UK: International Investment Arbitration Part 1

International Investment Arbitration

International investment takes place in the context of private contracts and an increasing proliferation of international investment agreements at bi-lateral, multi-lateral, sub-regional, regional and inter-regional levels.

International investment agreements include over 2,300 bi-lateral investment treaties (BIT’s), numerous preferential free trade and investment agreements as well as multi-lateral investment agreements. Some 73 BIT’s were concluded in 2004 alone, 10 of which were renegotiated treaties that superseded existing treaties. 12 of the 30 OECD countries are parties to some 670 BIT’s. The growth of international foreign investment has also seen a proliferation of stablisation agreements made between developing country governments and foreign private investors¹ many of which contain international investor-state dispute settlement provisions.

These investment agreements confirm the now-established international norm by which private investors are recognised as having standing under investment treaties to bring international arbitral proceedings against states.

It is increasingly common for bi-lateral Free Trade Agreements (FTA’s) to include investment protection provisions, as well as provisions on trade in goods and services, intellectual property rights and trade facilitation². FTA’s may overwrite or supersede the provisions of earlier BIT’s concluded between the same countries. The potential benefits of FTA’s are particularly attractive to capital-importing countries. For its part, the US has used its FTA’s to pursue a policy of "competitive liberalisation" to obtain commitments that exceed those contained in existing multilateral agreements, such as the WTO Trade-Related Investment Measures (TRIMS) agreement, or the General Agreement on Trade and Services (GATS) in the area of trade in services.

The cumulative number of treaty-based cases brought before the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) and other arbitration tribunals rose from 5 in 1994 to a total of 160 by November 2004 with over half (92) filed over the previous three years.³ Over 50 states were brought before an international tribunal, 31 of which were developing countries. Prior to 1997 there had been 23 ICSID arbitrations in the previous 14 years. Since 1997 there have been 65 concluded ICSID cases and there are currently 85 pending cases.⁴

Whilst the ICSID arbitration facility is the only facility to maintain a public registry of claims the actual number of investment claims is likely to be higher than the available figures indicate as a number of treaty-based claims are known to be proceeding outside ICSID. Many international investment agreements allow investors to choose between ICSID (including the ICSID Additional Facility) and ad hoc arbitration using, for example, UNCITRAL arbitration rules. Institutional arbitration rules have also been agreed for some of these disputes (including the arbitration rules of the ICC, LCIA, the Stockholm Chamber of Commerce and various regional arbitration centres, including Singapore and Cairo).

Investor-state arbitration proceedings concern foreign investments in both pre-establishment and post-establishment phases and involve all kinds and types of foreign investment, including privatisation contracts and state concessions. Industry sectors include oil and gas, mining, construction, water, telecoms, brewing, banking, hotel management, TV, waste management and textiles. The range of state measures complained of in these arbitrations include emergency laws put in place during financial crises; re-zoning of land; measures on hazardous waste facilities; rules for divestment of shareholdings in public enterprises to a foreign investor and media regulators. The investment claims have concerned issues of fair and equitable treatment, non-discrimination, expropriation, and regulatory measures "tantamount to expropriation".

Claims brought under multilateral investment treaties constitute a significant further development in the evolution of a global foreign investment dispute resolution system.

The North American Free Trade Agreement (NAFTA) between the US, Canada and Mexico allows the private investor to select arbitrators under the ICSID Convention (provided both are parties to the Convention); the Additional Facility Rules of ICSID (provided either but not both is a party to the Convention) or the UNCITRAL Rules.

NAFTA has given rise to numerous claims. It may be noted that true ICSID arbitration under the ICSID Rules is not available to NAFTA investors because neither Canada nor Mexico have ratified the Convention. Accordingly, review of or recourse against an award made pursuant to NAFTA will be left to the courts in the seat of the arbitration. Likewise, the scope and procedure of the review will be determined by the applicable international commercial arbitration legislation at the seat.

In Asia the 1987 ASEAN Agreement for the Promotion and Protection of Investments contemplates several methods of dispute resolution, including ICSID arbitration, for resolving disputes between member states and an investor from another member state. However, the disputing parties are required to agree on the particular system of arbitration, failing which the dispute is to be submitted to neutral ad hoc arbitration.

