INVESTMENTS IN THE TERRITORY' OF THE HOST STATE - Oxford Scholarship

1/4/2017 INVESTMENTS
‘IN THE TERRITORY’ OF THE HOST STATE Oxford Scholarship
University Press Scholarship Online
Oxford Scholarship Online
International Investment Law for the 21st Century: Essays in
Honour of Christoph Schreuer
Christina Binder, Ursula Kriebaum, August Reinisch, and Stephan Wittich
Print publication date: 2009
Print ISBN13: 9780199571345
Published to Oxford Scholarship Online: September 2009
DOI: 10.1093/acprof:oso/9780199571345.001.0001
INVESTMENTS ‘IN THE TERRITORY’ OF
THE HOST STATE
Christina Knahr
DOI:10.1093/acprof:oso/9780199571345.003.0005
Abstract and Keywords
Many bilateral as well as multilateral investment treaties contain in their
provisions on the definition of investment a requirement that the investment
has to be made in the territory of the host State, while other treaties do not
contain language to that effect. This issue has been addressed briefly in some
International Centre for Settlement of Investment Disputes (ICSID) cases but
has not played a major role among the judicial requirements usually examined
by tribunals. In two recent North American Free Trade Agreement (NAFTA)
Chapter 11 cases, Bayview v Mexico and Canadian Cattlemen for Fair Trade v
United States, the tribunals for the first time rejected jurisdiction because the
claimants had not made an investment in the territory of the respondent State.
This chapter analyzes the reasoning and the findings of the tribunals in these
two cases and tries to determine the relevance of the territorial nexus in
investment arbitration. While the focus will be on Bayview and the Canadian
Cattlemen Claims, previous ICSID cases that have addressed the issue is also
considered.
http://www.oxfordscholarship.com/view/10.1093/acprof:oso/9780199571345.001.0001/acprof9780199571345chapter5?print 1/18
1/4/2017 INVESTMENTS ‘IN THE TERRITORY’ OF THE HOST STATE Oxford Scholarship
Keywords: investment protection treaties, territoriality, jurisdiction, NAFTA, Bayview, Canadian
Cattlemen for Fair Trade, investment arbitration
A. Introduction
Many bilateral as well as multilateral investment treaties contain in their
provisions on the definition of investment a requirement that the investment
has to be made in the territory of the host State, while other treaties do not
contain language to that effect. So far this issue has been addressed briefly in
some International Centre for Settlement of Investment Disputes (ICSID) cases
but has not played a major role among the judicial requirements usually
examined by tribunals. In two recent North American Free Trade Agreement
(NAFTA) Chapter 11 cases, Bayview v Mexico1 and Canadian Cattlemen for
Fair Trade v United States, 2 however, the tribunals for the first time rejected
jurisdiction because the claimants had not made an investment in the territory
of the respondent State. This chapter will analyse the reasoning and the
findings of the tribunals in these two cases and tries to determine the relevance
of the territorial nexus in investment arbitration. While the focus will be on
Bayview and the Canadian Cattlemen Claims, previous ICSID cases that have
addressed the issue will also be taken into consideration.
B. Territoriality Requirement in Investment Protection
Treaties
Many bilateral investment treaties (BITs) and also multilateral treaties like the
NAFTA and the Energy Charter Treaty (ECT) refer to the territory of the host
State in their provisions on the definition of investments. For example Article I
1(a) ArgentinaUS BIT provides that ‘?“investment” means every kind of
investment in the territory of one Party owned or controlled directly or
indirectly by nationals or companies of the other Party […]’ (emphasis added).
Similarly, Article 1101(1)(b) NAFTA states that (p.43)
This Chapter applies to measures adopted or maintained by a Party
relating to:
(b) investments of investors of another Party in the territory of
the Party existing at the date of entry into force of this
Agreement as well as to investments made or acquired
thereafter by such investors…(emphasis added)
Relying on such treaty provisions, in some cases respondent States have objected
to the tribunals’ jurisdiction, arguing that due to a lack of territorial nexus there
had been no investment according to the definitions contained in the applicable
BIT and thus the tribunals were not competent to decide the dispute.
