Protecting your investment – new cases show importance of forethought

Cross-border business typically involves a range of activities – from exporting goods, to providing services to an overseas client, to establishing a joint venture with a foreign partner.  Often not widely understood is that these different activities are regulated through different international legal mechanisms and receive differing levels of protection.

Whereas international trade law is governed by the rules of the WTO and the trade chapters of regional trade agreements (RTAs), international investment law is governed by bilateral investment treaties (BITs) and investment chapters of certain RTAs.  An international investment will be covered if it falls within the terms of a BIT or an RTA. 

There are presently more than 2600 BITs and some 250 investment chapters in existence.1  Almost every country in the world is now party to at least one such investment agreement.  New Zealand’s two newest RTAs – the NZ-China Free Trade Agreement (NZ/China FTA, which entered into force on 1 October 2008) and the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA, signed on 27 February 2009 and still to come into force) – both contain comprehensive investment chapters. 

The very real advantage of having a covered international investment is that you are (a) granted specific protections against interference with that investment, usually including standards governing direct and indirect expropriation and guarantees of fair and equitable treatment and full protection and security, which (b) you can enforce in binding arbitration proceedings against the government of the host country.  Almost 300 investment treaty arbitration cases have now been filed worldwide.  Even if you never contemplate, let alone bring, such proceedings, the right to do so provides an important form of insurance and risk management, especially when doing business in new or unpredictable countries.   

It is now possible to structure international investments with the same forethought as companies use for their tax planning, to ensure these investments receive international protection.  But this raises the question: what activities count as “investments”?

This issue was addressed in two important cases recently decided by different international tribunals under two different BITs. 

In Phoenix Action Ltd v Czech Republic (ICSID Case No ARB/06/5, Award, 15 April 2009), an arbitral tribunal held that an Israeli company’s ownership of the share capital of two Czech companies did not constitute an investment, whether under Article 25 of the International Convention for the Settlement of Investment Disputes (the ICSID Convention) or the relevant BIT between Israel and the Czech Republic.2  In reaching this conclusion the Tribunal did not apply the literal words of the two treaties, but instead the body of ICSID case law which has developed around the meaning of “investment”, which has come to be known as the “Salini test” after the case of Salini Costruttori SpA & Anor v Kingdom of Morocco (ICSID Case No ARB/00/4, Decision on Jurisdiction, 23 July 2001: see para 52).  The four elements of the Salini test are: (i) a contribution in money or other assets; (ii) a certain duration over which the project is implemented; (iii) an element of risk; and (iv) a contribution to the host State’s economy.

The Phoenix Action Tribunal held that item (iv) was not clearly satisfied and added a fifth criterion – that an investment be “bona fide" – which it held was clearly not satisfied (see paras 135-144).  The Tribunal found that Phoenix Action was a corporate vehicle for its Czech owner, Mr Vladimir Beňo, who was already embroiled in domestic litigation against the Czech government, and had acquired the two Czech companies for the sole purpose of bringing an investment treaty claim in respect of this litigation, not in order to progress any genuine economic activity.  The Tribunal concluded that “the ICSID mechanism does not protect investments...[that are] in essence domestic investments disguised as international investments for the sole purpose of access to this medium” (para 144).  

The following day a second tribunal rendered its decision (by a two to one majority) in Malaysian Historical Salvors v Government of Malaysia (ICSID Case No ARB/05/10, Decision on the Application for Annulment, 16 April 2009.  This was not a first instance tribunal, but an Ad Hoc Annulment Committee constituted under the ICSID Convention.  The Convention does not permit the appeal of an ICSID arbitral decision, but does allow for ICSID decisions to be annulled on very narrow grounds: in this case that the first instance tribunal, a sole arbitrator, had “manifestly exceeded its powers” under Article 52(1)(b) of the ICSID Convention. 

The Annulment Committee, chaired by former ICJ President Judge Schwebel, held that the arbitrator had manifestly exceeded its powers in ruling that he lacked jurisdiction over the dispute because the claimant had not made an “investment” in Malaysia.  This is only the seventh ICSID award to be annulled (in whole or in part) in ICSID’s history, so the Annulment Committee’s decision is already attracting widespread attention. 

The reasoning of the Annulment Committee is effectively the reverse of that applied by the tribunal in Phoenix Action.  The annulled decision had carefully applied the Salini test and concluded that item (iv) was not satisfied because the contract in question – a search and salvage contract with respect to the porcelain cargo of an 1817 British shipwreck in Malaysian territorial waters – did not make any significant economic contribution to Malaysia’s economy.  The Annulment Committee held that the arbitrator had started at the wrong point (with the undefined meaning of “investment” in the ICSID Convention) and elevated the Salini principles to jurisdictional conditions.  He ought to have begun with the defined meaning of investment under the applicable BIT, which expressly included “claims to money or to any performance under a contract having a financial value”.  It was both incongruous, and not mandated by legislative history, to define “investment” under the ICSID Convention so as to preclude activities which expressly qualified as investments under the relevant BIT (which in this case provided for ICSID arbitration as the sole remedy).

The dissenting member of the Committee issued an opinion consistent with the reasoning in Phoenix Action.

All of this is rather confusing and serves to underline that there is no formal doctrine of precedent in investment treaty arbitration.  Each tribunal and each ad hoc annulment committee (which, as the title suggests, is not a permanent body) must decide the case before it by construing the words of the relevant treaty or treaties anew. Despite the apparent confusion, three important lessons can be drawn:

  1. In making an investment abroad, it is prudent to ensure that it is being made in a manner and through a vehicle which benefits from a BIT with a directly applicable definition of investment.
  2. The Annulment Committee is surely correct that the Salini principles offer guidance only, not definitive criteria.  Yet, because they are likely to be considered by future tribunals, they should still be taken into account in structuring a foreign investment.  Where it is unclear whether an activity satisfies these criteria, legal advice should be sought. 
  3. The divergence of opinion on the meaning of “investment” stems largely from the fact that this term is not defined in the ICSID Convention.  The definition of the term in most BITs and investment chapters is, however, usually express and clear.  Moreover, many BITs and investment chapters provide non-ICSID arbitration options which circumvent this ICSID controversy.  This is true of the investment chapters of both the NZ/China FTA and the AANZFTA.  If there is any doubt, therefore, it may be wiser to elect one of these alternative options.

Finally, the reason these issues are being contested is that the ability to obtain international investment protection rights, which can be vindicated in arbitration proceedings against the host State, is commercially valuable.  If in doubt as to whether you enjoy these rights for your foreign investments, you should consider seeking legal advice.


  1. UNCTAD International Investment Rule-Making: stocktaking, challenges and the way forward (October 2008), 8.
  2. When commencing an investment treaty arbitration under the ICSID system, as opposed to, say, ad hoc UNCITRAL arbitration, there is a double-barrelled jurisdictional requirement: there must be an “investment” pursuant to Article 25 of the ICSID Convention as well as under the relevant BIT or RTA investment chapter.

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