Table Of ContentINTERNATIONAL JOURNAL OF LAW: ““LLAAWW AANNDD WWOORRLLDD““
April 2021 (№17). Volume 7; Issue 2; Page No. 33-55
https://doi.org/10.36475/7.2.4
www.lawandworld.ge
ISSN: 2346-7916 (Print); ISSN: 2587-5043 (Online)
https://creativecommons.org/about/cclicenses/ (Licensed under: CC BY-SA)
NOTION OF DIRECT INVESTMENT
IN NON(cid:487)ICSID INVESTMENT TREATY ARBITRATION
Irina Chankseliani
Head of Interna(cid:415) onal Legal Projects at Georgian Lawyers for Independent Profession, Interna(cid:415) onal
Arbitra(cid:415) on Services Consultant
ABSTRACT
In recent times, the importance of foreign investments becomes vital in the world’s economy. The mutual
cooperation between developed and developing countries by signing the bilateral and multilateral treaties with
its own dispute settlement mechanisms is growing signifi cantly. Due to the fact mentioned above, the frame-
work gives the possibilities for both - investors and host states to protect their rights in the international forum.
The present research is related to the importance of the notion of “Investment” in International Investment
Arbitration, its implications, and the current trends on the defi nition itself. This issue is very important, as it is a
threshold jurisdictional question for the International Investment Tribunal’s jurisdiction.
The paper discusses the Bilateral Investment Treaties, their legal nature, and the expediency of their conclu-
sion. The issue of Notion of direct investment in bilateral investment treaties will also be detailed in the paper,
moreover, there will be an overview of different types of BIT defi nitions on the example of different countries’ BIT
practice. A very comprehensive discussion will be followed on the best practices established by the International
Investment Tribunals regarding the defi nition of “investment”. In the end, the author will analyze whether or not
there is a common/universal notion of investment in Investor-State disputes.
KEYWORDS: International Arbitration, International Investment Arbitration, ICSID, UNCITRAL, BIT
INTRODUCTION non-ICSID, the former consisting of the ICSID Con-
vention, the latter of all others (including ICSID Addi-
In many cases, the choice of non-ICSID arbitra- tional Facilities Rules).1
tion is due to the circumstance that one of the States “In order for tribunals to determine whether an
involved is not a party to the ICSID Convention. How- investment can be the subject of international invest-
ever, there are cases where either the investor or the ment arbitration, two steps have to be followed. First,
State has chosen a method of arbitration other than a tribunal must try to defi ne an investment. Then a tri-
the ICSID Convention, although the latter was avail- bunal must analyse whether all investments are pro-
able to it. tected investments“.2
The inquiry into the reasons for investors’ choice
cannot but be based on the review of the essential 1 Piero Bernardini, ‘ICSID versus non-ICSID Investment
Treaty Arbitration’, (Amicorum Bernardo Cremades,
features of each method of arbitration and the re-
2009), p. 3-4.
spective pros and cons. To this end, the dispute set-
2 Brigitte Stern, ‘Are There New Limits on Access to
tlement methods provided by investment treaties may
International Arbitration?’ (ICSID Review, 2010) 25(1), p.
be conveniently grouped in two categories, ICSID and 26-36.
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““LLAAWW AANNDD WWOORRLLDD““
This paper will be mainly devoted to the notion Investment regimes need to defi ne their scope
of direct ‘investment’ in non-ICSID treaty arbitration. ratione materiae. Contemporary treaties do not re-
First of all, paper will discuss the importance of defi - fl ect the classical formula ‘property, rights and in-
nition of ‘investment, in substantive rights documents, terests’, which is found in traditional treaties, FCN
followed by a discussion on article 25 of the ICSID treaties, to settle claims after hostilities, and in hu-
Convention and its characterisations. The second part man rights documents. Instead, they are built upon
will look at the defi nition of ‘investment’ in bilateral in- the narrower term ‘investment’. This usage is now
vestment treaties and the different types of BIT defi ni- fully accepted even though the phrase ‘property,
tions. The last part of the paper will mainly concentrate rights and interests’ had to a considerable extant
on arbitration awards rendered by non-ICSID arbitral acquired a legal meaning and the term ‘investment’
tribunals and its interpretations on defi nition of ‘invest- has its origin in economic terminology and needed
ment’; in order for a comparison, the paper will also to be understood and defi ned as a legal concept
discuss several ICSID awards in relation to the key when fi rst used in investment agreements.
topic of this thesis. The economic debate often assumes that a di-
After understanding, reviewing and analysing the rect investment involves (a) the transfer of funds,
issues mentioned above the present author will then (b) a longer-term project, (c) the purpose of regular
conclude whether or not there is a common notion of income, (d) the participation of the project, and (e)
investment in Investor-State disputes. a business risk. These elements distinguish foreign
direct investment from a portfolio investment (no el-
ement of personal management), from an ordinary
1. NOTION OF INVESTMENT transaction for purposes of a sale of a good or a
AS A JURISDICTIONAL REQUIREMENT service (no management, no continuous fl ow of in-
come), and from a short-term fi nancial transaction.6
The definition of the term ‘investment’ has be- The notion of investment and its defi nitions are
come one of the most controversial issues in invest- inherently vague, and the meanings of the term ‘in-
ment treaty arbitration, in particular as it relates to vestment’ in economics and investment protection
jurisdiction. In the absence of an investment, the instruments do not necessarily coincide. These in-
jurisdiction of the arbitral tribunal fails ratione ma- struments set forth defi nitions of investment that are
teriae. Hence, in most cases the arbitral tribunal quite broad and unhelpful; the listed categories of
will address the question whether the claimant has things that constitute investment under these instru-
made a protected investment at the outset of the ments illustrate assets that tribunals would normally
proceeding.3 Thus, questions relating to the exis- fi nd within the scope of protection even without the
tence or scope of an investment are fundamental help of explicit language.
