Alive or Dead: Why the Concept of Investment in International Commercial Arbitration is the Definitive Thought Experiment in International Investment Arbitrations

The travaux préparatoires of the Convention on Settlement of Investment Disputes between States and Nationals of Other States

The Convention on Settlement of Investment Disputes between States and Nationals of Other States (hereinafter “the Convention”) established the International Centre for Settlement of Investment Disputes[1] (ICSID). The Convention was formulated by the Executive Directors of the International Bank for Reconstruction and Development (World Bank). On 18-3-1965, the Executive Directors submitted the Convention, with an accompanying Report, to member governments of the World Bank for consideration with a view to its signature and ratification. The Convention came into force on 14-10-1966 when it was ratified by 20 countries. As on date, there are 155 signatory States to the Convention.

A dive into the travaux préparatoires[2] of the Convention, shows that the Convention was drafted in three stages, an initial drafting process at the World Bank, a series of regional meetings where legal experts from participating States reviewed and discussed the World Bank’s draft and then finally a convocation of member State delegates for the Legal Committee that rewrote the document for the final approval by the World Bank Executive Directors[3].

The first draft of the Convention, prepared by renowned jurist Aron Broches, did not impose any subject-matter restrictions on the proposed dispute resolution facility, the first draft proposed extending the Centre’s jurisdiction to any disputes between contracting States and nationals of other contracting States. The only preconditions in this draft were that the Centre would have jurisdiction through the mutual consent of the parties and provided that the sum in dispute was at least $100,000. The text of the first draft contained no reference to the need for an underlying “investment” as a precondition for invoking the jurisdiction of the Centre[4].

This first draft then proceeded to the second stage and was placed before the Regional Committee of experts. The Memorandum of their meetings suggest that there were concerns about the open-ended language of the first draft of the Convention in so much that any conceivable dispute between individuals and foreign Governments would be covered. It was accordingly proposed that only disagreements concerning legal rights, contractual rights or property rights, rather than political or commercial disputes be the subject-matter of the Convention. One notes that even at this stage there was no overt articulation for the need for an investment as a prerequisite to invoke the jurisdiction of the Centre[5].

The draft then went through an internal review at the World Bank over the course of one year, the Executive Directors of the World Bank and its staff generally agreed that the jurisdiction of the Tribunal could not be left open ended but they were equally concerned about having an excessive, specific or technical hurdle which would foreclose access to the Centre[6].

The next draft of the Convention which arose from the aforementioned round of internal discussions was circulated in October 1963. It tried to find a middle ground by limiting the Centre’s jurisdiction to proceedings regarding “any existing or future investment dispute of a legal character as opposed to a political, economic or purely commercial dispute[7].

After four rounds of expert meetings broadly speaking the members were divided into two camps with one proposing that a wide range of disputes be referred to ICSID while the other suggested that matters or claims which were based on regulatory politics or unapproved investments be excluded from the jurisdiction of the Tribunal. The next draft circulated by the staff of the World Bank in September 1964 retained the restriction on the Centre’s jurisdiction to only disputes arising out of “any investment”. As a further note of interest, for the first time, the draft proposed a definition of the term “investment” as “any contribution of money or other asset of economic value for an indefinite period or, if the period be defined, for not less than five years[8].

This draft was placed before the Legal Committee on settlement of Investment Disputes, where once again the aforementioned fault lines emerged and since no resolution was possible, the entire issue was transferred to a working group[9]. The impasse was so serious that the working group was unable to reconcile the differences between the two groups[10].

The issue was reopened by the Legal Committee on 8-12-1964 where the United Kingdom proposed a solution that resulted in a compromise yielding the jurisdictional definition and structure of ICSID that exists today. The solution proposed contemplated a wide-open jurisdiction for ICSID with the option for individual states to opt-out or limit the jurisdiction on an individual basis. The draft proposed by the United Kingdom proposed three things namely that the jurisdiction of the Centre be retained over “investment” disputes, that while there was to be no definition of what would constitute an investment its text introduced a sub-section for states to notify signatories of the categories of disputes that they would not consider submitting to arbitration[11].

The Convention as revised in the manner previously mentioned, received support from members of both factions and as a result the Legal Committee adopted essentially the version of Article 25 of the Convention as it exists today, extending the jurisdiction of the Convention “to any dispute of a legal character, arising directly out of an investment”. It also created a notification process whereby member States were to notify the category of cases they were unwilling to submit to the jurisdiction of the Centre[12].

The Report of the Executive Directors which accompanied the Convention and invited signatures and ratification by member States explained that “no attempt was made to define the term “investment” given the essential requirement of consent by the parties, and the (notification) mechanism through which contracting States can make known in advance, if they so desire, the classes of disputes they would or would not consider submitted to the Centre[13].

Here may be an appropriate moment to revert back to the Schrödinger thought experiment, where a cat, a flask of poison and a radioactive source are placed in a sealed box, because of which it could not precisely be said whether the cat were dead or alive without actual observation by a subjective observer. Niels Bohr, a scientist had proposed that a radioactivity measurement device placed inside the box would dispel the need for an external observer and hence, answer the question as to whether the cat was alive or dead within the box with precision.