C. Bayview v Mexico
In Bayview v Mexico a group of 46 claimants, all US nationals, brought a case
before ICSID alleging that Mexico had seized and diverted water in which they
had property rights. 3 Mexico argued that this dispute would fall outside of the
scope of NAFTA and that the claimants could not have property rights in
Mexico in the water of the Rio Bravo/Rio Grande even if they had ownership
rights in the water once it was within the territory of the United States. 4 The
primary issue before the tribunal therefore was to determine if there had been
an investment within the meaning and scope of NAFTA Chapter 11 and its
territorial requirements.
The tribunal started its analysis by asking whether the claimants would qualify
as investors and/or have made an investment within the meaning of Article
1139 NAFTA. Article 1139 contains a long list of what constitutes an
investment. 5 It defines investment in the (p.44) following terms: ‘investment
of an investor of a Party means an investment owned or controlled directly or
indirectly by an investor of such Party’. Furthermore, Article 1139 also
includes a definition of investor, which provides that ‘investor of a Party
means a Party or State enterprise thereof, or a national or an enterprise of such
Party, that seeks to make, is making or has made an investment’.
For the tribunal it was clear that although Article 1139 NAFTA does not
expressly talk about ‘foreign’ investments, it would be obvious that Chapter 11
would cover foreign, and not domestic investments. 6 Furthermore, it held the
view that in order to qualify as an investor an enterprise had to make an
investment in another NAFTA State, not in its own. 7 It concluded that
[…] [i]t is clear that the words ‘territory of the Party’ in that phrase do
not refer to the territory of the Party of whom the investors are
nationals. It requires investment in the territory of another NAFTA
Party—the Party that has adopted or maintained the measures
challenged. In short, in order to be an ‘investor’ under Article 1139 one
must make an investment in the territory of another NAFTA State, not
in one's own. 8
Also the State measure that is complained about must affect an investment that has
a significant connection with the State that created and applied the measure. For an
enterprise in one NAFTA Party to be only marginally affected by measures of
another NAFTA Party would not be sufficient in order for this enterprise to have the
right to be protected under Chapter 11.9 The tribunal also found that it was the
object and purpose of the NAFTA that the protection provided for under Chapter
11 should only be granted to foreign and not to domestic investors. It held that
[w]hile the effect of the NAFTA may in some respects be close to the
effect of the elimination of economic boundaries between the three
States Parties, and while it is certainly true that the purpose of NAFTA
was to strengthen the economics [sic] link between their economies, the
three States Parties remain three distinct sovereign States with three
distinct nationalities. Therefore, when an investor of one NAFTA Party
makes an investment that falls under the laws and the jurisdiction of the
authorities of another NAFTA Party, it will be treated as a foreign
investor under Chapter Eleven. It is not NAFTA's purpose to give every
investment in any NAFTA State the protections set out in Chapter
Eleven. […] [I]t is quite plain that NAFTA Chapter Eleven was not
intended to provide substantive protections or rights of action to
investors whose investments are wholly confined to their own national
States, in circumstances where those investments may be affected by
measures taken by another NAFTA State Party. The NAFTA should not
be interpreted so as to bring about this unintended result. 10
Having established that only foreign investors and investments are covered by the
protection, the tribunal turned to the question whether the claimants did in fact
qualify as foreign investors. It did, however, answer the question in the negative. It
found that the claimants were domestic investors in Texas rather than foreign
investors in Mexico. It stated that ‘[t]he economic dependence of an enterprise
upon supplies of goods— in this case, water—from another State is not sufficient to
make the dependent enterprise an “investor” in that other State’.11
It did consider that the claimants’ water rights would fall within the
(p.45)
scope of the definition of property according to Article 1139(g) NAFTA. 12
However, it found that the claimants did not own personal property rights in
the waters of rivers flowing in Mexican territory. 13 It stated that