to each phase of an investment treaty dispute. The Determining whether a particular economic ac-
attribution of jurisdiction to the tribunal is contingent tivity constitutes investment under the defi nitions
upon the claimant having made an investment in the of investment protection instruments is one of the
host state, and thus satisfying the quid pro quo for prerequisites for jurisdiction of an arbitral tribunal.7
the host state’s consent to investment treaty arbitra- In this chapter, the defi nition of the term investment
tion. The nexus between the claims and the invest- will be examined according to the different types of
ment shapes the boundaries of the tribunal’s ratione investment treaties, in national investment legisla-
materiae jurisdiction.4 tions and etc.
The starting point for understanding the scope of
an International Investment Agreement is the defi ni-
tion of the terms that activate the protection afforded
under the agreement. Specifi cally, such protection
usually extends to the ‘Investor’ or their ‘Investment’.5 and Shareholders’, The Oxford Handbook of International
Investment Law, (Oxford University Press, 2008), chapter
3 Jean-Pierre Harb, ‘Definition of Investments Protected 2, p. 50.
by International Treaties: An On-Going Hot Debate’, 6 Rudolf Dolzer, Christoph Schreuer, ‘Principles of
(Mealey’s International Arbitration Report, Vol. 26, #8, International Investment Law’ (Oxford University Press,
2011), p. 1. 2008), p. 60.
4 Zachary Douglas, The International Law of INVESTMENT 7 Christopher Dugan, Don Wallace Jr, Noah D. Rubins,
CLAIMS, (Cambridge University Press, 2012), p. 165. Borzu Sabahi, Investor-State Arbitration, (Oxford
5 Engela C Schlemmer, ‘Investment, Investor, Nationality, University Press 2008), p. 247.
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““LLAAWW AANNDD WWOORRLLDD““
1.1. Ratione Materiae Requirements in to consider, whether the claimant’s ‘development costs’
Substantive Right Documents (National independently qualifi ed as an investment. The question
Legislation; Bilateral and Other Investment posed by the tribunal was whether Georgia had consent-
Protection Treaties; Multilateral ed to the treatment of ‘developing costs’ as an invest-
Investment Treaties – e.g. ECT) ment for the purposes of Article 25(1) of the ICSID Con-
vention independently of the defi nition of an investment
Since the interpretation of defi nition of ‘investment’ in the 1996 Investment Law. Unsurprisingly, the tribunal
is the important jurisdictional requirement for all in- found no evidence of such consent on the record.10
vestment treaty arbitration, we will look how it can be Most investment arbitration cases in recent years
interpreted in investment protection instruments, such are based on jurisdiction established through BIT’s.
as: international investment treaties (Bilateral Invest- The basic mechanism is the same as in the case of
ment Treaties, Multilateral Investment Treaties) and national legislation: the state parties to the BIT offer
national legislation. consent to arbitration to investors who are the na-
One basis for non-contractual ICSID arbitration is tionals of the other contracting party. The arbitration
the national investment legislation of the host state, by agreement is perfected through the acceptance of that
which the latter unilaterally offers to submit investment offer by an eligible investor.11
disputes to ICSID jurisdiction. The consent becomes In order to fulfi l ratione materiae requirements of
effective foreign investor accepts the State’s offer to ICSID Convention it is important for the tribunal to
arbitrate, at the latest when the foreign investor fi les determine what constitutes an ‘investment’ under the
its claim with ICSID.8 specifi c BIT.
National legislation offering consent to ICSID’s ju- In recent years the vast majority of cases have
risdiction often contains defi nitions or descriptions of in- been brought to ICSID under the provisions of in-
vestments to which it relates. Some of these defi nitions vestment treaties containing consent to jurisdiction.
are quite tense.9 These investments laws sometimes In most cases jurisdiction is based on a bilateral in-
contain their own defi nition of investment and very often vestment treaty (BIT). The treaty clauses providing for
also contain other requirements that a transaction must ICSID jurisdictions are drafted in general terms refer-
comply with in order to be considered as an investment ring to future investment disputes.12 For a qualifying
or to be entitled to certain benefi ts or privileges. This is- investor to be able to rely on the substantive protec-
sue was discussed in Zhinvali Development Limited v tions and procedural safeguards of a BIT, it must have
Republic of Georgia case. The consent to ICSID arbitra- made an investment protected by the treaty.13
tion in Zhinvali was not recorded in an investment treaty In most modern BITs these defi nitions have similar
but rather in the national investment law, the claimant features. They are usually introduced by a broad, gen-
sought compensation for its ‘pre-investment expendi- eral description followed by a non-exhaustive list of
tures’ and the tribunal defi ned the issue as ‘whether the typical rights. The general description frequently refers
claimant’s purported expenditures qualify as an „invest- to „every kind of asset“. The list of typical rights usually
ment” under the 1996 Georgian Investment Law, which includes:
supplied the operative defi nition of an ‘investment’ for the ● Traditional property rights;
purposes of Article 25(1) of the ICSID Convention. The ● Participation in companies;
Tribunal didn’t confront squarely the issue as to whether; ● Money claims and rights to performance;
the claimant had acquired a property right within the rel- ● Intellectual and industrial property rights;
evant defi nition of an investment. Thus, in particular, the ● Concession or similar rights.14
tribunal considered whether, pursuant to the Georgian
Investment Law, the claimant had obtained ‘intellectual 10 Zachary Douglas, The International Law of INVESTMENT
CLAIMS, (Cambridge University Prss, 2012), p. 189.
property’ by virtue of its expenditure on preparatory stud-
11 Rudolf Dolzer, Christoph Schreuer, ‘Principles of
ies and feasibility reports in respect of a proposed project
International Investment Law’ (Oxford University Press,
for the rehabilitation of a hydroelectric power plant and
2008), p. 242.
its tailrace tunnel. The tribunal as not satisfi ed that the 12 Christoph H. Shreuer, Loretta Malintoppi, August
claimant had acquired such a right. The tribunal went on Reinisch and Anthony Sinclair, The ICSID Convention: A
Commentary (Second edition 2009), p. 122.