The Convention as it arose from the various rounds of debate, did not include any measurement device, in the form of a definition, limitation by which one could with an element of precision define what constituted an investment, requiring the “box to be opened” so to say so that its contents could be observed by an external observer namely the ICSID Tribunals before whom disputes were brought.

Icsid Tribunals and their observations on the notion of investment

The Convention was ratified in the year 1966 and the first case came to be filed before ICSID in the year 1972. There was only one case filed that year and cases remained in the single digits until the latter half of the 1990’s. ICSID has seen an average of 40 cases filed annually between the years 2011-2021[14].

With an increase in the number of cases being filed before ICSID, the opportunities for ICSID Tribunals to analyse the concept of investment and incidental enquiries increased. Each case in the opinion of the author has proven to be a unique thought experiment of sorts.

In 2001, Christoph Schreuer (Schreuer) wrote his treatise on the ICSID Convention[15] where he suggested the five typical characteristics of an investment as being (a) a certain duration of the enterprise;(b) a certain regularity of profit and return; (c) an assumption of risk;(d) a substantial commitment by the investor; and (e) some significance for the host State’s development[16].

Schreuer did not intend for the aforesaid to be a prescriptive test to determine whether or not a given venture was an investment, ICSID Tribunals have apparently adopted it as one. This is particularly problematic given what we have seen from our discussion on the travaux of the Convention and in particular the discarding of limitations of quantum, significance and duration of the investment during the development of the Convention[17].

The first case which I would like to review is the ruling in Salini Costruttori SpA and Italstrade SpA v. Kingdom of Morocco[18]. The claim in these proceedings was made by two Italian construction companies for unpaid sums due to them for construction of a major motorway within the Kingdom of Morocco. At the time as noted by the Tribunal, there had been no major pronouncement on what constituted an investment for the purposes of Article 25 of the Convention. The only prior instance of any guidance was the refusal by the Secretary General of ICSID to register a request for arbitration arising out of a simple sale[19]. Although, Article 25 does not prescribe any qualifications or limitations on what would constitute an investment, the Tribunal nevertheless recorded that “generally” the term investment infers: contributions, a certain duration of performance of the contract and a participation in the risks of the transaction which add to the economic development of the host State of the investment[20]. It then went on to examine whether these “requirements” had been met in the facts of the case[21]. The basis for this reasoning of the Tribunal was nothing but its own ipse dixit accumulated from general descriptions of what were the elements of investment found in commentaries on Investment Arbitration[22] and from a reading of the Preamble to the Convention which records that reads the contracting States “considering the need for international cooperation for economic development, and the role of private international investment therein”. The law with respect to interpretation of statutes however, regards the views expressed by authors and/or legal scholars on the meaning of legal text as being merely persuasive and these rules resort to the Preamble as an internal aid in construction only in cases where the provision in question were ambiguous[23]. We have already seen that the requirements for a duration of the investment had been expressly removed from the text of an earlier draft of the Convention along with certain other qualifiers. Hence, one could argue that to read this qualification into Article 25 especially when the travaux préparatoires showed a clear intention to not include any such condition precedent is not justified[24].

A completely different perspective was taken by the Arbitral Tribunal in Patrick Mitchell v. Democratic Republic of Congo[25]. The case pertained to the confiscation and forced closure of the legal practise of Mr Patrick Mitchell, an American attorney in the Democratic Republic of Congo. There the Tribunal held that “in the absence of any indication directing to the exclusion from the scope of the Treaty of particular activities that may be considered as services, such a concept should be given a broad meaning, covering all services provided by a foreign investor on the territory of the host State”. In its award, the Tribunal also expressly rejected considerations of any objective requirements of an investment such as its term, its significant contribution to the State’s economy, etc. as not being formal requirements for the finding that a particular activity or transaction constitutes an investment[26]. The Democratic Republic of Congo challenged the award in annulment proceedings but was unsuccessful.

The early jurisprudence of ICSID thus produced two completely different thoughts on the notion of an investment for the purposes of the Convention. One case saw the Tribunal introduce a test in order to verify whether there had been an investment and the other the Tribunal expressly refusing to enter into any such examination noting that the Convention did not call for it. In both cases however the Tribunal held that it had jurisdiction.

In Banro American Resources and Societe Aurifère du Kivu et du Maniema SARL v. Democratic Republic of the Congo[27] the Tribunal was asked to give its finding on whether the investment in question was made by a national of another contracting State. In this case Banro Resource (the parent company) a Canadian entity had invoked the jurisdiction of ICSID through its Congolese subsidiary. Canada was not a signatory of the Convention and Banro American Resources was not a signatory of the Mining Treaty in question. The Tribunal by majority, held that it was willing to deem the American subsidiary as a signatory to the Mining Treaty through its holding company Banro Resource and its Congolese subsidiary company, but that it was unwilling to exercise jurisdiction as the parent company had utilised diplomatic means of protection. The question as to whether the investment was made by a national of a contracting State really remained unanswered, though having held that Banro American Resources was deemed to be a party to the Mining Treaty in question there could only have really been one answer.