The 1994 Energy Charter Treaty (ECT) is a multilateral investment treaty intended to provide treaty protection to investors of the signatory states in respect of investments and activities in the energy sector. The ECT was signed in June 1995 between 49 countries (most OECD, CIS and East and Central European countries) and the European Community (but not the US and Canada) and became effective in 1998.⁵ The signatories also include Japan, Australia and Mongolia. Russia and Norway have not ratified the ECT but Article 45(1) provides for provisional application prior to ratification.

Under Article 26 of the ECT disputes that cannot be settled amicably can be submitted at the choice of the investor (only) to national courts or to arbitration under the treaty. The investor can choose arbitration under the Convention, the ICSID Additional Facility, UNCITRAL Arbitration Rules or the Stockholm Chamber of Commerce Rules in respect of alleged breaches of the obligations under Part III of the ECT (non-discriminatory treatment; the international minimum standard obligations of "fair and equitable" treatment and "most constant protection" (Article 10); compensation for losses and prompt, adequate and effective compensation in case of nationalisation (Article 12); undertakings in respect of expropriation (Article 13) and transfers of capital and payments (Article 14)).

The first award under the ECT was issued in December 2003 in a claim by a Swedish firm against the Republic of Latvia arising out of an electricity project.⁶ To date there have been relatively few cases under the ECT.⁷ However, the recent US$28.3 billion claim by Group Menatep in UNCITRAL arbitration proceedings commenced against the Russian Federation under the ECT in February 2005, alleging expropriation of the Group’s majority shareholding in Yukos, has been described as the largest known investment treaty claim to date.

Most signatories to the ECT have also become signatories to the European Convention of Human Rights (ECHR), adopted in 1950 and which came into force in 1953. Article 1 of the Additional Protocol provides protection to all persons (national and foreigners) from unreasonable and uncompensated interference with property. The ECHR has until now been mainly relevant for domestic investors and reflects a greater recognition of state prerogatives than is to be found under BIT protection regimes. Recourse to the European Court of Human Rights will in most circumstances be of limited practical assistance. The jurisdiction of the Court will only arise when local remedies have been exhausted. The Court’s ability to award compensation has to date also been of limited practical value, with very few exceptions.

The first bilateral investment treaty (BIT) was signed in 1959⁸. Early BIT’s contained reciprocal undertakings by which each state guaranteed a minimum standard of treatment to investors of the other signatory state. They did not confer rights on investors as against the host state. Private parties had no standing under international law. Since the 1960s the trend has been to allow foreign investors to bring actions directly against host states.

The 1965 Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (the "Convention") provided a framework within which foreign investors could refer a dispute with a state party directly to the International Centre for the Settlement of Investment Disputes (ICSID) provided consent was obtained in writing (Article 25.1). By virtue of the Convention international law could now be applied directly to the relationship between the investor and the host state. This system was initially restricted to cases in which the state of the investor and the state-party were both parties to the Convention.

In 1978 the ICSID Additional Facility was created which allows recourse to the main elements of the ICSID system even if only one party is a party to the Convention, provided both parties to the dispute had given their consent. The parties use ICSID Rules and supervisory personnel outside the Convention framework. As with awards obtained under UNCITRAL Rules the finality of such an award will be subject to any judicial review mechanism(s) in the place of arbitration.

The general trend in international arbitration is for tribunals to refuse to permit state entities to rely on restrictive provisions of their own law to challenge the validity of an arbitration agreement they have previously entered into, by the application of principles of good faith and estoppel.⁹ An arbitration agreement to which a state is a party is generally deemed to constitute a waiver of sovereign immunity because such an arbitration agreement (a specific forum selection agreement) would be in direct contradiction to an assertion of immunity.

Article 25.1 of the Convention provides that where both parties have consented to the jurisdiction of ICSID "no party may withdraw its consent unilaterally". Article 26 of the Convention provides, "Consent of the parties to arbitration under this Convention shall, unless otherwise stated, be deemed consent to such arbitration to the exclusion of any other remedy." Accordingly, if a court of a state party to the Convention were to issue an anti-suit injunction in respect of an ICSID arbitral proceeding the state would be in violation of its international legal obligations under the Convention and in violation of conventional international law. In customary international law it has long been accepted that a state that refuses an alien person or company access to its courts commits a denial of justice. That principle would equally apply to a state refusing access to the arbitral process it has agreed to. Such an action may also be considered a violation of international public policy¹⁰.