8 Lucy Reed, Jan Paulsson and Nigel Blackaby, Guide to ICSID 13 Lucy Reed, Jan Paulsson and Nigel Blackaby, Guide to ICSID
Arbitration (Kluwer Law International, 2004), p. 36. Arbitration (Kluwer Law International, 2004), p. 44.
9 Christoph H. Shreuer, Loretta Malintoppi, August 14 Christoph H. Shreuer, Loretta Malintoppi, August
Reinisch and Anthony Sinclair, The ICSID Convention: A Reinisch and Anthony Sinclair, The ICSID Convention: A
Commentary (Second edition 2009), p. 121. Commentary (Second edition 2009), p. 122-123.
3
““LLAAWW AANNDD WWOORRLLDD““
For the purpose of our main topic it is relevant to vision or agency of a Contracting State designated to
discuss how defi nition of ‘investment’ are interpreted the Centre by that State) and a national of another
in multilateral investment treaties and how it is import- Contracting State, which the parties to the dispute
ant for the ratione materiae requirements. consent in writing to submit to the Centre. When the
An investor wishing to avail herself of the offer of parties have given their consent, no party may with-
ICSID arbitration in an investment treaty will have to draw its consent unilaterally.
show that two distinct requirements ratione materiae Article 25 of the ICSID Convention limits the juris-
are met: the transaction out of which the dispute aris- diction of the ICSID Centre to legal disputes arising
es must be an investment under the ICSID Conven- ‘directly out of an investment’. However, as we have
tion. In addition, it must be an investment as defi ned mentioned above, the ICSID Convention does not de-
by the applicable investment treaty.15 fi ne the term ‘investment’. The rationale was „the es-
Most multilateral and bilateral investment treaties sential requirements of consent by the parties, and the
and trade agreements with investment chapters in- mechanisms through which Contracting States can
clude a broad defi nition of investment. They usually make known in advance, if they so desire, the classes
refer to ‘every kind of asset’ followed by an illustra- of disputes which they would or would not consider
tive but usually non-exhaustive list of covered assets. submitting to the Centre“.17 Therefore, in effect, the
Most of these defi nitions are open-ended and cover parameters of what constitutes an investment fall to
both direct and portfolio investment. Their approach be supplied by the parties’ consent and ultimately by
is to give the term ‘investment’ a broad, non-exclu- tribunals.
sive defi nition, recognizing that investment forms are It follows from Article 25 of the ICSID Convention
constantly evolving. However, there are some agree- that one of the prerequisites for jurisdiction of the IC-
ments, which provide a different approach to defi ning SID Centre is that the legal dispute arises directly out of
investment, setting forth a broad but exhaustive list of an ‘investment’. The meaning of the term ‘investment’
covered economic activities. is therefore essential to establish jurisdiction ratione
For instance, Article 1(6) of the Energy Charter materiae of the Centre and key in defi ning the types of
Treaty defi nes investment as ‘every kind of asset’ and disputes that can be settled by ICSID tribunals.
refers to any investment associated with an economic The jurisdiction ratione materiae, or subject-matter
activity in the energy sector. jurisdiction, of the centre under Article 25(1) is thus
NAFTA, in its Article 1139 provides for a broad defi ned as ‘any legal dispute arising directly out of an
business activity related, exhaustive list of assets, with investment.’ Therefore, ICSID’s subject-matter juris-
specifi c exclusions. Investments under the NAFTA diction, as defi ned in Article 25(1), has three compo-
include FDI, portfolio investment (equity securities), nents:
partnership and other interests and tangible and in- (a) The requirement of a legal dispute;
tangible property acquired „in the expectation [...] of (b) The requirement that the legal dispute arise di-
economic benefi t.”16 rectly out of the underlying transaction; and
(c) That such underlying transaction qualifi es as
an investment.18
1.2. Definition of Investment under Each of these elements, the existence of dispute,
Article 25 of ICSID Convention the legal nature of the dispute, the directness of the
dispute, and the existence of an investment may raise
The fi rst sentence of Article 25, of the ICSID Con- jurisdictional questions.19 We have to look all these
vention provides the following provision concerning prerequisites in turn.
the jurisdiction of the centre and ICSID Tribunals: The existence of a dispute is a basic premise for
The jurisdiction of the Centre shall extend to any the jurisdiction of any international judicial or arbitral
legal dispute arising directly out of an investment, be- institution. A dispute requires a minimum of communi-
tween a Contracting State (or any constituent subdi-
17 World Bank, ‘Report of the Executive Directors on the
15 UNCTAD, ‘Requirements Ratione Materiae’, p. 16. Convention on the Settlement of Investment Disputes
16 OECD (2008), "Definition of Investor and Investment between States and Nationals of Other States, 1965’, (1
in International Investment Agreements", in ICSID Rep 23, 28).
OECD, International Investment Law: Understanding 18 UNCTAD, ‘Requirements Ratione Materiae’, p. 7.
