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Scope And Definition

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This paper analyses the scope and definitions of international investment agreements (IIAs). IIAs must specify not only their geographical and temporal coverage, but, most importantly, their subject-matter coverage. This is done primarily through the definitions of the terms “investment” and “investor”, which form the main focus of this paper. The definition of “investment” determines economic interests, to which governments extend substantive IIA protections, while the definition of “investor” specifies the range of individuals and legal entities that can benefit from the treaty.

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT












SCOPE AND DEFINITION




UNCTAD Series on Issues in International Investment
Agreements II










UNITED NATIONS


New York and Geneva, 2011




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NOTE



As the focal point in the United Nations system for investment


and technology, and building on 30 years of experience in these
areas, UNCTAD, through the Division on Investment and Enterprise
(DIAE), promotes understanding of key issues, particularly matters
related to foreign direct investment (FDI). DIAE assists developing
countries in attracting and benefiting from FDI by building their
productive capacities, enhancing their international competitiveness
and raising awareness about the relationship between investment
and sustainable development. The emphasis is on an integrated
policy approach to investment and enterprise development.


The term “country” as used in this study also refers, as
appropriate, to territories or areas. The designations employed and
the presentation of the material do not imply the expression of any
opinion whatsoever on the part of the Secretariat of the United
Nations concerning the legal status of any country, territory, city or
area or of its authorities, or concerning the delimitation of its
frontiers or boundaries. In addition, the designations of country
groups are intended solely for statistical or analytical convenience
and do not necessarily express a judgment about the stage of
development reached by a particular country or area in the
development process.


The following symbols have been used in the tables:


Two dots (..) indicate that data are not available or are not separately
reported.


Rows in tables have been omitted in those cases where no data are
available for any of the elements in the row.


A dash (-) indicates that the item is equal to zero or its value is
negligible.




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UNCTAD Series on International Investment Agreement II



A blank in a table indicates that the item is not applicable.


A slash (/) between dates representing years, e.g. 1994/1995,
indicates a financial year.


Use of a hyphen (-) between dates representing years, e.g. 1994-
1995, signifies the full period involved, including the beginning and
end years.


Reference to “dollars” ($) means United States dollars, unless
otherwise indicated.


Annual rates of growth or change, unless otherwise stated, refer to
annual compound rates.


Details and percentages in tables do not necessarily add to totals
because of rounding.


The material contained in this study may be freely quoted with
appropriate acknowledgement.



UNCTAD/DIAE/IA/2010/2



UNITED NATIONS PUBLICATION


Sales No. 11.II.D.9
ISBN 978-92-1-112815-4



Copyright © United Nations, 2011


All rights reserved
Printed in Switzerland




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PREFACE


This volume is part of a series of revised editions – sequels –
to UNCTAD’s “Series on Issues in International Investment
Agreements”. The first generation of this series (also called the
“Pink Series”) was published between 1999 and 2005 as part of
UNCTAD’s work programme on international investment
agreements (IIAs). It aimed at assisting developing countries to
participate as effectively as possible in international investment
rulemaking at the bilateral, regional, plurilateral and multilateral
levels. The series sought to provide balanced analyses of issues
that may arise in discussions about IIAs, and has since then
become a standard reference tool for IIA negotiators,
policymakers, the private sector, academia and other
stakeholders.


Since the publication of the first generation of the Pink
Series, the world of IIAs has changed tremendously. In terms of
numbers, the IIAs’ universe has grown, and continues to do so –
albeit to a lesser degree. Also, the impact of IIAs has evolved.
Many investor-State dispute settlement (ISDS) cases have
brought to light unanticipated – and partially undesired – side
effects of IIAs. With its expansive – and sometimes contradictory
– interpretations, the arbitral interpretation process has created a
new learning environment for countries and, in particular, for IIA
negotiators. Issues of transparency, predictability and policy
space have come to the forefront of the debate. So has the
objective of ensuring coherence between IIAs and other areas of
public policy, including policies to address global challenges
such as the protection of the environment (climate change) or
public health and safety. Finally, the underlying dynamics of IIA
rulemaking have changed. A rise in South–South FDI flows and
emerging economies’ growing role as outward investors – also




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vis-à-vis the developed world – are beginning to alter the context
and background against which IIAs are being negotiated.


It is the purpose of the sequels to consider how the issues
described in the first-generation Pink Series have evolved,
particularly focusing on treaty practice and the process of arbitral
interpretation. Each of the sequels will have similar key
elements, including (a) an introduction explaining the issue in
today’s broader context; (b) a stocktaking of IIA practice and
arbitral awards; and (c) a section on policy options for IIA
negotiators, offering language for possible new clauses that better
take into account the development needs of host countries and
enhance the stability and predictability of the legal system.


The updates are conceptualized as sequels, i.e. they aim to
complement rather than replace the first-generation Pink Series.
Compared to the first generation, the sequels will offer a greater
level of detail and move beyond a merely informative role. In
line with UNCTAD’s mandate, they will aim at analysing the
development impact and strengthening the development
dimension of IIAs. The sequels are finalized through a rigorous
process of peer reviews, which benefits from collective learning
and sharing of experiences. Attention is placed on ensuring
involvement of a broad set of stakeholders, aiming to capture
ideas and concerns from society at large.


The sequels are edited by Anna Joubin-Bret, and produced by
a team under the direction of Jörg Weber and the overall
guidance of James Zhan. The members of the team include
Wolfgang Alschner, Bekele Amare, Hamed El-Kady, Jan
Knörich, Sergey Ripinsky, Claudia Salgado, Ileana Tejada and
Elisabeth Tuerk.




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This paper is based on a study prepared by Peter Muchlinski.
Anna Joubin-Bret and Sergey Ripinsky finalized the paper.
Comments were received from Sedat Çal, Vilawan
Mangklatanakul, Julie A. Maupin and Khondaker Golam
Moazzem. The paper also benefited from comments made at an
ad-hoc expert group meeting convened by UNCTAD in
December 2009 on “Key issues in the evolving system of
international investment rule-making”, which was attended by
numerous experts and practitioners in this field.







Supachai Panitchpakdi


January 2011 Secretary-General of UNCTAD






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CONTENTS


PREFACE ........................................................................................iv
ABBREVIATIONS..........................................................................xi
EXECUTIVE SUMMARY .............................................................xi
INTRODUCTION ............................................................................1
I. EXPLANATION OF THE ISSUE.............................................5
A. Scope of international investment agreements .......................5
B. Definitions of key terms.............................................................7
1. Definition of investment........................................................7
2. Definition of investor...........................................................13



II. STOCKTAKING AND ANALYSIS .......................................21
A. Investment.................................................................................21
1. Main types of definitions.....................................................21
2. The broad asset-based definition of investment ..................24
3. Narrowing the scope of the term “investment” ...................28
4. The impact of article 25(1) of the ICSID Convention .........48
5. “Investment” and group structures in TNCs........................66
B. Investor .....................................................................................72
1. Natural persons ....................................................................73
2. Legal entities .......................................................................80
C. Territory ...................................................................................99

III. ASSESSMENT AND POLICY OPTIONS ..........................111
A. Investment...............................................................................112
B. Investor ...................................................................................122





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REFERENCES .............................................................................127


CASES AND ARBITRAL AWARDS.........................................133


SELECTED UNCTAD PUBLICATIONS ON
TRANSNATIONAL CORPORATIONS AND FOREIGN
DIRECT INVESTMENT.............................................................139



QUESTIONNAIRE ......................................................................147



FIGURES


Figure 1. Indirect investment with the parent company
originating from the host State .............................................16

Figure 2. Indirect investment structured through a third State which


does not have an IIA with the host State ..............................17

Figure 3. Example of an indirect investment (group structure)...........67

Figure 4. Investment by an investor from a non-Contracting Party


through an intermediate company established in the
Contracting Party .................................................................87



Figure 5. Investment by an investor from the host State through an


intermediate company established in the Contracting
Party .....................................................................................88



Figure 6. Investment through an intermediate company


incorporated in a non-Contracting Party ..............................90




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BOXES


Box 1. Selected examples of broad asset-based definitions
in IIAs................................................................................ 25

Box 2. Scope of investment in the Canadian model
BIT (2004) ......................................................................... 34

Box 3. Rwanda-United States BIT (2008) ................................... .42

Box 4. Examples of the widening scope of the term
“investment” ..................................................................... 50

Box 5. The case of Salini Costruttori SpA and Italstrade
Spa v. Kingdom of Morocco ............................................. .54

Box 6. The Case of Patrick Mitchell v. Democratic
Republic of Congo. ............................................................ 56









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ABBREVIATIONS


ASEAN Association of South-East Asian Nations
BIT bilateral investment treaty
CARICOM Caribbean Community
CARIFORUM Caribbean Forum
COMESA Common Market for Eastern and Southern
Africa
ECT Energy Charter Treaty
EPA economic partnership agreement
EU European Union
FDI foreign direct investment
FTA free trade agreement
GATS General Agreement on Trade in Services
ICJ International Court of Justice
ICSID International Centre for Settlement of
Investment Disputes
IIA international investment agreement
IMF International Monetary Fund
IPR intellectual property right
LDC least developed country
NAFTA North American Free Trade Agreement
OECD Organisation for Economic Cooperation and


Development
R&D Research and development
SCC Stockholm Chamber of Commerce
TNC transnational corporation
UNCITRAL United Nations Commission on International Trade


Law
WTO World Trade Organization




EXECUTIVE SUMMARY


This paper analyses the scope and definitions of international
investment agreements (IIAs). IIAs must specify not only their
geographical and temporal coverage, but, most importantly, their
subject-matter coverage. This is done primarily through the
definitions of the terms “investment” and “investor”, which form the
main focus of this paper. The definition of “investment” determines
economic interests, to which governments extend substantive IIA
protections, while the definition of “investor” specifies the range of
individuals and legal entities that can benefit from the treaty.


To a large extent, the definitions outline the boundaries of a
country’s exposure to possible investor–State claims. The outcomes
of many arbitral decisions of the past decade have depended on a
tribunal’s interpretation of whether a particular transaction or asset
qualified as a protected investment and/or whether the claimant
qualified as a protected investor. Arbitral decisions have revealed a
wealth of implications that particular definitional approaches or
particular treaty wording may have. Accordingly, the second edition
of this paper not only considers how investment and investor been
defined in existing investment agreements but also how different
definitions are likely to be interpreted.


With respect to the definition of investment, while the broad and
open-ended asset-based definition has remained wide-spread in
BITs focusing on investment protection, newer agreements have
used techniques for narrowing the scope of the definition. This trend
is likely to have been a reaction to those arbitral awards which
interpreted open-ended definitions in an over-extensive manner. In
particular, some treaties started to use a closed-list definition instead
of an open-ended one, introduce certain objective criteria or
elements to determine when an asset can be considered an
investment, explicitly exclude certain types of assets and employ
other narrowing techniques. Arbitral practice has further highlighted




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the importance of a proviso that a treaty should apply only to those
investments that are made in accordance with host State law.


An additional complication that has emerged with regard to the
term “investment” is the interrelationship between its scope under
the applicable IIA, on the one hand, and under Article 25(1) of the
International Centre for Settlement of Investment (ICSID)
Convention, on the other. Tribunals have differed as to which of the
two should be treated as decisive as well as to the exact meaning of
“investment” under the ICSID Convention, which requires the
existence of an “investment” but does not define the term. An
important question in this debate is whether an investment must
contribute to the economic development of the host State in order
for the ICSID Convention to apply.


With respect to the definition of investor, there are distinct
issues concerning individuals and legal entities. The position of
natural persons is generally less controversial, and the relevant
questions center mostly on whether treaty coverage can – in addition
to citizens of the home States – be extended to its permanent
residents and/or dual nationals. The increased mobility of global
population also means that the economic links of a person with the
country of his/her citizenship may be weak or even non-existent,
hence the issue of whether such person should be covered by a
treaty.


The status of legal entities is more complicated. The nationality
of a company can be determined using a number of tests, each
having its advantages and disadvantages. The country-of-
incorporation test remains prevalent in IIAs, even though its
limitations have been exposed in several high-profile cases that have
dealt with “treaty shopping” practices. Where an IIA employs the
country-of-incorporation test as the sole criterion, the issue has
arisen whether an arbitral tribunal must “pierce the corporate veil”




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in order to identify the nationality of the company’s ultimate owners
or controllers. Most arbitral tribunals have decided that the country-
of-incorporation test does not authorize or require them to do so.


This issue needs to be given due attention, if a State wishes to
eliminate the risk of claims by “mailbox” companies. There has
been an increasing trend to combine the formal country-of-
incorporation test with a requirement that a company have its seat in
the same country and/or carry out real economic activities there.
Another alternative is to supplement the country-of-incorporation
test with a denial-of-benefits clause, even though early arbitral
practice has demonstrated that a discretionary denial-of-benefits
clause may be not as effective in practice as generally believed.
Finally, there is a possibility to determine the nationality of an
investor by reference to the nationality of individuals who ultimately
own or control it. Prone to practical difficulties, this method would,
however, allow “piercing the corporate veil” in order to determine
the “true” nationality of the company. The country-of-incorporation
test will suffice, however, if a State is willing to grant IIA protection
to investments regardless of the nationality of persons who
ultimately own or control them. In the context of definitional
clauses, negotiators have to further consider issues of multiple
claims and claims by minority shareholders.


It has to be remembered that there is no such thing as the best
definition of “investment” or “investor”; they are simply a reflection
of each country’s preferences and policies. This paper discerns the
implications of particular treaty approaches and wording in order to
assist States in finding a formula that would suit their policy
objectives.


Furthermore, it is obvious that the definitions alone cannot
establish an appropriate balance between affording a sufficient




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degree of protection to foreign investors and preserving the vital
interests of the host country, including its regulatory policy space.
This fundamental goal needs to be kept in mind when drafting both
the definitions and each individual substantive obligation of the
investment agreement.









INTRODUCTION


This paper is the first of a series of revised editions of the
UNCTAD Series on Issues in International Investment Agreements
(IIAs). It is the purpose of this paper to consider how the issue of
scope and definition has evolved, both in treaty practice and in the
process of arbitral interpretation. The universe of IIAs has grown
dramatically since the publication of the first edition of this paper in
1999. During 2008, the network of IIAs continued to expand,
although the number of bilateral investment treaties (BITs)
concluded in 2008 (59) was lower than in 2007 (65). The total
number of BITs rose to 2,750 at the end of 2009 (UNCTAD 2010,
p. 81). Equally, the impact of IIAs has developed and changed. In
their inception, during the period of post-World War II
decolonization, IIAs were negotiated to have broad coverage and
protect against many potential threats. In particular, the threat of
mass expropriation in the course of strategic national economic
plans was seen as a major problem for investors in newly
independent host countries that had been former colonies of the
major powers. On the other hand, IIAs had rather limited dispute
settlement provisions that were centered on State-to-State
mechanisms. However, since the adoption, in 1965, of the
Washington Convention on the Settlement of Investment Disputes
between States and Nationals of other States (ICSID Convention)
this has changed and IIAs, especially BITs, routinely have an
investor–State dispute settlement clause. In such clauses, recourse to
ICSID is often provided as the main arbitration forum.


Until recently, such forms of dispute settlement were relatively
uncommon. But since the beginning of the twenty-first century,
investor–State dispute settlement cases have increased at an
unprecedented rate.1 As a result, an extensive arbitral interpretation
of specific clauses in IIAs has arisen, including scope and definition
clauses. This is referred to sometimes as “case-law”, though the
more appropriate description is “arbitral interpretation”, as awards
of tribunals in this field are not binding on third parties to the




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dispute and there is no doctrine of precedent that requires
subsequent tribunals to follow the reasoning of earlier awards. That
said, the outcomes of awards and the reasons for them cannot be
ignored in any contemporary discussion of IIA clauses.


The arbitral interpretation process has created a new learning
environment for countries and, in particular, for IIA negotiators.
Countries and negotiators are learning from their experiences and
new challenges lie ahead as the first generation of treaties comes up
for renewal and renegotiation. Specifically, given the kinds of
interpretations the scope and definition clauses have had in recent
years, concern has grown over the actual coverage of IIAs and
whether they are offering too wide a field of support for investors
and the various categories of investments that specific treaties have
been found to protect. The risk to the policy space of the host
country is enhanced in this way, as transactions that were not
thought to be investments at the time of the agreement’s signature
might suddenly become covered. For example, in recent arbitral
awards, as will be seen below, certain types of contractual claims
have now been regarded as “investments” under IIA provisions and
so are capable of being the subject of a claim before an arbitral
panel. A number of other phenomena that may appear undesirable to
States have emerged, such as structuring of investments by domestic
investors through foreign companies to avail themselves of the IIA
protection; other forms of treaty shopping; risk of multiple claims
brought by various links in the corporate chain under different IIAs;
and others.


Such concerns result in a changing environment for negotiators
and a change in negotiating objectives. In particular, it is now open
to discussion whether IIAs have become too one-sided in that
expansive interpretations of the scope of coverage and protection
offered by such agreements have led to fears that the host country’s
national policy space and right to regulate have been unduly




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curtailed in ways that might adversely affect genuine development
policy objectives (UNCTAD 2003, chapters V and VI). In addition,
given the emphasis placed by host countries on investor and
investment promotion, it may be useful for protection to be more
targeted covering not all investments, but only investments that can
contribute to development.


In the light of such concerns, the negotiator’s objective today
may be to ensure that the treaty covers those investors/investments
that can further development objectives. Such objectives have
themselves changed over time since the first BITs were negotiated.
In particular, although still very significant, no longer is the major
capital-intensive natural resource extraction or infrastructure
development project the main type of development-oriented
investment project covered by the agreement. In more recent years,
the emphasis has shifted to a larger number of small- and medium-
sized projects aimed towards export-oriented manufacturing,
services provision and R&D development in the developing host
country (UNCTAD 2002; 2004; and 2005a). This entails two
objectives in particular. First, IIAs should be focused on investment
that generates development benefits and, secondly, that the stability
and predictability of the legal system, required by investors and their
investments, is enhanced by clear and focused rules. This is
particularly important in the context of investment liberalization
agreements with rights of entry and establishment. Here the
definition of protected investors and investments needs to be
confined to what really needs to be covered so as to ensure a balance
of protection rights for investors and investments and legitimate
rights of regulation for host countries. Equally, there are awards that
stress the need to consider the development dimension in
determining the protected subject matter of an IIA. The analysis
contained in these awards is of value to the evolution of a genuine
development-friendly new generation scope and definition clause.




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Accordingly, these awards, and awards critical of this perspective,
will be considered in detail in Section II below. Before that is done,
Section I will provide an overview of the specific issues arising in
the context of scope and definition clauses. Finally, Section III will
put forward certain policy options for future agreements and will
offer examples of possible new model clauses that take more fully
into account the development needs of host countries.



Note



1 For recent figures on investor–State arbitrations, see UNCTAD 2010,


p. 83.




I. EXPLANATION OF THE ISSUE




A. Scope of international investment agreements


In relation to treaty practice, the most-used definition of
investment remains the broad asset-based definition of “investment”
and the nationality-based definition of “investor”. As will be seen
below, both terms have been extensively interpreted in arbitral
awards and this has given rise to concerns about the breadth of
coverage of each term.


As a result, a further trend has been the increasing
experimentation in newer agreements with techniques for narrowing
the scope of these broad interpretations. In relation to “investor”,
these focus on nationality, ownership, control and in the case of
legal persons, company seat and requirement of real economic
activities in the home country (though many agreements still rely on
a formal incorporation test). In the case of investments, narrowing
techniques include:


• Applying the protection of the treaty only to investments made
in accordance with host country law;


• Using a closed-list definition instead of an open-ended one;
• Excluding of portfolio shares by restricting the asset-based


approach to direct investment only;


• Introducing investment risk and other objective factors to
determine when an asset should be protected under the treaty;


• Excluding certain types of assets such as certain commercial
contracts, certain loans and debt securities and assets used for
non-business purposes;




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• A more selective approach to intellectual property rights as
protected assets; and


• Dealing with the special problems of defining the investment in
the case of complex group enterprises as investors.


In addition to the key terms of “investor” and “investment”,
which define the coverage of protected persons and assets under the
IIA, there are at least two further dimensions to the scope of an
investment agreement, namely, the geographical and temporal
scope. These are not usually determined by means of definitions, but
through specific provisions, whether among the instrument’s “final
clauses” or in special provisions. The geographical scope of an
investment agreement is determined, to begin with, by the number
and identity of the States that are party to it. It is also determined by
the territorial limits of the States concerned. The definition of the
term “territory” is important in this respect and will be briefly
addressed in Section II.C. To ascertain the exact temporal scope of
an agreement, its date of entry into force with respect to each party
and its duration has to be determined. Apart from such general
international law questions, the temporal scope of an agreement
raises the issue of whether the agreement applies to an investment
established prior to its entry into force; this is often addressed in the
definition of “investment” and will be discussed in connection with
that term. Another issue is whether the provisions of an agreement
continue to apply to established investments subsequent to the
treaty’s formal termination. Generally, this issue is not addressed in
provisions on definitions and will not be discussed here.


States can further circumscribe the scope of IIAs by excluding
certain matters such as taxation, government procurement or
subsidies and grants, or by adding exceptions or reservations, etc.
These issues are not discussed here and are left for consideration in
other UNCTAD publications. This paper primarily addresses the
problems of definitions, and especially those of the terms




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“investment” and “investor”, around which cluster most of the
important questions and whose importance has been highlighted by
international arbitration.


B. Definitions of key terms


Definitions serve many purposes. In international agreements,
they raise difficult policy issues and are often the subject of hard
bargaining between the negotiating parties. Accordingly, they
should be seen not as objective formulations of the meaning of
terms, but as part of an agreement’s normative content, since they
determine the extent and the manner in which the other provisions
are to be applied. Thus, the decision on a definition of terms will be
made on a case-by-case basis, taking into account the purpose and
circumstances of the negotiations at stake. In addition, the Vienna
Convention on the Law of Treaties requires that tribunals look first
to the ordinary meaning of the terms of the treaty as the best
manifestation of negotiators intent, and that, as a rule, the specific,
substantive provisions of a treaty are given priority over generalized
principles such as those contained in preambles.1 Therefore,
negotiators need to make their intentions manifest in the specific
provisions, including definitions.


In relation to scope and definition clauses the foregoing
considerations raise the question of how best to define the terms
“investment” and “investor” in the light of overarching priorities
and development concerns.


1. Definition of investment


(i) Historical development of the concept


The conception of what constitutes foreign investment has
changed over time as the nature of international economic relations




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has changed. The development of the types of assets that could be
the subject of protection under international investment agreements
has widened significantly since the mid-nineteenth century. Prior to
that time, trans-frontier capital flows typically assumed the form of
lending by European investors to borrowers in other European
States (Kindleberger 1993, pp. 208-224). Foreign direct investment
(FDI) was not as such the main form of international investment.
Rather, foreign-owned property in a country often took the form of
tangible property and financial interests in investments.
International law was thus concerned principally with the protection
of such property against seizure and the right of creditors to collect
debts. Some countries negotiated treaties that protected foreign
property, such as merchandise and vessels, against expropriation.2


By the mid-twentieth century, the protection of foreign
investment in the form of equity stock in companies became an
increasing concern of international law. Since much FDI was in the
primary sector, concession agreements for natural resource
extraction became a matter of importance in international law.3 By
the late twentieth century, the forms of foreign investment became
more diverse. As technological innovations spread around the
world, the producers of technology sought to protect their patents
and copyrighted materials against infringement. The consolidation
of business enterprises to form transnational corporations (TNCs)
with global name recognition has given great value to certain
trademarks that are associated with high quality and/or high demand
goods. Thus, the regulation of intellectual property has become a
concern of growing importance to national and international law.
Many developed economies that had concentrated their productive
resources in the manufacturing sector in the nineteenth century
began to shift a large portion of these resources to the services
sector, and continuing improvements in communication and
transportation made it feasible for service providers to render
services to clients in foreign countries (UNCTAD 2004). As this
suggests, changing circumstances create new ways of investment in




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foreign countries. In other words, there is an increasing array of
foreign-owned assets that have economic value and thus may be
regarded as foreign investment.


(ii) Need for increased precision


This creates the potential for investment to become an open-
ended and vague term in IIAs. Clear benchmarks as to what is an
investment must be developed so as to assess whether a given asset
or transaction is an investment or some other kind of uncovered
commercial transaction. These benchmarks will form the basis of
treaty text that may subsequently be interpreted on a case-by-case
basis in an arbitral award. Where it is clear that the IIA in question
sets limits as to what can be regarded as an investment under the
terms of the agreement, a tribunal must respect those limitations.
Thus, in the negotiating process, it is now important to consider how
to send a clear message as to the mutually agreed limits of protected
investments under the IIA.


The continued domination of the traditional broad asset-based
definition risks the possibility that transactions that were not thought
to be investments at the time the agreement was entered into might
nonetheless become covered as a result of an open-ended nature of
the definition. An issue of contractual claims has arisen in this
regard and, in particular, the question of the distinction between an
ordinary commercial transaction and an investment. Many IIAs
containing a broad asset-based definition include “claims to money
and claims under a contract having a financial value”. This
category may be taken as suggesting that the term “investment”
encompasses even ordinary commercial transactions unless the latter
are specifically excluded. The language does not seem to require
that the contracts be long-term contracts. As written, it does not
appear to distinguish between transactions that might be regarded as
trade in services and those that might be regarded as investment in




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services. In the light of such broad provisions, there is a danger of a
gradual extension, by arbitral tribunals, of the types of contractual
claims that can be regarded as assets capable of protection under the
broad asset-based definition of investment.


(iii) Narrowing the definition


Because of the risk of an overbroad interpretation of what
constitutes investment, various restrictions on a wide approach can
be introduced into the scope and definition clause. In the first place,
certain specific assets could be excluded from the definition. For
example, portfolio shares can be excluded from the definition of
covered assets. One reason for this possibility is that the risk
involved in some portfolio investments for the investor would not be
as high as that involved in a direct investment, since the former
investment could normally be pulled out of a host country more
easily than the latter (Sornarajah 2004, pp. 227-228). Other
approaches can restrict protection only to direct investments or
investments made though a locally established enterprise, thereby
emphasizing that only a contribution based on a transfer of finance
and managerial control over the investment will be sufficient to
warrant protection, given the greater commitment of resources and
risk that this entails on the part of the investor. In more recent years,
as noted in Section II below, the use of a tightly defined “closed
list” of protected assets has also become the practice of some
countries in their IIAs. This allows for a wide range of interests to
be protected but with a clear set of defining characteristics allowing
for a clearer distinction to be drawn between covered and uncovered
assets and transactions.


