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Defining the Term “Investment” in the Realm of International Investment Law

Paper Details 

Paper Code: RP06V12023

Category: Research Papers

Date of Publication: December 06, 2023

Citation: Ms. Somdatta Ghosh, Student, “Defining the Term “Investment” in the Realm of International Investment Law”, 1, AIJIPCA, (2023).

Author Details: Ms. Somdatta Ghosh, Student, St. Xavier’s University, Kolkata





ABSTRACT

Even in contemporary times, a lot of international investment disputes have the primary question at issue of whether the transaction is an investment or not. Although most tribunals opine do not have a fixed definition for investment, the objective definition of investment has also been considered in various instances. In this article, we will explore both the subjective and objective definitions of investment as well as analyze the merits and demerits of the approaches by looking into various decisions that have been arrived at by various International Arbitration Tribunals.

KEYWORDS

Definition; Bilateral Investment Treaties; International Investments; International Law


Introduction

Over the years, the parties entering into several Bilateral Investment Treaties (Hereinafter referred to as “BIT”) have defined the term investment as per their own prudence. There is no single arbitral tribunal that has defined the term ‘investment’ so that the parties have the flexibility and autonomy to determine what they consider as investment and act accordingly. In a large number of investment disputes, the major issue revolves around whether a transaction can be considered an investment or not. In this article, the scholar will be exploring what the stance of the arbitral tribunals has been throughout the years when it had to state whether a transaction constituted an investment or not.


An Objective Definition of Investment

Article 25 of the ICSID (“International Centre for Settlement for Investment Disputes”) convention clearly states that for a dispute to come under the ICSID jurisdiction the dispute shall directly arise out of an investment and the parties have to be signatories to ICSID.

The ICSID is an arbitration center that aims to facilitate international investment by resolving investment disputes between states and investors[1]. Throughout, scholars have seen that the drafters of various arbitration tribunals have refrained from defining the term investment primarily so that the parties have the flexibility and autonomy to define investment as per their own needs and requirements in the bilateral investment treaties they enter into. However, with time, the arbitrators realized that the lack of an objective definition was the need of the hour, without which, the parties can submit any dispute to the ICSID through their BITs irrespective of the subject matter.[2]

The exploration of the objective definition of “investment” was first done in Fedax v. Republic of Venezuela,[3] In this case, the respondent stated Venezuela had refused to honour the promissory notes to the investor Fedax, claiming that there was no long-term flow of financial resources but the tribunal rejected that contention saying that the investment made by Fedax had the basic characteristics of an investment. Later, in the case of Salini v. Morocco[4], the clear-cut test was laid down which mentioned that an investment has to meet the four criteria namely 1) Duration 2) Element of Risk 3) Contribution of money or assets 4) Contribution to the economic development of the host state. If we observe the cases that ICSID has taken up to date, we will come across several cases where the Salini test has been adopted and we will also observe many cases where the Salini test has been criticized and not adopted in its full sense.


Arguments in Favour of The Salini Test

Article 31 of the Vienna Convention for the Laws of Treaties states that the terms of every treaty should be interpreted as per its object and in the light of the circumstances it was entered into. The Salini test is in absolute compliance with the preamble of ICSID, which states that investment should be made to foster the economic development of the host state. At the same time, the Salini test had been followed for more than a decade and it is a settled precedent incorporating the preamble of the ICSID convention that ICSID can refer to ensure certainty[5] while dealing with investment disputes, and in the process, facilitate cross-border investment.

International bodies have the freedom to decide the amount of weightage they would like to give to precedents[6] as precedents do occupy an uneasy space in international law.[7] Many states actually value precedents in many of these cases because a settled precedent can give them an idea about how the litigation process would actually look in the future if they come across similar circumstances[8].

