INVESTOR AND INVESTMENT

INVESTMENT
• In economic terms --- investment means –
a) fund transfer
b) a long term project
c) a business risk
d)regular income and its purpose
e)person’s participation in transferring the funds.
• Art.25 of ICSID Convention --- uses the word
“investment”----- but no proper definition.
• BITs --- donot refer to Art. 25 of the Convention ------
but ---- contain their own definitions of investment
--- generally ---- at the beginning of the agreements.
DUAL APPROACH OF THE TERM INVESTMENT UNDER ART. 25:-
1)First, concerned with the interpretation of the non –defined term under
Art. 25 of the Convention.
2)Second, if the term used in Art. 25 was subject to the definition set forth in
the treaty referring to ICSID jurisdiction.
• This ---- led to dual examination of the notion of investment ---- also
called “double keyhole approach”.
 CSOB Vs. Slovakia.

• In a BIT between U.S. and Argentina ---- investment---- defined as ----

“Every kind of investment in the territory of one party owned or
controlled directly or indirectly by nationals or companies of the other
party, like equity, debt, service and investment contracts, and includes
without limitation :-
a)tangible and intangible property.
b)A company or shares of stocks.”
• Art. 1139 of NAFTA (North American Free Trade
Agreement, enacted in 1994) ---- defines investment as—
“Investment means– a)an enterprise; b)an equity
security of an enterprise ; c)a debt security of an
enterprise”.
NOTE: NAFTA created free trade zone for Mexico, Canada,
and the United States --- US -Mexico bilateral treaty
• Art. 1(6) of Energy Charter Treaty ----- investment ----
means---- “every kind of asset, owned or controlled
directly or indirectly, by an investor and includes tangible
and intangible property, movable and immovable
property, a company or business enterprise, shares,
stocks, etc.
• Evolution of ICSID jurisprudence ---- guided by
the ruling of Fedax Vs. Venezuela.
Here ---- tribunal examined three things ---
1)under Art. 25 of ICSID Convention.
2)Under the rules of the applicable BIT.
3)Under a scheme trying to distinguish foreign
investment from an ordinary commercial
transaction.
Tribunal --- held ---- all the three things ---
equally important.
• Investment ---- becomes --- foreign investment --- if
owned and controlled by a foreign investor.

INVESTOR :- 2 types:-
a)Natural persons :-
 In international law, it is a strongly defined principle that
the nationality of the investor as a natural person is
determined by the domestic law of the state claiming
nationality.
• The ICSID Convention requires nationality to be
established on two important dates: the date of consent
to arbitration ,and the date of registration.
• Convention --- doesnot recognise dual nationals.
• In the Nottebohm case (Liechtenstein v. Guatemala )---
ICJ --- held --- although a State may decide on its own
accord and in its own legislation whether to grant
nationality to a particular individual , a real connection
must exist between the state and the national.
• Nottebohm considerations ---- today ---- difficult ----
that is, the person’s attachment to the state through
tradition, interests, activities or family ties.
• Nottebohm principles are still useful in cases of dual or
multiple nationality when the nationality of the claimant
in order to be accepted has to be “predominant”
(powerful) ---- Art. 7 of International Law Commission
Draft Articles on Diplomatic Protection states.
• Esphahanian v. Bank Tejarat ---- test of dominant and
effective nationality .
In this case ----dual US-Iranian nationality was to
be regarded as predominantly American or Iranian for
purposes of bringing a claim before the Tribunal.