An additional requirement is that only investments made in
accordance with host country law could be given protection. In this
way, investments that fail to abide by the law of the host country, as
applied upon entry and establishment, will lose the protection of the
IIA, as they do not qualify as protected investments due to their




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illegality. Depending on the exact formulation of the requirement, it
could conceivably be used to deprive an investor of the treaty
protection for serious violations of host country law admitted during
the life of an investment, i.e. after it is made.


In is also possible to include objective criteria for the definition
of an investment to be covered by the agreement, based on
contribution of capital, investment risk, duration and contribution to
development. Finally the problems created by an overbroad
protection of intellectual property rights (IPRs) as investments need
to be considered. Extending protection to those IPRs that are not
protected under domestic law of a State may lead to an undue
restriction of regulatory discretion in dealing with such rights in the
context of the need for technology and skills transfer as part of its
development policy. Accordingly, more focused and limited
protection could be required through a more specific definition of
protected IPRs.


(iv) The application of Article 25(1) of the ICSID
Convention


In addition to these problems, a further difficulty emerges from
the fact that many arbitrations are based on a BIT with an open-
ended asset-based definition of “investment” and are at the same
time brought before the International Centre for Settlement of
Investment Disputes established under the ICSID Convention. The
latter also uses the term “investment”, without, however, defining it.
Article 25(1) of the ICSID Convention, the pillar of ICSID
jurisdiction, states:


“[t]he jurisdiction of the Centre shall extend to any legal dispute
arising directly out of an investment, between a Contracting
State (or any constituent subdivision or agency of a Contracting
State…) and a national of another Contracting State, which the




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parties to the dispute consent in writing to submit to the
Centre.” (Emphasis added.)


As will be discussed fully in Section II.A.(4), arbitral tribunals
have differed as to whether the definition of investment given in the
BIT or an interpretation of “investment” under Article 25(1) of the
ICSID Convention is decisive. This has significant implications for
a development-oriented approach to defining the term. Certain
tribunals have interpreted the term “investment” in Article 25(1) as
connoting certain objective features that characterize any investment
as well as certain development-related impacts, even though these
elements are not expressly mentioned in Article 25. Under this
approach, the term “investment” under the ICSID Convention can
turn out to be narrower that the same term in the applicable IIA,
especially if the latter uses a broad asset-based definition. Other
tribunals have held that the definition found in the applicable IIA
should be a controlling one. The question remains which approach
should prevail. From a development perspective, the former would
appear preferable and, given the importance of ICSID as a centre for
investor–State arbitration under IIAs, it would seem reasonable to
suggest that the ICSID Convention determines subject-matter
jurisdiction rather than the individual BIT given the choice of the
parties to take the dispute to ICSID. On the other hand such a
perspective could encourage investors to go to ad hoc arbitration
based on the BIT alone rather than to ICSID.


(v) The impact of complex corporate group structures


Finally, mention must be made of the special problems arising
in the case of complex group enterprises as investors. Broad
definitions of investment recognize both direct and indirect
shareholding as protected assets which can lead to multiple claims.
That is, a parent company can structure its investment in the host
State through one or more intermediate holding companies
established in various countries. Each of these companies will




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potentially have a right to bring a claim, provided that the relevant
country has an IIA with the host State. Claims made by intermediate
holding companies arising out of their investments in subsidiaries
are not uncommon. They are seen by tribunals as within the
jurisdiction of BITs containing references to interests in companies
as a category of protected investment (Dolzer and Schreuer 2008,
pp. 54–55). This has led to the use of holding or shell companies,
incorporated in jurisdictions enjoying investment treaty relations
with host countries, as a means of enhancing protection under IIAs,
especially where the home country of the parent company has no
treaty in place with a given host country. This practice is often
referred to as “treaty shopping”. The implications of this situation
will be further considered in Section II.A.(5).


The reference to interests in companies typically does not
require that the investor’s interest or participation in the company be
a controlling one. Indeed, minority shareholdings are generally
protected under IIAs and arbitral tribunals have supported this
approach (McLachlan et al. 2007, pp. 187–189).


2. Definition of investor


Investment agreements generally apply only to investment by
those who qualify as covered investors according to the agreement’s
provisions. The definition of the term “investor” thus can be critical
to determining the scope of an investment agreement. Two general
issues arise in defining the term “investor”: what types of person or
entity may be considered investors, and what are the criteria that
determine that a person is covered by an agreement? Two types of
person may be included within the definition of “investor”: natural
persons or individuals and legal persons, also referred to as legal or
juridical entities. Sometimes, the term “investor” is not used.
Instead, agreements refer to “nationals” and “companies”, with the




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former defined to include natural persons and the latter defined to
include a range of legal entities.4


(i) Natural persons


In relation to the category of natural persons, the major issue
concerns the determination of whether a natural person is covered
by an agreement. This is based on the qualifying links of the person
with the State party to the agreement. Typically, this is a nationality
link but other links, such as permanent residence, domicile,
residence or combinations thereof are also in use. For natural
persons, the criteria for determining nationality in the IIA usually
refer to the relevant national laws of the Contracting parties for the
determination of nationality (Schlemmer 2008, pp. 69–70).
Normally, this raises few problems in practice. In most cases, the
individual investor seeking protection under the IIA is the national
of another State Party. However, in cases of dual nationality, as will
be noted fully in Section II.B.(1), arbitral awards have so far refused
to apply the general principle found in international law based on
the effective link test, so far as personal jurisdiction for the purposes
of ICSID arbitration is concerned. Under customary international
law, a State can exercise diplomatic protection on behalf of one of
its nationals with respect to a claim against another State, even if its
national also possesses the nationality of the other State, provided
that the dominant and effective nationality of the person was of the
State exercising diplomatic protection (cf. Nottebohm Case and
Barcelona Traction Case).5 Typically, this test is not found in
existing investment agreements, which tend to be silent on the
matter of dual nationality. Whether this situation is supportable in
practice will be considered further in Section II.B.(1)(c).


(ii) Legal entities


The category of legal entities, by contrast, can be defined to
include or exclude a number of different types of entities. Entities
may be excluded on the basis of their legal form, their purpose or




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their ownership. Differences in the legal form of an entity may be
important to a host country in a variety of circumstances. The form
of the entity determines, for example, which assets may be reached
by creditors of the entity to satisfy debts and perhaps the extent to
which the entity can be sued in its own name in the courts. A host
country may wish to exclude from the category of covered investors
State-owned entities such as sovereign wealth funds or those entities
that, because of legal limitations on liability or susceptibility to suit,
are insulated from financial responsibility for any injuries that they
may cause. In addition, the host country may require that the entity
have real and effective commercial links with the home country
party to the relevant IIA. In this way, only investors from that
contracting party will have the right to protection under the
agreement.


Indeed, corporate nationality may raise questions of its misuse,
especially in the context of transnational corporate group structures.
For example, nationals of one contracting party to an IIA may
incorporate an entity in the other contracting party, so as to take
advantage of the IIA rules against their own country (figure 1).
Arguably, this is incompatible with the actual intent of the IIA,
which is to give protection to foreign investors from another
contracting party and not to domestic investors operating through a
foreign “shell” company. Equally, investors from a country that is
not a party to any IIAs with the host country may incorporate an
entity in a third country to take advantage of its IIA with the host
country. This is known as “treaty shopping” and it too raises
questions as to the proper approach to defining corporate investors
for the purposes of an IIA. These two situations raise the question
whether the IIA should authorize an arbitral tribunal to “lift the
corporate veil” to reach the actual controlling interests and to
determine whether they qualify, by reason of nationality, as proper
parties to the claim made under the IIA in question. Such




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arrangements have caused controversy in arbitral awards as will be
seen in Section II.B.(2)(b).


Figure 1. Indirect investment with the parent company
originating from the host State


State X (host State)


Parent
company


Local
Subsidiary


Intermediate
holding


company


State Y (home State)
IIA in place



A further problem arising out of complex corporate group


structures is whether an indirect controlling interest that possesses
the nationality of a contracting party can still make a claim on behalf
of an indirectly owned affiliate where its direct owner is located in a
non-contracting party. The specific problem here is whether a
company indirectly owned or controlled by another comes within
the scope of an agreement. For example, where company “A” has a
controlling interest in company “B” that has a controlling interest in
company “C”, does that make company “C” an investment
controlled by company “A” as well as company “B” (figure 2)? This
has particular repercussions where not every country in which the




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companies operate is a party to an agreement. Thus, to return to the
example, should company “B” have the nationality of a country not
party to the agreement, while companies “A” and “C” have the
nationality of countries party to the agreement, can company “A”
still claim the protection of the agreement despite the fact that its
investment in “C” is channeled through “B”, i.e. through a non-
party? Arbitral awards have on the whole been sympathetic to
accepting jurisdiction over such indirect claims as will be discussed
in Section II.B.(2)(b). This raises the question of how IIAs should
address the issue, especially given the proliferation of integrated
international production systems established by TNCs.


Figure 2. Indirect investment structured through a third State
which does not have an IIA with the host State


IIA


in place


State X (home State)


Company A


Local
Subsidiary


Company B


State Y (non-
Contracting Party)


State Z (host State)


Company C





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(iii) Denial of benefits


In policy terms, the issue of establishing the nationality of an
investor presents the question of the extent to which the parties to an
agreement wish to link the legal coverage of the agreement with the
economic ties between the parties and the covered investment. One
country may be seeking to establish a generally favourable
investment climate and may be prepared to extend treaty coverage to
investments that have minimal economic ties with the other party,
while another country may wish to extend treaty coverage only to
investments with strong economic ties to the treaty partners. Thus,
IIAs have included “denial of benefits” clauses to restrict the benefit
of the agreement only to investors who possess that nationality of a
contracting party. Pursuant to a denial-of-benefits clause, a host
State may deny benefits of the treaty to “letterbox” companies
constituted in the territory of the other party by persons from a third
country or from the host State itself. This is further discussed in
Section II.B.(2)(d).




Notes

1 See Vienna Convention on the Law of Treaties (1969), Articles 31-32.
2 See, e.g., Article 10, General Convention of Peace, Amity, Navigation


and Commerce, United States-Colombia, 3 October 1824 in United
States Treaty Series, No. 52.


3 See, e.g., Petroleum Development Limited v. Sheikh of Abu Dhabi,
Judgement (International Law Reports, 1951, Vol. 18, pp. 144-164);
Sapphire International Petroleum Limited v. National Iranian Oil
Company, Judgement (International Law Reports, 1967, Vol. 27, pp.
117-233); Ruler of Qatar v. International Marine Oil Company
Limited, Judgement (International Law Reports, 1953, Vol. 20, pp.
534-547); Saudi Arabia v. Arabian American Oil Company





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(ARAMCO), Judgement (International Law Reports, 1963, Vol. 27, pp.
117-233).


4 In addition, certain instruments refer specifically to “transnational
corporations” or to “multinational enterprises”. These terms tend to
appear in institutional policy-oriented documents such as the
Organisation for Economic Co-operation and Development (OECD)
Guidelines for Multinational Enterprises or the Draft United Nations
Code of Conduct on Transnational Corporations. These terms are not
generally used in IIAs and so need not be further considered in this
paper. For a full discussion of the relationship between these terms,
see Muchlinski 2007, pp. 6–7. For a deeper discussion see UNCTAD
1999, pp. 45–48.


5 Nottebohm Case (Liechtenstein v. Guatemala), ICJ, Judgement, 18
November 1953; Judgement, 6 April 1955 (ICJ Reports, 1955, pp. 4-
65); Barcelona Traction, Light and Power Company, Limited (Belgium
v. Spain), ICJ, 1970, Judgement, 24 July 1964; Judgement, 5 February
1970 (ICJ Reports, 1970, pp. 3-357).






II. STOCKTAKING AND ANALYSIS


This section shall cover the main developments in both treaty
and arbitral practice that have arisen since the publication of the first
edition of this paper. Since that time, a significant number of
investor–State disputes have been determined. While it would be
beyond the scope of this paper to cover every case in which the
terms “investment” or “investor” have been discussed, it aims to
highlight the main trends of analysis found in selected leading
arbitral awards. These are not always clear or consistent and so a
simple description of decisions is insufficient. The approach will be
to consider awards from the perspective of how far the interpretation
given therein is conducive to achieving flexibility for development
in IIAs, for the ensuring of a proper balance between the protection
of investor and investment rights and the host country’s right to
regulate in the furtherance of legitimate public and developmental
interests, as well as in relation to the creation of a clear definitional
structure.


A. Investment


1. Main types of definitions


Traditionally, IIAs have used asset-based definitions in
investor/investment protection agreements. Protection-oriented
instruments seek to safeguard the interests of the investors or, in
broader context, to promote foreign investment by safeguarding the
investors’ property rights, assets and interests. Investment is seen as
something that already exists or that will exist, by the time
protection becomes necessary. The older terminologies, which
referred to “acquired rights” or to “foreign property” (OECD Draft
Convention on the Protection of Foreign Property 1962) make the
context clear. The exact character of the particular assets is not by
itself important in this case, since protection is to be extended to
assets after their acquisition by the investor, when they form part of
the investor’s patrimony.




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Instruments mainly directed at the protection of foreign
investment contain definitions of investment that are generally
broad and comprehensive. They cover not only the capital (or the
resources) that has crossed borders with a view towards the creation
of an enterprise or the acquisition of control over an existing one,
but also most other kinds of assets of the enterprise or of the
investor, such as property and property rights of various kinds, non-
equity investment, including several types of loans and portfolio
transactions, as well as other contractual rights, including sometimes
rights created by administrative action of a host State (licenses,
permits, etc.). Such a definition is very common in BITs.


Enterprise-based definition. On the other hand, some IIAs
have opted for an enterprise-based definition pioneered by the
Canada–United States Free Trade Agreement (FTA) (1988). That
agreement defined investment as including the establishment or
acquisition of a business enterprise, as well as a share in a business
enterprise which provides the investor control over the enterprise. It
also limited investment to enterprises that were a direct investment
and thus excluded portfolio investment. The Canada-United States
FTA (1988) has since been superseded by the North American Free
Trade Agreement (NAFTA) (1992), which also employs an
enterprise-based definition albeit a much broader (open-ended) one.
The NAFTA definition designates an “enterprise” owned or
controlled by an investor as a type of investment as well as lists
more traditional types of assets including those linked to the
activities of an enterprise such as equity or debt security of an
enterprise. Also in contrast to the Canada-United States FTA, the
NAFTA definition includes portfolio investment.


An enterprise-based approach is useful where the agreement
covers pre-entry treatment as well as post-entry treatment, as the act
of entry and establishment has to take place through a specific entity
rather than through the mere transfer of assets such as goods and/or
services. By contrast, a post-entry-only agreement stresses the
protection of foreign-owned and controlled assets which do not take




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the form of an organized enterprise. Further, host States’ laws and
regulations are often addressed to enterprises (as opposed to their
shareholders), so where an enterprise constitutes a type of
investment, it becomes easier for such laws and regulations to be
caught by the term “treatment of investments” used in various IIA
obligations. Finally, by contrast to other types of investment, an
“enterprise” has legal personality: treaties with enterprise-based
approach often expressly enable a foreign investor to bring claims
not only on its own behalf but also on behalf of its enterprise, which
may have implications in terms of the amount of recoverable
damages.


Definition by reference to “commercial presence”. In some
IIAs, covered investments are limited to those that take the form of
“commercial presence”, i.e. to legal entities established by an
investor in the host State and branches or representative offices.1
This type of definition is not used in classical investment protection
treaties, however. Being very narrow in scope,2 it is most often
taken in agreements that have a specific aim of liberalizing trade in
services. In these treaties, “commercial presence” is seen as one
mode of cross-border supply of a service. Since it implies
establishing a presence in a host State, it is also a form of FDI, and
thus such agreements form part of the IIA universe. Treaties that
employ the “commercial presence” definition do not include
substantive protections of established investments (such as fair and
equitable treatment, protection against expropriation, etc). Instead,
they focus solely on providing market access opportunities.3


The European Union’s (EU’s) economic agreements take the
concept of “commercial presence” beyond services and apply it to a
broader range of economic activities. In terms of substantive
obligations, however, they are similar to services agreements and
are limited to liberalization.4 Thus, the “commercial presence”
definition serves the purposes of liberalization/market access




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agreements but is too narrow for investment protection treaties
which usually seek to protect a much broader range of assets.5


2. The broad asset-based definition of investment


As already noted, the broad asset-based definition is dominant
in the vast majority of IIAs and BITs and has been subject of
significant arbitral interpretation. It states, initially, that investment
includes “every kind of asset”, suggesting that the term embraces
everything of economic value, virtually without limitation. Some
BITs include the language “every kind of economic interest”, which
begs a distinction between “asset” and “interest” and is likely even
broader. The general definition is followed by an illustrative list of
the main categories of investment to be protected. Typically these
categories will cover:


• Movable and immovable property and any other property rights
such as mortgages, liens and pledges;


• Shares, stocks and debentures of companies or interests in the
property of such companies;


• Claims to money or to any performance under contract having a
financial value;


• Intellectual property rights and goodwill; and
• Business concessions conferred by law or under contract,


including concessions to search for, cultivate, extract or exploit
natural resources.


These categories are expressly included within the definition of
“investment”, but the listing is not exhaustive. Accordingly, assets
of “every kind” are included, even if they do not fall under the five
categories. These categories are typical of those that appear in
investment agreements with broad definitions of “investment” (see
box 1).6




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Box 1. Selected examples of broad asset-based definitions in
IIAs


China–Pakistan FTA (2006)


Article 46 Definitions


For the purpose of this Chapter,


1. The term “investment” means every kind of asset invested by
investors of one Party in accordance with the laws and regulations
of the other Party in the territory of the latter, and particularly,
though not exclusively, includes:


(a) movable and immovable property and other property rights such
as mortgages, pledges and similar rights;


(b) shares, debentures, stock and any other kind of participation in
companies;


(c) claims to money or to any other performance having an
economic value associated with an investment;


(d) intellectual property rights, in particular copyrights, patents,
trade-marks, trade-names, technical process, know-how and good-
will;


(e) business concessions conferred by law or under contract
permitted by law, including concessions to search for, cultivate,
extract or exploit natural resources.


/…




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Box 1 (continued)


Azerbaijan-Finland BIT (2003)


Article 1


Definitions


The term ‘Investment’ means every kind of asset established or
acquired by an investor of one Contracting Party in the territory of
the other Contracting Party in accordance with the laws and
regulations of the latter Contracting Party including, in particular,
though not exclusively:


(a) movable and immovable property or any property rights such as
mortgages, liens, pledges, leases, usufruct and similar rights;


(b) shares, stocks, debentures or other form of participation in a
company;


(c) titles or claims to money or rights to performance having an
economic value;


(d) intellectual property rights, such as patents, copyrights,
technical processes, trade marks, industrial designs, business
names, know-how and goodwill; and


(e) concessions conferred by law, by administrative act or under a
contract by a competent authority, including concessions to search
for, develop, extract or exploit natural resources.


Any alteration of the form in which assets are invested or reinvested
does not affect their character as investments.




/…




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Box 1 (concluded)


Botswana–Ghana BIT (2003)


Article 1


Definitions


1. For the purpose of this Agreement:


(a) ‘Investments’ means every kind of asset and in particular,
though not exclusively, includes:


(i) Movable and immovable property and any other property rights
such as mortgages, liens or pledges;


(ii) Shares in and stocks and debentures of a company and any other
form of participation in a company


(iii) Claims to money or to any performance under contract having
a financial value;


(iv) Intellectual property rights, goodwill, technical processes and
know how;


(v) Business concessions conferred by law or under contract,
including concessions to search for, cultivate, extract or exploit
natural resources; […]


Reinvestment. A further question is whether the term
“investment” covers reinvestment, that is to say, the investment of
the proceeds of the initial investment or whether only such
reinvestment that is formally authorized is covered. Those proceeds
have presumably been earned in the host country and have not been
imported from abroad, as may have been the initial capital (or part
of it). To the extent that national or international rules on foreign




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investment seek to encourage the importation of foreign capital, in
whatever form, the reinvestment of earnings may be seen from the
host country’s point of view as not qualifying. On the other hand,
foreign investors, in making investment decisions, will take into
account a host country’s policies regarding treatment of all their
assets and are likely to prefer that they be treated in the same
manner, whether purchased initially by imported capital or financed
through subsequent reinvestment. For instance, the China–Finland
BIT (2004) specifically provides in Article 1(1): “Reinvested returns
shall enjoy the same treatment as the original investment.”


Change in the form of investment. Many BITs provide that
change in the form of investment is covered to the same extent as
the original investment. For example, Article I of the United
Kingdom–Mexico BIT (2006) provides that “A change in the form
in which assets are invested does not affect their character as
investments as long as they are covered by this definition.”7 This
additional wording will have significance as and when foreign
investors change the form of their original investment, for example
from a claim under a contract into shares in a company. Investors
will want to be able to restructure their investments without being
concerned that they will no longer be protected by the relevant IIA.
Some investment treaties state explicitly that reinvestment is
covered only if established in accordance with the conditions placed
on the initial investment. For example, Article 2 of the
Belgium/Luxembourg–Cyprus BIT (1991) provides that “[a]ny
alteration of the form in which assets are invested shall not affect
their classification as investment, provided that such alteration is
not contrary to the approval, if any, granted in respect of the assets
originally invested”.


3. Narrowing the scope of the term “investment”


The possibility of taking a wide approach to the definition of
investment may be contrasted with developments in recent treaty
practice that seek to narrow down the scope of this term. A number
of narrowing approaches need to be highlighted here:




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• Excluding specific types of assets such as portfolio investments,
certain commercial contracts, certain loans and debt securities,
etc;


• Using a “closed list” definition with a wide asset-based list of
examples which are exhaustive rather than illustrative;


• Limiting investments to those made “in accordance with host
country law”;


• Supplementing definitions of “investment” by express
references to investment risk and other factors commonly
associated with investment, thereby introducing objective
criteria to the analysis of the term;


• Restricting covered investments depending on the time of their
of establishment;


• Limiting covered investments to certain industry sectors;
• Restricting the range of covered intellectual property rights


(IPRs).


(i) Exclusion of specific types of assets


Portfolio investments. Some investment agreements specify
that they apply to foreign direct, as opposed to portfolio, investment.
Portfolio investment is investment of a purely financial character,
where the investor remains passive and does not control the
management of the investment. The main concern of portfolio
investors is the appreciation of the value of their capital and the
return that it can generate, regardless of any long-term relationship
consideration or control of the enterprise. Portfolio investment does
not lead to technology transfer, training of local employees and
other benefits associated with direct investment.




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Where an agreement is limited to foreign direct investment, the
covered investment must be more than a passive financial
investment and must include in addition an element of management
control over the investment. This limitation may be included in an
agreement intended to facilitate international investment flows
where the host country is seeking to attract foreign direct – but not
necessarily foreign portfolio – investment, or where a host country
is concerned about the possible detrimental effects of applying
treaty provisions to certain types of investment, such as portfolio
investment. For example, by Article 45 of the European Free Trade
Association (EFTA)-Mexico FTA (2000):


“For the purpose of this Section, investment made in
accordance with the laws and regulations of the Parties means
direct investment, which is defined as investment for the purpose
of establishing lasting economic relations with an undertaking
such as, in particular, investments which give the possibility of
exercising an effective influence on the management thereof.”


Another example is the Framework Agreement on the
Association of South-east Asian Nations (ASEAN) Investment Area
(1998) which expressly excluded portfolio investments (Article 2).8


Governments may consider setting a benchmark, for example
10% of ordinary shares, to distinguish between direct and portfolio
investments.9 This approach would provide more certainty as to
which investments are covered and which are not.


In addition to equity securities, the concept of portfolio
investments also includes debt securities (IMF 1993, para. 385).
Practically all IIAs have debt securities in the definition of
investment, even though some IIAs choose to exclude debt
securities with short original maturity (typically, less than three
years) or to include in the definition only those debt securities
whose original maturity exceeds a certain minimum time period.
The usefulness of the distinction between long- and short-term debt




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securities is questionable as it is recognized that original maturity
may have no bearing on the length of time that an investment will be
held (ibid., para. 337).


Certain commercial contracts. The performance of a contract
in a host country by a foreign entity may involve the creation of an
investment and, as such, would be a natural element of a definition
of investment. Indeed, contracts such as turnkey, construction,
management, production, concession, revenue-sharing and other
similar contracts are routinely included in a definition of investment.
However, the fact that some IIAs also included “claims to money
and claims to any performance under contract having a financial
value”10 has led some tribunals to recognize even ordinary one-off
sales and services contracts as investments.


A number of countries have recognized that including ordinary
commercial contracts in the definition of investment would lead to
the term becoming overly broad and thus have started to add
language specifically excluding such contracts from the definition of
investment. Thus, Canada’s model BIT (2004) provides in Article 1:


“but investment does not mean,


(X) claims to money that arise solely from


(i) commercial contracts for the sale of goods or services by
a national or enterprise in the territory of a Party to an
enterprise in the territory of the other Party […].”


Clauses of this type remove any doubt as to how contracts for
sale of goods and services should be treated and provides helpful
guidance to arbitral tribunals.




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Certain loans and debt securities. Canada’s model BIT (2004)
also provides an example of a definition that excludes certain debt
securities and loans:


• Debt securities and loans with the original maturity of less than
three years (Article 1(III) and (IV);


• Debt securities of a State enterprise and loans to a State
enterprise, regardless of their original maturity (Article 1(III)
and (IV);


• A loan to or debt security issued by a financial institution which
are not treated as regulatory capital by the Party in whose
territory the financial institution is located;


• The extension of credit in connection with a commercial
transaction, such as trade financing.