In the case of Joy Mining Machinery v. The Arab Republic,[9] the Salini test was accepted completely. Joy Mining, a British Company was supposed to replace an existing mining system and build a new mining system. The dispute arose when both parties started blaming each other for the lack of equipment. Egypt deemed the transaction as a mere contract for sale whereas Joy Mining contended that the matter falls under ICSID jurisdiction since it satisfies all the four criteria of the Salini test. The tribunal sided with Joy Mining and upheld the Salini test. Even in the case of Jan de Nul N.V. and Dredging International N.V. v. Arab Republic of Egypt,[10] the Salini test was referred to out of respect for the value of settled precedence, and the transaction was deemed as an investment in compliance with the Salini test.

In the case of Quiborax v. State of Bolivia,[11] the fourth prong of the Salini test was heavily criticized and it was held that the first three criteria of the Salini test would be sufficient to constitute the objective definition of investment. However, there are two reasons for retaining the Salini test. Firstly, it is a well-settled and widely accepted precedence which faithfully complies with the preamble of the ICSID. Having a settled rule is highly beneficial for investors as they can predict the outcome of any dispute that may arise in the future and plan accordingly. There can be a counterargument that settling the law around Quiborax would work as well but that would give rise to a long period of uncertainty while the arbitrators shift from one test to another and at the same time, it would weaken the idea of having a settled precedent.

Secondly, the UN charter contains the provision of sovereign equality[12] that gives every state the sovereignty to govern their own economic affairs to facilitate economic development and all countries have equal rights to control whatever is going on within their borders[13]. As this solidarity is primarily for economic development, it automatically supports the fourth criterion of the Salini test.

When comparing the Quiborax and Salini judgments, it is clear that the Salini test completely adopts the Preamble's language regarding fostering the host state's economic development. In contrast, the Quiborax judgment, while acknowledging the Preamble's language, does not operate in accordance with the Preamble's stated goal of fostering the host state's economic development.

In MSH v. Malaysia,[14] Malaysian Historical Salvors excavated a significant amount of Chinese porcelain from the Strait of Malacca. This porcelain was auctioned and the company claimed that it did not receive the promised share of profits and went to ICSID to seek arbitration. ICSID, after looking at the facts and circumstances, concluded that there was no fixed duration of the contract nor did the excavation bring in any contribution to the economy of the host state. Hence, as per the Salini test, as the transaction was not an investment but rather a historical excavation, the tribunal did not feel that it was necessary to refer to the UK-Malayasia BIT.

In the case of Biwater v. Tanzania,[15] Tanzania contended that the transaction did not meet the criteria laid down in the Salini test and hence, does not have any jurisdiction under ICSID. However, ICSID rejected Tanzania’s contention by saying that although the Salini test was a settled precedent, ICSID was not bound by it. In this scenario, ICSID gave jurisdiction to Biwater by referring to the definition of investment in the Bilateral Investment treaty that the parties had entered into.


Criticism of the Salini Test

The last requirement in the Salini test, which states the contribution to the host state’s economy has been the most controversial. In the case of Victor Casado v., the Republic of Chile,[16] the tribunals as economic development of the host state is a consequence of an investment and not a characteristic of investment, the fourth criterion of Salini was not taken into consideration. In one of the cases[17], it was held that the criteria mentioned in the Salini test are just characteristics of an investment which may help in excluding extreme cases that have no relation with investment and not compulsory legal requirements that can beat the broad and flexible definition of investment. In the Phoenix case,[18] the tribunals felt that the criteria mentioned in the Salini test weren’t sufficient. The tribunal in this case added that the bona fide nature of investment and compliance with the domestic laws are also mandatory conditions to constitute an investment. This approach is only taken when there is an abuse of the process or any illegality involved in the process.

We have to keep two things in mind while we are dealing with the fourth condition of the state, which is the economic development of the host state.

Firstly, economic development and investment are in no way related to each other or dependent on each other and secondly, the investor can only invest keeping economic development as the primary goal. As economic development depends on a lot of factors and not just the investment, it is certainly not in the hands of the investor.