Consent to jurisdiction under the ICSID system was originally seen as deriving from the express agreement contained in the arbitration clauses of investment contracts. However, the basis of consent was significantly widened by provisions contained in inter-state BIT’s amounting to a standing offer by the host state to submit to ICSID jurisdiction. That offer is accepted when an investor from another signatory state issues a Request for ICSID arbitration. Such blanket consents became more commonly contained in BIT’s from the 1970s onwards. It has also been recognised that consent to ICSID arbitration may be given in a unilateral promise given by a state contained in its investment legislation¹¹.

Different investment treaties contain a variety of different dispute resolution mechanisms. Many BIT’s permit only the private investor to choose a method of dispute resolution provided in the treaty. The options are often the courts of the host state or international arbitration.

Some BIT’s bar access to international arbitration where the investor has already chosen a different resolution path e.g. by commencing proceedings in the host state courts. Such "fork-in-the-road" provisions may prevent an unsuspecting investor who has commenced proceedings from taking the international arbitration "fork" offered in the treaty as an alternative to the courts. Accordingly, the treaty should be carefully examined for the existence of such a provision before any court proceedings are commenced.

The BIT may frequently provide that the specified dispute resolution method can only be resorted to after a "cooling off" or conciliation period has elapsed. If the private investor selects arbitration the options are usually ICSID (including the ICSID Additional Facility where the state party to the investment treaty has not ratified the Convention) and the UNCITRAL Arbitration Rules. Some treaties also include ICC arbitration as a possible option and others allow the parties to agree on a type of arbitration not expressly specified in the treaty. The Energy Charter Treaty allows the private investor a wide choice of arbitral options including arbitration under the Rules of the Arbitration Institute of the Stockholm Chamber of Commerce.

Article 26 of the Convention provides that, unless otherwise stated, consent to arbitration under the Convention is deemed consent to such arbitration to the exclusion of any other remedy. This implies a waiver by the host state of the right to require the exhaustion of local remedies. However, Article 26 further provides that such a right to require the exhaustion of local remedies may be expressly reserved as a condition of the state’s consent and state parties to BIT’s have done so in several instances¹²

The autonomous character of ICSID arbitration is stated in Article 26 which provides that the consent of the parties to arbitration under the Convention shall, unless otherwise stated, be deemed consent to such arbitration to the exclusion of any other remedies. By submitting to ICSID arbitration the parties have agreed, and have the assurance, that the administration of the ICSID rules will be exempt from scrutiny or control of domestic courts in states that are parties to the Convention.

Article 54 of the Convention provides that each Contracting state shall recognise an award rendered pursuant to the Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court of that state.

The Convention creates a supranational system which excludes appeal and forecloses challenges to awards (for example, on traditional New York Convention grounds¹³). The Convention supplies the sole remedies available to a losing party; namely, as to the interpretation of the meaning or the scope of the award; revision of the award on the grounds of discovery of a previously unknown factor of decisive importance; and annulment of the award by an ad hoc Review Committee. Article 52 of the Convention provides for the grounds of annulment, which are that the tribunal was not properly constituted; the tribunal manifestly exceeded its powers; there was corruption on the part of a member of the tribunal; there has been a serious departure from a fundamental rule of procedure, or the award has failed to state the reasons on which it is based.

The ICSID Additional Facility does not provide a procedure for review or recourse against awards, which will be left to the courts in the place of arbitration. However, Article 1136 of NAFTA (Finality and Enforcement of an Award) provides that a disputing party may not seek enforcement of a final award under the ICSID Additional Facility or UNCITRAL Arbitration Rules until 3 months have elapsed from the date the award was rendered and no disputing party has commenced a proceeding to revise, set aside or annul the award, or a court has decided such an application and there is no further appeal.