A different, less clear-cut example of this approach can be found
in the Peru–United States FTA (2006). Article 10.28 sets out a
definition of investment qualified by exclusions in footnotes. For
example, while the definition covers “bonds, debentures, other debt
instruments and loans”, a footnote in that Article states:


“Some forms of debt, such as bonds, debentures, and long-term
notes, are more likely to have the characteristics of an
investment, while other forms of debt, such as claims to payment
that are immediately due and result from the sale of goods or
services, are less likely to have such characteristics.”


Public debt securities. Some States have chosen to exclude
sovereign debt securities from covered investments,11 as IIA
obligations could interfere with debt restructuring or rescheduling in
case of default or financial difficulties. Another option, employed in
the Peru–United States FTA, is to limit an investor’s ability to bring
an investor–State claim based on a debt restructuring where holders




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of 75% or more of the outstanding debt have agreed to the
restructuring.12


Assets used for non-business purposes. IIAs are typically
aimed at promoting the flow of capital that would be used for
business purposes. For this reason, a number of IIAs expressly
exclude those foreign-owned assets that are intended for non-
business use, such as vacation homes. IIAs do that in different ways:


• In a definition’s chapeau: “The term ‘investment’ shall mean
every kind of asset invested in connection with economic
activities by an investor of one Contracting Party…” (Belarus–
Czech Republic BIT (1996), Article 1, emphasis added);


• In the last “catch-all” sentence of the illustrative list of
investments: “interests arising from the commitment of capital
or other resources in the territory of a Party to economic
activity in such territory…” (NAFTA (1992), Article 1139,
emphasis added);


• In a separate note: “For the purposes of this Chapter, ‘loans and
other forms of debt’ […] and ‘claims to money and claims to
any other performance under contract’ […] refer to assets
which relate to a business activity and do not refer to assets
which are of personal nature, unrelated to any business
activity” (Japan–Singapore EPA (2002), Article 72(a), emphasis
added).


An interesting facet of this requirement emerged in Phoenix
Action v. Czech Republic, where the tribunal deprived the
investment of the legal protection under the relevant BIT essentially
because it found that the investment had been made with the sole
aim of gaining access to the ICSID dispute settlement mechanism,
rather than engaging in economic activity in the host State.13 The
tribunal held that such an investment violated a separate principle of




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good faith but its reasoning also suggests that for an investment to
be eligible there must be a genuine intention to engage in an
economic activity on the part of an investor.


(ii) “Closed list” approaches


The “closed list” approach illustrated by the definition of
investment used in the Canadian model BIT of 2004 (box 2) differs
from the broad open-ended approach in that it does not contain a
conceptual chapeau to define investment (“every kind of asset…”)
but contains an extensive but finite list of tangible and intangible
assets to be covered by the treaty as well as certain clear exclusions
of certain purely commercial transactions, including sales contracts
and pure financial loan agreements involving no capital risk
(UNCTAD 2007a, pp. 10-11). The “closed list” method can be
applied to narrow down an asset-based definition as well as an
enterprise-based definition.


Box 2. Scope of investment in the Canadian model BIT (2004)

“Investment means:
(I) an enterprise;
(II) an equity security of an enterprise;
(III) a debt security of an enterprise
(i) where the enterprise is an affiliate of the investor, or
(ii) where the original maturity of the debt security is at least three
years,
but does not include a debt security, regardless of original maturity,
of a state enterprise;
(IV) a loan to an enterprise
(i) where the enterprise is an affiliate of the investor, or
(ii) where the original maturity of the loan is at least three years,
but does not include a loan, regardless of original maturity, to a
state enterprise;


/…




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Box 2 (continued)

(V) (i) notwithstanding subparagraph (III) and (IV) above, a loan
to or debt security issued by a financial institution is an investment
only where the loan or debt security is treated as regulatory capital
by the Party in whose territory the financial institution is located,
and
(ii) a loan granted by or debt security owned by a financial
institution, other than a loan to or debt security of a financial
institution referred to in (i), is not an investment;
for greater certainty:
(iii) a loan to, or debt security is sued by, a Party or a state
enterprise thereof is not an investment; and
(iv) a loan granted by or debt security owned by a cross-border
financial service provider, other than a loan to or debt security
issued by a financial institution, is an investment if such loan or debt
security meets the criteria for investments set out elsewhere in this
Article;
(VI) an interest in an enterprise that entitles the owner to share in
income or profits of the enterprise;
(VII) an interest in an enterprise that entitles the owner to share in
the assets of that enterprise on dissolution, other than a debt
security or a loan excluded from subparagraphs (III) (IV) or (V);
(VIII) real estate or other property, tangible or intangible, acquired
in the expectation or used for the purpose of economic benefit or
other business purposes; and
(IX) interests arising from the commitment of capital or other
resources in the territory of a Party to economic activity in such
territory, such as under
(i) contracts involving the presence of an investor’s property
in the territory of the Party, including turnkey or construction
contracts, or concessions ,or


/…




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Box 2 (concluded)

ii) contracts where remuneration depends substantially on the
production, revenues or profits of an enterprise;
but investment does not mean,
(X) claims to money that arise solely from
(i) commercial contracts for the sale of goods or services by a
national or enterprise in the territory of a Party to an enterprise in
the territory of the other Party, or
(ii) the extension of credit in connection with a commercial
transaction, such as trade financing, other than a loan covered by
subparagraphs (IV) or (V); and

(XI) any other claims to money


that do not involve the kinds of interests set out in subparagraphs (I)
through (IX). [Emphasis added]


(iii) Limitation to permitted investment under host country
laws


Certain IIAs contain a specification that investment is covered
only if made in accordance with the laws of the host country. For
example, most of the BITs concluded by the People’s Republic of
China provide that “[t]he term ‘investment’ means every kind of
asset invested by investors of one Contracting Party in accordance
with the laws and regulations of the other Contracting Party in the
territory of the latter ...”.14 This has the effect of making the
protection of the investment under the BIT subject to the obtaining
of any required approvals under the national laws of the host
Contracting State party (Gallagher and Shan 2009, p. 56). Similarly,
Article 1(9) of the Common Market for Eastern and Southern Africa
(COMESA) Common Investment Area agreement (2007) states that
“‘investment’ means assets admitted or admissible in accordance
with the relevant laws and regulations of the COMESA Member




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State in whose territory the investment is made”. In agreements that
apply this limitation, investment that is not established in
accordance with the host country’s laws and regulations will not be
considered protected investment. One tribunal has emphasized that
the relevant analysis “has to be performed taking into account the
laws in force at the moment of the establishment of the investment”
rather than later modifications in legislation.15


An alternative approach is to include a separate provision stating
that an agreement shall apply only to investment made in
accordance with the laws and regulations of the host country and/or
previously approved by host State officials. Thus, in the new
ASEAN Comprehensive Investment Agreement of 2009 the term
“covered investment” means, with respect to a Member State, “an
investment in its territory of an investor of any other Member State
in existence as of the date of entry into force of this Agreement or
established, acquired or expanded thereafter, and has been admitted
according to its laws, regulations, and national policies, and where
applicable, specifically approved in writing by the competent
authority of a Member State”.


Particular attention is paid to this feature of investments,
whether strictly in terms of definitions or otherwise, by agreements
providing investment insurance or guarantees. For example, Article
15.6 of the Convention Establishing the Inter-Arab Investment
Guarantee Corporation provides that “[t]he conclusion of insurance
contracts shall be subject to the condition that the investor shall
have obtained the prior approval of the competent official authority
in the host country for the making of the investment and for its
insurance with the Corporation against the risks to be covered”.
And the Convention Establishing the Multilateral Investment
Guarantee Agency, in Article 12 (d) on eligible investments
provides that “In guaranteeing an investment, the Agency shall
satisfy itself as to: (ii) compliance of the investment with the host




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country’s laws and regulations; (iii) consistency of the investment
with the declared development objectives and priorities of the host
country”.


Limiting the applicability of an investment agreement only to
investments made in accordance with applicable laws and/or
approval procedures is intended to induce foreign investors to
ensure that all local laws and regulations are satisfied in the course
of establishing an investment. This will have the additional effect of
ensuring that both foreign and domestic investors are required to
observe the laws of the land, thereby ensuring a “level playing
field”. Moreover, on the assumption that the host country’s
investment laws will be written and applied to further its
development policy, this limitation also is intended to ensure that
investment is covered only if it is consistent with the host country’s
development policy, and other policies, such as immigration or
internal security, that impact on investment. Depending on the exact
formulation of the requirement, it could conceivably be used to
deprive an investor of the treaty protection for serious violations of
host country law admitted during the life of an investment, i.e. after
it is made.


Arbitral practice. Failure to comply with national laws and
regulations could result in a tribunal refusing jurisdiction over any
subsequent claim made by the investor.16 Some tribunals have
treated the requirement to comply with local laws as implicit even
where not expressly stated in the relevant BIT.17 There is also an
emerging understanding that national legal systems include a
general requirement of good faith that should prevent investments
made through misrepresentations, concealments or corruption.18


However, the respondent country cannot rely on an
interpretation of its national law that effectively excludes any
recourse to remedies under the BIT. The overriding concern of good
faith in the application of national investment approvals and other
national regulatory requirements may be important in this




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connection. Thus, the withdrawal of an approval will not negate the
fact that an investment has been made under applicable investment
law. Otherwise, the host country could unilaterally undermine the
protection of the applicable BIT (McLachlan et al. 2007, p. 196).
Furthermore, as the tribunal in Ioannis Kardassopoulos v. Georgia
observed, the State cannot preclude the protection of the BIT, “on
the ground that its own actions are illegal under its own laws. In
other words, a host State cannot avoid jurisdiction under the BIT by
invoking its own failure to comply with its domestic laws.”19


The need for good faith on the part of the host country has been
recently reinforced by the decision of the tribunal in Desert Line
Projects LLC v. Yemen.20 The case arose out of a road construction
project. The claimant had agreed to build a number of tarmac roads
in Yemen. A dispute arose over payment to the claimant. The latter
complained that the subsequent settlement of the dispute was
inadequate and erroneous, and that its workers and personnel had
been attacked and harassed by Yemeni personnel. On failure to
resolve the dispute before the Yemeni courts, the claimant
commenced proceedings before ICSID. The respondent State argued
that the claimant’s investment was not “accepted, by the Host Party,
as an investment according to its laws and regulations, and for
which an investment certificate is issued” as required by Article 1 of
the Oman–Yemen BIT (1998). According to the respondent State,
no such certificate had ever been issued and so the investment was
not covered. The tribunal rejected this formal argument, saying that
Article 1 should be interpreted as having a “material objective” and
that this would not be served by a purely formal requirement that
advanced no real interest of either signatory State but would, to the
contrary, constitute, “an artificial trap depriving investors of the
very protection the BIT was intended to provide.”21 On the facts, the
investment had been accepted and welcomed by the Head of State in
good faith and so the imposition of formalistic qualifications and




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requirements would have been offensive to “the most elementary
notions of good faith and insulting to the Head of State.”22


It should be noted that the reference to investments made in
accordance with host country laws and procedures does not refer to
definitions given by the laws and regulations of the host country but
to the validity of the investment (Joubin-Bret 2008, p. 27). In effect
it determines that only investments made in accordance with host
country laws and regulations are to be given protection under the
agreement. Illegal investments deserve no such protection.23


Whether the non-use of national law to define what constitutes
an investment under an IIA should remain unaltered in future
agreements is open to discussion. In particular, it is at least arguable
that the definition of an investment covered by an IIA should take
heed of any relevant definitions of an investment used in the
national law of the host contracting party. This may be defended on
the grounds that there appears to be an anomaly between the central
role of national law in defining who may be seen as an “investor”
under the IIA and its absence in relation to defining “investment”.
As will be shown below, the normal practice in relation to the
definition of “investor” in IIAs is to refer to the nationality law of
the home country of the investor and to see whether the candidate in
question would qualify as a national under that law. If so, then they
are a protected “investor”. Yet in relation to “investment” national
law plays no part in determining what this term means in the IIA.
Accordingly, it may be that the national law of the host country
should in future determine what is and is not a covered “investment”
by reference to national law definitions. In this way, the agreement
could further protect the regulatory space of the host country and
ensure that only such investments are seen by host country law to
fall into this category are protected under the IIA. The implications
of such a provision will be further discussed in Section III.




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(iv) Reference to investment risk and other factors


Another way to focus and control the scope of the term
“investment” is to use an express reference to investment risk and
other common economic features associated with an investment to
provide objective criteria for a tribunal to assess whether the
transaction before it is in fact a covered “investment”. This approach
may follow the features included in the so-called “Salini Test”,
which is further discussed in Section II.A.(4) in relation to Article
25 of the ICSID Convention, or it may use a narrower range of
features. For example, the Colombian model BIT takes as its basis
the similar test in the case of Fedax v. Venezuela24 and, in Article
2.3 thereof lists these criteria as the minimum characteristics of an
investment but leaves out the host State development criterion
(Rivas 2009, p. 4).


An alternative approach, exemplified by United States BITs, is
to limit the definition of investment to “every asset that an investor
owns or controls, directly or indirectly, that has the characteristics
of an investment” followed by an illustrative list of investments
based on assets. In order to qualify as an investment under the
United States model BIT (2004), an asset must have the
characteristics of an investment, “including such characteristics as
the commitment of capital or other resources, the expectation of
gain or profit, or the assumption of risk” (box 3). Similarly, the
Brunei–Japan EPA (2007) notes in the definition of investment that:


“Note 3: Where an asset lacks the characteristics of an
investment, that asset is not an investment regardless of the
form it may take. The characteristics of an investment include
the commitment of capital, the expectation of gain or profit, or
the assumption of risk.”


One arbitral award stated that these three criteria constitute an
“inherent common meaning” of the term “investment”.25 Similarly,




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a tribunal in Romak v. Uzbekistan held that “the term ‘investment’
under the BIT has an inherent meaning entailing a contribution that
extends over a certain period of time and that involves some risk.”26
Accordingly, despite the broad definition of investment in the
applicable BIT (“every kind of assets and particularly…”), the
tribunal found that the claimant did not own an investment within
the meaning of Article 1 of the BIT as its rights were embodied in
and arose out of a sales contract. The tribunal, thus, dismissed the
investor’s claims for lack of jurisdiction.27 However, this approach
is not yet settled, and if a government wishes to make sure that
objective characteristics of an investment be considered by a
tribunal, it is well-advised to include them in the definition.


Box 3. Rwanda-United States BIT (2008)


Article 1


“Investment” means every asset that an investor owns or controls,
directly or indirectly, that has the characteristics of an investment,
including such characteristics as the commitment of capital or other
resources, the expectation of gain or profit, or the assumption of
risk. Forms that an investment may take include:


(a) an enterprise;1


(b) shares, stock, and other forms of equity participation in an
enterprise;


(c) bonds, debentures, other debt instruments, and loans;2


(d) futures, options, and other derivatives;


(e) turnkey, construction, management, production, concession,
revenue-sharing, and other similar contracts;


(f) intellectual property rights;
/…




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Box 3 (concluded)


(g) licenses, authorizations, permits, and similar rights conferred
pursuant to domestic law; 3, 4 and


(h) other tangible or intangible, movable or immovable property,
and related property rights, such as leases, mortgages, liens, and
pledges.


1. For greater certainty, where an enterprise does not have the
characteristics of an investment, that enterprise is not an investment
regardless of the form it may take.


2. Some forms of debt, such as bonds, debentures, and long-term
notes, are more likely to have the characteristics of an investment,
while other forms of debt, such as claims to payment that are
immediately due and result from the sale of goods or services, are
less likely to have such characteristics.


3. Whether a particular type of license, authorization, permit, or
similar instrument (including a concession, to the extent that it has
the nature of such an instrument) has the characteristics of an
investment depends on such factors as the nature and extent of the
rights that the holder has under the law of the Party. Among the
licenses, authorizations, permits, and similar instruments that do not
have the characteristics of an investment are those that do not
create any rights protected under domestic law. For greater
certainty, the foregoing is without prejudice to whether any asset
associated with the license, authorization, permit, or similar
instrument has the characteristics of an investment.


4. The term ‘investment’ does not include an order or judgment
entered in a judicial or administrative action.




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“Or” vs. “and”. Importantly, many treaty provisions that set
out characteristics of an investment operate with the conjunction
“or”, thereby emphasizing that not all factors need to exist for an
investment to be identified (see, for example, the quotes from the
treaties above). Thus an investment may be covered if it merely has
“an expectation of profit” – it need not include a commitment of
capital or the assumption of risk. It is open to discussion whether
this approach is workable. Notably, in the context of Article 25 of
the ICSID Convention (see section II.3 below), arbitral tribunals
have treated characteristics of investments as cumulative, i.e. the
investment exists only of all of the factors are present. Examples of
a cumulative formulation can also be found in some treaties such as
the Belgium/Luxembourg-Colombia BIT (2009) (Article I(2.3)).


(v) Time of establishing an investment


A further factor used in IIAs to delimit the scope of
“investment” is a limitation based on the time of establishment. The
agreement may exclude investment established prior to a certain
date, such as the date on which an agreement is signed or enters into
force. For example, Article 13 of the Egypt–Russian Federation BIT
(1997) provides that “[t]he present Agreement shall be applied with
respect to all capital investments carried out by the investors of one
of the Contracting Parties on the territory of the other Contracting
Party, beginning in January 1 1987”. Developing countries
sometimes seek to exclude investment established prior to entry into
force of an investment protection agreement. For example Article 12
of the Cyprus-Egypt BIT (1998) states:


“This Agreement shall apply to all investments made by
investors of either Contracting Party in the territory of the other
Contracting Party after its entry into force.”


This excludes the possibility of an arbitral tribunal extending its
jurisdiction to disputes that arise out of investments established
before the agreement enters into force.




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Most bilateral investment agreements do not specifically
exclude pre-existing investment. Some of them even state explicitly
that they do apply to existing investment. For example, Article 6 of
the Estonia-Switzerland BIT (1992) provides that “[t]he present
Agreement shall also apply to investments in the territory of a
Contracting Party made in accordance with its laws and regulations
by investors of the other Contracting Party prior to the entry into
force of this Agreement”. A similar provision can be found in the
Austria-Philippines BIT (2002). The effect of such a provision is to
ensure that an investment tribunal will have jurisdiction to hear any
claim arising after the entry into force of the agreement but arising
out of an investment made before the agreement entered force.


Few IIAs exclude investment established prior to some other
date, such as the date on which the host country’s foreign
investment law entered into force. For example, Article 2 (3) of the
Indonesia–United Kingdom BIT (1976) provides that “[t]he rights
and obligations of both Contracting Parties with respect to
investments made before 10 January 1967 shall be in no way
affected by the provisions of this Agreement”. This provision
presumably was to exclude investment established prior to the entry
into force of Indonesia’s Foreign Capital Investment Law No. 1 of
1967. Indeed the Indonesian BITs with the United Kingdom (1977),
Australia (1993) and Chile (1999) require that investments in
Indonesia can only be protected if they are admitted in accordance
with Law No 1 of 1967 and any law amending or replacing it.28


Some IIAs emphasize that prior investments are protected if
approved by the host country’s government. For example, Article 9
of the Egypt–Germany BIT (2005) provides that “[t]he present
Agreement shall also apply to investments by nationals or
companies of either Contracting Party, made prior to the entering
into force of this Agreement and accepted in accordance with the
respective prevailing legislation of either Contracting Party”.




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Timing of disputes. Some agreements that apply to investments
made prior to as well as after the entry into force of the agreement
may also deal with the timing of disputes. Thus, the agreement may
specify that it applies only to disputes that arise after the entry into
force of the agreement.29 This requires the tribunal to determine
when the dispute actually arises. For jurisdiction to be available, the
dispute must arise after the treaty has entered into force. In this
matter, the awards of tribunals do not offer a clear guide as there are
inconsistent findings, though it is clear that the mere fact that the
investment has ceased to exist by the time of the claim does not
negate jurisdiction. Otherwise investments could be expropriated
without any duty to pay compensation on the ground that there is no
longer an owner of the investment (McLachlan et al. 2007, pp. 174–
177).


(vi) Limiting to certain industry sectors


Other factors that could be used to limit the scope of the term
“investment” are size and industry sector. Many countries, however,
seek foreign investment from small and medium-sized companies
and thus limitations on the size of investment are not common in
investment agreements. The term “investment” may be limited to
investment only in certain sectors of the economy. For example,
Article 1 of the Energy Charter Treaty provides that “investment”
refers to any investment associated with an Economic Activity in
the Energy Sector and to investments or classes of investments
designated by a Contracting Party in its Area as “Charter efficiency
projects” and so notified to the Secretariat. In this particular case,
the agreement was intended to cover only the energy sector and all
its provisions were limited to that sector.


Another example can be found in the ASEAN Comprehensive
Investment Agreement (2009), which applies, for the purposes of
liberalization, to the following sectors: “(a) manufacturing;
(b) agriculture; (c) fishery; (d) forestry; (e) mining and quarrying;
(f) services incidental to manufacturing, agriculture, fishery,




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forestry, mining and quarrying; and (g) any other sectors, as may be
agreed upon by all Member States” (Article 3(3)). Many IIAs
exclude government procurement activities from their scope of
application.


(vii) Intellectual property rights


As noted earlier, many agreements include intellectual property
rights (IPRs) in the illustrative list of assets that are “investments”.
Such rights may include trademarks, trade secrets, patents and
copyrights. In some investment agreements, the range of protected
intellectual property includes also “technical processes” and “know-
how”, which are not legally protected as traditional forms of
intellectual property. For example, the Romania–United Kingdom
BIT (1999) follows this approach. This category also includes
goodwill, an indication that the protected assets of a company may
include not only its tangible property, but also its reputation. The
transfer of intellectual property or know-how will count as a
contribution to the development of the host country for purposes of
being seen as an investment.30


Some BITs contain a very wide definition of IPRs which may
raise significant concerns for the effectiveness of technology and
skills transfer where host country policies may require this. For
example the Japan–Peru BIT (2008) states in Article 1 (1) (f):


“(f) intellectual property rights, including copy rights and
related rights, patent rights and rights relating to utility models,
trademarks, industrial designs, layout-designs of integrated
circuits, new varieties of plants, trade names, indications of
source or geographical indications and undisclosed
information; […]




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(h) any other tangible and intangible, movable and immovable
property, and any related property rights, such as leases,
mortgages, liens and pledges”.31


This covers virtually any intangible right that the investor might
enjoy. Given that tribunals are willing to accept IPRs and related
rights to know-how, goodwill and other intangible rights as
protected investments, this broad approach may have to be
reconsidered where it might adversely affect the host country’s right
to regulate. Attention has to be given to ensuring consistence of the
scope of protection offered by the IIA and domestic laws and
regulations on IPRs.


4. The impact of article 25(1) of the ICSID Convention


A significant portion of IIA claims is adjudicated by arbitral
tribunals convened under the ICSID Convention, which sets forth its
own jurisdictional requirements. Article 25(1) of the Convention
limits jurisdiction of arbitral tribunals to legal disputes “arising
directly out of an investment”. The Executive Directors of the World
Bank deliberately avoided including a definition of “investment” in
the terms of Article 25(1) of the ICSID Convention, in part because
there was no possibility of the Members coming to an agreement on
the precise meaning of the term (Schreuer et al. 2009, pp. 114–117).
Equally, this approach was designed to enable the Convention to
accommodate both traditional types of investment, in the form of
capital contributions, and new types of investment, including service
contracts and transfers of technology (Delaume 1983, pp. 795; 1982,
pp. 800–808).


The broad, non-exhaustive, nature of the asset-based definition
of investment in BITs in particular, coupled with the fact that under
Article 25(1) of the ICSID Convention the term “investment” is not
defined, has led to a widening of the types of transactions that
tribunals have accepted as investments. This has led to a possible
blurring of the distinction between investments and other types of
commercial transactions which has significant implications for the




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range of possible disputes that could come before arbitral tribunals.
What might have been seen as purely commercial transactions at the
time the IIA was signed could now be viewed as investments.


According to Gaillard, there are two basic approaches to the
interpretation to the term “investment” in Article 25(1) that can be
seen in awards and in scholarly analysis (Gaillard 2009). The first is
a liberal intuitive method, which concentrates on the features of the
transaction before the tribunal on a case-by-case basis, and the
second is a deductive method that requires objective criteria which
go beyond the subjective consent of the parties to the dispute to treat
the transaction as an investment. The former is more likely to lead to
a finding of jurisdiction while the later is more restrictive.


(i) Seeking flexibility in the definition of an investment


A liberal approach to defining investments can give greater
flexibility in the protection of investments as these acquire more
sophisticated forms. In this regard, investments can be seen often as
bundles of transactions, some of which may be pure commercial
contracts, but which together form an investment process. It is not
always easy to unbundle such processes and to highlight the
contractual nature of the transaction from which the claim arises and
to ignore the context in which it occurs. As the ICSID tribunal in
CSOB v. Slovakia stated:


“A dispute that is brought before the Centre must be deemed to
arise directly out of an investment even when it is based on a
transaction which, standing alone, would not qualify as an
investment under the Convention, provided that the particular
transaction forms an integral part of an overall operation that
qualifies as an investment.”32


Accordingly, it would not be prudent to lose this element of
flexibility for investor protection given the way in which TNCs and




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other foreign investors are developing their operational processes.
However this flexibility may need to be limited if it is misused to
obtain access to international investment arbitration as a means of
resolving problems arising out of the transaction concerned. The
clearest illustration of this trend has been in relation to the widening
of investments to include various financial and contractual processes
(box 4).


