certain cases international methods of settlement may be appropriate. While in traditional ICSID cases the courts being referred to are the courts of the host state, in cases of transboundary harm the courts could be either the national courts of the host state, the respondent state, or even a third state.
50 Kate Kelly and Ben Hubbard, 'Endeavor Returns Money to Saudi Arabia, Protesting Khashoggi Murder' New
York Times (New York, 8 March 2019) <www.nytimes.com/2019/03/08/business/endeavor-saudi-arabia> accessed 04 January 2020
It does appear to offer a good argument against the inclusion of transboundary harm, as if third country courts are available, this would weaken one of the main rationales for the existence of ISDS: actual or perceived bias of the domestic courts.51
It fails to consider, however, that the statement is as applicable to cases of transboundary harm as they are to traditional ISDS cases. The sentence does not state that all cross-border disputes between an investor and sovereign would be appropriately settled before an international tribunal, but that certain cases may be appropriate. The same is true of transboundary harm, not all cases will be suitable, but some will be, and as such this aspect of the preamble again contains no extra element that would prohibit the arbitration of transboundary harm under the Convention.
3.5.4 Importance of Consent
The final relevant point in the preamble is that it was emphasised that there is no obligation for Contracting Parties to submit disputes to the Centre, and that consent was key in the arbitrability of any dispute.
The consent was usually envisaged to be found within a contract between the state and the investor, but in practice it has usually been found within one of the many IIAs that were signed after the creation of the Centre.52 This consent means that states have the choice of allowing
transboundary harm to be included in their consent agreement or whether they wish to exclude it.
The vast majority of BITs have a requirement that the investment be made in the host state, and as such have acted on their own to limit the arbitrability of transboundary harm.53 This raises a crucial distinction between the issue of transboundary harm in the BIT and in the Convention, a distinction often overlooked in analysis.
As was noted in the dissent in Abaclat there are two different types of jurisdiction: general jurisdiction, that sets out the rough outline as to what is and is not arbitral, which would be the
51 Vera Korzun, "The Right to Regulate in Investor-State Arbitration: Slicing and Dicing Regulatory
Carve-Outs." Vand. J. Transnat'l L. 50 (2017): 355; 405
52 Antonio Parra, 25 Advancing Reform at ICSID. In Reshaping the Investor-State Dispute Settlement System
(Brill, 2015) 567
Convention and special jurisdiction, that sets out the specific jurisdictional requirements in a specific instance, which can be a BIT or Investment Agreement.54
When discussing the ratione loci of the convention, authors often point to the territorial requirement found in the consent agreement.55 This is a conflation of the two types of jurisdiction as noted by Abi-Saab; the BIT should not be so heavily relied upon for our understanding of the Convention, as it is the special agreement which can limit the general agreement.
The requirement for consent leads one to a generous understanding of what is applicable under the Convention, as for those that wish to prohibit such treatment, they are free to withhold consent in their special jurisdiction.
3.5.5 Conclusion
The preamble does not rule out the possibility of the arbitrability of transboundary investment disputes under the Convention. It may appear that certain aspects of the preamble favour a more restrictive approach, but on closer inspection it is clear that they do add nothing that is not already contained in article 25.
In fact, the reference to consent leads us to a broader interpretation of Article 25, with an understanding that the Convention should not be read in the narrowest possible way, as states can narrow or limit it however they choose.
3.6 Conclusion
The Convention has a great many aspects that have been cited as the reason for the existence of such a prohibition. Upon a closer analysis, no such prohibition can be reasonably demonstrated to exist. This does not, however, confirm that transboundary harm is arbitrable, and that investors will start filing their claims immediately.
We have a result that it would be fair to describe as ‘ambiguous’, and under the rules of treaty interpretation contained in the VCLT when this occurs, recourse should be had to a
54 Abaclat and Others v. Argentine Republic, Dissenting Opinion, Georges Abi-Saab, 28 October 2011, para
118-119
55 Peter Tzeng, 'Investment Protection in Disputed Maritime Areas' (2018) 19 Journal of World Investment &
supplementary means of interpretation; and using the travaux préparatoires to gain a greater understanding of the provisions.
Chapter IV: Travaux Préparatoires
Article 32 offers the supplementary materials to be used in the event of such an ambiguous result when utilising Article 31:
Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning
resulting from the application of article 31, or to determine the meaning56
4.1 History of the ICSID Convention
The History of the Convention sets out the negotiating history of the Convention and how it was created, it can help colour our understanding of what was intended by those that came to the agreement.