In TokiosTokelés v. Ukraine[28],the majority took the view that the method adopted by the Tribunal in Banro[29] noted above was not the proper approach to define the nationality of the claimant. The Tribunal ruled that it could not and did not need to pierce the corporate veil in order to determine the identity or source of the investment and would determine the identity of the claimant basis its country of incorporation.

Again, we find two different ICSID Tribunals coming to two completely different conclusions whilst interpreting the same terms of the Convention. Here of course, not only did the Tribunals approach the problem differently they also arrived at opposite conclusions.

In conclusion, it is an undesirable state of affairs that the Tribunals come to divergent views on the same legal terms and provisions. Provisions of law are not experiments and litigants are not metaphysical cats to be whimsically subjected to these experiments. It is essential that the law have certainty and clarity. To propose for a limited or expansive view is itself a thought experiment and this is not what the author proposes to suggest. The history of the Convention and in particular the problems faced by its draughtsmen is a forewarning as it would appear that the Convention has once again been dragged back into the tug of war match between two rival perspectives leaving one guessing as to whether the investment is alive or dead.

*Independent Arbitrator and practising Advocate of Bombay High Court.

[1]ICSID Convention, Regulations and Rules, ICSID/15 (April 2006). <https://icsid.worldbank.org/sites/default/files/ICSID%20Convention%20English.pdf>.

[2] The History of the ICSID Convention, International Centre for Settlement of Investment Disputes.

<https://icsid.worldbank.org/resources/publications/the-history-of-the-icsid-convention>.

[3]Aron Broches, Development of International Law by the International Bank for Reconstruction and Development, 59 AM. SOC’Y INT’L PROC. 33 (1965).

[4] Working Paper in the form of a Draft Convention (5-6-1962) in History of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 59 (1968).

[5] Memorandum of the Meeting of the Committee of the Whole, 52 (5-6-1963) in History of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 59 (1968) at p. 96.

[6]Memorandum of the Meeting of the Committee of the Whole, 52 (5-6-1963) in History of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 59 (1968) at p. 96.

[7]Preliminary Draft of a Convention on Settlement of Investment Disputes between States and Nationals of Other States, Art. II (15-10-1963) in History of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 59 (1968) at p. 204.

[8] Draft Convention on the Settlement of Investment Disputes between States and Nationals of Other States (11-9-1964), in History of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 59 (1968) at p. 623.

[9] Summary Proceedings of the Legal Committee Meeting (27-11-1964, Morning), in History of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 59 (1968) at p. 711.

[10]Report on Scope of Jurisdiction of the Centre, Arts. 26, 29 (7-12-1964), in History of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 59 (1968) at p. 828.

[11]Summary Proceedings of the Legal Committee Meeting (27-11-1964, Morning), in History of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 59 (1968) at pp. 821-822.

[12] A thorough and elaborate discussion on the history and travaux of the Convention can be found in: The Meaning of “Investment”: ICSID’s Travaux and the Domain of International Investment Law by Julian Davis Mortenson published in Vol. 51 of Harvard Internal Law Journal (2010).

[13] Report of the Executive Directors of the International Bank for Reconstruction and Development on the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, 18-3-1965.

[14] ICSID Caseload Statistics, Issue 2021-22.

[15] Christoph Schreuer, The ICSID Convention:  A Commentary (2001).

[16] Christoph Schreuer, The ICSID Convention:  A Commentary (2001), at p. 122.

[17] This has however not been understood by ICSID Tribunal’s and in cases like Phoenix Action Ltd. v. Czech Republic, ICSID Case No. ARB/06/05, dated 6-4-2007, the Tribunal has applied this test as if it were an objective parameter to determine what were an investment.

[18] (2003) 42 ILM 609.

[19] 18I.F.I. Shihata and A.R. Parra, The experience of the International Centre for Settlement of Investment Disputes: ICSID Review, Foreign Investment Law Journal Vol. 14 (No. 2), 1999 at p. 308.

[20]Salini Costruttori SpA and Italstrade SpA v. Kingdom of Morocco, (2003) 42 ILM 609, para 52.

[21] Salini Costruttori SpA and Italstrade SpA v. Kingdom of Morocco, (2003) 42 ILM 609, paras 53 to 58.

[22] D. Carreau, Th. Flory, P. Juillard, Droit International Economique: 3rd Ed., Paris, LGDJ, 1990, p. 558-578.

493. Schreurer, Commentary on the ICSID Convention: ICSID Review – FILJ, Vol. 11, 1996, pp. 318-493.

[23]Motipur Zamindary Co. (P) Ltd. v. State of Bihar, AIR 1962 SC 660; Sita Devi v. State of Bihar, 1995 Supp (1) SCC 670.

[24] Reference under Art. 317 (1) of the Constitution of India, In re, (1983) 4 SCC 258.

[25] Case No. ARB/99/7, award dated 9-2-2004, para 24.

[26] Case No. ARB/99/7, award dated 9-2-2004, para 24.

[27] ICSID Case No. ARB/98/7, dated 1-9-2000.

[28] ICSID Case No. ARB/02/18, dated 29-4-2009.

[29] ICSID Case No. ARB/98/7, dated 1-9-2000.