There are many reasons underlying the increasing attractiveness of investment arbitration which protects foreign investors and their investments by investment treaties. This increasing attractiveness also makes an observable appearance in the globalized banking and financial sector.
Since investment arbitration is perceived by investors as a direct, impartial remedy against any unfair behavior or attribution of the state and typically allows investors to apply a state's international liability for violating its international obligations stipulated in the Investment Treaties, banks and financial institutions can demonstrate that the behavior of these authorities should be attributed to the state in accordance with the International Arbitration.
However, an investor and an investment must comply with the definitions set out in an investment treaty to be protected by the investment treaty. At this point, the question arises; whether the financing instruments are within the scope of the investment concept protected in bilateral investment treaties or not?
The term “Investment” refers generally under the Bilateral Investment Treaties to share certificates; bills; investment incomes; monetary receivables; any other financial rights which might be yielded from investment; movable and immovable properties; real rights such as mortgage, attachment, and pledge; industrial and intellectual property rights such as copyright, patent, license, industrial designs, technical processes; monetary receivables, and similar kinds of other monetary rights including but not limited to trademarks and know-how.
The term “Investment” is also generally interpreted in a quite broad extent to cover “any and all kinds of properties”.
Due to such principle of broad interpretation; the said definition might be narrowed and/or excluded from some certain activities under some BITs (e.g.: Portfolio investments have been excluded from the scope of investment under the Denmark-Poland Agreement).
On the other hand; the term “Investment” is set out in a quite broad extent to cover the loans extended to initiatives under some agreements. It should also be underlined here that the term “Investment”” is interpreted in a quite broad extent in cases where it is not limited under the respective agreement.
Some BITs expressly acknowledge bank deposits as investments. On the other hand, there are other more restrictive BITs which expressly exclude them. Therefore, we can say that the scope of the investment concept will be determined within the framework of the bilateral investment treaties.
For example, it is stated in the Uruguay – United States BIT that ‘Some forms of debt, such as bonds, debentures, and long-term notes, are more likely to have the characteristics of an investment, while other forms of debt, such as a bank account that does not have a commercial purpose and is related neither to an investment in the territory in which the bank account is located nor to an attempt to make such an investment, are less likely to have such characteristics.’
Another example to the treaties which that interprets investment broadly is the Energy Charter Treaty, which set outs that Article 1; “Investment” refers to any investment associated with an Economic Activity in the Energy Sector and to investments or classes of investments designated by a Contracting Party in its Area as “Charter efficiency projects”.
In terms of situated practice in international arbitration cases, we see that the assessment of the “investment” is based on some basic standards.
The ICSID tribunals generally apply the Salini test to determine whether an alleged investment constitutes an “investment” under Article 25(1) of the ICSID Convention or not. In a remarkable amount of case, non-ICSID tribunals also prefer to apply the Salini test, or a modified version in order to determine whether an investment constitutes an “investment” under the investment treaty in question.
The definition most
frequently referred to relies on what has come to be known as the “Salini
test”, according to which the notion of investment implies the presence of the
following elements:
(i)
a contribution of money or other assets of economic value,
(ii)
a certain duration,
(iii)
an element of risk, and
(iv) a contribution to the host State’s development.
“The Tribunal concurs with ICSID precedents which, subject to minor variations, have relied on the so-called “Salini test”. Such test identifies the following elements as indicative of an "investment" for purposes of the ICSID Convention: (i) a contribution, (ii) a certain duration over which the project is implemented, (iii) a sharing of operational risks, and (iv) a contribution to the host State’s development, being understood that these elements may be closely interrelated, should be examined in their totality and will normally depend on the circumstances of each case.” [1]
Such approach has been used for example in the recent Decision on Jurisdiction in the Jan de Nul case, where the tribunal stated;
The Tribunal concurs with ICSID precedents which, subject to minor
variations, have relied on the so-called “Salini test”. Such test identifies
the following elements as indicative of an "investment" for purposes
of the ICSID Convention: (i) a contribution, (ii) a certain duration over which
the project is implemented, (iii) a sharing of operational risks, and (iv) a
contribution to the host State’s development, being understood that these
elements may be closely interrelated, should be examined in their totality and
will normally depend on the circumstances of each case. [2]
The Tribunal, in Fedax case, applied the same elements to the case where the company Fedax applied with the ICSID arbitration, claiming that the bills assigned by way of endorsement were not paid by Venezuela, as can be seen under the Fedax v. Venezuela award.