The first thing to note is that there is no direct mention of transboundary harm within the History, this is due to the fact that transboundary harm was not generally considered in arbitration outside of International Environmental Law.57 The silence of the history on this matter is not decisive either way, and as such further inquiry is necessary.
The History does reference the term extra-territoriality multiple times, as Broches assures delegates that the Centre will not become an extra-territorial court for all disputes, and that there will exist both objective requirements and limitations on the consent of states.58
There were also attempted definitions of ‘investment’ offered throughout the drafting, with one definition specifying that investment should be “the commitment of capital by the national of a Contracting State in the territory of another Contracting State”.59 While it is important to state
that this definition was not accepted, even if it were it would not necessarily preclude the jurisdiction of the centre over disputes involving transboundary harm as the Dutch investors in
56 Vienna Convention on the Law of Treaties 1969, Article 32
57 Rebecca Bratspies and Russell Miller, Transboundary Harm in International Law: Lessons From the Trail
Smelter Arbitration (Cambridge University Press 2006)
58 History of the ICSID Convention, Vol. II, p58, 452, 500 59 Ibid, p493
our example have made an investment in the territory of another Contracting State, it is just not the state they wish to bring before a tribunal.
The History expands on a point regularly referenced in the literature60 and alluded to in the Report of the Executive Directors:61 the unique and special nature of the Centre.62 All other types of dispute had an accepted mechanism for resolution: disputes between two states could be taken to the International Court of Justice or the Permanent Court of Arbitration. Disputes between two nationals of the same state would be heard in the national courts, as would disputes between a national and his government. Disputes between two commercial parties of different nationalities could be heard at the International Chamber of Commerce or the Inter-American Commercial Arbitration Commission. There was no adequate forum for a commercial party to bring a claim against a state that was not his own, and as such the Centre was created.63
This special role of the Centre is one of the biggest arguments in favour of allowing transboundary harm to be arbitrable under ICSID, as there is no proper method of settling disputes between foreign investors and states, regardless of where the investment or harm actually takes place.
In our example, the Dutch investors have no recourse to any other international body apart from the Bulgarian and Turkish courts and by pressuring the Dutch government to take up their case. These options are unsatisfactory for the same reasons that traditional ISDS arbitration was created.
The History provides us with a useful understanding of the background to the Convention, but still leaves us in an ambiguous position, although one that slightly leans towards the acceptance over the rejection of transboundary harm being arbitrable.
4.2 Report of the Executive Directors
9. In submitting the attached Convention to governments, the Executive Directors are prompted by the desire to strengthen the partnership between countries in the cause of
60 Paul Szasz, ‘Investment Disputes Convention – Opportunities and Pitfalls (How to Submit Disputes to
ICSID)’ (1970) 5 JL & Econ Dev 23; Christoph Schreuer, The ICSID Convention: A Commentary (2nd Edition, Cambridge University Press, 2009) p82-83
61 ICSID, ‘Report of the Executive Directors on the Convention on the Settlement of Investment Disputes
between States and Nationals of Other States’ ICSID Doc 2 (18 March 1965) para 10-11
62 History of the ICSID Convention, Vol. II, pp. 78, 205
63 While the PCA was available for such disputes, there was no binding nature, and as such states would
economic development. The creation of an institution designed to facilitate the settlement of disputes between States and foreign investors can be a major step toward promoting an atmosphere of mutual confidence and thus stimulating a larger flow of private international
capital into those countries which wish to attract it.
10. The Executive Directors recognize that investment disputes are as a rule settled through administrative, judicial or arbitral procedures available under the laws of the country in which the investment concerned is made. However, experience shows that disputes may arise
which the parties wish to settle by other methods; and investment agreements entered into in recent years show that both States and investors frequently consider that it is in their mutual
interest to agree to resort to international methods of settlement.
11. The present Convention would offer international methods of settlement designed to take account of the special characteristics of the disputes covered, as well as of the parties to whom it would apply. It would provide facilities for conciliation and arbitration by specially
qualified persons of independent judgment carried out according to rules known and accepted in advance by the parties concerned. In particular, it would ensure that once a government or investor had given consent to conciliation or arbitration under the auspices of
the Centre, such consent could not be unilaterally withdrawn.
12. The Executive Directors believe that private capital will continue to flow to countries offering a favorable climate for attractive and sound investments, even if such countries did not become parties to the Convention or, having joined, did not make use of the facilities of
the Centre. On the other hand, adherence to the Convention by a country would provide additional inducement and stimulate a larger flow of private international investment into its
territories, which is the primary purpose of the Convention.