Box 4. Examples of the widening scope of the term “investment”


According to the arbitral tribunal in Mytilineos Holdings SA v. The
State Union of Serbia & Montenegro and Republic of Serbia,
UNCITRAL, Partial Award, 8 September 2006, para. 113, 115:


“Examples from early ICSID practice include the construction of a
chemical plant on a turn-key basis coupled with a management
contract providing technical assistance for the operation of the
plant as in Klöckner Industrie Anlagen GmbH v. Cameroon and
Société Camerounaise des Engrais (SOCAME), Case ARB/81/2, a
management contract for the operation of a cotton mill as in
SEDITEX v. Madagascar, Case CONC/82/1, a contract for the
conversion of vessels into fishing vessels and the training of crews
as in Atlantic Triton Company Ltd v. Guinea, Case ARB/84/1, or
technical and licensing agreements for the manufacturing of
weapons as in Colt Industries Operating Corp, Firearms Div v.
Republic of Korea, Case ARB/84/2. More recently financial
instruments (Fedax N.V. v. Venezuela, ICSID Case No. ARB/96/3,
Ceskoslovenska Obchodni Banka, a.s. v. The Slovak Republic,
ICSID Case No. ARB/97/4), road constructions (Salini Costruttori
S.p.A. and Italstrade S.p.A. v. Jordan, ICSID Case No. ARB/02/13;
Salini Construtorri S.p.A. and Italstrade S.p.A. v. Morocco, ICSID
Case No. ARB/00/4) and pre-shipment inspection arrangements


/…




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Box 4 (concluded)


(SGS Société Générale de Surveillance S.A. v. Islamic Republic of
Pakistan, ICSID Case No. ARB/01/13; SGS Société Générale de
Surveillance S.A. v.Republic of the Philippines, ICSID Case No.
ARB/02/6) have been regarded as investments under Article 25 of
the ICSID Convention.”


That said, arbitral awards interpreting BITs have distinguished
between contractual arrangements that are investments and those
that are not. Thus, contingent liabilities, such as bank guarantees,
will not be regarded as “investments”.33 Nor will mere sales
transactions unless expressly included in the definition of
investment.34 Pre-investment expenditure has been held not to
constitute an “investment”, though each such case will depend on its
particular facts and, in particular, on the question whether the parties
have agreed that such expenditure should be recoverable in the case
of non-completion of the investment.35 In addition, an investment
contract may be held to exist even if certain terms remain to be
agreed at a later date and where there is a possibility of renegotiation
(Muchlinski 2007, pp. 732–733).36


(ii) The issue of objective requirements in the definition of
“investment”


It was mentioned earlier that the arbitral interpretation of the
broad asset-based definition of investment involves a determination
of the interrelationship between the definition of “investment” in the
BIT governing the particular transaction and the jurisdictional
requirements of Article 25 (1) of the ICSID Convention. This has
prompted tribunals to consider whether there are any mandatory
definitional requirements stemming from the concept of
“investment” that should control investor’s rights to bring a claim
before an ICSID tribunal. This is an issue specific to cases in which




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ICSID arbitration is used, but one which has affected the analysis of
the term even in ad hoc arbitrations governed by rules other than
those of ICSID.37


(a) The ICSID Convention


Before the relevant awards are discussed, it is necessary first to
examine the ICSID Convention itself. The Executive Directors of
the World Bank deliberately avoided including a definition of
“investment” in the terms of Article 25(1) of the ICSID Convention,
in part because there was no possibility of the Members coming to
an agreement on the precise meaning of the term (Schreuer et al.
2009, pp. 114–117). Equally, this approach was designed to enable
the Convention to accommodate both traditional types of
investment, in the form of capital contributions, and new types of
investment, including service contracts and transfers of technology
(Delaume 1983, pp. 795; 1982, pp. 800–808). The Executive
Directors believed that adherence to the Convention by a country
would provide an additional inducement for, and stimulate a larger
flow of, private international investment into its territory. This was,
in their opinion, the primary purpose of the Convention (IBRD
1965, p. 525, paras. 11-12). Thus, the ICSID Convention should not
be seen merely as a means of dispute settlement. It is also “an
instrument of international policy for the promotion of economic
development” (Delaume 1986, p. 23; Schreuer et al. 2009, pp. 4-5).
Indeed, the Preamble to the ICSID Convention speaks of, “the need
for international cooperation for economic development, and the
role of private international investment therein.”


The precise meaning of this preambular statement lies at the
heart of the differences in the various ICSID awards that have
discussed the meaning of “investment”. On the one hand, it has led
some tribunals to declare that Article 25(1) introduces certain
objective requirements, based on the nature and purpose of the
ICSID Convention, which have to be present for a transaction to
come within the meaning of “investment”. Such an approach is




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justified by the view that ICSID jurisdiction cannot be left simply to
the will of the parties to the IIA that offers the option of ICSID
arbitration. Indeed, according to this line of awards, Article 25(1)
will control the BIT, under which the claim is brought, so far as
subject matter jurisdiction is concerned. Other tribunals have
rejected this approach arguing that ICSID jurisdiction is not based
on any pre-determined criteria but is founded on the applicable BIT.


(b) Awards favouring objective requirements


The leading example of the “objective requirements” approach
is the case of Salini v. Morocco, where the Preambular reference to
economic development was seen as an important factor in defining
the nature of an investment for the purposes of ICSID jurisdiction
(box 5). The case in effect establishes four requirements for there to
be an investment over which an ICSID tribunal has jurisdiction.
This case has been followed by other awards. Thus, in Joy Mining v.
Egypt, a case arising out of a dispute over whether the claimant was
entitled to the release of a bank guarantee, the tribunal states that for
an arrangement to qualify as an “investment” it should have, “a
certain duration, a regularity of profit and return, an element of
risk, a substantial commitment and that it should constitute a
significant contribution to the host State’s development”.38 In
general, the development element should be met in most cases
where the other elements, noted above, are shown to exist (Dolzer
and Schreuer 2008, p. 69). The issue of a contribution to
development was considered in the case of Patrick Mitchell v.
Congo (see box 6).





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Box 5. The case of Salini Costruttori SpA and Italstrade Spa v.
Kingdom of Morocco



This case arose out of a non-payment by the respondent State to the
claimants, two Italian construction companies, due to the late
completion (by four months over the stipulated contractual
completion period) of a highway construction contract entered into
by the claimants with the Moroccan state highways company
Société Nationale des Autoroutes du Maroc (ADM). The latter
claimed that the project had been completed late in breach of
contract, while the claimant maintained that the delay was due to
external causes and not its failure to comply with the contract. On
the issue of the definition of “investment” the tribunal stated:


“51. No definition of investment is given by the Convention. The two
Parties recalled that such a definition had seemed unnecessary to
the representatives of the States that negotiated it. Indeed, as
indicated in the Report of the Executive Directors on the
Convention: No attempt was made to define the term ‘investment’
given the essential requirement of consent by the parties, and the
mechanism through which Contracting States can make known in
advance, if they so desire, the classes of disputes which they would
or would not consider submitting to the Centre (art. 25(4)).


52. The Tribunal notes that there have been almost no cases where
the notion of investment within the meaning of Article 25 of the
Convention was raised. However, it would be inaccurate to consider
that the requirement that a dispute be ‘in direct relation to an
investment’ is diluted by the consent of the Contracting Parties. To
the contrary, ICSID case law and legal authors agree that the
investment requirement must be respected as an objective condition
of the jurisdiction of the Centre (cf. in particular, the commentary
by E. Gaillard, in JDI 1999, p. 278 et seq., who cites the award
rendered in 1975 in the Alcoa Minerals vs. Jamaica case as well as
several other authors).


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Box 5 (continued)

The criteria to be used for the definition of an investment pursuant
to the Convention would be easier to define if there were awards
denying the Centre’s jurisdiction on the basis of the transaction
giving rise to the dispute. With the exception of a decision of the
Secretary-General of ICSID refusing to register a request for
arbitration dealing with a dispute arising out of a simple sale (I.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, p. 308)., the awards at
hand only very rarely turned on the notion of investment. Notably,
the first decision only came in 1997 (Fedax case, cited above). The
criteria for characterization are, therefore, derived from cases in
which the transaction giving rise to the dispute was considered to be
an investment without there ever being a real discussion of the issue
in almost all the cases.


The doctrine generally considers that investment infers:
contributions, a certain duration of performance of the contact and
a participation in the risks of the transaction (cf. commentary by E.
Gaillard, cited above, p. 292). In reading the Convention’s
preamble, one may add the contribution to the economic
development of the host State of the investment as an additional
condition.


In reality, these various elements may be interdependent. Thus, the
risks of the transaction may depend on the contributions and the
duration of performance of the contract. As a result, these various
criteria should be assessed globally even if, for the sake of
reasoning, the Tribunal considers them individually here.”



Source: Salini Costruttori SpA and Italstrade Spa v. Kingdom of Morocco,


ICSID Case No. ARB/00/4, Decision on Jurisdiction, 23 July
2001 (42 International Legal Materials 609 (2003)).




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Box 6. The Case of Patrick Mitchell v. Democratic Republic of


Congo


In this case, a claim made by a United States lawyer working in his
law firm in the Democratic Republic of the Congo, which he alleged
was expropriated by the Democratic Republic of the Congo
authorities by way of the firm’s closure and the imprisonment of
two of its lawyers, was rejected by the Annulment Committee on the
grounds that the original tribunal had committed a manifest excess
of powers and a failure to state reasons when they found that the
legal practice was an investment under Article 25(1) of the ICSID
Convention:


“28. The Preamble of the Washington Convention sets forth a
number of basic principles as to its purpose and aims, which imbue
the individual provisions of the Convention, including Article 25,
which makes it needless to mention that the Convention was
concluded under the auspices of the International Bank for
Reconstruction and Development itself: ’Considering the need for
international cooperation for economic development, and the role of
private international investment therein;’ […].


29. It is thus quite natural that the parameter of contributing to the
economic development of the host State has always been taken into
account, explicitly or implicitly, by ICSID arbitral tribunals in the
context of their reasoning in applying the Convention, and quite
independently from any provisions of agreements between parties or
the relevant bilateral treaty.


30. Indeed, in the Salini case, the contribution to the economic
development of the host State was explicitly set as a ‘criterion’ for
an investment which was subsequently taken into account in respect
of the construction of a highway, which led to the conclusion that


/…




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Box 6 (continued)


the highway was clearly of public interest. Similarly, in the Fedax
case, which involved promissory notes issued by the Republic of
Venezuela to guarantee a loan equivalent to their amount, the
arbitral tribunal observed that: “It is quite apparent that the
transactions involved in this case are not ordinary commercial
transactions and indeed involve a fundamental public interest […]
There is clearly a significant relationship between the transaction
and the development of the host State.” Finally, in the CSOB case,
which involved a ‘consolidation agreement’ between the Czech
Republic, Slovakia, and the Czechoslovak bank CSOB, with each of
the two new States guaranteeing the reimbursement of the loan
granted by CSOB to its national Collection Company, the Arbitral
Tribunal observed that: “Under certain circumstances a loan may
contribute substantially to a State’s economic development […]
[The] undertaking involved a significant contribution by CSOB to
the economic development of the Slovak Republic within the
meaning of the Convention.” While it is true that in these cases,
where explicit reference was made to the “contribution to the
economic development of the host State,” the concept of investment
was somewhat ‘broadened,’ this does nothing to alter the
fundamental nature of that characteristic. It is thus found that, in
another group of cases where the contribution to the economic
development of the host State had not been mentioned expressly, it
was doubtless covered by the very purpose of the contracts in
question – all of which were State contracts – which had an obvious
and unquestioned impact on the development of the host State.


31. In addition to the foregoing, it bears noting that Professor
Schreuer regards the contribution to the economic development of
the host State as ‘the only possible indication of an objective


/…




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Box 6 (continued)


meaning” of the term “investment.’ In other words, the parties to an
agreement and the States which conclude an investment treaty
cannot open the jurisdiction of the Centre to any operation they
might arbitrarily qualify as an investment. It is thus repeated that,
before ICSID arbitral tribunals, the Washington Convention has
supremacy over an agreement between the parties or a BIT.


32. This said, the problem does not arise in the case at hand, since
not only are the aforementioned provisions of the Bilateral Treaty
between the Democratic Republic of Congo and the United States
altogether usual and in no way exorbitant, but the same Treaty also
recognizes clearly in its Preamble that agreement upon the
treatment to be accorded such investment will stimulate the flow of
private capital and the economic development of both Parties.
Moreover, this is a provision that appears in all bilateral treaties
signed by the United States, and was even emphasized in the
Preamble to the 2004 Model BIT.


33. The ad hoc Committee wishes nevertheless to specify that, in its
view, the existence of a contribution to the economic development of
the host State as an essential – although not sufficient –
characteristic or unquestionable criterion of the investment, does
not mean that this contribution must always be sizable or
successful; and, of course, ICSID tribunals do not have to evaluate
the real contribution of the operation in question. It suffices for the
operation to contribute in one way or another to the economic
development of the host State, and this concept of economic
development is, in any event, extremely broad but also variable
depending on the case.”


Source: Patrick Mitchell v. Democratic Republic of Congo, ICSID Case
No.ARB/99/7, Decision on Annulment, 1 November 2006.





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The most extensive list of factors is found in the case of Phoenix
Action v. Czech Republic:


“114. To summarize all the requirements for an investment to
benefit from the international protection of ICSID, the Tribunal
considers that the following six elements have to be taken into
account:


1 – a contribution in money or other assets;


2 – a certain duration;


3 – an element of risk;


4 – an operation made in order to develop an economic activity
in the host State;


5 – assets invested in accordance with the laws of the host State;


6 – assets invested bona fide.


115. The Tribunal wants to emphasize that an extensive scrutiny
of all these requirements is not always necessary, as they are
most often fulfilled on their face, “overlapping” or implicitly
contained in others, and that they have to be analyzed with due
consideration of all circumstances.”39


In that case, the claimant alleged a number of breaches of the
Czech Republic–Israel BIT (1997). According to the Czech
Republic, Phoenix’s claims fell outside the jurisdiction of the
tribunal because Phoenix was, “nothing more than an ex post facto
creation of a sham Israeli entity created by a Czech fugitive from
justice, Vladimír Beňo, to create diversity of nationality”.40 On the
facts, the tribunal upheld this view, finding that the only purpose
behind the creation of the claimant company was to gain access to
ICSID procedures and not to make a bona fide investment.




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Accordingly, the transactions in the case fell outside the ICSID
definition of an “investment” and amounted to no more than an
abuse of process.41


In a recent development, an ICSID tribunal dismissed – on an
expedited basis as “manifestly without legal merit” – a claim that it
considered to arise out of a purchase and sales contract and not out
of an investment under the ICSID Convention.42 The impact of this
approach to defining “investment” has also been felt in cases
brought outside ICSID. For example, in Romak SA v. Uzbekistan, a
tribunal constituted under UNCITRAL Arbitration Rules adopted
the following definition of “investment”:


“The Arbitral Tribunal therefore considers that the term
“investments” under the BIT has an inherent meaning
(irrespective of whether the investor resorts to ICSID or
UNCITRAL arbitral proceedings) entailing a contribution that
extends over a certain period of time and that involves some
risk.”43


The tribunal felt that whether there was an investment should be
answered on the basis of the “entire economic transaction that is the
subject of these arbitral proceedings”.44 The question at issue was
whether a transfer of title to wheat from the claimant to the
respondent amounted to an investment. Applying the above
definition, the tribunal concluded that the claimant’s interests did
not constitute an investment because the transfer of title to wheat
was a sales transaction and did not constitute a contribution in kind
in furtherance of a venture, it did not reflect a commitment beyond a
one-off transaction,45 and did not involve risk typically associated
with investment.46 On this issue the tribunal stated:


“An ‘investment risk’ entails a different kind of alea, a situation
in which the investor cannot be sure of a return on his
investment, and may not know the amount he will end up
spending, even if all relevant counterparties discharge their




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contractual obligations. Where there is “risk” of this sort, the
investor simply cannot predict the outcome of the transaction”.47


(c) Awards rejecting objective requirements


Other awards have refused to follow this deductive approach
and have declared that there are no mandatory elements in the
definition of investment under Article 25 (1). For example, in
Biwater v. Tanzania, an ICSID claim brought by an operator of a
water and sewerage services agreement after the respondent State
purported to terminate the agreement, the tribunal held that there
was little reason to use Article 25 (1) as a means of narrowing down
the scope of the term “investment” as defined in the applicable BIT:


“Further, the Salini Test itself is problematic if, as some
tribunals have found, the ‘typical characteristics’ of an
investment as identified in that decision are elevated into a fixed
and inflexible test, and if transactions are to be presumed
excluded from the ICSID Convention unless each of the five
criteria are satisfied. This risks the arbitrary exclusion of
certain types of transaction from the scope of the Convention. It
also leads to a definition that may contradict individual
agreements (as here), as well as a developing consensus in
parts of the world as to the meaning of ‘investment’ (as
expressed, e.g., in bilateral investment treaties). If very
substantial numbers of BITs across the world express the
definition of ‘investment’ more broadly than the Salini Test, and
if this constitutes any type of international consensus, it is
difficult to see why the ICSID Convention ought to be read more
narrowly.”48


In addition, the contribution to development requirement may
be open to criticism as it introduces an element of motivation into
the definition. This may not be relevant if the given definition of
“investment” in the BIT is asset-based.49 Indeed, it has been doubted




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whether the Preamble to the Convention can be read as implying a
significant contribution to economic development as a condition of
subject-matter jurisdiction. Thus in Pey Casado v. Chile the tribunal
stated that:


“232. The present tribunal considers that there is a definition of
investment under the ICSID Convention and that it is not
enough to note the existence of certain ‘characteristics’ of an
investment to determine whether the objective condition for the
Center’s jurisdiction is satisfied. Such an interpretation would
render meaningless certain provisions of Article 25 of the
ICSID Convention, which is not compatible with the
requirement to interpret the terms of the Convention by giving
them practical effect, as was rightly recalled by the decision in
the case Joy Mining Machinery Limited v. Arab Republic of
Egypt August 6, 2004.


According to the tribunal, this definition comprises only three
elements. The requirement of a contribution to the economic
development of the host State, which is difficult to measure,
seems to be a central element in the disputes, and not of the
competence of the tribunal. It is true that the preamble of the
ICSID convention mentions the contribution to economic
development of host States. This reference is however presented
as a consequence, and not as a condition of the investment: by
protecting investments, the convention favors the development
of host States. This does not mean that the economic
development of the host State is encompassed in the notion of
investment. This is the reason why this fourth condition is in fact
included in the previous three conditions.”[unofficial
translation]50


Thus, the tribunal comes out clearly against the reading of a
“contribution to development” as an essential component of an
investment.




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More recently, the validity of introducing the development
criterion as a jurisdictional requirement has been criticized by the
Annulment Committee in the case of Malaysian Historical Salvors
v. Malaysia.51 The question at issue was whether the salvage
contract between the Government of Malaysia and Malaysian
Historical Salvors was an “investment” for the purposes of Article
25(1) of the ICSID Convention. The original sole arbitrator held that
it was not on the ground that, “while the Contract did provide some
benefit to Malaysia”, there was not “a sufficient contribution to
Malaysia’s economic development to qualify as an ‘investment’ for
the purposes of Article 25(1) or Article 1(a) of the BIT”.52 The
Annulment Committee disagreed. It felt that the arbitrator had failed
to take into account the fact that Article 1 of the Malaysia–United
Kingdom BIT (1981), under which the claimant brought his claim,
contained a broad asset-based definition of investment whose
purpose was to give a wide range of investments protection under
the BIT.53 Instead, the sole arbitrator used the approach taken in
earlier awards to the interpretation of “investment” under Article 25
(1) of the ICSID Convention as the basis for interpreting the same
term in the BIT as well.


According to the Annulment Committee, the contract was an
investment as it was “one of a kind of asset” and in accordance with
the definition in Article 1 of the BIT there was, “a claim to money
and to performance under a contract having financial value”.
Furthermore, “the contract involves intellectual property rights; and
the right granted to salvage may be treated as a business concession
conferred under contract”.54 The Annulment Committee went on to
criticize the decision of the sole arbitrator on the grounds that:


“(a) it altogether failed to take account of and apply the
Agreement between Malaysia and the United Kingdom defining
“investment” in broad and encompassing terms but rather
limited itself to its analysis of criteria which it found to bear




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upon the interpretation of Article 25(1) of the ICSID
Convention;


(b) its analysis of these criteria elevated them to jurisdictional
conditions, and exigently interpreted the alleged condition of a
contribution to the economic development of the host State so as
to exclude small contributions, and contributions of a cultural
and historical nature;


(c) it failed to take account of the preparatory work of the
ICSID Convention and, in particular, reached conclusions not
consonant with the travaux in key respects, notably the
decisions of the drafters of the ICSID Convention to reject a
monetary floor in the amount of an investment, to reject
specification of its duration, to leave ‘investment’ undefined,
and to accord great weight to the definition of investment
agreed by the Parties in the instrument providing for recourse
to ICSID.”55


Accordingly, the majority of the annulment committee
concluded that the sole arbitrator had manifestly exceeded his
powers in making this decision.


The majority decision was strongly criticized by Judge
Mohamed Shahabuddeen in his dissenting opinion. He felt that the
ICSID Convention set certain “outer limits” to the meaning of an
“investment” based on the fact that a major aim of the Convention
was to encourage the economic development of member countries
by way of investment. Thus, it was perfectly reasonable to read that
term as requiring a contribution to the economic development of the
host country. Judge Shahabuddeen stated:


“In this connection, it is possible to conceive of an entity which
is systematically earning its wealth at the expense of the
development of the host State. However, much that may collide
with a prospect of development of the host State, it would not
breach a condition – on the argument of the Applicant.




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Accordingly, such an entity would be entitled to claim the
protection of ICSID. Host States which let in purely commercial
enterprises would have something to worry about.
Correspondingly, ICSID would seem to have lost its way: it is
time to call back the organization to its original mission.”56


That original mission was, in the judge’s view, to provide a
dispute settlement mechanism for investments that made a positive
contribution to the economic development of the host country.
According to him, it was Article 25(1) that governed the definition
of investments for the purposes of taking the dispute to ICSID, not
the terms of the BIT. Otherwise the parties could determine the
jurisdiction of ICSID and Article 25(1) would be rendered
meaningless.57


The disagreement between the majority of the annulment
committee and Judge Shahabuddeen encapsulates the dilemma in
international investment law as to whether it is a law of investment
protection, pure and simple, in which case the notion of investment
must be given as wide a compass as possible so that access to
dispute settlement procedures is made easier for the investor, or
whether it is a law of international economic cooperation, in which
case the need for a balancing of the private interests of the investor
and the public interests of the host country may be essential. On this
approach, the requirement of a significant contribution to
development arising out of the investment may be seen as a key
jurisdictional prerequisite. It remains to be seen whether ICSID
tribunals will follow the majority position in Malaysian Salvors and
ignore the development criterion or continue to apply it. The
development implications of this approach will be discussed in
Section III.





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5. “Investment” and group structures in TNCs


(i) Indirect investment and issues of ownership and control


The broad asset-based definition includes, as noted above,
various types of interests in companies including stockholding that
can be held directly or indirectly. This has significant implications
for the way in which the term “investment” may be seen when
applied to the situation of complex transnational corporate groups.
Such groups operate a network of owned and controlled holding and
subsidiary companies that together form an integrated enterprise
across national borders. Given the breadth of the term “interests in
companies” this raises the possibility that an “investment” by a TNC
could comprise not only of the locally incorporated subsidiary, by
reason of its foreign controlling ownership, but also the intermediate
holding company as the direct owner of the subsidiary. In the case
of groups of companies it means in effect that a corporate entity in
the host country can be an “investor” and can also be part of the
enterprise that constitutes the “investment” (figure 3).


Furthermore, the natural persons who hold shares in any of
these companies might also have a claim based on their investment
in the group as outside shareholders. The analysis of whether such
investments come within the IIA is closely tied up to the definition
of “investor” as well, and will be discussed below (see Section II.B).


The existence of complex group structures may require the IIA
to clarify issues of ownership and control. Some agreements include
a definition of these terms for the purposes of determining the
existence of an investment. For example, the Japan–Peru BIT (2008)
states in Article 1 (3):


“An enterprise is:


(a) ‘owned’ by an investor if more than 50 percent of the equity
interest in it is owned by the investor;




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(b) ‘controlled’ by an investor if the investor has the power to
name a majority of its directors or otherwise to legally direct its
actions; and


(c) ‘affiliated’ with an investor when it controls, or is controlled
by, the investor; or when it and the investor are both controlled
by the same investor.”




Figure 3. Example of an indirect investment (group
structure)


State Z (host State)State X


Company A
(investor)


Company B
(investor)


State Y


Local
Subsidiary


Company C
(investment of


companies
A and B)
(investor


for company D)


Company D
(investment)








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(ii) The impact of public international law rules on
corporate nationality


A further problem concerns the relationship between the general
international law rules on corporate nationality and their
applicability to investment law. Under public international law, in
the light of the Barcelona Traction Case (ICJ 1970) and, more
recently, the Diallo Case (ICJ 2007), a narrow approach to
corporate nationality has prevailed and the right of diplomatic
protection has been limited to the state of incorporation or of the
seat of the company. The Barcelona Traction Case arose out of the
purported expropriation of power generating facilities in Catalonia
owned by the Canadian company Barcelona Light and Traction Co.
Canada had originally brought a claim against Spain on behalf of the
company but had since withdrawn. As the majority of the
shareholders were Belgian nationals Belgium brought a claim
against Spain. The latter argued successfully that Belgium’s claims
were inadmissible on the grounds that only the home state of the
company could bring a claim arising out of harm to corporate
interests. The Court in Barcelona Traction admitted only two
situations in which the shareholder’s State can intervene, namely,
where the company ceases to exist as a legal entity or where the
shareholders have suffered an interference with their direct rights as
shareholders towards the company. The Court relied on the formal
legal separation between the company and its shareholders. This has
considerable limiting effects on the bringing of claims by
shareholders. To avoid such an outcome the ICSID Convention by
Article 25(2)(b) has created an exception to the logic of Barcelona
Traction. By Article 25(2)(b) the term “national of another
Contracting State” includes, for the purposes of Article 25(l):


“[…] any juridical person which had the nationality of a
Contracting State other than the State party to the dispute on
the date on which the parties consented to submit such dispute
to conciliation or arbitration and any juridical person which
had the nationality of the Contracting State party to the




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dispute on that date and which, because of foreign control, the
parties have agreed should be treated as a national of another
contracting state for the purposes of this Convention”.
(Emphasis added)


The second part of the sentence ensures that claims made by
direct controlling foreign shareholders in a locally incorporated
subsidiary can bring claims before ICSID. This is significant from a
definitional perspective as it makes clear that formal legal separation
between a local subsidiary and its foreign controlling interest will
not deny the foreign character to the subsidiary, thereby allowing
claims to be made by the local subsidiary itself.