AGREEMENTS RELATED TO INVESTMENTS:-

• Finland-Egypt BIT provides that the term “national”
means :-
a)In respect of Finland, an individual who is a citizen
of Finland according to Finnish law. b) In respect of Egypt,
an individual who is a citizen of Egypt according to
Egyptian Law.”
• Germany-Israel BIT:- In its Article (1)(3)(b)---
the term “nationals” means with respect to
Israel ---- Israeli nationals being permanent
residents of the State of Israel.
• The criterion of permanent residence is
sometimes used as an alternative to citizenship
or nationality. Eg :- Canada-Argentina BIT the
term “investor” means :-
any natural person possessing the
citizenship of or permanently residing in a
Contracting Party in accordance with its laws.
• Article 201 of NAFTA equally provides in part
that: “National means a natural person who is
a citizen or permanent resident of a Party.
• Article 25(1) of the ICSID Convention ---- The
jurisdiction of the Centre shall extend to any
legal dispute arising directly out of an
investment between a Contracting State and
a national of another Contracting State.
• Investment treaty jurisprudence under the ICSID
Convention as to the nationality of natural persons is limited
to four cases brought by dual nationals :-
(1) Eudoro A. Olguin v. Republic of Paraguay ------ Mr. Olguin,
a dual national of Peru and the United States, brought a claim
against the Republic of Paraguay( a small country of South
America) under the Peru-Paraguay BIT, for the treatment
allegedly received from the Paraguayan authorities, in relation
to his investment in a company for the manufacture and
distribution of food products in Paraguay. The arbitral tribunal
rejected Paraguay’s objection to jurisdiction based on the
claimant’s dual nationality by relying on the fact that Mr.
Olguin’s Peruvian nationality was effective, which was deemed
enough for purposes of the ICSID Convention and the BIT.
(2) Soufraki v. United Arab Emirates:- Tribunal
investigated his claim of Italian nationality and
found that he had lost it when he acquired
Canadian citizenship.
(3) Champion Trading v. Egypt ------ US
nationals who were also found to be Egyptian
nationals were denied the right to bring a claim
against Egypt (based on the US-Egypt BIT)
because of the rule in Article 25(2)(a) ----- which
excludes nationals having the nationality of the
Contracting State Party to the dispute.
(4) Siag and Vecchi v. Egypt :- Mr. Siag and his
mother Ms. Vecchi ---- submitted a claim under
the Italy-Egypt BIT as Italian nationals -----
Tribunal -----examined extensively the Egyptian
law in order to determine whether they had
ceased to be Egyptian nationals ----- held --- Ms.
Vecchi had lost her Egyptian nationality on the
date she re-acquired her Italian nationality ----
and ---- also held ----- Mr. Waguih Siag had lost
his Egyptian nationality by virtue of his failure to
take formal steps to retain it.
 NATIONALITY OF CORPORATIONS
• Corporate nationality --- more complex --- than that of
individuals.
• For corporate nationality --- most commonly used criteria ---
incorporation or the main seat of business.
• The nationality of corporation in international law plays a vital
role as the jurisdiction of the tribunals will be decided on the
basis of the nationality of investors.
• Legal system and treaties use different criteria to determine
the nationality of a corporate personality.
• The basis for deciding the nationality of a corporate
personality is the state where it is registered with principal
place of business or where its place of business is established.
• The Energy Charter Treaty (ECT) definition of investor
includes ‘a company or other organization organized in
accordance with the laws applicable to contracting
parties’.
• In Saluka v. Czech Republic, the claimant was a legal
person incorporated under the law of Netherlands. The
respondent objected that Saluka was merely a shell
company controlled by a Japanese owner. As per the BIT
signed between the parties, the term ‘investor’ includes
legal personality constituted under the laws of
Netherlands. The tribunal observed that a company
which has no real connection with the state party or
company which is not constituted under the laws of that
state should not be entitled to invoke the provisions of
the treaty.s
• In Republic of Guinea v. Democratic Republic of
Cang popularly called as Ahmadou Sadio Diallo
Case ---- ICJ decided on the scope of customary
principles of international law. In protecting the
right of shareholders, the court affirming decision
of Barcelona case it held that ‘international law
recognizes separate personality of corporation as
it exist under municipal law and the state of the
corporation can present claims on behalf of it’.
• In cases where incorporation is the only criteria --- tribunals
--- emphasized on the company’s owners.
• In Tokios Vs. Ukraine --- claimant was --- business enterprise
estbd. under laws of Lithuania. But --- nationals of Ukraine
owned 99 percent of its shares. Respondent --- argued that
the claimant was not a genuine entity of Lithuania ---- as it
was owned and controlled by the Ukkrainian nationals.
Held --- Claimant was an investor of Lithuania under the BIT
and a ‘national of another Contracting State under Art. 25 of
ICSID Convention’---- Also ---- Art. 1(2)(b) of Lithuania – Ukraine
BIT defines “investor” with respect to Lithuania as “Any entity
estb. In territory of the Republic of Lithuania in conformity with
its laws and regulations”.
• In few treaties --- “preponderant interest”
(having importance , or of superior force) of
nationals in a company --- sufficient.
• In BIT between Iran and Switzerland --- grants
investor status to a legal entity which is
established under the law of the state in
question provided it has real economic
activities in that country.
 ARTICLE 25 (2)(B)OF ICSID CONVENTION

• Provides --- Agreement to treat a local company as

a foreign national because of foreign control.
• Often host states require investments to be made
only through locally incorporated companies ---
which will normally not qualify as foreign investors
and will not enjoy the protection under the ICSID
Convention.
• But --- a specific provision is contained in the
Convention to address the phenomenon of
investments made in Corporations that are
registered in the host state.
• Art. 25 (2)(b) --- deals with juridical persons
that are incorporated in the host state, but
are controlled by nationals of another state.
• On the basis of an agreement between the
host state and the investor ---- these may be
treated as “Foreign Nationals”.
• Under Art. 25 (2)(b), the agreement ----
supported by actual foreign control. (Klockner
Vs. Cameroon)
• Only mere agreement is not enough.
• In Vacuum Salt Vs. Ghana :-
 Claimant was incorporated in Ghana.
 An ICSID clause was contained in an
agreement between the parties.
 Tribunal --- held --- the ICSID clause implied an
agreement to treat the claimant as “Foreign
National” --- but --- the existence of “foreign
control” needs to be examined as a separate
requirement.
 NATIONALITY PLANNING OR TREATY
SHOPPING AND DENIAL OF BENEFIT
CLAUSE
• Generally, a sensible investor invests his investment in a
manner that affords maximum protection under the existing
treaties.
• This is done through the establishment of a company in a
state that has favourable treaty relations with the host state
and accepts its incorporation as a basis for corporate
nationality.
• Sometimes --- states may hold such practices ---- undesirable.
• Saufraki Vs. UAE (Discussed earlier).
 SHAREHOLDERS AS INVESTORS
• Investments generally take place through the ac
quisition of shares in a company that is different
from the investor's nationality.
• Barcelona Traction Case (Discussed)
• Diallo Case (discussed)
• Under Art. 25(2)(b) of ICSID --- shareholder
protection is a very serious issue where
investments are made through companies
incorporated in the host state and the local
company is the immediate investor.
• Protection of shareholders ---- not restricted
to ownership in the shares.
• It usually applies to the company’s assets.
• Adverse action by the host state in breach of
treaty guarantees the affect the financial
situation of the company that provides rise to
shareholders’ rights (GAMI Vs. Mexico).