The tribunal, in Fedax v Venezuela [3] expressed the view that
‘Loans qualify as an investment
within ICSID’s jurisdiction […] Since promissory notes are evidence of a loan
and a rather typical financial and credit instrument there is nothing to
prevent their purchase from qualifying as an investment under the Convention in
the circumstances of a particular case such as this.’ In the same line, the
loan in question in the CSOB v Slovakia was held to involve ‘a significant
contribution by CSOB to the economic development of the Slovak Republic […]
this is evident from the fact that CSOB’s undertakings include the spending or outlays
of resources in the Slovak Republic in response to the need for the development
of the Republic’s banking infrastructure.’
Although it was claimed by Venezuela that the bills did not constitute an investment, the arbitral tribunal ordered that the bills are also a means of borrowing, and therefore, an investment, judging from the expressions of “any and all kinds of titles to money”, as set out under the Bilateral Agreement on Investments between the Kingdom of the Netherlands and the Republic of Venezuela
It is also argued and ordered under the said award that the funds, not physically transferred to the territory of the beneficiary but put at its disposal elsewhere, shall also qualify as the investment, beyond direct investments.
(…) 41. Like a number of other bilateral investment treaties and
multilateral arrangements,57 the Agreement contains several references to
investments made "in the territory" of the Contracting Parties.58 In
this context, the Republic of Venezuela has argued that Fedax N.V. does not
qualify as an investor because it has not made any investment "in the
territory" of Venezuela. While it is true that in some kinds of
investments listed under Article l(a) of the Agreement, such as the acquisition
of interests in immovable property, companies and the like, a transfer of funds
or value will be made into the territory of the host country, this does not
necessarily happen in a number of other types of investments, particularly
those of a financial nature. 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 same is true of many
important offshore financial operations relating to exports and other kinds of
business. And of course, promissory notes are frequently employed in such
arrangements. The important question is whether the funds made available are
utilized by the beneficiary of the credit, as in the case of the Republic of
Venezuela, so as to finance its various governmental needs. It is not disputed
in this case that the Republic of Venezuela, by means of the promissory notes,
received an amount of credit that was put to work during a period of time for
its financial needs. (ICSID: FEDAX N.V. V. VENEZUELA (JURISDICTION) (…)
“Lending” is also addressed and considered under the scope of investment in several awards. Another example, where the elements of the “investment” were evaluated under the light of the investment agreement was the case between CSOB v. Slovakia, where the arbitral tribunal deems the loan as an investment.
The said dispute arose between CSOB Bank, established as per the Czech Law, and the Republic of Slovakia from the alleged breach of the “Financial Consolidation Agreement of CSOB Bank” executed by and between the Ministry of Economy of the Czech Republic, the Ministry of Economy of the Republic of Slovakia, and CSOB Bank.
As per the said Agreement; the Czech Republic shall grant a nonperforming loan to the Slovakian Collection Company to be incorporated in the Republic of Slovakia upon separation of the Czech Republic and the Republic of Slovakia. CSOD subsequently applied with the ICSID against the Republic of Slovakia for compensation, claiming that it sustained some damages due to breach of the Agreement during the process of repayment of such loans.
Under the said case; the Arbitrators ordered that limiting interpretations should not be performed as a rule while interpreting the definition of the term “Investment”, and that the term “Investment” should be interpreted in a broad extent.
It has also been stated under the CSOB award that the criteria, as stipulated to be adopted while considering the debt instruments under the scope of investment, do not have a mandatory or imperative nature, and that although all of such criteria have not realized in a concrete dispute, the investment might be at issue, and also that each of the criteria used to define the term “Investment” is a “feature”, like the Fedax award.
Under the said award, the transactions, which constitute an important part of the investment, have also been considered under the scope of investment as they are deemed as investment along with the other parts.