13. While the broad objective of the Convention is to encourage a larger flow of private international investment, the provisions of the Convention maintain a careful balance between the interests of investors and those of host States. Moreover, the Convention permits
the institution of proceedings by host States as well as by investors and the Executive Directors have constantly had in mind that the provisions of the Convention should be
equally adapted to the requirements of both cases.64
64 ICSID, ‘Report of the Executive Directors on the Convention on the Settlement of Investment Disputes
The Report of the Executive directors generally follows and reiterates what was said in the preamble, such as the notion that these disputes would normally be settled by domestic courts and that the convention is about stimulating investment for the purposes of economic development. With that being said, it does add some aspects surrounding the importance of flows and the relevance of mutual interests.
4.2.1 Investment Flows
The Report places considerable emphasis on the notion of private investment flows into Contracting States, while recognising that non-signatories will still attract investment, signing the convention will give investors extra confidence and security. This aspect of investment flows could be detrimental to the claim that transboundary investment is covered by the Convention as it could be seen to add an implicit requirement that the investment must flow into the host state.
In our example, the investment was made in Bulgaria, and as such there were no such investment flows into Turkey, so this sort of behaviour would not be covered by the mention of flows in the Report.
This interpretation is misleading for two reasons: first, investment flows are a benefit, not an inherent requirement and second transboundary hard does affect investment flows in a way that disadvantages states.
First, ‘investment flows’ is not a requirement of an investment, it is a benefit the host state will receive. Accepting the arbitrability of transboundary harm does not negate any investment flows that a country benefits from; investment flows are the primary purpose of the convention, not the exclusive purpose. It is a logical fallacy to suggest that investment flows are needed in every single case, merely that they exist in certain cases.
This has been confirmed in practice, as will be demonstrated below, arbitral tribunals have generally dismissed the idea that an investment flow is required for an investment to be covered by Article 25, even if this has previously been claimed to be the case.65
Second, as demonstrated above with reference to economic development, transboundary harm can inherently impact investment flows. Actions are not isolated, and if a state damages investors or investments anywhere in the world, prudent multinational investors will take notice.
65 Southern Pacific Properties (Middle East) Limited v. Arab Republic of Egypt, Dissenting Opinion of
This is to say nothing of the states that may also take notice and impose sanctions on the accused state.
In investment advice to companies, most international law firms point out that investing in Russia carries extra complexities and risks due to the situation in Crimea.66 So while the investment flows may not have a direct link to the investment at hand, it does have an indirect one, and the lack of an effective dispute resolution mechanism can and does drag on disputes, deepening their impact.
4.2.2 Mutual Interest
The Report also adds a dimension of mutual interest that is missing from the preamble, and while it could be suggested that mutual interest is just following on or exploring the issue of consent, it does go further.
It has been suggested that from this aspect of the Report, a territorial requirement can be inferred as a state has neither “responsibility nor interest in resolving a conflict that emerges from a territory over which it does not exercise its regulatory authority, unless otherwise agreed.”67 There are three problems with such an idea: responsibility, interest and consent.
First, the claim that a state has no responsibility for resolving conflicts that arise due to the acts it commits outside of its territory, is without merit or justification. While not an investment treaty, the jurisprudence of the ECHR has been clear that a state is responsible for acts taking place outside of its own jurisdiction.68 It is a general principle of international law that a state is not only responsible for acts that take place on its territory.69
Second, the idea that a state has no interest in resolving such disputes is both incorrect and beside the point. In our example, we have a state that has consented to jurisdiction as they have decided it is in their best interests to resolve the dispute at hand. This is not a farfetched example, states may wish to resolve a dispute in order to dispel the notion that they are an anti-investor country, or to repair relations with those involved.
66 Baker & McKenzie, 2019, Conducting Business in Ukraine
<https://www.bakermckenzie.com/-/media/files/insight/publications/2018/04/conducting-business-in-ukraine-2019-(003).pdf> accessed 4 January 2020
67 Johan Billiet, International Investment Arbitration: A Practical Handbook, (Maklu, 2016), p232 68 Chittharanjan Felix Amerasinghe, Jurisdiction of Specific International Tribunals (2008, Brill), p343 69 Malcom Shaw, International Law (8th Ed, Cambridge University Press, 2017) pp515-520
Finally, Billiet seems to suggest that a state having neither responsibility nor interest is a rebuttable presumption, that the state can agree to waive. This does no service to the claim, as if there is such an objective requirement in the Convention, states cannot get around that with their consent.70
Mutual interest, far from being a reason to prohibit such arbitration, is a reason to allow it. There are plausible scenarios in which it would be in the best interests of a state to arbitrate a dispute and bring it to an end, whether that involves the dismissal or payment of compensation. As mutual interest is a rationale for the Centre’s existence, and this is a unique situation where it would be in the mutual interest of the state to submit such a dispute to arbitration, it would seem that this falls within the intended scope of the Convention.