In the case of non-Convention awards arising under investment treaties, both the investor and the state party will potentially have recourse against the award to courts of the place of arbitration, depending upon the applicable lex arbitri. In the recent English High Court decision in Republic of Equador v Occidental Exploration and Production Company¹⁴ Occidental had obtained an award against Equador in UNCITRAL arbitration proceedings seated in London under the US-Equador BIT. Equador sought to challenge the award under section 68 of the English Arbitration Act 1996. The court rejected the argument put forward by Occidental to the effect that the challenge was not justiciable by the English courts since it would require the court to adjudicate upon rights arising out of a treaty entered into by independent sovereign states on the plane of international law. The court held that it was entitled to consider the BIT to decide the scope of the arbitration agreement and whether the award was within its terms, so as to determine the right of challenge granted to the parties under English domestic law (under section 68 of the Arbitration Act 1996).

On 2 March 2006 the High Court dismissed an application by the Government of Ecuador challenge the award on the basis that the tribunal had wrongly interpreted an article in the US-Ecuador bilateral investment treaty addressing how the treaty applies to disputes related to "matters of taxation". Aikens, J. held that the tribunal was "correct in holding that it had jurisdiction" to examine claims of alleged breach of the US-Ecuador BIT's national treatment and fair and equitable treatment obligations. He held that there had been no breach of Section 67 of the Arbitration Act 1996, and Ecuador's challenge to the arbitral award failed on this basis.

BIT’s are international treaties between states providing legal rules to be applied to foreign investments. They are international law treaties but also become part of the contracting state’s national law upon ratification. BIT’s set out their own scope of application; define the protections to be granted to the investment and the investor and the consequences in case of breach of the treaty.

A BIT will normally provide for the resolution of disputes arising out of the investment between the two contracting states (state-to-state disputes) or between an investor from one contracting state and the host state (investor-state disputes). However, the contents of BIT’s and their wording varies, not only as between BIT’s but also between the various BIT’s concluded by a single state.

Arbitrators deciding state-investor disputes apply the provisions of a BIT to the facts, whilst having regard to the BIT’s dual legal character of national and international law; the general principles of private international law and, where appropriate, the national laws of the disputing parties.

In interpreting investment treaties in the context of state-investor disputes a subjective approach to interpretation will be of limited value as the individual investor has not negotiated the terms of the BIT. The common principles for the interpretation of public law treaties (including BIT’s) are set out in the Vienna Convention on the Law of Treaty, Article 31 of which provides for General Rules of Interpretation. Article 31(1) provides, "… [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."

A frequent objection to jurisdiction in state-investor arbitrations concerns the question of whether a claimant is an "investor" within the meaning of the BIT.

In the case of natural persons most BIT’s define an investor as a person who is a citizen of a party to the treaty. Determination of nationality will normally be determined by the party’s national laws. In cases of dual nationality the effective nationality prevails. In some BIT’s the definition of investor is broadened to include natural persons who are permanent residents.

In the case of "juridical persons" or "legal entities" (including a company) BIT’s commonly use different criteria to determine an "investor" under the treaty. Common law countries normally use the place of incorporation to determine nationality. Civil law countries tend to rely on the place of management or the seat consistent with Article 25.2(b) of the Convention.

Some BIT’s use control of the company by nationals of a state party as the sole criterion to determine its nationality. In other BIT’s this is used as a possible alternative to the seat or constitution criteria.

In Asia Corporation et al. v. Indonesia¹⁵ P T Amco, an Indonesian company controlled by an American entity, entered an agreement for investment that included an arbitration clause providing for ICSID Rules. That agreement was accepted by the Indonesian government. The ICSID tribunal found that the Indonesian government had thereby accepted that P T Amco should be treated as a national of another contracting state (the US) for the purposes of Article 25.2(b) of the Convention.

In Banro v. Congo¹⁶ Banro Resource Corporation was the Canadian parent company that signed a concession agreement with the Congolese state. The concession agreement contained an ICSID arbitration agreement. No BIT existed between Congo and Canada. Banro Resource Corporation subsequently transferred its rights under the concession agreement to Banro American Resource, a wholly-owned U.S. subsidiary. A BIT existed between Congo and the U.S. The tribunal found that Banro American could not avail itself of its Canadian parent’s consent to ICSID arbitration under the concession agreement, as Banro Resource did not have the requisite nationality at the time the concession agreement was entered into and therefore could not transfer any valid consent to Banro American.