A number of IIAs employ another way to deal with the same
issue: they entitle a foreign investor to bring claims not only on its
own behalf but also on behalf of the host-State enterprise which it
owns or controls (this is typical for IIAs that use the enterprise-
based definition of investment) (see Section II.A.(1)). For instance,
Article 11(2) of the Mexico–Singapore BIT (2009) entitles an
investor to bring a claim “on behalf of an enterprise legally
constituted pursuant to the laws of the other Contracting Party that
is a legal person such investor owns or controls, directly or
indirectly”. This provides an opportunity for the investor to recover
the damage suffered by the enterprise, which can be different from
the damage suffered by the investor as a shareholder. Moreover,
where the investor does not have full ownership, this approach
should make it possible to recover all damages of the enterprise and
not only the part proportionate to the shareholder’s stake in the
company.


(iii) Claims of parent and holding companies and minority
shareholders


Claims made by parent and holding companies arising out of
their direct investments in subsidiaries are not uncommon. They are




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seen by tribunals as within the jurisdiction of BITs containing
references to interests in companies as a category of protected
investment (Dolzer and Schreuer 2008, pp. 54–55). It is this fact that
has led to the use of holding or shell companies, incorporated in
jurisdictions enjoying investment treaty relations with host
countries, as a means of enhancing protection under IIAs, especially
where the home country of the parent company has no treaty in
place with a given host country. The implications of this situation
will be further considered below.


Unlike the requirements of Article 25(2)(b) of the ICSID
Convention, the reference to interests in companies in BITs does not
require that the investor’s interest or participation in the company be
a controlling one. Indeed, minority shareholdings are generally
protected under IIAs and arbitral tribunals have supported this
approach (McLachlan et al. 2007, pp. 187–189). For example, in the
case of CMS Gas Transmission Co v. Argentina the tribunal states:


“Precisely because the [ICSID] Convention does not define
‘investment’, it does not purport to define the requirements that
an investment should meet to qualify for ICSID jurisdiction.
There is indeed no requirement that an investment, in order to
qualify, must necessarily be made by shareholders controlling a
company or owning the majority of its shares. It is well known
incidentally that, depending on how shares are distributed,
controlling shareholders can in fact own less than the majority
of shares. The reference that Article 25 (2) (b) makes to foreign
control in terms of treating a company of the nationality of the
Contracting State party as a national of another Contracting
State is precisely meant to facilitate agreement between the
parties, so as not to have the corporate personality interfering
with the protection of the real interests associated with the
investment. The same result can be achieved by means of the
provisions of the BIT, where the consent may include non-
controlling or minority shareholders.”58




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This statement has been cited with approval in many other cases
and represents a settled approach of arbitral tribunals (McLachlan et
al. 2007, p. 188 and cases cited therein).


(iv)The risk of multiple claims


The impact for a State of such an approach to complex group
structures will be felt mainly in relation to the risk of multiple
claims being made on the basis of the same investment by various
classes of shareholders. This could expose the host country to
considerable legal pressure and uncertainty, as well as risk the
creation of inconsistent decisions by domestic and/or various
international tribunals involving different claimants from the TNC
group and its outside shareholders. Such events may contribute to
the lack of predictability in the investment arbitration process.


The potential for multiple claims is well illustrated by the case
brought by the American entrepreneur Ronald Lauder against the
Czech Republic arising out of the dispute over the Czech TV station
TV Nova. Mr. Lauder had set up this station but lost control over it
in circumstances which he alleged had been engineered by the
Czech State amounting to a breach of his rights against
expropriation under the Czech Republic-United States BIT (1991) in
relation to his own losses as the ultimate owner, and under the
Czech Republic-Netherlands BIT (1991) in relation to the losses
alleged to have been suffered by the Netherlands holding company
of TV Nova. The first case Lauder v. Czech Republic59 was
unsuccessful. On the other hand, the claim brought by the holding
company CME Czech Republic v. Czech Republic60 was successful,
even though the facts of each case were identical. Both tribunals
noted that the Czech Republic had refused an offer of consolidation
of the claims. Equally, both tribunals felt that they were entitled to
act independently and to come to their own decisions as each
tribunal was dealing with a different BIT and with different parties.




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In addition, the CME tribunal held that this was not a proper case in
which to apply a “single economic entity” or “company group”
theory, which was generally not accepted in international arbitration
especially as in this case Mr. Lauder was not the majority
shareholder in CME even though he was the ultimate controller of
the group.61


To avoid such an outcome, a host country may wish to ensure
that a control-based test of corporate nationality is included in its
IIAs so that the tribunal is enabled to lift the corporate veil and to
see the true nationality of the ultimate controller. Alternatively, an
(automatic) denial-of-benefits clause would deprive the intermediate
holding company of the IIA protection, provided that it does not
engage in substantial business operations in the State of
incorporation (see section II.B.(2)(d)).




B. Investor


Investment agreements apply typically only to investment by
investors who qualify for coverage. The definition of the term
“investor” is thus as important in determining the scope of an
agreement as that of “investment”. The definition of “investor”
normally includes natural persons and artificial or legal persons (or
juridical entities). As noted earlier, with respect to natural persons,
the main issue that arises is that of determining the relevant link
between the investor and his/her home State party to an agreement.
Legal entities, by contrast, can be defined to include or exclude a
number of different types of entity. Generally speaking, legal
entities may be excluded because of their legal form, their purpose
or their ownership.


Arbitral tribunals have interpreted the definitions of “investor”
and the concept of “nationality” in ways that have significant
implications for the application of IIAs. Recent awards have




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concentrated on two particular issues. First, in order to determine
jurisdiction, ratione personae arbitral tribunals have considered the
relevant criteria for determining the nationality of natural and/or
legal persons. Secondly, tribunals have considered what rights of
standing minority shareholders, non-controlling and indirect
shareholders may have under investor-state dispute settlement
provisions of IIAs (UNCTAD 2007b, p. 9). This mirrors the
question of whether such minority and indirect interests can be
considered investments, which was discussed above (see Section
II.A.5(a) and (c)).


1. Natural persons


(i) Nationality links


Natural persons are considered “investors” within the meaning
of an agreement only if they have the nationality of a State party to
an IIA or, in a number of cases, if they are linked to that State in
another manner, such through permanent residence, domicile or
residence. Under customary international law, a State may not be
required to recognize the nationality of a person unless the person
has a genuine link with the State of asserted nationality (Nottebohm
Case).62 Most investment agreements do not require such a link, at
least in the case of natural persons. Indeed, by Article 25(2) of the
ICSID Convention, a different criterion, the nationality at the date of
consent to submission of a dispute to ICSID, is more important:


“‘National of another Contracting State’ means:


(a) any natural person who had the nationality of a Contracting
State other than the State party to the dispute on the date on
which the parties consented to submit such dispute to
conciliation or arbitration as well as on the date on which the
request was registered pursuant to paragraph (3) of Article 28
or paragraph (3) of Article 36, but does not include any person




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who on either date also had the nationality of the Contracting
State party to the dispute.” (Emphasis added.)


The common practice in investment agreements (as in more
general international practice) is that a natural person possesses the
nationality of a State if the law of that State so provides. For
example, Article 1(2)(b) of the Ethiopia–Spain BIT (2006) defines
nationals as “physical persons who, according to the law of that
Contracting Party, are considered to be its nationals”. This
language limits the nationality test to the formal requirement of
citizenship and does not require that there be a genuine link between
the person and the state of asserted nationality.


(ii) Other links


Certain investment agreements may, however, require some link
beyond nationality. For example, the Germany–Israel BIT (1976)
provides, in Article 1 (3) (b), that the term “nationals” means, with
respect to Israel, “Israeli nationals being permanent residents of the
State of Israel”. Equally, the new ASEAN Comprehensive
Investment Agreement (2009) goes beyond its predecessor (the
ASEAN Agreement for Promotion and Protection of Investments of
1987) and defines “natural person” as “any natural person
possessing the nationality or citizenship of, or right of permanent
residence in the Member State in accordance with its laws,
regulations and national policies” (emphasis added). On the other
hand, a concept like permanent residence can be used not only in
addition to a nationality link but also as an alternative. The latter
may be especially in the interest of high immigration countries in
which a considerable proportion of the economically active
population may not yet be full citizens. Such countries (e.g.
Australia, Canada and the United States) regularly extend a special
legal status to permanent residents. For example, Article 1(c) of the
Argentina–Australia BIT (1995) defines a natural person as an
“investor” as follows:




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“(i) in respect of Australia:
(A) a natural person who is a citizen or permanent resident
of Australia; […] and


(ii) in respect of the Argentine Republic:
(A) a natural person who is a national of the Argentine
Republic in accordance with its laws on nationality […]”



Here, a difference in approach is enshrined between Australian


investors and Argentine investors. The former may not necessarily
be a citizen as permanent residence suffices while the latter need
only be a national under Argentine nationality laws.


Other IIAs allow a natural person to claim, for the purposes of
the agreement, the nationality of a country or some other basis, such
as residency or domicile in that country. For example, Article 3.1 of
the Treaty Establishing the Caribbean Community (CARICOM)
Agreement on the Harmonization of Fiscal Incentives to Industry
defines “national” to mean “a person who is a citizen of any
Member State and includes a person who has a connection with
such a State of a kind which entitles him to be regarded as
belonging to or, if it be so expressed, as being a native or resident of
the State for the purpose of such laws thereof relating to
immigration as are for the time being, in force”.


(iii) The problem of home and host country dual nationality


One question not explicitly addressed by most IIAs is whether a
natural person is a covered investor if he or she possesses the
nationality of both the home and the host countries which are parties
to the agreement. This issue is likely to arise in particular in an
investment agreement that provides for the protection of foreign
investment. As noted earlier, under customary international law, a
State could exercise diplomatic protection on behalf of one of its
nationals with respect to a claim against another State, even if its




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national also possessed the nationality of the other State, provided
that the dominant and effective nationality of the person was of the
State exercising diplomatic protection (Nottebohm Case and
Barcelona Traction Case).63 This test, however, typically is not
found in existing IIAs, which, as noted, tend to be silent on the
matter of dual nationality. The effective link test has also been
rejected by arbitral tribunals which have had to determine whether
the claimant, a natural person, possesses the nationality of a
Contracting Party other than the host Contracting Party country for
the purposes of the ICSID Convention.64 Most recently, in the case
of Micula v. Romania, where the claimants’ Swedish nationality was
doubted by the Respondent State, Romania, on the grounds that they
had no effective links with Sweden but only with Romania, the
tribunal held that:


“100. The Tribunal must […] examine whether there is any
room for the Nottebohm requirement of a ‘genuine link’ in this
proceeding. There is little support for the proposition that the
genuine link test has any role to play in the context of ICSID
proceedings. The ICSID Convention requires only that a
claimant demonstrate that it is a national of a ‘Contracting
State’. In fact, Article 25(2) (a) of the ICSID Convention does
not require that a claimant hold solely one nationality, so long
as its second nationality is not that of the State party to the
dispute. The Tribunal agrees with the conclusion of the tribunal
in Siag that the regime established under Article 25 of the
ICSID Convention does not leave room for a test of dominant or
effective nationality. No previous ICSID tribunal appears to
have ever ruled to the contrary and Respondent has not supplied
any convincing evidence to the contrary. In fact, Respondent has
not convinced the Tribunal to hold otherwise.”65


The tribunal went on to consider the effect of the Romania-
Sweden BIT (2002), which applied to the case:




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“101. It is also doubtful whether the genuine link test would
apply pursuant to the BIT. The Contracting Parties to the BIT
are free to agree whether any additional standards must be
applied to the determination of nationality. Sweden and
Romania agreed in the BIT that the Swedish nationality of an
individual would be determined under Swedish law and
included no additional requirements for the determination of
Swedish nationality. The Tribunal concurs with the Siag
tribunal that the clear definition and the specific regime
established by the terms of the BIT should prevail and that to
hold otherwise would result in an illegitimate revision of the
BIT.”


Given that the claimants’ Swedish nationality was validly
obtained under Swedish law, there was no doubt that they were
nationals of another ICSID Contracting Party and of the other
Contracting Party to the BIT.


Some treaties do have rules on how to deal with dual nationality
where one nationality is that of a non-Contracting Party. Thus
Article 1 of the United States-Uruguay (2005) treaty defines
“investor of a Party” in the following way:


“Article 1
Definitions
‘investor of a Party’ means a Party or State enterprise thereof,
or a national or an enterprise of a Party, that attempts to make,
is making, or has made an investment in the territory of the
other Party; provided, however, that a natural person who is a
dual citizen shall be deemed to be exclusively a citizen of the
State of his or her dominant and effective citizenship.”
(Emphasis added.)




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Article 17.3 of the Convention Establishing the Inter-Arab
Investment Guarantee Corporation has similar language, but states
even more explicitly in Article 17.1 that:


“[i]n no event shall the investor be a natural person who is a
national of the host country or a juridical person whose main
seat is located in such country if its stocks and shares are
substantially owned by this country or its nationals.” (Emphasis
added.)


Another agreement addressing dual nationality is the Canada–
Lebanon BIT (1997). It states:


“Article 1
Definitions
‘investor’ means:
any natural person possessing the citizenship of or permanently
residing in one Contracting Party in accordance with its laws;
... who makes the investment in the territory of the other
Contracting Party. In the case of persons who have both
Canadian and Lebanese citizenship, they shall be considered
Canadian citizens in Canada and Lebanese citizens in
Lebanon.” (Emphasis added.)

The literal language of many agreements requires that the host


country protect investment owned by nationals of the other party,
and nothing explicitly states that this obligation lapses where the
investors happen also to be nationals of the host country. A host
country may argue that limitations on the rights of dual nationals are
implied, but a country that does not wish to extend treaty coverage
to investment owned by dual nationals would be well advised to
insert explicit language to that effect in the agreement. This may be
particularly important where the investor, a natural person, uses a
legal entity established in the other Contracting Party to bring a
claim. In such a case, the claimant may well be protected under the
applicable IIA even if the natural person does not possess the




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nationality of one of the Contracting Parties. Such a possibility was
held out to be a solution to the lack of Contracting Party nationality
on the part of the claimant in the case of Soufraki v. The United
Arab Emirates.66 The claimant was a dual Italian and Canadian
national but had allowed his Italian nationality to lapse. Thus, he
could not bring a claim under the Italy–United Arab Emirates BIT.
The tribunal held that, “had Mr. Soufraki contracted with the United
Arab Emirates through a corporate vehicle incorporated in Italy,
rather than contracting in his personal capacity, no problem of
jurisdiction would now arise”.67 This is another example of “treaty
shopping” which is further discussed in Section 2.B.(2)(c).


(iv) Implications for treaty negotiation


The recent trend in arbitral interpretations of when natural
persons qualify as investors on grounds of their nationality has
important negotiating implications. First, not only the impact of the
wording used in the BIT should be taken into account but also the
impact of Article 25 of the ICSID Convention when it comes to
determining nationality for the purposes of the ICSID Convention.
Second, the central role of national legislation in determining
nationality for these purposes may not always exclude problems of
dual or uncertain nationality. Though tribunals will not in general
second guess decisions of national authorities in these matters, they
may not be able to ignore manifest errors either. Accordingly it may
be prudent to include language dealing with problems of dual and/or
uncertain nationality in the relevant IIA.


Some recent agreements have included a dominant of effective
nationality test. For example, the Rwanda–United States BIT (2008)
states:


“[…] ‘investor of a Party’ means a Party or State enterprise
thereof, or a national or an enterprise of a Party, that attempts
to make, is making, or has made an investment in the territory of




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the other Party; provided, however, that a natural person who
is a dual national shall be deemed to be exclusively a national
of the State of his or her dominant and effective nationality.”
(Emphasis added.)


Should that effective nationality come to be the same as that of
the host respondent State in an ICSID claim, then Article 25 (2)
would operate to exclude that claim. Equally, where the BIT allows
permanent residents to be protected under its terms, this too might
not be sufficient for ICSID jurisdiction to be allowed where the
effective nationality is that of a State that is not a Party to the ICSID
Convention (UNCTAD 2007b, p. 12).


2. Legal entities


(i) Range of entities covered


Legal entities can be defined to include or exclude a number of
different types of entity. In this context, a State may wish to
consider whether to include entities without legal personality,
branches of enterprises, non-profit entities and government-owned
entities. Some IIAs only cover those entities that have legal
personality, while others also include those without it. For example,
German BITs consistently mention entities “with or without legal
personality” in order to protect those German undertakings that
operate without adopting a separate legal personality. Some IIAs
further specify that the term “investor” also includes branches of
legal entities (see, for example, Canada-Jordan BIT (2009), Article
1(j) and 1(t)).


Treaty-makers can further consider whether or not to cover non-
profit entities (educational, charitable or other). The Mexico-
Singapore BIT (2009), as well as many others, explicitly covers
non-profit organization (Article 1(2) and 1(8)). The kinds of
activities in which a non-profit entity engages may produce
desirable forms of investment, such as a research facility or a
hospital. Further, non-profit entities often acquire shares in




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commercial enterprises in order to earn revenue to support their
charitable or educational activities. In that capacity, non-profit
entities are likely to act in the same way as any other portfolio
investor and their distinct status as non-profit entities would seem of
little significance.


Finally, States that actively pursue investment activities, either
directly or through government–owned entities, including sovereign
wealth funds, may wish to ensure that the relevant entities are
covered. Many IIAs expressly mention government-owned entities.
Perhaps the most vivid example can be found in the BIT concluded
by Saudi Arabia that includes in the definition of investor “the
Government of the Kingdom of Saudi Arabia and its financial
institutions and authorities such as the Saudi Arabian Monetary
Agency, public funds and other similar governmental institutions
existing in Saudi Arabia” (Article 1(3) of the Malaysia–Saudi
Arabia BIT (2000)).


(ii) Tests of corporate nationality


In the case of legal entities, most investment agreements use one
of three different criteria for determining nationality: the country of
organization or incorporation, the country of the seat or the country
of ownership or control. In many cases, they use some combination
of these criteria. Other criteria are occasionally used as well.


Country of organization/incorporation. An example of an
agreement using the place of organization as the criterion of
nationality is the Energy Charter Treaty, which in Article 1 (7) (a)
(ii) defines “investor” with respect to a Contracting Party to include
“a company or other organization organized in accordance with the
law applicable in that Contracting Party”. Similarly, the Rwanda–
United States BIT (2008) states:




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“‘enterprise’ means any entity constituted or organized under
applicable law, whether or not for profit, and whether privately
or governmentally owned or controlled, including a
corporation, trust, partnership, sole proprietorship, joint
venture, association, or similar organization; and a branch of
an enterprise.


‘enterprise of a Party’ means an enterprise constituted or
organized under the law of a Party, and a branch located in
the territory of a Party and carrying out business activities
there” (Emphasis added).


The use of country-of-organization is consistent with the
decision of the International Court of Justice in Barcelona
Traction.68


The advantage of using the country-of-organization test is ease
of application, as there usually will not be any doubt concerning the
country under whose law a company is organized. Further, the
country-of-organization is not easily changed, meaning that the
nationality of the investor usually will be permanent under this
approach. Because an important purpose of some investment
agreements is to attract investment by providing a stable investment
regime and because changes in the nationality of an investor will
result in the loss of treaty protection for investment owned by the
investor, a definition of “investor” that stabilizes the nationality of
the investor and thus the protection afforded to investment is
particularly consistent with the purposes of IIAs.


The disadvantage of using country-of-organization is that the
link between the investor and its country of nationality may be
insignificant. Under this test, a company may claim the nationality
of a particular country even though no nationals of that country
participate in the ownership or management of the company and
even though the company engages in no activity in that country. In
effect, the company could claim the benefits of nationality of a




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particular country, including protection under the treaties of that
country, despite the fact that it conferred no economic benefit of any
kind on that country. This should perhaps be of concern principally
to the home country, which finds itself protecting an investor that
brings it no economic benefit. It may also be of concern to the host
country, however. The effect of this test may be that the host
country is extending protection to investment ultimately owned by
persons who live in a country that extends no reciprocal benefits to
the host country’s own investors. Indeed, the country of ownership
or control may not even have normal economic relations with the
host country. To address this potential problem, IIAs using the place
of incorporation as the sole criterion to determine nationality of a
legal entity often also include a denial-of-benefits clause (see
Section 2.B.(2)(c)).


Country of company seat. Turning to the company seat
approach, an example of a treaty using this test as the basis for
attributing nationality is the 2005 German model BIT. That treaty
defines “company” in Article 1(3) (a) to include in respect of
Germany “any juridical person as well as any commercial or other
company or association with or without legal personality having its
seat in the territory of the Federal Republic of Germany”
(emphasis added).69 The seat of a company may not be as easy to
determine as the country of organization, but it does reflect a more
significant economic relationship between the company and the
country of nationality. Generally speaking, “seat of a company”
connotes the place where effective management takes place. The
seat is also likely to be relatively permanent as well. To strengthen
the country-of-seat test further and avoid granting protection to
“mail-box” companies, some IIAs provide that to be eligible as an
investor of a contracting party, a legal entity must carry out “real
economic activities” (Colombia-Switzerland BIT (2006), Article
1(2)(b)) or engage in “business activities” (Canada-Jordan BIT
(2009), Article 1(k)) in the territory of a that party.




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Country of ownership or control. The country-of-ownership
or control criterion means that a legal entity will be considered an
investor of a State whose nationals own or control it. This test may
be the most difficult to ascertain and the least permanent,
particularly in the case of companies whose stock is traded on major
stock exchanges. Its principal benefit as a test is that it links
coverage by an agreement with a genuine economic link. Perhaps
for these reasons, the ownership or control test sometimes is used in
conjunction with one of the other tests. Combining the criteria in
this way lends a degree of certainty and permanence to the test of
nationality, while also ensuring that treaty coverage and economic
benefit are linked. The control test is of great relevance when
dealing with issues of multiple claims by discrete members of a
corporate group and also as a means of controlling treaty shopping.


(iii) Problems arising out of formal country-of-organization
test


(a) Standing of locally incorporated subsidiaries


A further problem already alluded to above is that the use of a
country of organization test can lead to odd results in the context of
a complex corporate group structure. As noted above, in accordance
with the Barcelona Traction Case, given that the locally
incorporated subsidiary of a foreign parent company has the
corporate nationality of the host country, under customary
international law the subsidiary cannot bring a claim against that
country. In order to avoid this situation, the ICSID Convention
allows for the use of a test of foreign control coupled with the
consent of the host country to treat the local subsidiary as a foreign
national for the purposes of ICSID jurisdiction. Thus by Article
25(2)(b) of the ICSID Convention the term “national of another
contracting State” means, for the purposes of Article 25(l):


“any juridical person which had the nationality of a Contracting
State other than the State party to the dispute on the date on




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which the parties consented to submit such dispute to
conciliation or arbitration and any juridical person which had
the nationality of the Contracting State party to the dispute on
that date and which, because of foreign control, the parties
have agreed should be treated as a national of another
contracting state for the purposes of this Convention.”
(Emphasis added)


The purpose of this part of Article 25(2)(b) is to ensure that
foreign investments carried out by means of a locally incorporated
subsidiary or joint venture are not excluded from the ICSID
Convention. If that were so, then a major category of claims based
on the treatment of local subsidiaries would fall outside the scope of
the Convention, causing it to lose much of its utility. Thus the
ICSID Convention goes beyond the limitations laid down in the
Barcelona Traction Case, concerning the protection of foreign
shareholders in a locally incorporated company (Muchlinski 2007,
p. 727). The host Contracting Party is given discretion over whether
to extend ICSID arbitration to locally incorporated entities. The
extent of this discretion has been clarified in the decisions of ICSID
tribunals (Asouzu 2002). On the issue of consent, tribunals have
been ready to find this not only in cases of express consent but also
in cases where this can be implied (Muchlinski 2007, pp. 727-728).
Thus, if a host State wishes to restrict ICSID arbitration only to
disputes between the parent company and itself, this should be made
explicit.


As regards the criterion of foreign control, in Vacuum Salt v.
Ghana70 the tribunal held that agreement to treat a claimant as a
foreign national does not ipso facto confer jurisdiction. The
requirement of “foreign control” in Article 25(2)(b) sets an objective
limit beyond which jurisdiction cannot be granted.71 Accordingly a
20 per cent holding by a Greek national in Ghanaian incorporated
Vacuum Salt was, in the circumstances, insufficient to show foreign




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control, given that he did not exercise anything other than a
technical advisory function and that the remaining 80 per cent of the
equity, and actual managerial control, was in Ghanaian hands.72 In
Vacuum Salt, the fact that the majority of the controlling interests
possessed the nationality of the host country party to the dispute was
sufficient to dispose of jurisdiction. In Aguas del Tunari SA v.
Bolivia, the tribunal gave a detailed analysis of the meaning and
application of the term “controlled directly or indirectly” in the
Bolivia-Netherlands BIT (1992), where the question of actual
control by Dutch nationals of the Bolivian claimant company was at
issue for the purposes of jurisdiction. Bolivia claimed that the Dutch
holding companies were mere shells and that the real nationality of
control was that of the ultimate United States parent. The tribunal
held that the Dutch companies were in actual control of the Bolivian
claimant company and so it was an entity under control from the
Netherlands for the purposes of the BIT.73


(b) Making investments through intermediate companies:
The problem of “treaty shopping”


In the more recent case of Tokios Tokelés v. Ukraine the factor
of foreign control appears to have been diluted.74 This and other
cases reviewed below suggest that an investor from a third State, or
even from the host State itself, can obtain the benefits of IIA
protection by channelling its investment through an intermediate
holding company incorporated in a State which has an IIA with the
host State (see figures 4 and 5). The possibilities for such “treaty
shopping” are created by permissive language of many IIAs, which
define “investor” solely by reference to the country of incorporation.