The arbitral tribunal held under the case between CSOB v. Slovakia that investment is a complex operation with a whole of interrelated transactions. Therefore; while the transaction, as escalated to the tribunal, may not be deemed as an investment when considered alone, it has been deemed as an investment considering that it is an important part of an investment as a whole.
…“72 The Tribunal agrees with the interpretation adopted in the Fedax
case. An investment is frequently a rather complex operation, composed of
various interrelated transactions, each element of which, standing alone, might
not in all cases qualify as an investment. Hence, a dispute that is brought
before the Centre must be deemed to arise directly out of an investment even
when it is based on a transaction which, standing alone, would not qualify as
an investment under the Convention, provided that the particular transaction
forms an integral part of an overall operation that qualifies as an
investment.”
“89. The Tribunal concludes, moreover, that the requirements spelled out
in Article 1(1) of the BIT for a qualifying investment are also met in the
instant case. This must have been the view of the parties when they accepted a
reference to the BIT in Article 7 of the Consolidation Agreement. The contrary
conclusion would deprive this reference to the BIT of any meaning (cf. para.
67). Furthermore, CSOB’s activity in the Slovak Republic and its undertaking to
ensure a sound banking infrastructure in that country compel the conclusion
that CSOB qualifies as the holder of an “asset invested or obtained” in the
territory of the Slovak Republic within the meaning of Article 1(1) of the BIT,
including “movable and immovable property and any other encumbrances, including
any mortgages, liens, guarantees, and similar rights” (Art. 1(1)(a)) and
“monetary receivables or claims to any performance related to an investment”
(Art. 1(1)(c)).”
Finally, applying the definition of an investment proffered by the
Slovak Republic (para. 78, supra), it would seem that the resources provided
through CSOB’s banking activities in the Slovak Republic were designed to
produce a benefit and to offer CSOB a return in the future, subject to an
element of risk that is implicit in most economic activities. The Tribunal
notes, however, t8hat these elements of the suggested definition, while they
tend as a rule to be present in most investments, are not a CASES 283 formal
prerequisite for the finding that a transaction constitutes an investment as
that concept is understood under the Convention.
91. The Tribunal concludes, accordingly, that
CSOB’s claim and the related loan facility made available to the Slovak
Collection Company are closely connected to the development of CSOB’s banking
activity in the Slovak Republic and that they qualify as investments within the
meaning of the Convention and the BIT. (…)” (Decision on Jurisdiction, 24 May
1999, parag.89. [4]
Accordingly; considering that it is generally not stuck to the pre-contemplated definitions while considering the term “Investment” under the investment treaties, it should be underlined here that the recently-ordered awards take the “matter of being a part of an investment” into account.
In Deutsche Bank v. Sri Lanka, the tribunal found that a hedging agreement (under which the Sri Lankan national petroleum corporation contractually failed to make a required payment to the claimant) fell within the investment definition in the Germany–Sri Lanka BIT, which covered ‘claims to money which have been used to create an economic value or claims to any performance having an economic value and associated with an investment’.
The Tribunal limited its analysis to only three elements contribution; risk; and duration and found that each of these elements had been satisfied. Tribunal also reached that Deutsche Bank made a substantial contribution in connection with the Hedging Agreement invested Money and substantial resources. [5]
On the other hand; in another case, Joy Mining v Egypt, the Tribunal concluded that a bank guarantee relating to a supply contract concluded between the investor and an Egyptian State enterprise could not be considered as an investment under Article 25(1) of the ICSID Convention because the overall analysis of the operation revealed that the terms thereof were entirely normal commercial terms, including those governing the bank guarantees. [6]
The arbitral tribunal decided that the relevant guarantee is simply a contingent liability and cannot be regarded as an “investment” to be protected under the BIT. Furthermore, the tribunal pointed out that even if the counter performance and the return of the letters of guarantee hold a financial value, a dispute on a bank guarantee in essence will never develop into an investment dispute. [7]
However, the application and interpretation of the term of the “investment” in international arbitration also changes and develops from day today.