Only investments falling within the scope of the particular BIT will form the basis of a claim in substance.

Most BIT’s provide their own definition of an investment that includes a broad general description which frequently refers to either "every kind of asset" or (in the case of U.S. BIT’s) to "every kind of investment". These general definitions are commonly illustrated by non-exhaustive lists of examples, including movable and immovable property; participation in companies¹⁷: money claims; rights to performance; intellectual and industrial property rights and concessions or similar rights.

Article 1139 of NAFTA contains a detailed definition of investment narrower than that found in typical BIT’s, excluding claims for money related to the sale of goods or services or short term credit in connection with a commercial transaction such as trade financing.

Indirect investments (e.g. the placement of funds in foreign markets) or the acquisition of existing investments by third parties give rise to further issues of interpretation.

In Fedax v. Venezuela¹⁸ promissory notes were endorsed from a Venezuelan company to Fedax N.V., a company based in the Netherlands. Venezuela refused payment of the notes. The tribunal considered that since loans qualify as an investment under ICSID jurisdiction and promissory notes are evidence of a loan they fell within the meaning of "every kind of asset" in the Netherlands-Venezuela BIT. The acquisition of promissory notes by the Dutch claimant therefore constituted a foreign investment.

In Mihaly v. Sri Lanka¹⁹ the ICSID tribunal held that expenses incurred in bidding for a public contract would not be protected as investments under the BIT (partly due to an express disclaimer made by the state when inviting bids in that case).

Treaty protection may be extended to indirect owners, including minority shareholders, through corporate vehicles of the requisite nationality.

In Gami Investments, Inc. v United Mexican States ²⁰ GAMI, a US company, brought an expropriation claim under NAFTA in its own right in respect of its 14.18% minority shareholding in GAM, Mexico’s fourth largest sugar producer.

In Waste Managemen v United Mexican States (Number 2) ²¹ Waste Management, Inc., a US company, pursued its claims for expropriation under Chapter 11 of NAFTA in its own right in respect of its indirect interest in Acavarde, a Mexican company which had entered into a concession agreement for waste disposal services with the municipal authorities in Acapulco. Acavarde was a wholly-owned subsidiary of a Cayman Islands company, Acavarde Holdings Ltd., which was in turn wholly-owned by Sun Investment Co., another Cayman Islands company. At the time the concession agreement was entered into Sun Investment Co. had been acquired by US Sanfill Inc., a US company owned and controlled by Waste Management, Inc., such that Acavarde could be described as a wholly-owned subsidiary of Waste Management, Inc. for the purpose of the claim under NAFTA. The tribunal held that the nationality of the investment (as opposed to that of the investor) was irrelevant in determining whether the investor has the nationality of a Party to NAFTA.

The rights to protection of investments under the BIT derive from international law principles. With a view to encouraging foreign investment BIT’s provide the investor with a variety of general protections. These standards generally entitle the investor to carry out its business free from unreasonable and discriminatory measures. Any violation of these rights (for example by expropriation, nationalisation or other forms of hindrance; deprivation of property; reduction of investor’s rights by regulatory measures by the host state) may constitute a breach of the BIT entitling the investor to claim damages.

Expropriation may include "de facto expropriation", "creeping expropriation" or "indirect expropriation" which describe actions equivalent to a formal deprivation of property rights, destroying the economic value of the investment e.g. if the state deprives the investor of its rights to use, let or sell its property by reason of a change of law.

In determining a claim for damages for breach of a BIT the tribunal will not normally have to judge whether the actions taken by the host state comply with the law of the host state, but must decide whether those actions are a breach of the treaty applying international law.

In Metalclad Corporation v. United Mexican States ²² under NAFTA Article 1110 (expropriation) the ICSID (AF) tribunal found that that expropriation included not only outright seizure but also covert or incidental interference with use of property which had the effect of depriving the owner, in whole or in significant part, of the use or economic benefit reasonably to be expected from the property, even if not necessarily to the obvious benefit of the host state. Such actions included permitting or tolerating the conduct of the municipality concerned, which the tribunal held amounted to an unfair and inequitable treatment that breached NAFTA Article 1105. Such actions also included participating or acquiescing in the denial to the investor of the right to operate, notwithstanding the fact that the project had been fully approved by the federal government.