In Tokios Tokelés v. Ukraine, the majority of the tribunal held
that a company incorporated in Lithuania, but owned and controlled
by Ukrainian nationals (who owned 99 per cent of the shares and
formed two thirds of the management), was a Lithuanian national
for the purposes of Article 25(2)(b). As this provision was aimed at
expanding, and not restricting, the jurisdiction of ICSID so long as




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the formal nationality of incorporation was that of another
Contracting Party the tribunal would not “lift the corporate veil”.75
This conclusion was reinforced by the fact that the BIT defined an
“investor” of Lithuania under Article 1(2)(b) as an “entity
established in the territory of the Republic of Lithuania in
conformity with its laws and regulations.” This method of defining
corporate nationality was found by the tribunal to be consistent with
modern BIT practice and that it satisfied the requirements of Article
25.76 In addition, the company had been incorporated six years
before the Lithuania–Ukraine BIT (1994) had entered into force,
showing that the incorporation was not undertaken to gain access to
ICSID arbitration.77


Figure 4. Investment by an investor from a non-Contracting
Party through an intermediate company established in the


Contracting Party


IIA


in place


State X (non-
Contracting Party)


Parent
company


Local
Subsidiary


Intermediate
holding


company


State Y (home State)


State Z (host State)


Local
subsidiary





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This decision gave rise to a strong dissent from the President of
the tribunal, Professor Prosper Weil,78 who held that this finding
undermined the object and purpose of the ICSID Convention, which
required that the investor be a national of a Contracting Party other


Figure 5. Investment by an investor from the host State
through an intermediate company established in the


Contracting Party




than the respondent Contracting Party. There is much to be said for
this position, given the history of the Convention. It is also
supported by academic opinion.79 Against this, the majority justifies
its view by reference to the intention of the parties as expressed in
the BIT. In this, the arbitrators may be said to follow the rules on
treaty interpretation in the Vienna Convention on the Law of
Treaties, which posits that the best evidence of parties’ intent is the
ordinary meaning of the terms used in the treaty. In other words,
arbitrators often invoke the “ordinary meaning of the terms of the
treaty” and decline to infer any other “intent” because that is what
the Vienna Convention calls for. It may be said, in response, that the


State X (host
State)


Parent
company


Local
subsidiary


Intermediate
holding


company


State Y (home
State)


IIA in place




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jurisdiction of ICSID cannot be determined by the subjective
intention of the parties to a BIT but by the Convention organs
themselves.80 More recently, in TSA Spectrum de Argentina S.A. v.
Argentine Republic, the corporate veil was lifted by the tribunal to
reveal that the Dutch claimant company was in fact owned and
controlled by an Argentine citizen for the purposes of Article
25(2)(b) of the ICSID Convention and so the tribunal had no
jurisdiction.81 Thus, the approach of the majority in the Tokios
Tokelés case is not uniformly followed, though a number of more
recent cases have done so where the applicable treaty and/or
national law refer only to a test of formal incorporation as
determining nationality.82


The formal approach to corporate nationality as a factor in
determining personal jurisdiction in Tokios Tokelés has been applied
in other arbitrations. It has been held that where the local subsidiary
is controlled by a company established in a non-Contracting Party,
but where the ultimate parent is incorporated in a Contracting Party,
ICSID will have jurisdiction over a claim brought by the parent (see
figure 6). The nationality of the intermediate holding company will
not be decisive.83 Thus, in Company X v. State A, State A objected
to ICSID jurisdiction based on the fact that, notwithstanding its
apparent consent to jurisdiction under Art. 25(2)(b), the immediate
controller of the local subsidiary, Company X, had the nationality of
a state not party to the Convention and so the requirements of Art.
25(2)(b) were not met. The tribunal rejected this argument on the
ground that since the immediate controller was itself controlled by
nationals of a Contracting State, Company X was entitled to bring
ICSID proceedings, it having the nationality of those foreign
controllers for the purpose of Art. 25(2)(b).84





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Figure 6. Investment through an intermediate company
incorporated in a non-Contracting Party


IIA


in place


State X (home State)


Parent
company


Local
Subsidiary


Intermediate
holding


company


State Y (non-
Contracting Party)


State Z (host State)


Local
subsidiary






A similar position has been taken in relation to NAFTA claims.
In Waste Management v. Mexico, a United States corporation
claimed against Mexico for losses suffered by its Mexican
subsidiary, which was owned through two Cayman Islands
corporations, arising out of operations concerning a landfill site in
Mexico. The tribunal held that, as NAFTA was not restricted to
claimants having the nationality of one or other of the Contracting
Parties, and given that the Mexican enterprise was indirectly
controlled by the United States claimant, the nationality of the
intermediate holding companies was irrelevant.85 Equally, as held in
the case of Autopista v. Venezuela, where the directly controlling
parent is a national of a non-Contracting Party, and this fact is




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known to the host country, a subsequent transfer of a majority of its
shares in the local subsidiary to an intermediate holding company
possessing the nationality of a Contracting Party, will not be fatal to
ICSID jurisdiction, where the host Contracting Party is aware of the
situation and has applied a formal test of nationality to the local
subsidiary (Muchlinski 2007, p. 730; Schlemmer 2008, p. 60).86


More recently, in the case of Rompetrol v. Romania, the tribunal
rejected the respondent State’s argument that, notwithstanding the
fact that the claimant’s formal nationality met the requirements of
the applicable BIT, both the BIT and the ICSID Convention
required an investigation of the actual control over a corporate
claimant to establish nationality.87 The claimant was incorporated in
the Netherlands. The dispute arose from the claimant’s investment
in the Romanian oil sector and, in particular, the purchase of shares
by the claimant in Rompetrol Rafinare S.A. (RRC), a privatized
Romanian company which owns and operates an oil refinery and
petrochemical complex. The claimant alleged that the Romanian
Government ordered “extraordinary and unreasonable”
investigations of RRC and its management, as well as
“discriminatory and arbitrary” treatment of the company, which
according to the claimant amounted to violations of the Netherlands-
Romania BIT (1994).88 The respondent argued that as the ultimate
controller of the claimant was a Romanian national it could not
bring a claim under the BIT. The tribunal held that the BIT
contained a test of formal nationality by way of incorporation for
legal persons that was entirely consistent with the Barcelona
Traction Case. In the circumstances it was not necessary to read into
the agreement a control-based “effective link” test of nationality or
to examine the factual basis of the assertion that the claimant
company was in fact under Romanian control.


Similarly, in the case of Rumeli v. Kazakhstan, the tribunal was
faced with an allegation that the claimant was no more than a shell




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company with the real controlling interest vesting in the Turkish
State and not in an investor who was a national of Turkey, the other
Contracting State in the Kazakhstan-Turkey BIT (1992) under
which the claim was made. The tribunal dismissed this argument on
the basis that “[t]he BIT does not provide a basis for looking beyond
a company on the alleged basis that it would be a shell company
and does not exclude such companies from its scope of application
from the moment it is incorporated in another contracting State”.89


In sum, both intermediate holding companies and ultimate
parent companies have rights to bring a claim on the basis of their
investment in the subsidiary company located in the host country. If
they possess the nationality of a Contracting Party other than the
host country, they are also “investors” who can bring a claim. The
Tokios Tokelés case shows that “treaty shopping” is a phenomenon
that tribunals will accept if they take a formal view of a BIT that
makes the nationality of incorporation the main test of nationality
for a legal entity to be regarded as an “investor”. Equally, the use of
an intermediate holding company in a non-Contracting Party has
also been seen as no bar to jurisdiction, nor has the ownership of the
local subsidiary by a non-Contracting Party parent company, which
then transfers the majority of the shares in the subsidiary to a
holding company in a Contracting Party. This paves the way for
investors to structure their investments so as to take advantage of
nominal “home” jurisdictions that have a network of BITs in place
so as to attract “treaty shoppers”. However, a State may not see this
as a problem if it considers irrelevant whether the capital originates
from a Contracting Party or from a non-Contracting Party. In other
words, a country’s negotiation position may be based on a view that
an IIA achieves its purpose as long as it attracts foreign capital, and
that the country of the capital’s origin is of little importance.


(c) Denial-of-benefits clause


To limit treaty shopping, certain BITs use a “denial of benefits”
clause. Thus, the model BIT (2004) used by the United States,




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which also uses country-of-organization as the test of nationality,
permits the host country to refuse to extend treaty benefits to
investments owned by investors of the other Party if the investors do
not have substantial business activities in the territory of the other
Party or if the country of ultimate control does not have normal
economic relations with the host country. For example, Article 17 of
the Rwanda-United States BIT (2008) provides that:


“1. A Party may deny the benefits of this Treaty to an investor of
the other Party that is an enterprise of such other Party and to
investments of that investor if persons of a non-Party own or
control the enterprise and the denying Party:
(a) does not maintain diplomatic relations with the non-Party;
or
(b) adopts or maintains measures with respect to the non-Party
or a person of the non-Party that prohibit transactions with the
enterprise or that would be violated or circumvented if the
benefits of this Treaty were accorded to the enterprise or to its
investments.
2. A Party may deny the benefits of this Treaty to an investor of
the other Party that is an enterprise of such other Party and to
investments of that investor if the enterprise has no substantial
business activities in the territory of the other Party and
persons of a non-Party, or of the denying Party, own or
control the enterprise.” (Emphasis added.)

This introduces a twofold test for avoiding treaty shopping.


First, it allows the tribunal to determine if the investor has any
substantial business activities in the home country. This requires
some analysis of what constitutes “substantial business activities”.
Some guidance could be obtained here from municipal law rules as
to business presence for the purposes of jurisdiction over foreign
companies. Normally, this would require more than a “brass plate”
office with an address for legal service and evidence of some clear




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business activity in the jurisdiction. Similarly, taxation laws that
seek to distinguish between income located abroad for tax deferral
purposes and genuine manufacturing activities for the purposes of
so-called “controlled foreign corporations” rules could offer some
guidance (Muchlinski 2007, pp 141, 303).



The second part of the test is one of ownership or control, which


introduces a veil-lifting possibility: a denying Party (host State) can
lift the corporate veil to determine the owners or controllers of the
alleged “investor”. If such owner/controller originates from a third
State or from the host State itself, treaty protection can be denied.
For example, in Banro American Resources et al. v. Congo, a
Canadian parent company sought diplomatic protection, as a
national of a non-Contracting State, against the Congo, and its
United States subsidiary, which undertook the actual investment in
that country, sought to file a claim before ICSID. The tribunal
rejected jurisdiction on the ground that it was not open to the group
to neutralize the nationality requirements of the ICSID Convention
in this way and to undermine the fundamental consensual
characteristic of the Convention between the host Contracting State
and the home Contracting State of which the foreign investor is a
national.90



A denial of benefits clause can be formulated as discretionary


(“a Party may deny the benefits” or “a Party reserves a right to deny
the advantages”) or automatic (“benefits shall be denied”). Early
arbitral practice reviewed below shows that the language used in the
denial of benefits does matter, and that it may be difficult to use a
discretionary clause in an effective way (see Section II.B.(2)(d)).



In addition, it is not certain that the approach in Tokios Tokelés


could be uniformly followed. For example, the tribunal in the
NAFTA case of Loewen v. United States suggested that, under
NAFTA, for an international claim to be sustainable, diversity of
nationality must exist between the claimant investor and the
respondent State from the date of the inception of the claim to the




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date of resolution. Accordingly, where, as in that case, the
reorganization of the claimant company, due to its bankruptcy,
caused it to lose its original Canadian nationality and to acquire
United States nationality, the international character of the claim
disappeared.91 The absence of any evidence that its controller, a
Canadian national, retained any shares in the reorganized company
was fatal to any personal claim he might have had under NAFTA.92
It should be noted that this is a NAFTA case and is not binding upon
an ICSID tribunal determining jurisdiction under any other IIA. In
addition, as noted above, under Article 25(2)(b), diversity of
nationality need only exist under the ICSID Convention at the date
the parties consent to the claim being brought and not at the date of
its resolution. However, the decision in Loewen does stress the need
to maintain a distinction between disputes of a purely national
character, which should be settled before national bodies, and
genuine international disputes (Muchlinski 2007, p. 730).



(d) Denial of benefits under the Energy Charter Treaty



The denial of benefits clause in Article 17(1) of the Energy


Charter Treaty (ECT) has been interpreted in several arbitral awards.
By Article 17 of the ECT:



“Each Contacting Party reserves the right to deny the
advantages of this Part to:
(1) a legal entity if citizens or nationals of a third state own or
control such entity and if that entity has no substantial
business activities in the Area of the Contracting Party in
which it is organized; [... ]
(2) an Investment, if the denying Contracting Party establishes
that such Investment is an Investment of an Investor of a third
state with or as to which the denying Contracting Party:


(a) does not maintain a diplomatic relationship; or
(b) adopts or maintains measures that:




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(i) prohibit transactions with Investors of that state; or
(ii) would be violated or circumvented if the benefits of
this Part were accorded to Investors of that state or to
their Investments.” (Emphasis added.)

It must be noted that Article 17(1) refers to owners and


controllers only from a third State but not from the host State. This
is a peculiar approach that leaves a loophole for domestic investors
from the host State to benefit from the ECT protection if they
structure their investment through a territory of another Contracting
Party. Also, this provision has to be read together with the definition
of “Investor” in Article 1(7). According to the tribunal in AMTO v.
Ukraine, this provision establishes two classes of investors of a
Contracting Party for the purposes of the ЕСТ:


“The first class comprises Investors with an indefeasible right to
investment protection under the ЕСТ. This class includes
nationals of another Contracting Party – whether natural
persons or juridical entities – except for those nationals falling
within the second class.


The second class comprises Investors that have a defeasible
right to investment protection under the ЕСТ, because the host
State of the investment has the power to divest the Investor of
this right. In this second class are legal entities that satisfy the
nationality requirement by reason of incorporation but are
owned or controlled by nationals of a third state in a manner
potentially unacceptable to the host State. Such foreign
ownership or control is potentially unacceptable where it
involves a State with which the Host State does not maintain
normal diplomatic or economic relationships, or where it is not
accompanied by substantial business activity in the state of
incorporation.”93


The tribunal went on to assert that:




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“Article 17(1) affects only juridical rather than natural persons,
and requires the fulfilment of two requirements in order for the
host state to exercise its right to deny. First, the investor must be
owned or controlled by citizens or nationals of a ‘third state’.
‘Third state’ is not defined in the ЕСТ, but is used in Article
1(7) in contradistinction to ‘Contracting Party’, which suggests
that a third state is any state that is not a Contracting Party to
the ЕСТ. Secondly, the investor must have ‘no substantial
business activities’ in the state of its incorporation. These are
cumulative requirements so that both must exist before the
respondent can exercise its right to deny.”94


On the facts of this case, the question arose whether the
claimant company should be denied the protection of the ECT on
the grounds that it was ultimately controlled by Russian nationals,
the Russian Federation being a signatory of the ECT but not having
ratified the treaty. The tribunal rejected this argument. AMTO was a
limited liability company incorporated in Latvia, a full party to the
ECT, whose shares were owned by a Lichtenstein holding company
that was itself controlled by a Lichtenstein-based foundation, and
thus a national of another Contracting Party. The controller of the
foundation was indeed a Russian citizen but that was not conclusive
proof that AMTO could not benefit from the protection of the ECT,
especially as the Russian Federation’s status as a “third State” was a
complex matter, given that it had signed the ECT. However, that
issue did not have to be decided as the decisive fact was that AMTO
“has substantial business activity in Latvia, on the basis of its
investment related activities conducted from premises in Latvia, and
involving the employment of a small but permanent staff”.95


This award is notable for the determination that the test of
substantial business activity can be relatively easily met in that it
does not require large-scale or extensive operations in the host
contracting State, but it is questionable if other tribunals applying




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Article 17 could so easily ignore the issue of third state control.
Other awards have clearly stated that both parts of Article 17(1)
have to be given equal weight.96


Problems relating to invocation of the clause. The denial-of-
benefits clause is formulated in the ECT as discretionary (a “Party
reserves the right to deny…”). At least two arbitral tribunals have
held that such formulation allows a State to deny the protections of
the treaty only prospectively, not retrospectively.97 In other words,
according to these tribunals, a State cannot deny the benefits of the
treaty to an investor after the claim is brought, in relation to events
that took place before the initiation of proceedings. This
interpretation would seem to impose on a host State a task of
denying benefits to non-qualifying investors at an early stage. In
practice, this seems to mean that a government is supposed to
monitor ultimate owners and controllers of all incoming investments
(who can also change over time), as well as determine whether the
direct owner engages in substantial economic activity in the territory
of the other contracting party. Such an approach is unfeasible in
practice and would seem to deprive the clause of much of its useful
effect. Arguably, however, even under this “prospective”
interpretation, a State may deny the benefits of the treaty (including
the investor’s right to initiate international arbitral proceedings)
after the investor notifies the State of the dispute but before he
submits the claim to arbitration. This is because the consent to
arbitration is perfected by the investor only at the latter moment.
This reading would give States some time to investigate the
nationality of the company’s owners/controllers and to see whether
the company carries out substantial business activities in the country
of incorporation.


Even though it may be too early to say that the case law on this
point is settled,98 it may be more prudent to formulate a denial-of-
benefits clause as automatic (“benefits shall be denied”). Another
way to deal with the problem may be to issue a declaration (or
attach it to the treaty at the time of conclusion) expressly denying




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the benefits of the IIA (or IIAs) to all those investors that fall within
the ambit of the clause.


(e) Implications for treaty negotiation


The above cases on corporate nationality suggest that more
attention needs to be paid in the drafting of definitions of “investor”
to actual foreign control and to the possibility of treaty shopping that
a formal reading of place of incorporation test creates. For this
purpose, negotiators may consider supplementing the country-of-
organization test with the company-seat test and/or requirement of
real or substantial economic activities in the home State, and/or a
denial-or-benefits clause (discretionary or automatic). On the other
hand, if a government is willing to grant IIA protection to
investments regardless of whether they flow from the other
Contracting Party, from a third State or even from its own territory
(channelled through the territory of the other Contracting Party), the
country-of-organization test will suffice.




C. Territory


Investment generally is covered by an investment agreement
only if it is in the territory of one of the State parties to the
agreement. Some investment agreements define the term “territory”.
The most common definition is typified by Article 1 (4) of the
Lebanon-Republic of Korea BIT (2006), which provides that,


“‘Territory’ means the territory of the Contracting Parties,
including the territorial sea as well as the maritime areas
including the exclusive economic zone, its seabed and subsoil
adjacent to the outer limit of the territorial sea over which the
State concerned exercises, in accordance with national and
international law, jurisdiction and sovereign rights.”




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The Energy Charter Treaty (1994) provides a similar definition
in Article 1, para. (10):


“‘Area’ means with respect to a state that is a Contracting
Party:
the territory under its sovereignty, it being understood that
territory includes land, internal waters and the territorial sea;
and
subject to and in accordance with the international law of the
sea: the sea, sea-bed and its subsoil with regard to which that
Contracting Party exercises sovereign rights and jurisdiction.”



As is evident, the purpose of the definition of “territory”


generally is not to describe the land territory of the parties, but to
indicate that “territory” includes maritime zones over which the host
country exercises jurisdiction. The significance is that investments
located within the host country’s maritime jurisdiction, such as
mineral exploration or extraction facilities, would be covered by the
agreement. More recent agreements have included such
comprehensive definitions of territory emphasizing the wider area of
control that current international law gives to states in relation to the
extraction of natural resources in particular (UNCTAD 2007a, pp.
18-19).



Even where it is completely clear which geographical areas


constitute the territory of a party, there may still be uncertainty
concerning whether an investment is located in the territory of a
party. Because “investment” includes many intangible rights, the
location of a particular asset may be difficult to identify. For
example, a service provider in one country may sign an agreement
with a company headquartered in a second country to perform
professional services for a branch of the company in a third country.
The definition of “investment” may well include the rights derived
from that contract, but it may be unclear which of the three countries
should be considered the location of the “investment” of contractual




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rights. The texts of IIAs, however, provide little assistance in
resolving issues concerning the location of investments.




Notes



1 In the General Agreement on Trade in Services (GATS) “commercial


presence” is defined as meaning “any type of business or professional
establishment, including through (i) the constitution, acquisition or
maintenance of a juridical person, or (ii) the creation or maintenance
of a branch or a representative office within the territory of a Party for
the purpose of supplying a service” (Article XXVIII(d)).


2 As noted by Westcott, “by limiting the treaty’s coverage of investment
to commercial presence, an important narrowing is assured. The
constitution, acquisition or maintenance of a business, professional
establishment or branch for the purpose of economic activity is a much
more limited concept than commonly used asset-based definitions of
investment that cover portfolio investments and a range of other assets
such as intellectual property.” (Westcott 2008, p. 9).


3 See further, UNCTAD 2005b.
4 See, for example, CARIFORUM-EU EPA (2008), Title II, Chapter 2


“Commercial presence”.
5 Another alternative to the asset-based approach is to omit the reference


to assets generally and to include instead an enumeration of the
transactions covered (see, e.g. the OECD Code of Liberalisation of
Capital Movements, which does not define the term “investment” or
“capital” as such, but contains in Annex A lists of capital movements
to be liberalized, including direct investment). The transaction-based
definition is conceptually different from the asset-based definition as
the former necessarily considers only the transaction of establishing or
liquidating an investment, not the protection of assets. Thus, it would
only be suitable for those agreements that are limited to liberalization
of investment.





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6 Unless otherwise noted, all instruments and BITs’ texts cited in this


report may be found in UNCTAD’s online collection of BITs and IIAs
at www.unctad.org/iia.


7 Agreement between the Government of the United Kingdom of Great
Britain and Northern Ireland and the Government of the United
Mexican States for the Promotion and Reciprocal Protection of
Investments, 2006.


8 This agreement has been superseded by the ASEAN Comprehensive
Investment Agreement (2009), which did not retain this exclusion.


9 The 10% benchmark is used in the IMF Balance of Payments Manual
(IMF 1993), para. 362, and the OECD Benchmark Definition of
Foreign Direct Investment (OECD 1996), para. 7.


10 See, for example, Japan–Singapore EPA (2002), Article 72(a)(v).
11 See Canada–Colombia FTA, Article 838, footnote 11.
12 See Peru–United States FTA (2006), Annex 10-F “Public Debt” and


the definition of “negotiated restructuring” in Article 10.28
“Definitions”.


13 Phoenix Action Ltd v. Czech Republic, ICSID Case No. ARB/06/5,
Award, 15 April 2009, para. 142.


14 See for example Benin–China BIT (2004).
15 Phoenix Action Ltd v. Czech Republic, ICSID Case No. ARB/06/5,


Award, 15 April 2009, para. 103.
16 See, for example, Fraport AG Frankfurt Airport Services Worldwide v.


The Philippines, ICSID Case No. Arb/03/25, Award, 16 August 2007.
(Jurisdiction refused where the claimant had deliberately sought to
evade nationality of ownership requirements under local law and
where the Germany-Philippines BIT required that investments be
made in accordance with the laws of the Philippines.)


17 Plama Consortium Limited v. Bulgaria, ICSID Case No. Arb/03/24,
Award, 27 August 2008, paras. 138-139; Phoenix Action Ltd v. Czech
Republic, ICSID Case No. ARB/06/5, Award, 15 April 2009, para.
101.


18 Phoenix Action Ltd v. Czech Republic, ICSID Case No. ARB/06/5,
Award, 15 April 2009, para. 109; Inceysa Vallisoletana, S.L. v.





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Republic of El Salvador, ICSID Case No. ARB/03/26, Award, 2
August 2006, paras. 239, 245-252.


19 Ioannis Kardassopoulos v. Georgia, ICSID Case No. ARB/05/18,
Decision on Jurisdiction, 6 July 2007, para. 182.


20 Desert Line Projects LLC v. Yemen, ICSID Case No. ARB/05/17,
Award, 6 February 2008.


21 Ibid., para. 106.
22 Ibid., para. 119.
23 See Salini Costruttori SpA and Italstrade Spa v. Kingdom of Morocco,


ICSID Case No. ARB/00/4, Decision on Jurisdiction, 23 July 2001 (42
International Legal Materials 609 (2003)), para. 46; Tokios Tokelés v.
Ukraine, ICSID Case No. ARB/02/18, Decision on Jurisdiction, 29
April 2004 (20 ICSID Review-Foreign Investment Law Journal 205
(2005)), para. 84.


24 Fedax v. Venezuela, ICSID Case No. Arb/96/3, Decision on
Jurisdiction, 11 July 1997 (37 International Legal Materials 1378
(1998)), para. 43: “The basic features of an investment have been
described as involving a certain duration, a certain regularity of profit
and return, assumption of risk, a substantial commitment and a
significance for the host states development.”


25 Pantechniki S.A. Contractors & Engineers v. Albania, ICSID Case No.
ARB/07/21, Award, 30 July 2009, paras. 46-49.


26 Romak S.A v. Uzbekistan, PCA Case No. AA280, Award, 26
November 2009, para. 207.


27 Ibid., paras. 242-243.
28 As noted by the tribunal in Desert Line Projects LLC v. Yemen, ICSID


Case No. ARB/05/17, Award, 6 February 2008, para. 110.
29 For example, Article II(2) of the Argentina-Spain BIT (1991) states:


“This agreement shall not however apply to disputes or claims arising
before entry into force.” This provision was relied upon by Spain to
contest jurisdiction in the case of Maffezini v. Spain, ICSID Case No.
Arb/97/7, Decision on Objections to Jurisdiction, 25 January 2000 (16
ICSID Review-Foreign Investment Law Journal 212 (2001)). Spain





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argued that the dispute, which concerned compliance with
environmental law requirements by the claimant, had arisen before the
entry into force of the treaty in 1992. This was not accepted by the
Tribunal which upheld jurisdiction.


30 Bayindir v. Pakistan, ICSID Case No. Arb/03/29, Decision on
Jurisdiction, 14 November 2005, para. 131.


31 See also for example, Indonesia–Japan EPA (2007), Article 58.
32 Ceskoslovenska Obchodni Banka, A.S. v. The Slovak Republic,


Decision on Jurisdiction, 24 May 1999 (14 ICSID Review-Foreign
Investment Law Journal 251 (1999)).


33 Joy Mining v. Egypt, ICSID Case No. ARB/03/11, Decision on
Jurisdiction, 6 August 2004, para. 45. Note that in X (United Kingdom)
v. The Republic (Central Europe), SCC Case 49/2002, a “best efforts”
agreement to secure necessary licenses for the investment did not have
a financial value and so could not be an “investment” under the
applicable BIT.