Concepts and Tracking Innovations: A Companion 19 Rudolf Dolzer, Christoph Schreuer, „Principles of
Volume to International Investment Perspectives, OECD International Investment Law” (Oxford University Press,
Publishing, pp. 43-44. 2008), p. 230.
4
““LLAAWW AANNDD WWOORRLLDD““
cation between the parties. This communication must ‘investment’ as they deem appropriate. With such a
have revealed a disagreement on a point of law or record in Article 25 of the ICSID Convention restricts
fact. A failure to respond to demands by the other side the parties to submit just any legal dispute to ICSID.
may also signify a dispute. In addition, a disagreement In order to further determine above issue, we
between the parties should have some practical rele- should defi nitely discuss the so-called ‘double test’
vance and should not be merely theoretical. which is used by the ICSID tribunals for determination
The requirement that there is a legal dispute is an its ratione materiae jurisdiction. As we have seen from
absolute requirement for ICSID’s jurisdiction. It is inde- the above analysis, the notion of ‘investment’ has a
pendent of the chosen method of dispute settlement crucial role in investment treaty arbitration submitted
under the Convention and applies even if a tribunal is to the ICSID. In the light of the ICSID’s ratione mate-
authorized to decide on the basis of equity rather than riae jurisdiction, it is important to discuss differences
law. Therefore, the requirement that there is a legal between ICSID and non-ICSID assessments about
dispute needs to be met irrespective of whether the notion of ‘investment’, how the different tribunals de-
parties have agreed to submit a dispute to arbitration termined it. In the context of qualifying an investment
or to conciliation, and even if they have agreed under as a protected investment, the most obvious distinc-
Article 42(3) that the dispute may be decided ex aequo tion between an ICSID and non-ICSID assessment
et bono.20 is that only ICSID requires close connection to Article
The directness of the dispute in relation to the in- 25(1) of the ICSID Convention.22
vestment is also important during the discussions of In examining whether the requirements for an ‘in-
Article 25(1) of the ICSID Convention. The element of vestment’ have been met, most tribunals apply a dual
directness applies to the dispute in relation to the in- test: whether the activity in question is covered by the
vestment. It does not relate to the investment as such. parties consent and whether it meets the Convention’s
One of the main reasons for resisting a defi nition requirements. If jurisdiction is to be based on a treaty
of investment in the Convention was the fear that it containing an offer of consent, the treaty’s defi nition of
could give rise to lengthy jurisdictional discussions ‘investment’ will be relevant. In addition, the tribunal
even if the parties’ consent to submit a dispute to IC- will have to establish that the activity is an investment
SID was well established. The concerns did not nec- in the sense of the Convention. This dual test has at
essarily involve the notion of investment itself, but times been referred to as ‘double keyhole’ approach or
rather what kind of investment would be a suitable as a ‘double barrelled’ test.23
subject matter for the ICSID system. Proposals were According to the ICSID convention, a claim must
made for minimum amounts, or for the exclusion of satisfy above-mentioned double test. Firstly, claim-
investment that pre-dated the Convention. In fact, a ant’s claim must be satisfi ed with the article 25 of IC-
number of attempts were made in the preparation of SID Convention. Secondly, claimant’s claim must fulfi l
the Convention to include a defi nition of „investment” the ratione materiae requirements according to the
but they all failed. substantive rights documents, i.e. bilateral investment
Therefore, the approach adopted in the Convention treaty, State contract, national investment law in order
gives potential parties to ICSID arbitration wide discre- for the arbitral tribunal to have jurisdiction. Non-ICSID
tion to describe a particular transaction, or a category investment arbitrations skip the fi rst test of the double
of transactions, as investment. Ultimately, however, test and only require claimants to qualify the second
the requirement of an investment is an objective one. test.
The parties’ discretion results from the fact that the One approach to the interpretation of „investment”
notion of investment is broad and that its contours are in Article 25 will orient itself solely to the defi nitions
not entirely clear. But the parties do not have unlimit- in investment treaties. The other approach will also
ed freedom in determining what constitutes an invest- consider the economic defi nition of the notion of in-
ment. Any such determination, while important, is not vestment – so-called ‘Salini test’. There have been re-
conclusive for a tribunal deciding on its competence. peated attempts to defi ne the concept of investment in
Under Article 41 of the Convention, a tribunal may ex- general terms. All attempts to reach an agreement on
amine on its own motion whether the requirements of
jurisdiction are met.21 We can assume that convention 22 Convention on the Settlement of Investment Disputes
between States and Nationals of Other States, 14 October
itself gives the parties wide discretion to defi ne term
1966, Article 25(1).