A recent
decision of the tribunal in Portigon AG v. Kingdom of Spain (ICSID
Case No. ARB/17/15) has started a new chapter for direct claims by project
finance lenders against states where the projects they finance are adversely
affected.
The
decision was rendered on August 20, 2020, and the tribunal held that project
finance provided by Portigon, a German financial services company, qualified as
an investment protected under the Energy Charter Treaty (ECT) and the ICSID
Convention.
It appears that the tribunal, by majority, found that no distinction had
to be drawn between equity and debt, and that both fulfil the requirements for
an investment under the Energy Charter Treaty (ECT) and Article 25 of the ICSID
Convention. The ECT explicitly includes "bonds and other debt of a company
or business enterprise" and "claims to money and claims to
performance pursuant to contract having an economic value and associated with
an Investment" in its definition of "investment" (Article 1(6)).
[8]
This award points out that although it is not a direct and physical investment provided by the bank, the finance as provided is deemed as a foreign investment where the finance has been provided to the investor.
Besides, the decision is important because of the interpretation of the Energy Charter Treaty Clause. For example, in EDF v. Argentina case, the ICSID tribunal allowed an investor to incorporate an umbrella clause into the applicable investment treaty via the most-favored-nation (MFN) clause in the treaty. Therefore, it is possible to say that the parties of the investment treaties including the MFN clause, may also request the Energy Charter Treaty (ECT) to be applied to the case in the light of the award given in Portigon AG v. Kingdom of Spain (ICSID Case No. ARB/17/15)
Moreover; it is quite commonly-observed under the decisions ordered recently that the Portfolio investments, meaning that investors invest in share certificates, bills and any other securities to yield capital gain, interest and dividend incomes by assuming various risks such as politic risks, currency risks and information risks, etc. and/or financing and project sponsorships, provided to launch and develop a certain project, are considered under the scope of investment.
In conclusion, since investment arbitration provides a
direct an impartial remedy against any unfair behavior or attribution of the
state and typically allows investors to apply a state's international liability
for violating its international obligations stipulated in the Investment Treaties,
banks and financial institutions can demonstrate that the behavior of these
authorities should be attributed to the state in accordance with the
International Arbitration.
A protected
investment could provide confidence to the actors of the financial sector in international
area to invest foreign investments and investment treaties provide crucial substantive protections for banks and
financial institutions on several counts.
While considering the term “Investment” under the investment treaties, it should be underlined here that the recently-ordered awards take the “matter of being a part of an investment” into account. This provides the banks and financial institutions with a potential direct way to apply the liability of the host states when they fail to protect the foreign investments in accordance with their treaty obligations.
Att. Semra Gurcal
References:
1. Phoenix Acion, Ltd. V. The Czech Republic (ICSID Case
No. ARB/06/5) AWARD 83
2. Salini Costruttori S.P.A.
and İtalstrade S.P.A. v. Kingdom of Morocco Respondent ICSID Case No. ARB/00/4
3. Fedax N.V. v. The Republic
of Venezuela, ICSID Case No. ARB/96/3
4. Ceskoslovenska Obchodni
Banka, A.S. v. The Slovak Republic, ICSID Case No. ARB/97/4
5. Deutsche Bank AG v.
Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/09/02, Award, 31
October 2012, paras. 284–286.
6. Can Yeginsu and Ceyda Knoebel, Covered
Investment, Investment Treaty Arbitration Review Third Edition, page 4
available at https://www.4newsquare.com/wp-content/uploads/2018/10/Covered-Investment.pdf
7. Jan de Nul N.V. v. Arab Republic of Egypt,
ICSID Case No. ARB/04/13, Decision on Jurisdiction, June 16, 2006, § 91.
8. Major Cases Involving
Investment Treaty Arbitration, Available at https://www.meti.go.jp/english/report/downloadfiles/2013WTO/03_05_reference_1.pdf
9. Holland & Knight Alert Alejandro Landa Thierry | Carlos Vejar | Laura Yvonne Zielinski available at https://www.hklaw.com/es/insights/publications/2020/09/project-finance-protected-as-foreign-investment-in-investor-state