4.3.3 Conclusion
The Report clearly raises some new issues that the preamble did not, and while it has been claimed that the Report is the source of the territorial requirement, it does not appear so in reality; in fact, the Report seems to give credence to the acceptability of such a claim.
4.3 Conclusion
The travaux préparatoires help aid our understanding of the object and purpose of the Convention, and the extent to which it may apply in the present case. The most important thing to take from the analysis is that throughout the reasons given for the creation of the Centre and the understanding as to its role, a transboundary dispute like the one in our example would fit in perfectly.
Chapter V: Arbitral Treatment of Other Territorial
Requirements
The arbitral treatment of the convention’s provisions help shape our understanding of the exact meaning and limits of the provisions. As there have been no investment cases on this topic – there has been no tribunal practice on this specific issue.
70 ICSID, ‘Report of the Executive Directors on the Convention on the Settlement of Investment Disputes
There has been, however, tribunal practice on the question of whether or not the investment must be made within the host state, while this is a similar issue it is not necessarily the same as it is questioning whether or not any investment has been made, not questioning whether the convention protects an investment made in a different state. There has also been tribunal practice on the related objective requirement that the investor be a “national of another Contracting State”.
The tribunal practice on both of these issues have often confused the analysis of the objective requirements with the analysis of the consent agreement (often the BIT), but their treatment of both has been remarkably similar. They have shown a great deal of deference to the choice of parties, and have been reluctant to assert that the objective requirement exists in a meaningful way. They have adopted broad interpretations of the Convention, allowing a great deal of flexibility when it comes to party choice.
5.1 In the Territory of the Host State
As stated earlier this requirement was suggested during the drafting, and has been suggested as a requirement since the inception.71 It is important once again to note that there is
a difference between the requirement that is found in BITs and an objective requirement in the ICSID Convention. An example of the former is the Pakistani-Swiss BIT 1995 which states:
The present Agreement shall apply to any investments in the territory of one
Contracting Party by investors of the other Contracting Party, that have been made later than first September 1954 in accordance with the laws and regulations of the former Contracting Party.72
The requirement has been confirmed as a part of NAFTA in two cases: Bayview v Mexico where the tribunal held that American investors owning water rights on the Texas side of the border did not make an investment in Mexico for the purposes of NAFTA.73 This was confirmed in Canadian Cattlemen, which emphasised that investors and investments are indivisible, and as the investor must be foreign, so must be the investment, i.e. made in the host
71 Zachary Douglas, ‘Property, Investment, and the Scope of Investment Protection Obligations’ in Zachary
Douglas, Joost Pauwelyn, and Jorge E. Viñuales, The Foundations of International Investment Law: Bringing
Theory into Practice (OUP, 2014)
72 Pakistan-Switzerland Bit 1995 Article 2(1)
state.74 This is pertinent to NAFTA as it contains a specific territorial requirement contained
within the Convention.75
While such a requirement is contained in NAFTA, the ECT76 and many BITs,77 this does not necessarily mean that it is present within the ICSID Convention as these consent instruments refer to Abi-Saab’s specific jurisdiction not the general jurisdiction.78
The arbitral treatment of this requirement as found in BITs and potentially found in the Convention has been very expansive and flexible in three general ways: focusing on the host state benefit, future investments and the indivisibility of the investments.
5.1.1 Host State Benefit
There is a body of cases that, while accepting the validity of the territorial requirement contained within the BIT, have loosened its application by allowing investments that did not enter the host state to be classed as investments for the purposes of the BIT and Convention when they gave a benefit to the host state.