Hence, it is unfair for the investor to include the economic development of the host state, as a criterion for investment, something which the investor does not have control over in the first place. This is the primary reason why we can see a lot of cases that have chosen not to follow the Salini test.

·         Saba Flakes v. Republic of Turkey[19]

In this case, the Turkish Government had frozen the shares of the Dutch investor Flakes and had sold those shares, which Flakes claimed to be a gross violation of the BIT. When this matter went for arbitration, the tribunal did not consider the fourth criterion and held that the fulfillment of the first three criteria of the Salini test was enough to constitute an investment.

·         LESI S.p.A. Astaldi S.p.A. v. People's Democratic Republic of Algeria[20]

In this case, the company was involved in the construction of a dam project in which the Algerian government had been creating difficulties time and again. When this dispute went for arbitration, the tribunal held that the fourth criterion was already covered in the first three criteria of the Salini test and need not be established separately.

Hence, looking at the following case, we can conclude that ICSID, although gives prime importance to the Salini test, might not refer to it in every case. ICSID will observe the contention of the parties and the facts and circumstances in each case and then decide if it entirely wants to go by the Salini test, just by the first three criteria of the Salini test, or not refer to the test at all, and go completely by the definition given in the BIT.[21]


Definition of Investment as per the Non-ICSID Tribunals

In the case of Romak v. State of Uzbekistan,[22] there was a contract for a food grains supply between Romak and the Uzbekistan Government. The contract was not honored by the State of Uzbekistan. Romak went to NAFTA to seek arbitration and the arbitral award was in favor of Romak. However, the Uzbekistan Government refused to execute the Arbitral award.

Romak again had to move the Permanent Court of Arbitration (hereinafter referred to as ‘PCA’) to seek remedy. The Permanent Court of Arbitration found that the definition in the BIT was ambiguous and hence, took the approach of travaux preparatoiris. The PCA referred to the history of the parties to find out why the parties had entered into the treaty in the first place. The PCA found out that while entering into the BIT, Romak had also entered into a trade agreement with the state of Uzbekistan, thereby establishing the fact that Romak wanted to enter into a trade agreement with Uzbekistan and it was not an investment. Hence, by taking the approach of travaux preparations, the PCA concluded that Roman had entered into a trade agreement and not an investment, and hence, Romak did not have jurisdiction.

While getting into foreign investment, India adopted the broad asset-based definition that was adopted by the United Kingdom. In Flemingo Duty-Free v. the Republic of Poland,[23] Flemingo had invested in a duty-free shop in the Chopin airport through a subsidiary. When the dispute arose, Poland claimed that as Flemingo held an indirect shareholding, it could not be regarded as an investment. However, as the India-Poland BIT had a broad definition of investment, the PCA tribunal regarded indirect shareholding as an investment.

In the case of White Industries v. The Republic of India,[24] White Industries, an Australian Company had invested in the coal-mine sector. When a dispute arose, White Industries had to suffer huge losses in the nine years of seeking a remedy from the domestic courts of India. When the matter went to the tribunal, India contended that investment needed resource commitment and an assumption of risk, which the transaction with the White Industries lacked. As UNICTRAL was a non-ICSID tribunal, it interpreted the broad asset-based definition given in the BIT and regarded the transaction as an investment due to which India had to suffer a loss worth billions of dollars.

Being a developing nation or a capital-importing country, India must look for an enterprise-based definition instead of an asset-based definition to protect its interest and unfortunately, India had to learn it the hard way. India is also not a member of ICSID. Hence, it cannot take up any matter for arbitration to ICSID. As ICSID refers to the Salini test many times, there could have been a possibility that ICSIID referred to the objective criteria laid in Salini and protected India’s interest. As India cannot go to ICSID, the non-ICSID tribunals will refer to the subjective definition in the BITs. Hence, India must always look for an exhaustive and enterprise-based definition in the BIT it is entering to play on the safer side.