[…] the holder of a right granted by the State of Texas to take a certain
amount of water from the Rio Bravo / Rio Grande does not ‘own’, does
not ‘possess property rights in’, a particular volume of water as it
descends through Mexican streams and rivers towards the Rio Bravo /
Rio Grande and finds its way into the rightholders [sic] irrigation
pipes. While the water is in Mexico, it belongs to Mexico, even though
Mexico may be obliged to deliver a certain amount of it into the Rio
Bravo / Rio Grande for taking by US nationals. […] Thus, the
Claimants do not own any of the water within Mexico. Nor do the
Claimants possess any water rights in Mexico and enforceable against
the State of Mexico. Their water rights are granted by the State of
Texas. Those rights are created in Texas and exercised in Texas. 14
Therefore the tribunal drew the conclusion that the Claimants were not ‘seeking to
make, making or have made an investment’ in Mexico as required by Article 1139
NAFTA. Thus the claim would fall outside the scope of NAFTA Chapter 11 and it
consequently denied jurisdiction to decide the case on the merits.15
D. The Canadian Cattlemen Claim
In January 2008 the NAFTA Chapter 11 tribunal in Canadian Cattlemen for
Fair Trade v United States also declined jurisdiction because the territoriality
requirement of the investment had not been met. In this case, a large group of
more than 100 individuals, known as the Canadian Cattlemen for Fair Trade,
initiated arbitration against the United States for violation of the national
treatment provision of NAFTA. All claimants are in the cattle business and
have made investments in the cattle market. Due to measures enacted by the
respondent, the claimants allegedly suffered economic losses. They argue that
the measures unfairly discriminate against them to the benefit of US investors
and thus constitute violations of Article 1102 NAFTA. The respondent,
however, argued that the claimants had not made an investment in the territory
of the United States and thus the tribunal lacked jurisdiction to decide this case.
The main issue the tribunal therefore had to address was whether or not the
claimants had made an investment in the United States.
The tribunal thus found itself in a similar situation to the Bayview tribunal. It
also had to answer the question whether the NAFTA even required that an
investment be made in another NAFTA Party. Article 1101, which defines the
scope of NAFTA, only talks about ‘investments of investors of another Party
in the territory of the Party’. It does not say anything about the investment
being made in the territory of another NAFTA Party. In order to solve this
issue, the tribunal followed the rules of interpretation laid down in the Vienna
Convention on the Law of Treaties (VCLT) and looked at the ordinary
meaning of the terms and the object and purpose of the treaty.
(p.46) It was of the opinion that the provisions of Chapter 11 would make it
clear that only ‘foreign’ investors, that is, investors of one NAFTA Party
investing in another NAFTA Party, should be protected by this treaty.
Furthermore, Article 1139 NAFTA defines an investor of a Party as ‘a Party or
State enterprise thereof, or a national or an enterprise of such Party, that seeks
to make, is making or has made an investment’. The tribunal therefore also had
to answer the question whether the claimants were ‘seeking to make, making or
have made an investment’ in Mexico. It concluded that ‘?“investors” are
inextricably linked to “investments”, which Article 1101 limits to “foreign
investments”—that is to say, investments of a party in the territory of another
Party whose measure is at issue’. 16
It continued that Chapter 11 would be applicable ‘only to investors of one
NAFTA Party who seek to make, are making or have made, an investment in
another NAFTA Party. Absent those conditions, both the substantive
protections of Section A, and the remedies provided by Section B, of Chapter
Eleven, are unavailable to an investor.’17
The tribunal also examined Article 1102 NAFTA, which according to the
claimants, had been violated by the respondent. This provision does not contain
a territorial limitation. 18 Nonetheless the tribunal found that ‘to read Article
1102 (1) […] as conferring national treatment rights on investors without
foreign investments because of the absence of territorial language in that
subparagraph, would ignore this structure and context’. 19
Furthermore, the tribunal analysed the procedural provision of Article 1116,
which formed the basis for the claim and which also does not contain any
territorial language. 20 The tribunal found that Article 1101 applies to the