Some BIT’s go further by providing for the continuing requirements of the investment. For example, facilitating the employment of personnel from the host state, or providing positive rights with regard to the investment including the right to transfer money or know-how and the right to transfer profits; access to raw materials, liquidation of the investment and the making of related laws.

BIT’s normally contain clauses according to which the host state provides for treatment of the investor and the investment that is "fair-equitable" and often also provides for "full protection". The assessment of what is fair and equitable is not to be determined by the host state in accordance with the standards used for its own nationals. Rather, this assessment has to be made in accordance with general principles of international law.

To provide an investor with "full protection and security" the host state is obliged to ensure that the agreed and approved security and protection of the foreign investor’s investment will not be withdrawn or devalued either by amendment of laws or by actions of its administrative bodies or agencies. It has also been held to have been breached where a state fails to maintain proper law and order.

BIT’s frequently provide for "most favoured nation" treatment, guaranteeing that foreign investors and investments are not to be treated less favourably than any other national investors or investments (including protections provided under BIT’s). Nearly all BIT’s list actions which will not be deemed to be a treatment less favourable²³.

Principles of international law will apply to the issue of compensation for expropriation and the question of whether expropriation is in the public interest. Expropriation clauses in BIT’s generally do not prohibit states from exercising expropriations or nationalisations. Rather, they aim to protect investors from unlawful expropriation, in particular prohibiting any expropriation without full, prompt and effective compensation.

BIT’s frequently contain provisions setting out the conditions under which expropriation is permitted against payment of compensation, referring in particular to the public purpose or interest served by the expropriation. In accordance with general principles of international law BIT’s frequently state that expropriations must be non-discriminatory with regard to the nationality of the investor, the procedure and the compensation granted.

BIT’s frequently require "adequate, full and prompt" compensation to the expropriated investor. The UN has passed several resolutions addressing expropriation, including the United Nations Resolution on Permanent Sovereignty on National Resources (Resolution 1803) which provides that, in compliance with generally acknowledged principles of international law, nationalisation and expropriation shall only be based on public utility and national interests, and the investor shall be paid appropriate compensation in accordance with the rules in force in the state taking such measures in the exercise of its sovereignty, and in accordance with international law.

Some BIT’s provide a basis for calculation for compensation. U.S. BIT’s frequently determine that compensation shall be:

"… equivalent to the fair market value of the expropriated investment before the expropriatory action was taken or became known, whichever is earlier; to be paid without delay; include interest at a commercial rate from the date of expropriation; be fully realizable; and be freely transferable at the prevailing market rate of exchange at the date of expropriation."

The World Bank "Guidelines on the Treatment of Foreign Direct Investment"²⁴ provide:

As a pre-condition to formal arbitration most BIT’s require that an attempt is made at amicable settlement or "consultations for the purpose of finding a solution in a spirit of friendship." The time period for such consultations varies between three, six and twelve months, while in some cases no time limit is fixed. These requirements are frequently not strictly enforced by ICSID tribunals, and may in some cases be treated as procedural rather than substantive requirements.

The arbitral tribunal must decide the investment dispute according to the law applicable to the dispute. Investments under BIT’s are ruled by the general principal of the parties’ contractual freedom to determine the applicable law. The investment contract and/or the BIT may contain an express choice-of-law clause.

Relatively few BIT’s contain explicit rules with regard to the law applicable to the merits of the dispute under the BIT. If the BIT refers to the applicable law, reference is frequently made to ".. the provisions of this Agreement, the international agreements both contracting Parties have concluded and the generally recognised principles of international law." It is generally accepted that the law applicable to the merits of a BIT dispute are principles of public international law, although some commentators have argued for the application of lex mercatoria or even equity provisions.

Article 42.1 of the Convention provides that, in the absence of agreement, the tribunal shall apply the law of the contracting state party to the dispute (including its rules of conflict of laws) and such rules of international law as may be applicable or, upon the parties’ specific agreement, even on the basis of ex aquae et bono. The usual approach is that the wording of the treaty, as lex specialis, is decisive in the interpretation of the parties’ rights and duties under the treaty. Only after it has been applied should the contracting party’s national law be considered. A basic principle of international treaty interpretation is that international law, including the wording of the treaty itself, overrules national law in case of conflict.