23 Christoph H. Shreuer, Loretta Malintoppi, August
20 UNCTAD, ‘Requirements Ratione Materiae’, p. 9. Reinisch and Anthony Sinclair, The ICSID Convention: A
21 UNCTAD, ‘Requirements Ratione Materiae’, p. 14. Commentary (Second edition 2009), p. 117.
5
““LLAAWW AANNDD WWOORRLLDD““
a defi nition to be inserted into the Convention failed. treaty are important jurisdictional questions in invest-
In Salini v Morocco, the Respondent contended that ment treaty arbitration and must be answered at the
the contract for the construction of a road did not con- threshold of a case.25
stitute an investment in the sense of the Convention. Bilateral investment treaties, or BITs, are a more
The Tribunal noted that the existence of an investment focused continuation of the practice of concluding
under the Convention was an objective condition of bilateral treaties governing ‘friendship, commerce
jurisdiction in addition to consent. and navigation.’ BITs are intended to promote, en-
In Salini v Morocco,24 the arbitral tribunal estab- courage and protect investments by nationals of
lished four criteria for the defi nition of „investment”, one of the contracting States in the territory of the
which is known as a Salini test. According to this test, other contracting State. The fi rst BIT was signed be-
the notion of investment implies if these following four tween Germany and Pakistan in 1959. Other West-
criteria will be met: ern European governments soon began concluding
● Must involve a substantial contribution/com- BITs with selected developing States. Since 1990,
mitment from the investor; however, an explosive growth in the number of BITs
● Must have a certain duration; worldwide has revolutionized the protection of for-
● Must contain an element of risk for the inves- eign investments. In addition to the BIT programs
tor; established by Western States, developing and
● And must contribute to the economic develop- transition economy States have embraced BITs in
ment of the host State. order to encourage foreign investments, both from
These four criteria were substantial for under- industrialized States and among themselves. To-
standing of an ‘investment’ within the meaning of Arti- day, around 3,000 BITs have been signed, covering
cle 25 of ICSID Convention and it considered the fi rst countries in practically every region of the world.26
part of the double test. The signifi cance of BITs is growing and it is vital how
Signifi cance of the notion of ‘investment’ as it is BITs can legitimately protect the rights and interests
explained above, is crucial in order to ICSID have ju- of investors and on the other hand the rights of host
risdiction over the case. If tribunal will determine that state. Therefore, it is remarkable to review the is-
claimant’s claim does not satisfi es the requirements sue how a claim can be established according to the
ratione materiae jurisdiction of ICSID, the tribunal will BITs in Investor-State treaty arbitration. Out of the
not have jurisdiction and case will be out of the scope 290 investment treaty arbitration cases, 182 were
of ICSID Convention. Thus, the current debates about fi led with ICSID, including ICSID Additional Facility
notion of ‘investment’ and its interpretation under the Rules (62%), 80 under the UNCITRAL Rules (28%),
BIT’s, host states national law or multilateral invest- 14 under the SCC Rules (5%), 5 under the ICC
ment treaties becomes very important issue in inves- Rules (2%) and 5 under ad hoc arbitration (2%) and
tor-state related disputes. few others in unknown fora (1%).
In many cases, the choice of non-ICSID arbitra-
tion is due to the circumstance that one of the States
2. NOTION OF DIRECT INVESTMENT involved is not a party to the ICSID Convention. How-
IN BILATERAL INVESTMENT TREATIES ever, there are cases where either the investor or the
State has chosen a method of arbitration other than
The scope of an investment treaty’s application the ICSID Convention, although the latter was avail-
has at least two important legal ramifi cations. First, able to it.
a contracting state owes obligations under the treaty The inquiry into the reasons for investors’ choice
only to those investors and investments that fall within cannot but be based on the review of the essential
the treaty’s scope of application or treaty defi nitions. features of each method of arbitration and the re-
Second, the treaty’s defi nitions and scope of appli- spective pros and cons. To this end, the dispute set-
cation affect the jurisdiction of any international arbi- tlement methods provided by investment treaties may
tral tribunal adjudicating a dispute brought under its be conveniently grouped in two categories, ICSID and
provisions. Therefore, whether a company or person non-ICSID, the former consisting of the ICSID Con-
constitutes an ‘investor’ or whether an asset or trans-
25 Jeswald W. Salacuse, The Law of Investment Treaties,
action constitutes an „investment under the applicable
(Oxford University Press, 2010), p. 158.
24 Salini Costruttori SpA and Italstrade SpA v. Kingdom 26 ‘Investment Treaty Arbitration: A Primer’, (Latham &
of Morocco, ICSID Case No.ARB/00/4, Decision on Watkins International Arbitration Practice Number 1563,
Jurisdiction, 23 July 2001. 2013), p. 1.
6
““LLAAWW AANNDD WWOORRLLDD““
vention, the latter of all others (including ICSID Addi- normally endeavour to seek as wide protection as
tional Facilities Rules).27 possible.29
The purpose of this chapter is to review how much The substantive provisions of the BIT typically ap-
weight does the notion of ‘investment’ in bilateral in- ply to assets that fall within the defi nition of investment
vestment treaties carry in order to establish the juris- and that are located within the territory of one of the
diction international arbitral tribunals. BIT parties. Thus, the term „investment” is critical to
Defi nitions serve many purposes. In international defi ning the scope of application of a BIT and a defi ni-
agreements, they raise diffi cult policy issues and are tion of the term virtually always appears in a BIT.
often the subject of hard bargaining between the ne- Numerous tribunals acting under both the ICSID
gotiating parties. Accordingly, they should be seen not and UNCITRAL arbitration rules have applied this
as objective formulations of the meaning of terms, but principle. In the words of the UNCITRAL Tribunal in
as part of an agreement’s normative content, since Saluka v. Czech Republic: ‘as the party asserting that
they determine the extent and the manner in which the Tribunal has jurisdiction to hear and determine the
the other provisions are to be applied. Thus, the deci- counterclaim which it seeks to bring before the Tribu-
sion on a defi nition of terms will be made on a case- nal, the Respondent carries the burden of establishing
by-case basis, taking into account the purpose and that jurisdiction exists.’ The onus is therefore on the
circumstances of the negotiations at stake. In addi- party asserting an affi rmative jurisdiction claim.
tion, the Vienna Convention on the Law of Treaties At the jurisdictional stage, the burden of proof is
requires that tribunals look fi rst to the ordinary mean- twofold. If jurisdiction rests on the existence of certain
ing of the terms of the treaty as the best manifestation facts, the claimant has to prove them, whereas facts
of negotiators intent, and that, as a rule, the specifi c, that make up the merits of the case – i.e. the facts ca-
substantive provisions of a treaty are given priority pable of being analysed as a breach of the BIT – need
over generalized principles such as those contained in only be established prima facie.