entirety of Chapter 11, hence also to the procedural provisions of Section B, to
which Article 1116 belongs. Having established that Article 1101 defines the
scope of NAFTA to cover only foreign investments, the tribunal stated that
‘[c]onsidering Article 1116 in this context, the Tribunal sees no basis for
concluding it is intended to establish a claim mechanism for domestic
investors’. 21
Finally, the tribunal also examined the exceptions to the definition of
investment in Article 1139. It found that
these exclusions establish that mere crossborder trade interests are not
sufficient to trigger Chapter Eleven—something more permanent—such
as a commitment of capital or other resources in the territory of a Party
to economic activity in such territory—is necessary (p.47) for a
contractual claim for money based on crossborder trade to rise to the
level of an investment. 22
The tribunal looked at Article 1112(2), which distinguishes—in the context of
services—between crossborder activities that are subject to Chapter 11 and
activities that are not.23 It concluded that
[t]he drafters of Chapter Eleven thus carefully differentiated between
the underlying crossborder service and the commitment of financial
resources pursuant to a requirement of the country to which the services
are exported. The exclusion makes no exception for those crossborder
service providers that have investments in their home country that
enable them to provide the services, as this Tribunal would expect if
Claimants’ position were the intended one. The precise textual
distinction of this Article, and the absence of provisions addressing
home country investment, thus reinforce the conclusion that Chapter
Eleven is not intended to apply to interests arising merely from cross
border trade activities. 24
In its analysis, the tribunal also examined the other substantive provisions of
NAFTA Chapter 11. It found that while a number of these provisions focus on
investments as well as investors, others focus only on investments. The tribunal
pointed out that these provisions are inconsistent with regard to the extent that
they contain territorial references. It listed some provisions containing territorial
language (eg Articles 1104, 1105(1), 1107, 1111(1)) and others that do not (eg
Articles 1106, 1109, 1110).25 It tried to uncover the reasoning behind these
inconsistencies by looking at the drafting history of the NAFTA. Since it found that
there were, however, no official travaux préparatoires on which the tribunal could
rely and that would assist it in trying to explain the inconsistencies, the tribunal
thought that it was not very useful to infer too much from the drafting history.26
Rather the tribunal found that it did not matter whether territorial references were
included in some provisions and not in others. It considered Article 1101 as having
an overriding effect, making the territorial language in the provisions in which it
was included superfluous, but not contradictory.27
After this indepth textual analysis of the relevant provisions of NAFTA
Chapter 11, the tribunal turned to the object and purpose of the treaty. It held
the view that Chapter 11 should not be seen in isolation. Since it formed part
of a larger agreement, consideration needed to be given to how the different
parts of this treaty, that is, the NAFTA, interrelated in various circumstances.
Chapter 11 thus should be interpreted in light of its larger context. 28 The
tribunal found that
[t]he object and purpose of Chapter Eleven is only to protect foreign
investors. Chapter Eleven does not give investors of one NAFTA Party
who have not made, are not making, nor seeking to make, an
investment in another NAFTA Party the ability to claim directly for
damages for violations of rights granted by Chapter Eleven. The fact
that NAFTA indisputably seeks to promote economic integration among
industries in the three States (p.48) Parties does not mean that the
border has been eliminated for purposes of investor protection, no
matter how similar or integrated the industries on each side of the
border may be. 29
E. Other Cases Addressing the Issue
Prior to Bayview and the Canadian Cattlemen Claim, some ICSID tribunals
have dealt with the territorial nexus between an investment and the host State.
None of them, however, rejected jurisdiction on this basis. Although the issue
was not brought up by the respondents as their main argument opposing
jurisdiction and therefore the tribunals did not deal with this question in much
detail, they nonetheless made valuable observations which provided some
clarification and thus should also be pointed out briefly.
