The Concept of Investment under the ICSID Convention
The International Centre for Settlement of Investment Disputes (ICSID), an agency of the Washington-based World Bank, and the "Washington Convention on Investment Disputes Between States and Investors of Other States," also known as the ICSID Convention, which is the center for conflict resolution, plays a key role in resolving investment disputes. Thus, the first condition sought for the states calling for investment is that: the host state which is the state accepting the investment should be a member of the ICSID. Because ICSID is an unbiased and reliable institution that applies mediation and arbitration resolution methods directly in disputes between governments and foreign direct investors (private law persons) in order to ensure international investment flow.
The most important concept in the implementation of the ICSID Convention is the concept of investment. Because one of the conditions that determine the jurisdiction of the Center in Article 25 of the Convention is that the dispute should be considered as an "investment dispute". Accordingly, “the jurisdiction of the Centre covers legal disputes arising from investments between the contracting states and the citizens of other contracting states who have submitted their written consent to the settlement of the dispute with the Centre." Therefore the conditions for applying to ICSID are as follows: 1. The host state and the state to which the investor belongs must be parties to the ICSID. 2. The parties must have consented to the resolution of the dispute by arbitration within the scope of ICSID. 3. The dispute must arise from an investment.
However, ICSID Convention hasn't clearly stated the definition of investment. This Convention, which has been signed by more than 160 countries as of today, aims to provide a balance of interest between the host states and the states to which the investor belongs in defining the concept of investment and thus determining the authority of the Center in resolving investment disputes. In this context, economically developed countries that export foreign investors and developing economies that accept these investors have approached the definition of investment concept from different perspectives. While economically developed states have tried to keep ICSID's jurisdiction broad in order to protect their investors, economically developing states have tried to restrict ICSID's jurisdiction and they also aimed to attract foreign investors by being a party to ICSID.
For all these reasons, the concept of investment is not defined in the ICSID Convention, and the definition of investment is left to the parties and judicial decisions. In this sense, international law, jurisprudence, and doctrine are important sources of reference in the definition of investment within the scope of the ICSID Convention.
In the context of international law, in accordance with Article 31 of the Vienna Convention on the Law of Treaties of 1969, when interpreting the provisions of an interstate agreement, the ordinary meaning of the expression must be considered. In this respect, it is essential that the content, subject, and purpose of the agreement are interpreted in good faith. In the law of states, all bodies and persons related to an agreement are considered to have authority in the interpretation of an agreement. Therefore, the authority that will interpret the concept of investment will be the arbitral tribunal. However, it should be noted that there is no authorized body or board affiliated with the Center in the binding interpretation of the ICSID Convention. For this reason, ad hoc arbitral tribunals which are established in disputes falling under the jurisdiction of the Centre, interpret the concept of investment in the particular dispute that comes before them and decides whether they are competent to resolve the relevant dispute.
In the ICSID arbitral awards, in some disputes, the concept of investment is interpreted in a purposeful way, and in this respect, the Preamble section of the Convention is taken into consideration. The Preamble includes "the need for international cooperation for economic development ..." emphasizing the economic nature of the investment. In some decisions, the arbitral tribunal did not take the Preamble of the Convention into consideration and proceeded to the 25th article of the Amendment.
For example, the right to apply to arbitration, which is one of the rights included in contracts that the investment side outweighs the commercial purpose such as construction, service, manufacturing, and technology transfer contracts, is considered an investment element (Ata v. Jordan, ICSID Case No. ARB/08/2, 18.05.2010). In the case of portfolio investments in which the investor is a shareholder in a company in the host state via a stock exchange market but does not have the purpose of participating in the management of the company, it is also accepted as an investment, especially if it is considered as an investment within the scope of the BIT between the state to which the investor belongs and the host state.
One of the most important decisions in which the concept of investment is objectively defined is the Salini decision (Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco, ICSID Case No. ARB/00/4). In this decision, the four basic elements of investment were listed as follows:
- Monetary participation: It refers to the fact that the investor brings a certain amount of capital to the host state. The type of capital can vary; in addition to cash capital or capital other than cash, intellectual products are also accepted as capital elements. However, regardless of the type, the capital required for the fulfillment of the investment must exceed the amount of capital required under any commercial contract.
- Duration: It means that the investment has been made in the host state for a certain period of time, and a minimum period of time has passed in this sense. The contract date is taken as the beginning of the period. However, it is also possible to consider the pre-evaluation phase of the project in this period. The doctrine states that if the contractual relationship lasts an average of 2 to 5 years, this element shall be fulfilled.
- Risk: It refers to the economic, commercial, and political risks that the investor carries with the host state and are directly related to the investment project. In this sense, the risk of the host state acting contrary to its obligations, especially within the scope of the investment project, is not considered. Because risk exists in every contractual relationship.
- Contribution to the economic development of the host state: In the performance of a contract, for example, the know-how brought by the foreign investor in the execution of an infrastructure project, supplying of the necessary tools and equipment for construction and the employment of qualified personnel, taking into account all aspects such as the economic value of the project and the amount of credit used for its execution, taking into account all issues such as the contractual relationship (investment), the monetary, in-kind and industrial contribution it brings to the host state, are taken into consideration. In this sense, it is especially important that the construction of the infrastructure or superstructure, the property of which will remain to the state, will serve the public benefit.
However, there are also decisions stating that the first three conditions automatically fulfill the last condition (Bayındır v. Pakistan, ICSID Case No. ARB/03/29). Another condition that is sought is: that the investment must be made in good faith and comply with the laws of the host state (Phoenix Action Ltd. v. Czech Republic, ICSID Case No. ARB/06/5).
It should be noted at once that the 4 criteria required in the Salini test need to be examined independently in determining whether a dispute arises from an investment or not, but the result must be considered as a whole. For example, the fulfillment of the risk element may vary depending on the duration of the investment and its contribution to the economic development of the host state. However, when deciding whether the economic contribution in the case poses a risk to the investor, each criterion must be considered on its own.
However, in certain ICSID decisions, the arbitrators held the view that the method called Salini Test, which seeks the existence of the 4 elements determined in the Salini decision in whether the subject of the dispute is considered an investment, may not always give accurate results, that there is no legal basis for the strict application of the 4 criteria determined in the Salini decision in every dispute, in other words, that these criteria are not mandatory. Since the Convention deliberately did not define the term investment, "no determination should made being bound to an investment definition" (Biwater v. Tanzania, ICSID Case No. ARB/05/22; Toto v. Lebanon, ICSID Case No. ARB/07/12).
Therefore, when we review the ICSID arbitral awards, it would not be wrong to say that the "Salini Test" was applied in general, but this application was flexible and adjusted to the purpose of the case and that more subjective methods were adopted in the interpretation of the investment concept. In this context, in terms of defining a dispute as an investment dispute, an application practice has been developed which the four criteria in the Salini decision are used in a non-restrictive manner but in an attributional manner, which gives more accurate results.
It should also be noted that apart from the criteria mentioned above, the will of the parties is also important in determining whether a dispute arises from an investment or not. The content of the parties' consent to apply to ICSID and their acceptance of the investment-based contractual relationship between them have a strong effect in terms of showing that the dispute is an investment dispute. The fact that the parties have determined the dispute between them as an investment dispute and granted jurisdiction to ICSID plays a role in the evaluation of whether the dispute is an investment dispute. This evaluation is called the "double keyhole" approach.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