preambles. Therefore, negotiators need to make their Hence, in order to establish the existence of an
intentions manifest in the specifi c provisions, including investment protected under a BIT the party assess-
defi nitions.28 ing that an arbitral tribunal has jurisdiction would fi rst
With the exception of a few of the earlier treaties, have to prove that an investment has been made at a
almost all BITs contain a defi nition article and a cur- certain time and by an investor of a certain nationality
sory glance shows that many of the BITs in force de- and, second, to establish prima facie that the facts he
fi ned the term „investment” in very similar ways. This alleges amount to a violation of the applicable BIT.30
similarity does not, however, mean that there exists
a universally binding concept of investment for all
purposes. Rather, accepting that the concept has no 2.1. The Broad Asset-based Definition
absolute meaning and many changes in the future, of Investment
most treaties, as noted above, have adopted a broad,
open-ended defi nition that ensures a certain amount The purpose of defi nitions in legal instruments
of fl exibility in the treaty’s application. is to determine the object to which an instrument’s
The issue of whether a BIT should apply to in- rules apply and the scope of these rules’ applicability.
vestments made before the conclusion of the trea- Hence, they form part of the normative content of the
ty was previously often the cause of disagreement instrument. The scope of application of an IIA depends
during the negotiations. On the other hand, host on the defi nition of certain terms, principally ‘invest-
States would typically see little reason to provide ment’. This defi nition determines which investments
incentives to investments that had already been are covered by its provisions or are excluded from the
made. Furthermore, such investments had not been coverage of the agreement.31
subjected to the approval procedure of the BIT (or
current domestic legislation) and would therefore
29 Rudolf Dolzer and Margrete Stevens, Bilateral Investment
not fall into the category of investments to which the Treaties, (Martinus Nijhoff Publishers, The Hague/Boston/
host state would wish to extend preferential treat- London, 1995), pp. 25-26.
ment. The home State, on the other hand, would 30 Jean-Pierre Harb, ‘Definition of Investments Protected
by International Treaties: An On-Going Hot Debate’,
27 Piero Bernardini, ‘ICSID versus non-ICSID Investment (Mealey’s International Arbitration Report, Vol. 26, #8,
Treaty Arbitration’, (Amicorum Bernardo Cremades, 2011), p. 1-2.
2009), p. 3-4. 31 UNCTAD, ‘International Investment Agreements:
28 UNCTAD, Scope and Definitions, (2011), p. 21. Flexibility for Development’, (2000), p. 70.
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Clear benchmarks as to what is an investment In addition, as will be seen, even if an invest-
must be developed so as to assess whether a given ment meets the asset-based defi nition of a treaty,
asset or transaction is an investment or some other the treaty may nonetheless not cover that asset if it
kind of uncovered commercial transaction. These does not meet certain specifi c legal, geographical,
benchmarks will form the basis of treaty text that temporal or other requirement.35 The above-men-
may subsequently be interpreted on a case-by-case tioned main asset-based defi nition of investment
basis in an arbitral award. Where it is clear that the approaches with examples in different treaties will
IIA in question sets limits as to what can be regard- be outlined below.
ed as an investment under the terms of the agree- Recent BITs have adopted a more elaborate for-
ment, a tribunal must respect those limitations.32 mula, illustrated by a list of fi ve groups of specifi c
The term ‘investment’ in ordinary parlance can rights which usually include traditional property rights,
refer to the process or transaction by which an in- rights in companies, monetary claims and titles to per-
vestment is made or to the asset acquired as a re- formance, copyrights and industrial property rights as
sult of that process or transaction. Generally speak- well as concessions and similar rights. It is frequently
ing, investment treaties defi ne an investment as stated that these illustrations are not exhaustive.
an asset, rather than a process or transaction by Moving on, the paper will discuss another ap-
which an asset is acquired. Thus, they tend to em- proach of asset-based defi nition, which defi nes speci-
ploy asset-based defi nitions of investments. Such fying substantive investment characteristics as well as
defi nitions tend to be broad in scope. For example, investment forms. Such forms have certain substan-
Article I(g) of the Canada-Costa Rica BIT provides tive investment characteristics. Thus, they defi ne in-
that ‘‘investment’ means any kind of asset owned vestment as ‘an asset that has the characteristics of
or controlled either directly … or indirectly … by an an investment’ and include a non-exhaustive list of the
investor of one contracting party’. In order to come forms that such an investment may take.
within this and similar asset-based, treaty defi ni- The third approach of an asset-based defi nition is
tions, an investment must fi rst of all be an asset. An rather different from the above-discussed approaches;
initial problem in applying this provision is that trea- it is an asset-based defi nition with an exhaustive list of
ties, like the Canada-Costa Rica BIT, employing an assets. This list is not simply illustrative; its purpose is
asset-based defi nition of investment, rarely defi ne to be precise and defi nitive.
the term ‘asset’. One must therefore look to dictio- Although such defi nitions limit the investments
naries to determine its ordinary meaning. The word covered to only the listed forms, usually they are still
‘asset’ in most dictionaries is defi ned as ‘anything broad enough to include all the major investment
of value’ or a ‘valuable item that is owned’. Thus, it forms currently employed by investors. Meanwhile, its
can be seen that the concept of ‘asset’ is very broad clarifi cations and exclusions ensure that any assets
indeed.33 lacking the traditional characteristics required by the
The continued domination of the traditional broad treaty parties will not be protected36. As an example of
asset-based defi nition risks the possibility that trans- this approach we can look in the Canada-Peru BIT’s
actions that were not thought to be investments at the Article 1.37
time the agreement was entered into might nonethe- It is also possible for the parties to adopt a mixture
less become covered as a result of an open-ended of, for example, broad and narrow defi nitions or as-
nature of the defi nition.34 set-based and transaction-based defi nitions in relation
However, on the other hand, one can identi- to the different purposes of an investment agreement.