Conclusion

To conclude, the ICSID tribunal follows both the subjective definition of investment as well as the objective definition of investment. As ICSID is not bound by any sort of precedent, it is free to refer to anything and state its opinion whenever it has to answer whether a particular transaction can be constituted as an investment or not. ICSID might refer to the Salini test, with or without taking into account the fourth prong, or may just go by the definition of investment that is present in the BIT. However, non-ICSID tribunals always prefer a subjective approach[25], and hence they refer to the definition of investment that is mentioned in the BIT that both parties have entered into. In case the definition in the BIT is too vague or ambiguous, the tribunals look at travaux repertoires, which is the mindset of the parties while entering into a treaty. A broad asset-based definition is convenient for capital-exporting countries or foreign investors whereas developing countries/capital-importing countries must look for an enterprise-based definition of investment and opt for an exhaustive approach to be on the safer side.

 


[1] International Center for the Settlement of Investment Disputes Convention, Oct. 14, 1966, 17 U.S.T. 1270, 575 U.N.T.S. 159. (Hereinafter ICSID Convention).

[2] Alex Grabowski,’ The Definition of Investment under the ICSID Convention: A Defense of Salini’, [2014] PL 290.

[3] Fedax N.V. v. The Republic of Venezuela ICSID Case No. ARB/96/3.

[4] Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco ICSID Case No. ARB/00/4.

[5] ICSID Convention, supra note 1, at Preamble.

[6] Georg Nolte, ‘Subsequent Practice as a Means of Interpretation in the Jurisprudence of the IVIO Appellate, Body, in The Law of Treaties Beyond The Vienna Convention,’ [2011] PL 140.

[7] Sean D. Murphy, ‘The Relevance of Subsequent Agreement and Subsequent Practice for the Interpretation of Treaties, in THEORIES AND SUBSEQUENT PRACTICE,’ [2014], PL 84.

[8] Anthea Roberts, ‘Power, and Persuasion in Investment Treaty interpretation,’ [2010] PL 189.

[9] Joy Mining Machinery Limited v. the Arab Republic of Egypt ICSID Case No. ARB/03/11.

[10] Jan de Nul N.V. and Dredging International N.V. v. Arab Republic of Egypt ICSID Case No. ARB/04/13.

[11] Quiborax S.A., Non-Metallic Minerals S.A. and Allan FoskKaplún v. Plurinational State of Bolivia ICSID Case No. ARB/06/2.

[12] UN Charter art. 2.

[13] Hans Kelsen, ‘The Principle of Sovereign Equality of States as a Basis for International Organization’, [1944] PL 209.

[14]Malaysian Historical Salvors, SDN, BHD v. MalaysiaICSID Case No. ARB/05/10

[15]Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania ICSID Case No. ARB/05/22

[16] Victor Pey Casado and President Allende Foundation v. Republic of Chile ICSID Case No. ARB/98/2.

[17] Philip Morris Brand Sàrl (Switzerland), and Abal Hermanos S.A. (Uruguay) v. Oriental Republic of Uruguay ICSID Case No. ARB/10/7.

[18] Phoenix Action Limited v. Czech Republic Award ICSID Case No ARB/06/5, IIC 367 (2009).

[19] Saba Fakes v. Republic of Turkey ICSID Case No. ARB/07/20.

[20] L.E.S.I. S.p.A. and ASTALDI S.p.A. v. RépubliqueAlgérienneDémocratique et Populaire ICSID Case No. ARB/05/3.

[21] Acres Law, ’The Salini Test in ICSID Arbitration,’ [2018] PL 05.

[22] Romak S.A. (Switzerland) v. The Republic of Uzbekistan, UNCITRAL PCA Case No. AA280.

[23]FlemingoDutyFree Shop Private Limited v. Republic of Poland PCA Case No. 2014-11.

[24] White Industries Australia Ltd v India IIC 529 (2011).

[25] Mahnaz Mallick,’Definition of Investment in International Investment Agreements,’ [2009] PL 04.


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