34 Joy Mining v. Egypt, ICSID Case No. ARB/03/11, Decision on
Jurisdiction, 6 August 2004, para. 52.


35 Mihaly v. Sri Lanka, ICSID Case No.ARB/00/2, Award, 15 March
2002 (41 International Legal Materials 867 (2002)), paras. 51-60.
Here, the claimant sought to recover preliminary expenditure
undertaken by it in preparation for a build–operate–transfer (BOT)
contract to construct a power station in the respondent State. That
contract was ultimately never concluded. Also, in the separate
concurring opinion of Mr David Suratgar, it was asserted that pre-
contractual expenditure by a subsidiary in a BOT contract should in
principle be seen as an “investment”, even if it is not incurred by
reason of a signed contract but in anticipation of such signature. See
Mihaly v. Sri Lanka, ICSID Case No.ARB/00/2, Award and
Concurring Opinion, 15 March 2002 (41 International Legal Materials
867 (2002)), pp. 878–880.


36 PSEG v. Turkey, ICSID Case No. ARB/02/5. Decision on Jurisdiction,
4 June 2004 (44 International Legal Materials 465 (2005)), para. 88.


37 See further Mytilineos Holdings SA v. The State Union of Serbia &
Montenegro and Republic of Serbia, UNCITRAL, Partial Award, 8





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September 2006, paras. 117–125. The ad hoc tribunal, though holding
that it was not required to follow ICSID requirements as to subject
matter jurisdiction, still analyzed the facts on the basis of such
requirements as they had been put in argument to the tribunal. See also
Romak S.A v. Uzbekistan, PCA Case No. AA280, Award, 26
November 2009.


38 Joy Mining v. Egypt, ICSID Case No. ARB/03/11, Decision on
Jurisdiction, 6 August 2004, para. 53. See also Bayindir v. Pakistan,
ICSID Case No. Arb/03/29, Decision on Jurisdiction, 14 November
2005, paras. 122-138; Jan de Nul v. Egypt, ICSID Case No. Arb/04/13,
Decision on Jurisdiction, 16 June 2006, paras. 90-96; Saipem Spa v.
Bangladesh, ICSID Case No. ARB/05/7, Decision on Jurisdiction, 21
March 2007, paras. 99-114; Ioannis Kardassopoulos v. Georgia,
ICSID Case No. ARB/05/18, Decision on Jurisdiction, 6 July 2007,
para. 116.


39 Phoenix Action Ltd v. Czech Republic, ICSID Case No. ARB/06/5,
Award, 15 April 2009, para. 114.


40 Ibid., para. 34.
41 Ibid., paras. 143-145.
42 Global Trading Resource v. Ukraine, ICSID Case No. ARB/09/11,


Award of 1 December 2010, paras. 56-58.
43 Romak S.A v. Uzbekistan, PCA Case No. AA280, Award, 26


November 2009, para. 207 (emphasis in original).
44 Ibid., para. 222.
45 Ibid., para. 227.
46 Ibid., para. 232.
47 Ibid., para. 230.
48 Biwater v. Tanzania, ICSID Case No. ARB/05/22, Award, 24 July


2008, para. 312. See too Rompetrol v. Romania, ICSID Case No.
ARB/06/3, Decision on Jurisdiction, 18 April 2008, para.107: “At a
deeper level, though, the Tribunal is not persuaded that there is
anything in the rules of treaty interpretation that would justify giving





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the ICSID Convention overriding effect for the interpretation of the
BIT.”


49 See Saluka Investments BV v. Czech Republic, UNCITRAL, Partial
Award, 17 March 2006, paras. 209-211. See also LESI-Dipenta v.
Algeria, ICSID Case No. ARB/03/8, Decision on Jurisdiction, 12 July
2006, para. 72(iv).


50 Victor Pey Casado and President Allende Foundation v. Republic of
Chile, ICSID Case No. ARB/98/2, Award, 8 May 2008, para. 232
(unofficial translation from French).


51 Malaysian Historical Salvors v. Malaysia, ICSID Case No.
ARB/05/10, Annulment Decision, 16 April 2009.


52 Malaysian Historical Salvors v. Malaysia, ICSID Case No.
ARB/05/10, Award, 17 May 2007, para. 143:


53 By Article 1 “For the purpose of this Agreement (1)(a) ‘investment’
means every kind of asset and in particular, though not exclusively,
includes: […] (ii) shares, stock and debentures of companies or
interests in the property of such companies; (iii) claims to money or to
any performance under contract having a financial value; (iv)
intellectual property rights […]; (v) business concessions conferred
[…] under contract […]”.


54 Malaysian Historical Salvors v. Malaysia, ICSID Case No.
ARB/05/10, Annulment Decision, 16 April 2009, para. 60.


55 Ibid., para. 80.
56 Malaysian Historical Salvors v. Malaysia, ICSID Case No.


ARB/05/10, Dissenting Opinion, 16 April 2009, para. 22.
57 Ibid., paras. 43–47.
58 CMS Gas Transmission Co v. Argentina, ICSID Case No. ARB/01/8,


Decision on Jurisdiction, 17 July 2003 (42 International Legal
Materials 788 (2003)), para. 51.


59 Lauder v. Czech Republic, UNCITRAL, Final Award, 3 September
2001.


60 CME Czech Republic v. Czech Republic, UNCITRAL, Final Award,
14 March 2003.


61 Ibid., para. 436.




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62 Nottebohm Case (Liechtenstein v. Guatemala), ICJ, Judgement, 18


November 1953; Judgement, 6 April 1955 (International Court of
Justice Reports, 1955, pp. 4-65).


63 Nottebohm Case (Liechtenstein v. Guatemala), ICJ, Judgement, 18
November 1953; Judgement, 6 April 1955 (ICJ Reports, 1955, pp. 4-
65); Barcelona Traction, Light and Power Company, Limited (Belgium
v. Spain), ICJ, 1970, Judgement, 24 July 1964; Judgement, 5 February
1970 (ICJ Reports, 1970, pp. 3-357).


64 Champion Trading Company and others v. Arab Republic of Egypt,
ICSID No. Arb/02/9, Decision on Jurisdiction, 21 October 2003;
Waguih Elie George Siag and Clorinda Vecchi v. The Arab Republic
of Egypt, ICSID Case No. Arb/05/15, Decision on Jurisdiction, 11
April 2007; Hussein Nuaman Soufraki v. The United Arab Emirates,
ICSID Case No. Arb/02/7, Award, 7 July 2004. For criticism of this
position see Schlemmer 2008.


65 Micula v. Romania, ICSID Case No. ARB/05/20, Decision on
Jurisdiction and Admissibility, 24 September 2008.


66 Hussein Nuaman Soufraki v. The United Arab Emirates, ICSID Case
No. Arb/02/7 7, Award, July 2004.


67 Ibid., para. 83.
68 Barcelona Traction, Light and Power Company, Limited (Belgium v.


Spain), ICJ, 1970, Judgement, 24 July 1964; Judgement, 5 February
1970 (ICJ Reports, 1970, pp. 3-357).


69 The most recent version of the German model BIT (2008) has a
different definition of “company”, revised to conform to the law of the
European Union.


70 Vacuum Salt v. Ghana, ICSID Case No. ARB/92/1, Award, 16
February 1994 (9 ICSID Review-Foreign Investment Law Journal 72
(1994)). These summaries are taken from Muchlinski 2007, pp.728-
729.


71 Ibid., para. 36.
72 Ibid., para. 53




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73 Aguas del Tunari v. Bolivia, ICSID Case No. ARB/02/3, Decision on


Jurisdiction, 21 October 2005 (20 ICSID Review-Foreign Investment
Law Journal 450 (2005)), paras. 206-232.


74 Tokios Tokelés v. Ukraine, ICSID Case No. ARB/02/18, Decision on
Jurisdiction, 29 April 2004 (20 ICSID Review-Foreign Investment Law
Journal 205 (2005)).


75 Ibid., paras. 45–51. See also Saluka Investments BV v. Czech Republic,
UNCITRAL, Partial Award, 17 March 2006.The Tribunal held that a
formal legal definition of “investor” is effective to determine corporate
nationality and that, in the absence of a specific treaty provision, a
Tribunal does not have the power to look behind corporate structures
unless these have been used to perpetrate fraud or other malfeasance
(paras. 229-230).


76 Ibid., para. 52.
77 Ibid., para. 56.
78 Tokios Tokelés v. Ukraine, ICSID Case No. ARB/02/18, Dissenting


Opinion, 29 April 2004 (20 ICSID Review-Foreign Investment Law
Journal 245 (2005)).


79 Thus, Schreuer et al. 2009, p. 323, para. 849 asserts: “the better
approach would appear to be a realistic look at the true controllers
thereby blocking access to the Centre for juridical persons that are
controlled directly or indirectly by nationals of non-Contracting States
or nationals of the host State”.


80 Tokios Tokelés v. Ukraine, ICSID Case No. ARB/02/18, Dissenting
Opinion, 29 April 2004 (20 ICSID Review-Foreign Investment Law
Journal 245 (2005)), para. 16.


81 TSA Spectrum de Argentina S.A. v. Argentine Republic, ICSID Case
No. ARB/05/5, Award, 19 December 2008, paras. 114-162.


82 See ADC v. Hungary, ICSID Case No. ARB/03/16, Award, 2 October
2006, para. 360; Rompetrol v. Romania, ICSID Case No. ARB/06/3,
Decision on Jurisdiction, 18 April 2008, para. 85.


83 SOABI v. Senegal, ICSID Case ARB/82/1, Decision on Jurisdiction, 1
August 1984 (2 ICSID Reports 175), pp. 182–183.


84 Company X v. State A, News from ICSID, Vol. 2 No. 2, Summer 1985,
pp. 3–6.





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85 Waste Management v. Mexico, ICSID Case No. ARB(AF)/00/3,


Award, 30 April 2004 (43 International Legal Materials 967 (2004)),
paras. 77, 80 and 85.


86 Autopista v. Venezuela, ICSID Case No. ARB/00/5, Decision on
Jurisdiction, 27 September 2001, (16 ICSID Review-Foreign
Investment Law Journal 469 (2001)). Venezuela had permitted a
Mexican parent to transfer 75 per cent of its shares in its local
subsidiary to a United States affiliate, which then became the direct
owner of the subsidiary. The tribunal held that it had jurisdiction to
hear a claim brought by the United States affiliate as Venezuela had
applied a simple majority shareholding test for determining foreign
nationality, and it was not open to it to challenge this choice by
reference to economic criteria even if they would better reflect reality
(paras. 117–122) There was no evidence that the United States affiliate
was a corporation of convenience. The transfer was necessary to
ensure access to adequate capital during the Mexican Peso crisis
(paras. 123–126) The fact that Mexico, a non-Contracting Party, had
taken an interest in the dispute at the diplomatic level was not fatal to
the claim by the United States affiliate (paras. 135-140). The Banro
Case was distinguished as the transfer of the shares in that case was
not subject to the approval of the Government and the parties had not
defined the test of foreign control, see Banro American Resources et
al. v. Congo, ICSID Case ARB/98/7, Award, 1 September 2000
(excerpts) (17 ICSID Review-Foreign Investment Law Journal 382
(2002)), para. 143.


87 Rompetrol v. Romania, ICSID Case No. ARB/06/3, Decision on
Jurisdiction, 18 April 2008, para. 78.


88 Ibid., para. 3.
89 Rumeli Telekom a.s. and Telsim Mobil Telekomikasyon Hizmetleri a.s


v. Republic of Kazakhstan, ICSID Case No. ARB/05/16, Award, 29
July 2008, para. 326..





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90 Banro American Resources et al. v. Congo, ICSID Case ARB/98/7,


Award, 1 September 2000 (excerpts) (17 ICSID Review-Foreign
Investment Law Journal 382 (2002)), paras. 11-12.


91 Loewen v. United States, ICSID Case No.ARB(AF)/98/3, Award, 26
June 2003 (42 International Legal Materials 811 (2003)), paras. 223,
255, 232-234.


92 Ibid., para. 239. In EnCana v. Ecuador, UNCITRAL, Arbitration
Award of the London Court of International Arbitration, 3 February
2006, it was held that continuous nationality of ownership of the
subsidiary is not required where the parent makes a claim in its own
right and not on behalf of its subsidiary. So long as the nationality of
the parent remains that of another Contracting Party then it qualifies as
an investor of that Party (para. 128).


93 AMTO v. Ukraine, Arbitration Institute of the Stockholm Chamber of
Commerce, Arbitration No. 080/2005, Award of 26 March 2008, para.
61.


94 Ibid., para. 62.
95 Ibid., para. 69.
96 See Plama Consortium Limited v. Bulgaria, ICSID Case No.


Arb/03/24, Decision on Jurisdiction, 8 February 2005 (44
International Legal Materials 721 (2005)), Award, 27 August 2008.


97 Ibid., paras.161-162; Veteran Petroleum Limited (Cyprus) v. The
Russian Federation, UNCITRAL, PCA Case No. AA 228, Interim
Award on Jurisdiction and Admissibility, 30 November 2009, paras.
514-515.


98 The described interpretation may be a result of particular structure of
the ECT. Under the ECT, a Contracting Part may deny the benefits
only of Part III of the Treaty, which includes substantive protections,
and not the benefits of Part V, which includes an investor’s right to
ISDS. An interpretative outcome might be different with respect to a
treaty where the denial-of-benefits clause entitles an investor to deny
the protections of the treaty as a whole, including an investor’s right of
action against the State.




III. ASSESSMENT AND POLICY OPTIONS

The scope of the definitions used in an IIA will materially affect


the extent of protection and the rights offered by the agreement. As
an initial matter, the breadth of the definition raises a number of
potential concerns entirely apart from developmental considerations.
For example, the inclusion of contractual claims within the meaning
of “investment” could convert government regulatory action
affecting the validity of private contracts into an expropriation. The
inclusion of trade-related transactions within the meaning of
“investment” could result in the submission of a broad range of
matters to the special investor-to-State dispute settlement
mechanisms created by investment agreements. In short, the
interaction of a broad definition of “investment” within the
operative provisions of an agreement could result in the application
of treaty rules and procedures to a great range of transactions
unrelated to FDI.



This is not to say, however, that broad definitions coupled with


broad substantive provisions are necessarily problematic. Ultimately,
the scope of the agreement is established by the interaction between
all its provisions. In order to achieve a specific policy goal, parties
to an agreement can choose, for example, between:



• Narrowing a definition; or
• Narrowing one or more substantive provisions; or
• Allowing general and/or sectoral exceptions from treaty


obligations; or
• Any combination of these approaches.



The terms “investment” and “investor” indicate the types of


interests for which a host country must pay compensation in the
event of an expropriation or breach of any other IIA provision. In
recent years, the application of the terms “investment” and
“investor” in international investment arbitration have led to the
emergence of a number of new procedural issues related to the




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investor State dispute settlement process. As already noted, the wide
approach to the determination of an “investment” in relation to
complex corporate group structures and the determination of
corporate nationality based predominantly on a formal test of
incorporation, have opened the door to multiple claims arising out of
the same dispute from different entities and owners in the group.
Excessive reliance on the country-of-organization test for legal
entities has led to the emergence of “treaty shopping” whereby a
group establishes a legal presence in a country that has an investor
protection agreement with the host country allowing it to benefit
from protection even if the ultimate controlling interest possesses a
nationality of a country that is a non-party to any such agreement
with the host country (see figure 4). Similarly, nationals of the host
country can benefit from lax IIA wording by setting up a legal entity
in another country that has a BIT with the host country in place, and
then claim against the host country through that entity (see figure 5).
A third issue that has been identified above is that of the use of an
intermediate holding company in a non-Contracting State by a
parent from a Contracting State, in order to establish a subsidiary in
the host country (see figure 6). Such an arrangement often involves
a tax haven or other regulatory haven jurisdiction in which the
holding company is placed to take advantage of such de-regulation
for the purposes of the investment. Should the protection of the BIT
between the host country and the parent country apply?



In the light of such considerations, State practice in IIAs, as well


as the development dimension discussed in the Introduction to this
paper, the following policy options emerge:


A. Investment


The text below describes the main policy options as well as their
constitutive elements.






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1. Option 1: adopting a broad asset-based definition

A broad and open-ended asset-based definition of “investment”


has been adopted in general to offer a maximum of investment
protection as a matter of policy, by utilizing language that can
extend an agreement to new forms of investment as they emerge,
without renegotiation of the agreement. The developmental concern
can be stated quite simply: treaty coverage of all assets included
within the definition may increase exposure to investor-State claims,
lead to payments of high compensations and thus not be consistent
with a country’s development policy. The danger of an open-ended
definition is that it may commit a host country to promoting or
protecting forms of transactions and assets that the host country did
not contemplate at the time it entered into an agreement and would
not have agreed to include within the scope of the agreement had the
issue arisen explicitly.



Equally, the broad open-ended definition denies legal precision


as to the scope of agreed protection as it is merely illustrative of the
types of assets that are protected. Lack of precision effectively shifts
the determination of what constitutes an “investment” from
Contracting States to arbitrators, while open-endedness of the
definition invites an expansive interpretation. This risk is enhanced
where an IIA includes in the definition words like “every asset”, and
a tribunal follows the guiding principle that the very purpose of the
IIA is to give the maximum protection to investors and their
investments.



Traditionally, States have justified the use of such an approach


on the basis that maximizing investor and investment protection
would allow for increased investment flows. That has not proved to
be uniformly the case (UNCTAD 2009) and the more specialized
nature of foreign investment has created uncertainty that such an all




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encompassing approach to defining investment is necessarily the
best way forward. Thus more recent agreements have stressed the
need for greater precision in the scope and definition clause.



2. Option 2: narrowing the definition of investment



As noted in Section II, a number of agreements have done so by


way of a series of methods, using either an asset-based or an
enterprise-based definition as a basis. These may be broadly
grouped around (a) approaches that define protected investments on
the basis of closed list definition; (b) definitions including
investment risk and other objective defining criteria; and (c) specific
controls and exclusions. These can be used alone or in tandem
depending on the degree of narrowing sought by the agreement.



(a) Option 2(1): adopting a “closed list” definition

The closed list approach has the advantage of offering a broad


but finite list of covered assets and of giving specific definitions of
assets so as to make clear that the agreement does not apply to
certain kinds of assets. This is an emerging trend in BITs. The major
advantage of this approach is that it can give greater control to the
Contracting Parties as to which types of investments are covered, as
there is no room for treating the list as illustrative and thus open-
ended. That may be an advantage for development planning as it
gives more certainty as to the scope of the protection given under
the IIA. Current practice suggests that the closed list can be very
comprehensive, usually only excluding purely contractual
transactions such as sales of goods or services, credit arrangements
other than investment loans, or claims to money not linked to
investment activities. To achieve legal precision, negotiators could
consider including clarifying provisions or footnotes, which often
begin “for greater certainty” or “for the avoidance of doubt”, which
appears in newer United States BITs.





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(b) Option 2(2): including investment risk and other objective
defining criteria



It was seen in Section II that in contemporary practice the


definition clause contains a list of the main characteristics of an
investment, “including such characteristics as the commitment of
capital or other resources, the expectation of gain or profit, or the
assumption of risk.”1 The main advantage of this formulation is that
it offers certain objective criteria to guide tribunals that are based on
the economic distinction between commercial and investment
transactions. They would appear to require that a tribunal addresses
the nature of the transaction before it in its actual economic context.
This allows for a more focused scope of protection under the IIA
with an emphasis on genuine investments rather than a generalized
protection of any valuable asset owned and/or controlled by the
investor.



It may be useful to distinguish further between economic


characteristics of an investment (the ones mentioned immediately
above) and characteristics that are policy-oriented, i.e. those that
describe eligible investments by reference to their usefulness or
desirability. The latter category includes in particular the
requirement of “contribution to economic development of the host
State” considered in the context of the development-based definition
below (see option 3).



The major disadvantage of the approach based on objective


factors is that it may be hard to substantiate in practice: how much
capital or other resources must be committed, whether there is a
minimum size of commitment that will qualify as an investment,
what should be the duration of the transaction, and how investment
risk is to be assessed? The main problem here is how to define risk.
Risk is inherent to entrepreneurial business activity and arises both




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in ordinary commercial transactions and in investment transactions.
Thus, some special form of risk inherent only to investments may
have to be identified.



(c) Option 2(3) specific exclusions and controls

As to specific exclusions:


• As some agreements examined above show, it is possible to
expressly exclude classes of transactions that are deemed to be
only commercial transactions but not investments. Thus general
sales transactions, sales of services; short-term loans and certain
debt securities have been excluded in this way from some
agreements.


• Apart from the listing of excluded transactions, some
agreements exclude portfolio investment (because it may be
regarded as less desirable than FDI, given that it generally does
not bring with it technology transfer, training or other benefits
associated with FDI). Further, portfolio investment is easily
withdrawn, thus creating the potential for capital volatility in the
event of economic turbulence. In addition, portfolio investment
is less easily monitored than direct investment, giving rise to
concerns that it may be used as a mechanism for money
laundering. Exclusion of portfolio investments may offer a
solution, at least partial, to the risk of multiple claims by
minority shareholders. On the other hand, inclusion of portfolio
investment can make a positive contribution to development. It
is a potential source of capital and foreign exchange. Some
investors may not wish to control an investment or even have
any kind of equity position in the investment. Further, given that
one traditional concern about FDI was that it permitted domestic
assets to fall under the control of foreign nationals, there may be
sound reasons of national interest to encourage portfolio rather
than direct investment in certain enterprises.




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• Some investment agreements exclude assets of less than a
certain value, perhaps because these investments are considered
too small to justify the costs of treaty coverage or perhaps
because of a desire to reserve to domestic investors those parts
of the economy in which small investments are likely to be
made. However, the exclusion of small investments could
discourage small and medium-sized investors that some
developing countries may be seeking to attract, at least during
certain stages of the development process (UNCTAD 1998b). In
such cases, a size limitation may not be useful.


• Other investment agreements exclude investments established
prior to entry into force of an agreement, in order to avoid
bestowing a windfall on the investor. Such exclusion could be
interpreted as calling into question the parties’ commitment to
investment promotion or protection and in exceptional cases
could provide a permanent competitive advantage to investors
who invest after the conclusion of the agreement.


• Investment agreements may limit the parts of the economy to
which the agreement applies, particularly as far as entry/market
access disciplines are concerned. As noted in Section II, this is
the approach to definition taken by the Energy Charter Treaty
and to some extent in the ASEAN Comprehensive Investment
Agreement (2009).


• The scope of IPR protection may also have to be examined to
avoid the pitfalls of an overbroad protection of IPRs in order to
avoid covering those IPRs that are not protected under domestic
legislation of a Contracting State nor by its international
commitments. Further, consistency between the IIA and the
WTO Trade-Related Aspects of Intellectual Property Rights
(TRIPS) Agreement needs to be considered carefully, as
countries that are also members of the WTO cannot exclude




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their WTO obligations in any IIA they enter into (UNCTAD
2005a, pp. 23–234).



The above analysis suggests that countries need to consider


carefully the consequences of including or excluding certain types
of investment in the definition of “investment”. Critical
considerations include the purpose(s) of the investment agreement
and the precise nature of the operative provisions to which the
definition is applied. In addition, it may be considered whether the
definition of particular terms such as IPRs, or shares or goodwill
should be governed by the national law of the host country first and
only supplemented by international law. Thus, as long as the
national definition of the term is consistent with the host country’s
existing international commitments (e.g. under the TRIPS
Agreement) then the national definition could be expressly used as
the basis of the IIA definition of the term.



As to controls:


• The criterion of protecting only investments made in accordance
with the national laws and regulations of the host country
further ensures that illegal investments are not protected.
However, such a provision cannot act as a general preservation
of domestic discretion over investments. In particular, a country
cannot replace the treaty-based definition of investment with a
purely national law-based definition. Furthermore, the
requirement implies good faith on the part of the host country
and so it cannot rely on such a clause to avoid treaty protection
on the grounds of minor technical legal irregularities in the
investment-making process. On the other hand, it may be
possible to make the definition of “investment” subject to
national law definitions found in the law of the host country so
as to ensure that there is correspondence with what are regarded
as protected investments under national law and under the
applicable IIA. This is not the same as relying on national law to




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oust international obligations; it is using national law definitions
to interpret the scope of terms in the IIA, a practice already used
in relation to the definition of nationality for the purposes of
determining who is a protected investor.


• In order to avoid mass claims arising out of indirect investments
by complex TNC group structures, a host country may wish to
ensure that a control-based test of corporate nationality is
included in its IIAs so that a tribunal is enabled to lift the
corporate veil and to see the nationality of the ultimate
controller of the investment in question. A denial-of-benefits
clause can also help to minimize the risk of multiple claims in
relation to indirectly held investments. Another solution might
be to require a consolidation of claims under two or more BITs
in one case and to introduce such a clause into all BITs signed
by the host country.


• A further possible option is to include a general “interpretation
of terms” clause that specifies the approach to be taken by the
tribunal in interpreting terms under the agreement. For example,
such a clause may specify that an interpretation of particular
terms should be sensitive to developmental objectives and
concerns. General interpretation clauses are found in certain
national constitutions as a guide to judicial interpretation of
constitutional terms. Such a device may be worth examining in
relation to the scope and definition of terms in IIAs.


3. Option 3: a development-based definition

The stress given by some arbitral awards on the contribution to


economic development as a factor to consider when determining
whether an investment exists offers a further possible way in which
the balance between investment protection and the right of the host
country to pursue legitimate policy goals can be ensured. A




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development-based definition is not an alternative to the options set
out above; rather, it provides a supplementary element that adds a
clear development policy dimension to the technical definition of
investment. An IIA scope and definition clause could expressly
require that in order to be protected, an investment must contribute
to economic development of the host State. This would have the
advantage of making clear that the policy of the treaty is not just
investor and investment protection, but also the protection of the
legitimate expectation of the host country that the investment will
make a contribution to economic development. Preambles to IIAs
routinely stress that the purpose of the treaty is to encourage
economic development and the transfer of capital and technology,
which is a necessary first step. However, because the Vienna
Convention on the Law of Treaties prioritizes the ordinary meaning
of specific substantive text over general purpose statements, the
Preamble is so often ignored in favour of a broad definition
provision. Narrowing and focusing the scope and definition clause
towards a development-oriented definition of investment may be a
way to serve development objectives by ensuring that the treaty is
interpreted as a development-oriented investment protection
instrument.