fy three different approaches to employing an as- Thus, while some countries may wish to defi ne ‘invest-
set-based defi nition in investment treaties: (1) a ment’ to include not every kind of asset, but only the
broad asset-based defi nition with a non-exhaustive specifi c categories included in a list, those same coun-
list of investment forms; (2) a broad asset-based tries may wish to defi ne ‘investment’ more broadly in
defi nition specifying substantive investment char- an agreement that regulates foreig
acteristics as well as investment forms; and (3) an
asset-based defi nition with an exhaustive list of in-
vestment forms.
35 Jeswald W. Salacuse, The Law of Investment Treaties,
32 UNCTAD, Scope and Definitions, (2011), p. 9. (Oxford University Press, 2010), p. 160.
33 Jeswald W. Salacuse, The Law of Investment Treaties, 36 Jeswald W. Salacuse, The Law of Investment Treaties,
(Oxford University Press, 2010), p. 160. (Oxford University Press, 2010), pp. 165-166.
34 UNCTAD, Scope and Definitions, (2011), p. 9. 37 Canada-Peru BIT, Article 1, 2006.
8
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2.2. Narrowing the Scope the principle that no one should benefi t from its own
of the Term ‘Investment’ wrongdoing.43
As we have seen the broad and open-ended defi -
The possibility of taking a wide approach to the nition of investment has remained more common in
defi nition of investment may be contrasted with devel- BITs, they are focus on investment protection. New
opments in recent treaty practice that seek to narrow agreements which are signed recently, using more
down the scope of this term.38 Some IIAs will contain narrow defi nitions of ‘investment’.
narrower defi nitions, for example those that focus only
on a ‘closed list’ of investments.39 A narrow approach
was followed by earlier agreements, which were aim- 3. DEFINITION OF INVESTMENT BY
ing at the gradual liberalization of capital movements NON-ICSID ARBITRAL TRIBUNALS
and preferred to enumerate the transactions covered
by these agreements.40 In the present chapter, there will be a discussion
Regardless of whether a treaty defi nes ‘invest- on investment arbitration awards rendered outside the
ment’ broadly or narrowly, assets that fall within a scope of the ICSID Convention in arbitrations conduct-
treaty’s defi nition nonetheless may have to meet addi- ed under the UNCITRAL Arbitration Rules, or the rules
tional qualifi cations or requirements in order to come of other arbitral institutions such as the International
within the treaty’s scope of application and protection. Chamber of Commerce or the Stockholm Chamber of
Such additional qualifi cations may require that an in- Commerce, specifi cally on ‘non-ICSID awards. In or-
vestment be made (a) in accordance with the laws and der to assess whether there is, or there is no common
regulations of the host state, (b) in the territory of a notion of ‘Investment’, as a comparison to non-ICSID
host state, (c) before and/or after the date of entry into case law there will be a further discussion on ICSID
force of the BIT, (d) in certain sectors of the economy, tribunal’s decisions as well.
or (e) in projects classifi ed as ‘approved’ by appro- I will start discussion of the cases from Romak v
priate governmental authorities.41 Above-mentioned Uzbekistan44 case. I will analyse how the internation-
limiting conditions on the scope of application of the al investment arbitration tribunal in above-mentioned
notion of ‘investment’ given in different BITs, will be case discussed the concept of defi nition of „invest-
reviewed thoroughly. ment” outside ICSID. In the other words, we will look
Some IIAs exclude assets of less than a certain at the question how did the tribunal qualify the requi-
value, perhaps because these investments are con- site ratione materiae jurisdictional component outside
sidered too small to justify the costs of treaty coverage ICSID to determine if an investment was protected?
or perhaps because of a desire to reserve to domestic Romak commenced arbitration proceedings in
investors those parts of the economy in which small PCA, against Republic of Uzbekistan.
investments are likely to be made.42 The tribunal was required to decide whether Ro-
The main reason of IIAs is to promote capital fl ow, mak’s claim contained a protected investment in the
which should be used for business purposes after- context of the Switzerland-Uzbekistan Bilateral Invest-
wards. It is the reason why some of the BITs exclude ment Treaty of 199345 (‘SUBIT’).
foreign owned assets for non-business use. Romak executed a series of GAFTA contracts for
The practice of conditioning coverage of an invest- the supply of grain with Uzkhleboproduct, Uzdon and
ment on its compliance with local laws is an attempt Odil. Another agreement – Protocol of Intention on
to achieve a very important public purpose – ensur- Mutual Cooperation, was concluded between Romak,
ing that foreign investors observe host states’ laws Uzdon and Uzkhleboproduct.
and regulations this requirement also corresponds to After its unsuccessful attempts to recover sums
due from Uzdon and Uzkhleboproduct, Romak initiat-
38 UNCTAD, ‘Scope and Definitions’, (2011), p. 28.
ed arbitration proceedings against Uzdon under the
39 Engela C Schlemmer, ‘Investment, Investor, Nationality,
Romak Supply Agreement, ultimately resulting in an
and Shareholders’, The Oxford Handbook of International
Investment Law, (Oxford University Press, 2008), p. 56.
40 Catherine Yannaca-Small, Lahra Liberti, ‘Definition
of Investor and Investment in International Investment 43 Jeswald W. Salacuse, The Law of Investment Treaties,
Agreements’, (OECD 2008), p. 41. (Oxford University Press, 2010), p.167.