A concern arises as to whether protections intended to be given to an "investor" of a signatory state under a bilateral investment treaty may be inadvertently extended where the tribunal adopts an overly strict rather than purposive approach to the nationality requirement.

This issue highlights the potential for "treaty shopping" i.e. structuring investments through corporate vehicles located in jurisdictions which have investment treaties with the country in which the investment is to be made.

It may be noted that some of the above definitions of "investor" and "investment" allow the possibility of structuring investments through a chain of two or more holding companies, each of which may be located in different jurisdictions having investment treaties with the country in which the investment is made, allowing the possibility of multiple claims under the respective treaties in respect of the relevant investment interest. Many BIT’s contain "denial of benefits" provisions whereby the Contracting Parties reserve the right to deny the benefit of the treaty to any company controlled by nationals of a third party state.

The situation may also arise in which nationals of a signatory state to a BIT use a vehicle in the other signatory state to seek treaty protection in respect of their indirect investments in their own country.

In Tokios Tokeles v. Ukraine²⁵ Tokios Tokeles was a business enterprise established under the laws of Lithuania but 99% owned by Ukrainian nationals. Tokios Tokeles established a wholly-owned subsidiary in the Ukraine to carry on the business of advertising, publishing and printing in the Ukraine and elsewhere. They alleged that the Ukraine had engaged in actions affecting the Ukrainian subsidiary in breach of the Lithuania-Ukraine BIT, Article 1(2)(b) of which defined "investor" as "any entity established in the territory of Lithuania in conformity with its law and regulations". The BIT contained no "denial of benefits" provision.

The Respondent asserted that the Tokios Tokeles was merely a nominal Lithuanian legal entity controlled by Ukrainian nationals and that the capital used was of Ukrainian origin, such that:

"..to find jurisdiction in this case would be tantamount to allowing Ukrainian nationals to pursue international arbitration against their own government, which … would be inconsistent with the object and purpose of the ICSID Convention"

By a majority decision the ICSID tribunal nevertheless held that Tokios Tokeles was an investor within the meaning of the BIT noting that:

In a strong Dissenting Opinion the President of the tribunal ²⁶expressed the contrary view that this approach was:

"..at odds with the object and purpose of the ICSID Convention and might jeopardize the future of the institution… [T]he ICSID arbitration mechanism is meant for international investment disputes, that is to say, for disputes between States and foreign investors… The ICSID mechanism is not meant for investment disputes between States and their own nationals…[T]he [majority] Decision rests on the assumption that the origin of the capital is not relevant and even less decisive. This assumption is flying in the face of the object and purpose of the ICSID Convention and system as explicitly defined in the Preamble of the Convention..[which refers to "international investment"]…The ICSID mechanism and remedy are not meant for, and are not to be construed as, allowing — and even less encouraging — nationals of a State party to the ICSID Convention to use a foreign corporation, whether preexistent or created for that purpose, as a means of evading the jurisdiction of their domestic courts and the application of their national law. It is meant to protect— and thus encourage — international investment. It is regrettable, so it seems to me, to put the extraordinary success met by ICSID at risk by extending its scope and application beyond the limits so carefully assigned to it by the Convention.  This might dissuade Governments either from adhering to the Convention or, if they have already adhered, from providing for ICSID arbitration in their future BIT’s or investment contracts".

In a recent decision by an ICSID tribunal in Aguas del Tunori v Bolivia²⁷ in November 2005 a majority of the tribunal dismissed Bolivia’s objections to jurisdiction made on the basis that the claimant was "controlled" by the US-based Bechtel Corporation, and the Netherlands shareholders, by virtue of which Bechtel claimed the benefit of the Netherlands-Bolivia BIT, were merely "shell" companies which did not exert any real "control", and that the companies were set-up by Bechtel in 1999 in a post facto attempt to claim the benefit of the treaty.

The majority of the tribunal held that

The dissenting arbitrator opined that Bolivia could not have consented to face arbitration from an unlimited "universe of beneficiaries" and that the tribunal should have undertaken further inquiry as to the "motivations and the timing" of Bechtel’s decision to restructure the corporate ownership of the claimant company.

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