This is commonly applied in cases involving financial transactions, in government borrowing terms, governments often borrow to finance existing debts and as such the money raised by the issuing of such bonds does not ever enter the country. It is reasoned, however, that the situs of the bond issue is to be found within the host state, and that it is to be classed as an investment.79 The tribunal in Fedax dealt with this issue, and in considering whether or not such a government bond could be classed as an investment, stated:
It is a standard feature of many international financial transactions that the funds involved are not physically transferred to the territory of the beneficiary, but put at its disposal elsewhere. In fact, many loans and credits do not leave the country of origin at all, but are made available to suppliers or other entities…..The Important question is whether the funds made available are utilized by the beneficiary of the credit, as in
74 Canadian Cattlemen for Fair Trade v United States, NAFTA/UNCITRAL, Award on Jurisdiction, 28 January
2008, para 123-126
75 Article 1101 NAFTA
76 Energy Charter Treaty, Article 1
77 See Morocco – Rwanda BIT 2016 Article 1
78 Abaclat and Others v. Argentine Republic, Dissenting Opinion, Georges Abi-Saab, 28 October 2011, para
118-119
79 Michael Waibel, Sovereign Defaults before International Courts and Tribunals (Cambridge University Press,
the case of the Republic of Venezuela, so as to finance its various governmental needs.80
A similar argument was made by the tribunal in Inmaris, where it was explained that as the state would otherwise have had to fund the renovation of the sailing vessel at hand, and that the investment created value for in Ukraine, it was able to be classified as an investment in Ukraine for the purposes of the treaty. 81
The Abaclat majority went further in clarifying the distinguishing factor was that the investment was a financial transaction, which is inherently different from a bricks and mortar investment, stating:
With regard to investments of a purely financial nature, the relevant criteria should be where and/or for the benefit of whom the funds are ultimately used, and not the place where the funds were paid out or transferred. Thus, the relevant question is where the invested funds ultimately made available to the Host State and did they support the latter‘s economic development? This is also the view taken by other arbitral tribunals.”82
This was not unanimous, with Professor Abi-Saab dissenting from this opinion and holding the view that there was a strict territorial requirement in both the BIT and the Convention and they were not met in the case before him.83 With this opinion, Professor Abi-Saab does find himself
in a considerable minority.
5.1.2 Future Investments
The second categorisation of the arbitral treatment of this requirement broadens the understanding by allowing investors that had been taking preliminary steps for an investment that would eventually be located in the host state to be classed as investments.
In CSOB, the tribunal found that as there was an agreement between the two parties that CSOB would conduct future investment and activities in Slovakia, it was sufficient to say that the
80 Fedax N V v Venezuela, Decision on Jurisdiction, 11 July 1997, 37 ILM (1998) 1378; para 41
81 Inmaris Perestroika Sailing Maritime Services GmbH and others v. Ukraine, Decision on Jurisdiction, 8
March 2010; para 124
82 Abaclat and Others v. Argentine Republic, Decision on Jurisdiction and Admissibility (English), 4 August
2011; para 374
83 Abaclat and Others v. Argentine Republic, Dissenting Opinion, Georges Abi-Saab, 28 October 2011, para
investment was located in the host state.84 This reasoning was followed in LESI where the
tribunal held that as long as there was an initial investment preparing for an eventual move to the host state, this would satisfy the requirement. 85
The tribunal in SGS v Pakistan undertook a similar analysis and were particularly swayed by the fact that SGS were due to make certain expenditures within the host state under the contractual agreement. 86
None of the tribunals in these cases accepted or explained that they were offering a very broad application of the territorial requirement. They focused on the good faith aspect in that the states had entered into agreements that required preliminary work to take place outside of the territory.
5.1.3 Indivisibility of the Investment
A final aspect of the academic treatment of the territorial requirement was found in SGS v
Philippines, where the tribunal emphasised that an investment could not be divided into
different sections, and must be treated as one unified investment when it came to establishing whether or not it was made in the host state.
This meant that even though the vast majority of the operation was carried out outside of the Philippines,87 and the company was treated as foreign for tax purposes,88 the fact that it had a Liaison office in Manilla that employed a substantial amount of staff, and coordinated payments, the tribunal were able to find that it was an investment made in the Philippines.89 This was again a broad interpretation and understanding of how one is to interpret a territorial requirement, with a focus on trying to ascertain what the parties had intended, and no real discussion of the objective requirements.
84 Ceskoslovenska Obchodni Banka v 8 e Slovak Republic, Decision on Jurisdiction, 24 May 1999, 5 ICSID
Reports 335, para 83
85 LESI SpA et ASTALDI SpA v Algeria, Award, 10 January 2005, Decision on Jurisdiction, 12 July 2006; para
73
86 SGS Société Générale de Surveillance SA v Islamic Republic of Pakistan, Decision on Jurisdiction, 6 August
2003, 42 ILM (2003) 1290; 8 ICSID Reports 406; para 135-136
87 SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, Decision of the Tribunal on
Objections to Jurisdiction, 29 January 2004, Para 100
88 Ibid, Para 107 89 Ibid, Para 112