41 Jeswald W. Salacuse, The Law of Investment Treaties, 44 ROMAK S.A. v Uzbekistan, PCA Case No: AA280,
(Oxford University Press, 2010), p. 167. Award, 26 November 2009.
42 UNCTAD, ‘International Investment Agreements: 45 Promotion and the Reciprocal Protection of Investments,
Flexibility for Development’, (2000), p. 75. signed on 16 April 1993.
9
““LLAAWW AANNDD WWOORRLLDD““
arbitral award in Romak’s favour.46 But fi nally, it was The profi ts were to fi nance further scientifi c cooper-
unable to enforce that award in several countries. ation as detailed in the parties’ Protocol of Intention.
Having seen its enforcement efforts thwarted and Moreover, Romak assumed considerable risk, as the
the amounts owed for the wheat supplied remaining investment climate in Uzbekistan was not favourable,
outstanding more than ten years after delivery, Romak and involved non-directly compensable knowledge
brought its claim against Uzbekistan under UNCI- transfers. Finally, the contracts did contribute to Uz-
TRAL, on the basis that it had violated its Swiss-Uz- bekistan’s development, as at the time, Uzbekistan
bekistan BIT (SUBIT) obligations. desperately needed a cereal supply and such was vital
In the present case, there are two legal issues, to the Uzbek population and economy. Romak con-
which are important. The First question to look at would tended that its GAFTA award does qualify as a SUBIT
be how to defi ne investment outside ICSID and under protected investment via Article 1(2)(e) SUBIT accord-
the Swiss – Uzbekistan BIT? Secondly, is the GAFTA ing to which ‘…other rights given by law, by contract
arbitration an investment under the SUBIT? In legal or by decision of the authority in accordance with the
terms, investment regimes need to defi ne their scope law’ are investments.
ratione materiae.47 Thus, the tribunal had to determine Tribunal began its analysis that it was to be guid-
whether the contracts or GAFTA award qualifi ed as a ed by the provisions of the Vienna Convention, and
protected investment under the SUBIT. particularly by articles 31 and 32,51 and discussed the
Uzbekistan objected to the jurisdiction of the Tri- defi nition of ‘investment’ by looking at the ‘ordinary
bunal on the basis that Claimant had no qualifying meaning’ of the term.
investment under the BIT. It argued that the activity Finally, the tribunal held that ‘the term ‘investment’
envisaged under the Supply Contract was the sale of under the BIT has an inherent meaning entailing a
goods, which was to take place entirely outside the contribution that extends over a certain period of time
territory of Uzbekistan.48 It also relied on a separate and that involves some risk.’ Accordingly, despite the
treaty between Switzerland and Uzbekistan entered broad defi nition of investment in the applicable BIT
into at the same time as the BIT on the sale of goods (‘every kind of assets and particularly...’), the tribunal
to demonstrate the contracting parties’ intention to found that the claimant did not own an investment
exclude such activity from the scope of the BIT.49 It within the meaning of Article 1 of the BIT as its rights
further argued that the GAFTA Award could not con- were embodied in and arose out of a sales contract.
stitute an investment under the BIT, as the underlying The tribunal, thus, dismissed the investor’s claims for
transaction itself was not an investment. Uzbekistan lack of jurisdiction. However, this approach is not yet
also relied on the „Salini test”,50 arguing that Romak's settled, and if a government wishes to make sure that
sale of goods exhibited no regularity of profi t, duration, a tribunal considers objective characteristics of an in-
or suffi cient risk and its impact on the economic devel- vestment, it is well advised to include them in the defi -
opment of Uzbekistan was negligible. nition.52
Romak argued that the defi nition of investment The approach of defi ning an ‘investment’ which
outside ICSID is not subject to the double test appli- is used in Romak v. Uzbekistan case is followed by
cable in ICSID arbitrations. Therefore, as the Parties different tribunals, such as for example Alps Finance
were in a UNCITRAL investment arbitration, it needed and Trade AG v. The Slovak Republic53 case. The
neither qualify Article 25 nor the Salini test, only SU- tribunal concluded that couldn’t be ignored the most
BIT ratione materiae requirements. Romak proposed well-known principle for exclusion one-off sale trans-
that even if the Salini test applied, its claim would fulfi l action might qualify as an investment, and the tribunal
the requirements. The contracts had duration of over 5 assumed that Alps Finance and Trade AG did not in-
months and could have been extended by agreement. vest in the Republic of Slovakia in the proper technical
meaning, which confi rms that it lacks jurisdiction over
46 ROMAK S.A. v Uzbekistan, PCA Case No: AA280,
the case.54
Award, 26 November 2009, para. 52.
47 Rudolf Dolzer and Christoph Schreuer, Principles of
International Investment Law (Oxford University Press, 51 Vienna Convention on the Law of Treaties, 22 May 1969,
2012), p. 60. Article 31: General rule of interpretation, Article 32:
48 ROMAK S.A. v Uzbekistan, PCA Case No: AA280, Supplementary means of interpretation.
Award, 26 November 2009, pp. 98-99. 52 UNCTAD, Scope and Definitions, (2011), p.42.
49 Ibid, para. 100. 53 Alps Finance and Trade AG v. The Slovak Republic,
50 Salini Construttori SpA and Italstrade SpA v Morocco, (UNCITRAL Arbitration Rules 1976), Award of 5 March
Decision on Jurisdiction, ICSID Case No ARB/00/4, 23 2011.
July 2001, (2003) 42 ILM 609, paras. 52-58. 54 Alps Finance and Trade AG v. The Slovak Republic,
10
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