Investors and Investments

The Concept of an Investor

Investors are either natural or legal persons (companies). The “foreignness” of an investor is
determined by the investor’s nationality. When the investor is a natural person-the investor’s
nationality tells us which BIT the investor can rely upon to protect his rights, i.e. the investor
would have to show that it holds the nationality of the country that is a party to a particular BIT.1

However, when the investor is a legal entity (company), which is usually the case, then we have
to rely on other theories. The most commonly used theory is the incorporation as well as the
main seat of the business theory. It will depend largely on the treaty which theory will be
applied to determine the nationality of a company. While some apply the incorporation theory,
others might apply a combination, i.e. incorporation with main seat or even add additional
criteria, such as the requirement that the company has economic activities in the state in which it
has been established etc. Lastly, there is the so-called control theory. In accordance with article
25 of the ICSID Convention it would be possible to treat a company that is under foreign control
as a national of a foreign state, provided there is an agreement between the parties of a dispute to
treat it as such. Here, it would be necessary to prove that there is actual foreign control.

The Concept of an Investment

Traditional definition “property, rights and interests” not found in contemporary treaties.
Initially, there was absence of a traditional legal understanding of the term investment. This did
not prevent its usage; furthermore, it was seen as beneficial, since it provided for some
flexibility. Normally, the State-Parties define what an investment is within the BIT itself and
there are various different approaches to defining an investment. Similarly, Multilateral
Investment Treaties, such as NAFTA and the ECT, provide their own definitions of what is
considered an investment. Treaty based definitions are elaborate, they are either general (all
assets) or determine a list of assets that can be considered an investment. In any case, defining
what an investment is, is important for the jurisdiction of an arbitral tribunal as the tribunal
normally has jurisdiction ratione materiae only concerning legal disputes arising directly or
indirectly from an investment. When disputes are submitted to the ICSID the so called double
keyhole approach is used meaning that not only does the Tribunal have to determine if the
definition under the relevant BIT is satisfied but also that of Art 25 of the ICSID convention
(here the jurisprudence developed the so called Salini test).
Under the Salini test, the investment has to have:

1
Let’s say the investor wants to rely on the ICSID Convention- the investor would have to prove that the State of his
nationality is a party to the ICSID Convention.
a) a certain duration (a time of two years may suffice)
b) a certain regularity of profit and return

c) an assumption of risk (this element is not difficult to prove as the investor commits significant
resources into the project in the first place)

d) substantial commitment (any significant transfer of know-how, equipment and personnel will
count)

e) significance for the host state’s development (it has to be determined on a case by case basis
whether the investment benefits the host state’s economy)

Investment Contracts
Investors and host states often negotiate Investment Contracts.
a) Concession agreements

Before 1945 (first generation of investment contracts): the state transfers title on large pieces of
land or oil reserves to the investor. Under such agreements it was possible for the host country to
receive royalties for the e.g. barrels of oil produced. However, the investor did not have an
obligation to explore or produce oil.

Second generation of these agreements are somewhat different. The title on oil remained with the
host country and the investor carried the risk of not finding any oil during exploration. Once oil
and gas were produced the profits were split. There are also joint ventures which haven’t always
produced satisfactory results and service contracts (BOT- build operate transfer).

The most important clauses inserted into Investor agreements concern the choice of applicable
law and dispute resolution.
Case Hint

If a government breaches a commitment it has made regarding its future regulatory actions
(or inactions), however, under both approaches, a finding of expropriation on the one hand,
or fair and equitable treatment on the other hand, is available.

Tecmed

This decision has multiple and varied implications for the interaction between investment
law and sustainable development. Most obviously, it illustrates that non-discriminatory
measures taken by states to respond to public concerns about threats to health and
environmental protection may constitute expropriations and/or violate the FET standard. It
also sets forth an expansive interpretation of the FET standard as imposing broad
obligations on governments to act transparently and consistently in development and
pursuit of their goals and regulations.
With respect to the proportionality analysis, the Tribunal concluded that the facts of the
case and justifications offered for the agency’s decision indicated that Tecmed’s breaches of
the Permit’s terms and environmental regulations were generally minor and did not, even
according to relevant Mexican authorities, “compromise public health, [or] impair
ecological balance or protection of the environment” (para. 124; see also paras. 127, 130–
32). Thus, according to the Tribunal, there were no weighty health or environmental
concerns warranting the decision to deny renewal of the Permit or to require that the
Landfill be closed.
A particularly noteworthy aspect of this decision is the Tecmed Tribunal’s application of the
“proportionality” test, which was the first time such a test had been used in modern
investment treaty arbitration.[2] The proportionality test differs from the “sole effects” test
used by some other tribunals to determine whether a regulatory measure or measures
constitute an expropriation.[3] The “sole effects” test, as its name indicates, seems to leave
little or no room for tribunals to consider the purpose of, or public interests underlying,
challenged measures. In contrast, the proportionality test may enable tribunals to strike a
better balance between investor rights and domestic environmental, health or other
concerns when interpreting and applying BIT provisions.

Relative standards of protection (MFN and NT) presuppose that there are like circumstances-
this would mean that the foreign and domestic investor are in the same economic/business sector.
In any case, these like circumstances should be interpreted broadly.
When the investor’s state of nationality decides to exercise diplomatic protection, it does so by
going into negotiations with the host state of the investment. If this proves to be fruitless it would
be possible to go before the ICJ. Some ICJ cases are Barcelona Traction and Diallo. It would
also be possible to have state to state arbitration. Retaliatory measures are also possible against
the investors of the host state but no military action can be undertaken.

BITs provide for 2 types of dispute settlement. Either there is arbitration between the host state
and the investor or inter state arbitration.
J Williamson provided a list of conditions which became known as the Washington Consensus in
the 1980s and were considered to be necessary for economic growth.

Admission refers to the entry of the investment into the host state. It refers to licenses and
registration and the legal structure of an admissible investment.

Establishment concerns the conditions under which the investor is allowed to carry out business
during the period of the investment. Establishment is more concerned with matters such as
paying of certain taxes by the investor etc.

European treaties do not foresee a right to admit investments, meaning it is a matter of discretion
of each state to decide whether to admit.
AZURIX tribunal stated that even when there is a social function/public purpose the state
pursues by regulatory action there needs to be compensation paid to the investor.
IMPORTANTLY, it relied on ECtHR jurisprudence and stated that there has to be
proportionality between the regulatory action and the need to protect the rights of the investor.
There would be NO PROPORTIONALITY if the investors bears an excessive burdain.