Definition of investment and
admission and establishment
Morocco, Rabat, 11 December 2013
Dr. Ilia Rachkov, LL.M.,
attorney at law (Russia),
partner at King & Spalding, Moscow office,
senior lecturer at MGIMO
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Investment: economics
• Direct investments v. portfolio investments
• Direct investments:
-
Transfer of funds
Long-term project
Purpose: regular income
Investor participates in the project management
Business risk.
If these criteria are not fulfilled:
- portfolio investment (no personal involvement);
- Ordinary transaction (e.g. sale of goods or services): no
long-term element;
- Short-term financial transaction.
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Investment: legal meaning
• Why is it important to define the investments? – To define
the scope of application of BIT and the consent of the
states parties to submit their disputes to arbitration.
• Classical (but old-fashioned) formula (e.g. in Friendship,
Commerce & Navigation treaties; in treaties to settle claims
after hostilities; in documents on protection of human
rights): “property, rights and interests”.
• Contemporary treaties: “investment”.
• 2 approaches: elaborated definition or general terms, but
subject to interpretation by states and tribunals.
• Art. 25 ICSID Convention (1965): no definition => “double
keyhole approach” dictates examination from the points of
view of the BIT and the ICSID Convention
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Several interrelated activities
• Each of which should not be viewed in
isolation: CSOB v. Slovakia (1999);
• Are costs arising in the course of unsuccessful
negotiations for a contract an “investment”? –
No:
-
Mihaly v. Sri Lanka (2002);
Generation Ukraine v. Ukraine (2003);
Zhinvali v. Georgia (2003);
PSEG v. Turkey (2004).
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Investment protection treaties
•
•
•
•
Multilateral treaties:
North American Free Trade Agreement (NAFTA)
between US, Canada and Mexico: Art. 1139;
Energy Charter Treaty: Art. 1 section 6
Draft Multilateral Agreement on Investments
(OECD, 1998)
Bilateral treaties:
In most cases: general phrase defining investment
(e.g. “all assets”) + several examples
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Bilateral BITs
• Argentina – US BIT;
• Ukraine – Denmark BIT (1992): establishing lasting economic
relations;
• Chile – US BIT: commitment of resources, expectation of profit or
assumption of risk;
• Free Trade Agreement between European Free Trade Association
(EFTA: Norway, Switzerland, Liechtenstein, Iceland) and Mexico
(2000): investor exercises effective influence on management (i.e.
portfolio investment excluded)
• Reference to domestic law of the host state: “in accordance with
host state law”. Tribunals: this concerns only the legality of the
investment.
• Salini v. Morocco (2003)
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Investment in Art. 25 ICSID Convention
• In disputes arising outside ICSID, the question of
what investment is does not arise.
• Method of interpreting “investment”: Art. 31 of
the Vienna Convention on the Law of Treaties
(1969).
• Report of the Executive Directors: no minimum
duration of investment; no minimum financial
commitment.
• What did the parties to BIT understand under
“investment”?
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Case law
• Fedax v. Venezuela (1997): promissory notes
• 5 basic features of an investment:
-
Certain duration;
Certain regularity of profit and return;
Assumption of risk;
Substantial commitment;
Significance for the host state’s development.
• Subsequent practice: all features basically accepted,
except for “regularity of profit and return” => Salini v.
Morocco (2001)
• Joy Mining v. Egypt (2004): bank guarantee.
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Party autonomy v. Salini test
• Departure from the Salini test: Biwater Gauff v.
Tanzania (2008). Respondent state: investment
was not reasonably profitable.
• Tribunal:
- Art. 25 of ICSID Convention: no reference to Salini
criteria;
- Definition of investment intentionally left open
- Malaysian Historical Salvors v. Malaysia,
annulment decision (2009): Salini test unduly
narrows the circumstances under which parties
could have recourse to ICSID.
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Possible criteria: from 3 to 6
• Common ground:
- Contribution by an investor;
- Duration;
- risk
• Additional criteria:
- Contribution to the development of the host country;
- Regularity of profit (only occasionally);
- Legality of investment and good faith (Phoenix v.
Czech Republic).
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Investment “in the territory of the host state”
•
•
•
•
Fedax v. Venezuela (1997);
Canadian Cattlement v. US (2008);
Bayview v. Mexico (2007);
Grand River v. US (2011)
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Admission and establishment
• General international law: states are not compelled to
admit foreign investment.
• Each government decides whether to close the national
economy to foreign investors or to open it up, dully or with
respect to certain sectors.
• This includes the right to determine the terms and
conditions for admission and establishment of foreign
investors.
• Social effects of rapid economic change; moral, health and
environment concerns; national security.
• Binding commitment on admission and establishment
create lasting obligations, even if economic circumstances
changed.
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Right of admission and right of establishment
• Right of admission = right of entry of the investment in principle;
• Right of establishment = conditions to carry out business once
established.
• Typical issues of admission:
-
Relevant economic sectors;
Geographic regions;
Requirement of registration or license;
Legal structure of investment (e.g. type and seat of corporation; joint
venture; restrictions of ownership).
• Typical issues of establishment:
- Expansion of investment;
- Payment taxes;
- Transfer of funds.
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Treaty models of admission
- Treaties concluded by EU countries: right of admission
is not granted, but standards & guarantees for
admitted investments (German Model BIT, 2005);
- US, Canada, Japan: granting market access => right of
admission is based on national treatment clause (2004
& 2012 US Model BITs).
- In practice: no state grants unlimited access to foreign
investments; instead: positive and negative lists.
- Most common technique: national treatment or mostfavoured nation treatment.
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Performance requirements
• Obligations imposed by the host state on the investor to conduct its
business in a prescribed manner.
• Duty to purchase local goods / services or to export certain amount of
products;
• Obligation to hire local personnel;
• Mainly prohibited in BITs concluded by US (2004 and 2012 Model BITs) and
Canada, because inconsistent with the principle of liberal markets.
• NAFTA: list of prohibited performance requirements (Art. 1106), similar to
US Model BITs.
• WTO, Agreement on Trade Related Investment Measures (TRIMs), 1994,
Annex: illustrative list of performance requirements inconsistent with
national treatment.
• Are performance requirements applying only to foreign investors
admissible, from the point of view of national treatment standard?
• Hiring and presence of non-local personnel (including top managers) to
manage foreign investment.
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Non-compliance by investor
•
•
Many BITs: investments made “in accordance with the laws” of the host state.
Plama v. Bulgaria (2008): obligation of the investor to act in good faith, especially to obtain approval
of the investment.
 Investments made in violation of national law are not covered by treaties.
• Not just the rules on admission and establishment, but also rules on domestic legal order (including
corruption).
• Alasdair Ross Anderson v. Costa Rica (2010);
• Hamester v. Ghana (2010);
• Salini v. Morocco (2001);
• Tokios Tokeles v. Ukraine (2004);
• Desert Line v. Yemen (2008);
• Railroad Development v. Guatemala (2010);
• Kardassopoulos v. Georgia (2007);
• Aguas del Tunari v. Bolivia (2005);
• Inceysa Vallisoletana v. El Salvador (2006);
• Fraport v. Philippines (2007); award annulled on 23 December 2010 (right to be heard was not
properly observed);
• World Duty Free v. Kenya (2006) – arbitration based on a contract between investor and host state.
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Thank you for your attention!
Dr. Ilia Rachkov, LL.M.
attorney at law (Russia), senior lecturer,
international law chair,
international law faculty, Moscow State
Institute of International Relations (MGIMO)
at the Ministry of Foreign Affairs of Russia
irachkov@kslaw.com
+7 909 992 76 25 (mob.)
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