Equally, issues of the treatment of the least developed countries


(LDCs) may require some express provision for their needs. In this
connection, it may at least be considered whether an IIA is better
suited to such an end as compared to a specialized development
cooperation agreement, given that the latter seeks to balance the
particular needs of LDCs with the modalities of economic
development, including aid and investment, while IIAs cover a
narrower range of interests and usually remain silent over the actual
level of development of the developing country party to the
agreement and of its particular needs.



A development-orientated definition of investment would no


doubt be controversial: again, how would a tribunal assess a




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contribution to development? Would a minimum size of investment
be required or would small and medium sized investments also
constitute a contribution? Equally, there is the risk that a subjective
assessment of the contribution made by the host country and the
investor might be the only available measure thereof. How could a
tribunal make an objective assessment, given its limited resources
and expertise? In an adversarial setting, it would hear contradictory
perceptions from each party, with the host country saying the
contribution was minimal and so not protected, and the investor
saying that the investment made a significant contribution and that
therefore the protection of the treaty was available. While these are
formidable concerns which may be best addressed by elaborating
the developmental requirement further by parties to a specific treaty,
the requirement even in its simplest form should still play a useful
role providing legal grounds for denying protection to those
investments that clearly lack contribution to development.



To ensure that this perspective is accepted by an international


tribunal, it may be possible to include a provision that ensures that
deference is given to the host country’s understanding and
evaluation of the development impact of a particular investment. In
this connection, the fact that an investment has been authorized by
the host country may not be conclusive proof of its development
impact. Each case will turn on its own facts. What may have seemed
a development-friendly investment at the outset may turn out not to
be development friendly in practice. Changes in circumstances may
eviscerate the investment of its development potential and may
require corrective regulatory intervention by the host country. Such
corrective regulation may need to be protected from IIA claims by
reason of a development-oriented definition of covered investment.
In this connection, it should be remembered that development is an
interdisciplinary concept and not a legal term of art. Thus, a holistic
approach to definition is needed, which takes into consideration not




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only economic impacts but also social and environmental impacts
such as those included in the United Nations Millennium
Development Goals.



Finally, the issue of definition of “investment” should be viewed


not in isolation but together with the treaty’s substantive disciplines.
Other types of clauses – such as an express right to regulate clause
or a general exceptions clause – may well prove effective in
protecting the host country’s right to regulate in furtherance of
legitimate development policy goals. However, such an approach
would work by way of an exception allowing for what otherwise
might be seen as a prima facie breach of the IIA. Making the
definition of investment conditional on a contribution to the
economic development of the host country would help bring
developmental concerns to the fore even before going into the
substantive assessment of host country measures.




B. Investor


The definitional options in this area are, perhaps, less difficult to
describe. In essence, the central issue is the choice of links with one
or more Contracting Parties whereby natural and legal persons
become integrated into the scheme of an investment agreement.



1. Natural persons



Usually, a nationality link is sufficient, as long as the


contracting party’s domestic law recognizes the individual to be a
national. There do not appear to be significant development
implications stemming from this matter. Where a natural person
possesses dual or multiple nationalities, then an effective link
criterion could be inserted into the clause. Most bilateral treaties do
not follow this option. On the other hand, the insertion of other
connecting factors, such as residence or domicile in the country of




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nationality, may ensure that an effective link can be proved on the
facts. The main development implication of such a variation is to
ensure that only persons with a significant involvement in the
economy and society of the home country could claim the protection
of an investment agreement and, therefore, to minimize “free-
riding” on the basis of the nationality provisions of the agreement.
As noted earlier, it may also be necessary to consider whether to
prevent natural persons (or indeed legal persons as well), who are
host country nationals, from incorporating a legal person in the other
contracting party in order to benefit from the protection of the treaty
against their own country.



2. Legal persons



Two issues need to be addressed: first the range of legal persons


covered and, secondly, the links between the legal person and a
contracting party to an investment agreement.



As to the first issue, one option is to have all legal persons


covered. This gives maximum flexibility to investors as to the
choice of the legal vehicle through which to invest in a host country.
The development implications of such a “free choice of means”
would centre on whether the regulatory objectives of internal law
can be achieved regardless of the legal form that an investor adopts.
That, in turn, depends on the nature and context of internal laws and
regulations. The other option is to narrow the range of legal persons
covered. This might be done where the host country has a strict
regime as to the legal form that a foreign investment is permitted to
take or where it may wish to exclude specific types of entities such
as, e.g., sovereign wealth funds.



As to the second issue, a formal country-of-incorporation


linkage may be adopted. Such a linkage is very common in




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investment agreements but may be difficult to apply in practice,
given the complex structure of multinational corporate groups. In
addition, as noted earlier, a strict link of formal nationality may
encourage “treaty shopping” by investors who are non-nationals of
the contracting parties, in that they can set up a shell company in a
contracting country and thus benefit from its IIA network. This
concern is real, especially as tribunals will generally allow the test
of incorporation to govern the nationality question in such cases,
given the wording of the agreement. To mitigate the risk of such
outcome, a definition could require – in addition to the incorporation
test – that the company’s seat be located in the contracting party
and/or that it engage in real or substantial economic activities in the
territory of that party, or include an (automatic) denial of benefits
clause.



Alternatively, a wider provision could concentrate not on the


formal nationality of the legal person, but its effective nationality as
exemplified by the nationality of the controlling interest. This could
reduce the risk of “treaty shopping” by insisting that the corporate
veil is lifted and the true controlling interest is identified. On the
other hand, if a government is willing to grant IIA protection to
investments regardless of whether they flow from the other
Contracting Party, from a third State or even from its own territory
(channeled through the territory of the other Contracting Party), the
country-of-organization test will suffice.



A State may need to consider whether it is willing to recognize


foreign affiliates incorporated in a host country as “investors”
benefiting from an agreement and not being disbarred from bringing
a claim on the basis of their host country nationality. A specific
clause to this effect could be included where the right to bring a
claim by a local subsidiary is to be allowed. However, affiliates may
in any case be protected as “investments of the investor”.





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As with natural persons, the major problem to be borne in mind
is not to adopt a linkage provision that would permit legal persons
from non-Contracting States, or from the host State itself, to benefit
from the legal protection of the agreement on a “free rider” basis.
Thus the scope and definition clause needs to be considered
alongside the question of whether a denial-of-benefits clause,
containing a control test of corporate nationality, should be
included.



* * *



Definitions of investment and investor are crucial in shaping the


scope of an investment agreement. They determine economic
interests, to which governments extend substantive IIA protections,
as well as the range of natural and legal persons who will benefit
from the treaty. Thus, to a large extent, the definitions outline the
boundaries of a country’s exposure to possible investor–State
claims.



There is no such thing as the best definition of “investment” or


“investor”; each definition is a reflection of the contacting parties’
preferences and policies. The aim of this paper was to discern the
implications of particular treaty approaches and wording in order to
assist States in finding a formula that would suit their policy
objectives. Therefore, a government needs to approach the
definitional issues with a clear understanding of its negotiating goals
and priorities. The definitions will no doubt keep evolving as new
types of investment (e.g. carbon offset contracts) or new types of
investors (e.g. sovereign wealth funds) appear.



Furthermore, it is obvious that the definitions alone cannot


establish an appropriate balance between affording a sufficient
degree of protection to foreign investors and preserving the vital




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interests of the host country, including its regulatory policy space.
This fundamental goal needs to be kept in mind when drafting both
the definitions and each individual substantive obligation of the
investment agreement.





Note

1 It may be wiser to set out the list of characteristics as cumulative by


using “and” instead of “or”. This would also closer reflect the practice
of investment tribunals developed in the context of Article 25 of the
ICSID Convention who have held that for an investment to exist, all of
the characteristics must be present.




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Aguas del Tunari v. Bolivia, ICSID Case No. ARB/02/3, Decision on


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AMTO v. Ukraine, Arbitration Institute of the Stockholm Chamber of


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Autopista v. Venezuela, ICSID Case No. ARB/00/5, Decision on


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Banro American Resources et al. v. Congo, ICSID Case ARB/98/7,


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Bayindir v. Pakistan, ICSID Case No. Arb/03/29, Decision on


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Biwater v. Tanzania, ICSID Case No. ARB/05/22, Award, 24 July


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Ceskoslovenska Obchodni Banka, A.S. v. The Slovak Republic,


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Champion Trading Company and others v. Arab Republic of Egypt,
ICSID No. Arb/02/9, Decision on Jurisdiction, 21 October
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CME Czech Republic v. Czech Republic, UNCITRAL, Final Award, 14


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CMS Gas Transmission Co v. Argentina, ICSID Case No. ARB/01/8,


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Company X v. State A, News from ICSID, Vol. 2 No. 2, Summer 1985.

Desert Line Projects LLC v. Yemen, ICSID Case No. ARB/05/17,


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EnCana v. Ecuador, UNCITRAL, Arbitration Award of the London


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Fedax v. Venezuela, ICSID Case No. Arb/96/3, Decision on


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Fraport AG Frankfurt Airport Services Worldwide v. The Philippines,


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Global Trading Resource Corp. and Globex International, Inc. v.


Ukraine, ICSID Case No. ARB/09/11, Award, 1 December
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Hussein Nuaman Soufraki v. The United Arab Emirates, ICSID Case
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Inceysa Vallisoletana, S.L. v. Republic of El Salvador, ICSID Case No.


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Ioannis Kardassopoulos v. Georgia, ICSID Case No. ARB/05/18,
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Jan de Nul v. Egypt, ICSID Case No. ARB/04/13, Decision on


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Joy Mining v. Egypt, ICSID Case No. ARB/03/11, Decision on


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Lauder v. Czech Republic, UNCITRAL, Final Award, 3 September


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LESI-Dipenta v. Algeria, ICSID Case No. ARB/03/8, Decision on


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Loewen v. United States, ICSID Case No.ARB(AF)/98/3, Award, 26


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Maffezini v. Spain, ICSID Case No. Arb/97/7, Decision on Objections


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Malaysian Historical Salvors v. Malaysia, ICSID Case No. ARB/05/10,


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Mihaly v. Sri Lanka, ICSID Case No.ARB/00/2, Award and Concurring
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Mytilineos Holdings SA v. The State Union of Serbia & Montenegro


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Plama Consortium Limited v. Bulgaria, ICSID Case No. Arb/03/24,


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PSEG v. Turkey, ICSID Case No. ARB/02/5. Decision on Jurisdiction,


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Rompetrol v. Romania, ICSID Case No. ARB/06/3, Decision on


Jurisdiction, 18 April 2008.

Ruler of Qatar v. International Marine Oil Company Limited,


Judgement (International Law Reports, 1953, Vol. 20: 534-
547).



Rumeli Telekom a.s. and Telsim Mobil Telekomikasyon Hizmetleri a.s


v. Republic of Kazakhstan, ICSID Case No. ARB/05/16,
Award, 29 July 2008.



Saipem Spa v. Bangladesh, ICSID Case No. ARB/05/7, Decision on


Jurisdiction, 21 March 2007.

Salini Costruttori SpA and Italstrade Spa v. Kingdom of Morocco,


ICSID Case No. ARB/00/4, Decision on Jurisdiction, 23 July
2001 (42 International Legal Materials 609 (2003)).



Saluka Investments BV v. Czech Republic, UNCITRAL, Partial Award,


17 March 2006. See
http://ita.law.uvic.ca/documents/Saluka-PartialawardFinal.pdf.



Sapphire International Petroleum Limited v. National Iranian Oil


Company, Judgement (International Law Reports, 1967, Vol.
27: 117–233).



Saudi Arabia v. Arabian American Oil Company (ARAMCO),


Judgement (International Law Reports, 1963, Vol. 27:117–
233).



SOABI v. Senegal, ICSID Case ARB/82/1, Decision on Jurisdiction, 1


August 1984, (2 ICSID Reports 175).




138 SCOPE AND DEFINITON: A SEQUEL


 
 





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Tokios Tokelés v. Ukraine, ICSID Case No. ARB/02/18, Decision on
Jurisdiction, 29 April 2004 (20 ICSID Review-Foreign
Investment Law Journal 205 (2005)); Dissenting Opinion, 29
April 2004 (20 ICSID Review-Foreign Investment Law Journal
245 (2005)); Award, 26 July 2007.



TSA Spectrum de Argentina S.A. v. Argentine Republic, ICSID Case


No. ARB/05/5, Award, 19 December 2008.

Vacuum Salt v. Ghana, ICSID Case No. ARB/92/1, Award, 16


February 1994 (9 ICSID Review-Foreign Investment Law
Journal 72 (1994)).



Veteran Petroleum Limited (Cyprus) v. The Russian Federation,


UNCITRAL, PCA Case No. AA 228, Interim Award on
Jurisdiction and Admissibility, 30 November 2009.



Victor Pey Casado and President Allende Foundation v. Republic of


Chile, ICSID Case No. ARB/98/2, Award, 8 May 2008.

Waguih Elie George Siag and Clorinda Vecchi v. The Arab Republic of


Egypt, ICSID Case No. Arb/05/15, Decision on Jurisdiction,
11 April 2007. See
http://ita.law.uvic.ca/documents/Siagv.Egypt.pdf.



Waste Management v. Mexico, ICSID Case No. ARB(AF)/00/3, Award,


30 April 2004 (43 International Legal Materials 967 (2004)).




SELECTED UNCTAD PUBLICATIONS ON
INTERNATIONAL INVESTMENT


AGREEMENTS, TRANSNATIONAL
CORPORATIONS AND FOREIGN DIRECT


INVESTMENT
(For more information, please visit www.unctad.org/en/pub)





World Investment Reports
(For more information visit www.unctad.org/wir)



World Investment Report 2010. Investing in a Low-Carbon Economy.
Sales No. E.10.II.D.1. $80.
http://www.unctad.org/en/docs//wir2010_en.pdf.

World Investment Report 2009. Transnational Corporations,
Agricultural Production and Development. Sales No. E.09.II.D.15. $80.
http://www.unctad.org/en/docs/wir2009_en.pdf.

World Investment Report 2008. Transnational Corporations and the
Infrastructure Challenge. Sales No. E.08.II.D.23. $80.
http://www.unctad.org/en/docs//wir2008_en.pdf.

World Investment Report 2007. Transnational Corporations, Extractive
Industries and Development. Sales No. E.07.II.D.9. $75. http://www.unctad.org/
en/docs//wir2007_en.pdf.

World Investment Report 2006. FDI from Developing and Transition
Economies: Implications for Development. Sales No. E.06.II.D.11. $75.
http://www.unctad.org/ en/docs//wir2006_en.pdf.

World Investment Report 2005. Transnational Corporations and the
Internationalization of R&D. Sales No. E.05.II.D.10. $75.
http://www.unctad.org/ en/docs//wir2005_en.pdf.

World Investment Report 2004. The Shift Towards Services. Sales No.
E.04.II.D.36. $75. http://www.unctad.org/en/docs//wir2004_en.pdf.




140 SCOPE AND DEFINITON: A SEQUEL


 
 





UNCTAD Series on International Investment Agreement II


World Investment Report 2003. FDI Policies for Development: National and
International Perspectives. Sales No. E.03.II.D.8. $49. http://www.unctad.org/
en/docs//wir2003_en.pdf.

World Investment Report 2002: Transnational Corporations and Export
Competitiveness. 352 p. Sales No. E.02.II.D.4. $49. http://www.unctad.org/
en/docs//wir2002_en.pdf.

World Investment Report 2001: Promoting Linkages. 356 p. Sales No.
E.01.II.D.12 $49. http://www.unctad.org/wir/contents/wir01content.en.htm.

World Investment Report 2000: Cross-border Mergers and Acquisitions and
Development. 368 p. Sales No. E.99.II.D.20. $49. http://www.unctad.org/wir/
contents/wir00content.en.htm.

Ten Years of World Investment Reports: The Challenges Ahead. Proceedings
of an UNCTAD special event on future challenges in the area of FDI.
UNCTAD/ITE/Misc.45. http://www.unctad.org/wir.



International Investment Policies for Development


(For more information visit http://www.unctad.org/iia)

Investor-State Disputes: Prevention and Alternatives to Arbitration, 129
p. Sales No. E.10.II.D.11. $20.

The Role of International Investment Agreements in Attracting Foreign
Direct Investment to Developing Countries. 161 p. Sales No. E.09.II.D.20.
$22.

The Protection of National Security in IIAs. 170 p. Sales No.
E.09.II.D.12. $15.

Identifying Core Elements in Investment Agreements in the APEC Regions.
134 p. Sales No. E.08.II.D.27. $15.

International Investment Rule-Making: Stocktaking, Challenges and the Way
Forward. 124 p. Sales No. E.08.II.D.1. $15.




SELECTED UNCTAD PUBLICATIONS ON IIAs, TNCs and FDI  141 








UNCTAD Series on International Investment Agreement II




Investment Promotion Provisions in International Investment Agreements.
103 p. Sales No. E.08.II.D.5. $15.

Investor-State Dispute Settlement and Impact on Investment
Rulemaking. 110 p. Sales No. E.07.II.D.10. $30.

Bilateral Investment Treaties 1995—2006: Trends in Investment Rulemaking.
172 p. Sales No. E.06.II.D.16. $30.

Investment Provisions in Economic Integration Agreements. 174 p.
UNCTAD/ITE/IIT/2005/10.

Preserving Flexibility in IIAs: The Use of Reservations. 104 p. Sales No.
E.06.II.D.14. $15.

International Investment Arrangements: Trends and Emerging Issues. 110 p.
Sales No. E.06.II.D.03. $15.

Investor-State Disputes Arising from Investment Treaties: A Review. 106 p.
Sales No. E.06.II.D.1 $15

South-South Cooperation in Investment Arrangements. 108 p. Sales No.
E.05.II.D.26 $15.

International Investment Agreements in Services. 119 p. Sales No.
E.05.II.D.15. $15.

The REIO Exception in MFN Treatment Clauses. 92 p. Sales No. E.05.II.D.1.
$15.




142 SCOPE AND DEFINITON: A SEQUEL


 
 





UNCTAD Series on International Investment Agreement II


Issues in International Investment Agreements
(For more information visit http://www.unctad.org/iia)



Most-Favoured-Nation Treatment: A Sequel. 141 p. Sales No.
E.10.II.D.19. $25

International Investment Agreements: Key Issues, Volumes I, II and III. Sales
no.: E.05.II.D.6. $65.

State Contracts. 84 p. Sales No. E.05.II.D.5. $15.

Competition. 112 p. Sales No. E.04.II.D.44. $ 15.

Key Terms and Concepts in IIAs: a Glossary. 232 p. Sales No. E.04.II.D.31.
$15.

Incentives. 108 p. Sales No. E.04.II.D.6. $15.

Transparency. 118 p. Sales No. E.04.II.D.7. $15.

Dispute Settlement: State-State. 101 p. Sales No. E.03.II.D.6. $15.

Dispute Settlement: Investor-State. 125 p. Sales No. E.03.II.D.5. $15.

Transfer of Technology. 138 p. Sales No. E.01.II.D.33. $18.

Illicit Payments. 108 p. Sales No. E.01.II.D.20. $13.

Home Country Measures. 96 p. Sales No.E.01.II.D.19. $12.

Host Country Operational Measures. 109 p. Sales No E.01.II.D.18. $15.

Social Responsibility. 91 p. Sales No. E.01.II.D.4. $15.

Environment. 105 p. Sales No. E.01.II.D.3. $15.

Transfer of Funds. 68 p. Sales No. E.00.II.D.27. $12.




SELECTED UNCTAD PUBLICATIONS ON IIAs, TNCs and FDI  143 








UNCTAD Series on International Investment Agreement II



Flexibility for Development. 185 p. Sales No. E.00.II.D.6. $15.

Employment. 69 p. Sales No. E.00.II.D.15. $12.

Taxation. 111 p. Sales No. E.00.II.D.5. $12.

Taking of Property. 83 p. Sales No. E.00.II.D.4. $12.

National Treatment.. 94 p. Sales No. E.99.II.D.16. $12.

Admission and Establishment.. 69 p. Sales No. E.99.II.D.10. $12.

Trends in International Investment Agreements: An Overview. 133 p. Sales
No. E.99.II.D.23. $12.

Lessons from the MAI. 52 p. Sales No. E.99.II.D.26. $10.

Fair and Equitable Treatment.. 85 p. Sales No. E.99.II.D.15. $12.

Transfer Pricing.. 71 p. Sales No. E.99.II.D.8. $12.

Scope and Definition. 93 p. Sales No. E.99.II.D.9. $12.

Most-Favoured Nation Treatment.. 57 p. Sales No. E.99.II.D.11. $12.

Investment-Related Trade Measures. 57 p. Sales No. E.99.II.D.12. $12.

Foreign Direct Investment and Development.. 74 p. Sales No. E.98.II.D.15.
$12.



Investment Policy Monitors

Investment Policy Monitor. A Periodic Report by the UNCTAD
Secretariat. No. 3, 7 October 2010.
http://www.unctad.org/en/docs/webdiaeia20105_en.pdf




144 SCOPE AND DEFINITON: A SEQUEL


 
 





UNCTAD Series on International Investment Agreement II


Investment Policy Monitor. A Periodic Report by the UNCTAD
Secretariat. No. 2, 20 April 2010.
http://www.unctad.org/en/docs/webdiaeia20102_en.pdf

Investment Policy Monitor. A Periodic Report by the UNCTAD
Secretariat. No. 1, 4 December 2009.
http://www.unctad.org/en/docs/webdiaeia200911_en.pdf



IIA Monitors and Issues Notes

IIA Issues Note No. 1 (2010): Latest Developments in Investor–State
Dispute Settlement.
http://www.unctad.org/en/docs/webdiaeia20103_en.pdf

IIA Monitor No. 3 (2009): Recent developments in international
investment agreements (2008–June 2009).
http://www.unctad.org/en/docs/webdiaeia20098_en.pdf

IIA Monitor No. 2 (2009): Selected Recent Developments in IIA
Arbitration and Human Rights.
http://www.unctad.org/en/docs/webdiaeia20097_en.pdf

IIA Monitor No. 1 (2009): Latest Developments in Investor-State Dispute
Settlement.
http://www.unctad.org/en/docs/webdiaeia20096_en.pdf

IIA Monitor No. 2 (2008): Recent developments in international
investment agreements (2007–June 2008).
http://www.unctad.org/en/docs/webdiaeia20081_en.pdf

IIA Monitor No. 1 (2008): Latest Developments in Investor– State
Dispute Settlement.
http://www.unctad.org/en/docs/iteiia20083_en.pdf

IIA Monitor No. 3 (2007): Recent developments in international
investment agreements (2006 – June 2007).
http://www.unctad.org/en/docs/webiteiia20076_en.pdf




SELECTED UNCTAD PUBLICATIONS ON IIAs, TNCs and FDI  145 








UNCTAD Series on International Investment Agreement II




IIA Monitor No. 2 (2007): Development implications of international
investment agreements.
http://www.unctad.org/en/docs/webiteiia20072_en.pdf

IIA Monitor No. 1 (2007): Intellectual Property Provisions in
International Investment Arrangements.
http://www.unctad.org/en/docs/webiteiia20071_en.pdf

IIA Monitor No. 4 (2006): Latest Developments in Investor-State Dispute
Settlement.
http://www.unctad.org/sections/dite_pcbb/docs/webiteiia200611_en.pdf

IIA Monitor No. 3 (2006): The Entry into Force of Bilateral Investment
Treaties (BITs).
http://www.unctad.org/en/docs/webiteiia20069_en.pdf

IIA Monitor No. 2 (2006): Developments in international investment
agreements in 2005.
http://www.unctad.org/en/docs/webiteiia20067_en.pdf

IIA Monitor No. 1 (2006): Systemic Issues in International Investment
Agreements (IIAs).
http://www.unctad.org/en/docs/webiteiia20062_en.pdf

IIA Monitor No. 4 (2005): Latest Developments in Investor-State Dispute
Settlement.
http://www.unctad.org/en/docs/webiteiit20052_en.pdf

IIA Monitor No. 2 (2005): Recent Developments in International
Investment Agreements.
http://www.unctad.org/en/docs/webiteiit20051_en.pdf

IIA Monitor No. 1 (2005): South-South Investment Agreements
Proliferating.
http://www.unctad.org/en/docs/webiteiit20061_en.pdf




146 SCOPE AND DEFINITON: A SEQUEL


 
 





UNCTAD Series on International Investment Agreement II



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For further information on the work of the Division on Investment and
Enterprise, UNCTAD, please address inquiries to:


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Division on Investment and Enterprise


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QUESTIONNAIRE


Scope and Definition: A Sequel
Sales No. E.10.II.D.




In order to improve the quality and relevance of the work of
the UNCTAD Division on Investment, Technology and Enterprise
Development, it would be useful to receive the views of readers on this
publication. It would therefore be greatly appreciated if you could
complete the following questionnaire and return it to:



Readership Survey


UNCTAD Division on Investment and Enterprise
United Nations Office at Geneva
Palais des Nations, Room E-9123
CH-1211 Geneva 10, Switzerland


Fax: 41-22-917-0194


1. Name and address of respondent (optional):






2. Which of the following best describes your area of work?


Government † Public enterprise †
Private enterprise † Academic or research
institution †
International
organization † Media †
Not-for-profit
organization † Other (specify) ________________



3. In which country do you work? _________________________




148 SCOPE AND DEFINITON: A SEQUEL


 
 





UNCTAD Series on International Investment Agreement II


4. What is your assessment of the contents of this publication?


Excellent † Adequate †
Good † Poor †


5. How useful is this publication to your work?


Very useful † Somewhat useful †
Irrelevant †



6. Please indicate the three things you liked best about this


publication:





7. Please indicate the three things you liked least about this


publication:





8. If you have read other publications of the UNCTAD Division on


Investment, Enterprise Development and Technology, what is
your overall assessment of them?



Consistently good † Usually good, but with
some exceptions †
Generally mediocre † Poor †





QUESTIONNAIRE  149 








UNCTAD Series on International Investment Agreement II



9. On average, how useful are those publications to you in your
work?



Very useful † Somewhat useful †
Irrelevant †



10. Are you a regular recipient of Transnational Corporations


(formerly The CTC Reporter), UNCTAD-DITE’s tri-annual
refereed journal?



Yes † No †


If not, please check here if you would like to receive a sample
copy sent to the name and address you have given above: †








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