Transfer of funds
The issue of the location of an investment is certainly not an entirely novel
issue. In one of the early ICSID cases, Fedax v Venezuela, 30 the respondent
made the argument that the claimant had not made an investment within its
territory and therefore did not qualify as an investor. The tribunal thus
examined the kinds of investments listed in the definition of the applicable BIT
and concluded that not all types of investments necessarily will be made within
the territory of host States. In particular, financial transactions, loans, or
credits can qualify as investments without ever being physically transferred
into the host country. It stated that
[w]hile it is true that in some kinds of investments listed under Article 1
(a) of the Agreement, such as the acquisition of interests in immovable
property, companies and the like, a transfer of funds or value will be
made into the territory of the host country, this does not necessarily
happen in a number of other types of investments, particularly those of
a financial nature. It is a standard feature of many international
financial transactions that the funds involved are not physically
transferred to the territory of the beneficiary, but put at its disposal
elsewhere. In fact, many loans and credits do not leave the country of
origin at all, but are made available to suppliers or other entities. The
same is true of many important offshore financial operations relating to
exports and other kinds of businesses. And of course, promissory notes
are frequently employed in such arrangements. The important question
is whether the funds made available are utilized by the beneficiary of
the credit, as in the case of the Republic of Venezuela, so as to finance
its various governmental needs. 31
The tribunal therefore decided that the investment at issue did fulfil the
territoriality requirement and it thus refused to decline jurisdiction on this ground.
Two years later in CSOB v Slovakia, the respondent contended that CSOB had
not made an investment within the territory of the Slovak Republic. Referring
to the decision in Fedax v Venezuala, the tribunal stated that (p.49)
[…] while it is undisputed that CSOB's loan did not cause any funds to
be moved or transferred from CSOB to the Slovak Collection Company
in the territory of the Slovak Republic, a transaction can qualify as an
investment even in the absence of a physical transfer of funds. 32
The tribunal examined the loan and found that although it did not involve any
spending in the territory of the Slovak Republic, it was closely related to all other
transactions and could not be disassociated from them.33 It concluded that
CSOB's activity in the Slovak Republic and its undertaking to ensure a
sound banking infrastructure in that country compel the conclusion that
CSOB qualifies as the holder of an ‘asset invested or obtained’ in the
territory of the Slovak Republic within the meaning of Article 1(1) of
the BIT […]. 34
The tribunal thus applied a holistic approach, emphasizing the importance of the
entirety of the economic activities of the investor. According to the tribunal, it was
irrelevant whether particular aspects of an investment were not performed within
the territory of the host State. Rather it was decisive whether the activities as a
whole qualified as an investment within the meaning of the BIT. In the dispute at
hand, it reached the conclusion that CSOB's activities did in fact qualify as an
investment and thus it refused to decline jurisdiction on this ground.
Activities of the investor
One of the central questions that arises in the context of a territoriality
requirement is to what extent the activities of an investor in connection with
his investment have to be performed within the territory of the host State in
order to qualify as a whole as having a sufficient territorial nexus with the host
State. In SGS v Philippines?35 and in SGS v Pakistan, 36 the investments at
issue were preshipment inspections which, however, were primarily carried
out outside the territory of the Philippines and Pakistan.
In SGS v Pakistan, the tribunal only briefly addressed this issue. According to
a contractual agreement (the PSI Agreement) between SGS and Pakistan the
investor had to make certain expenditures within the territory of the
respondent. 37 The tribunal examined the claimant's investment and reached the
conclusion that the PSI Agreement fell within the definition of investment
contained in the applicable BIT and that the transfer of funds by the investor
into the territory of Pakistan was sufficient to meet the territorial requirement.
The tribunal found that
[t]his nonexhaustive definition [of investment] is, in our view,
sufficiently broad to encompass the PSI Agreement because: firstly, the
Agreement's performance, by granting SGS the right to carry out pre
shipment inspection services, gave rise to ‘claims to money;’ secondly,
Pakistan effectively granted SGS a public law concession (‘a concession
under public law’), (p.50) since SGS was conferred certain powers that
ordinarily would have been exercised by the Pakistani Customs service
(the identification and valuation of goods for duty purposes); and
thirdly, such rights as SGS exercised pursuant to the PSI Agreement
were ‘rights given by law’ and ‘by contract.’
The PSI Agreement defined the commitments of SGS in such a way as
to ensure that SGS, if it was to comply with them, had to make certain
expenditures in the territory of Pakistan. While the expenditures may be
relatively small (Pakistan's Reply estimates them as amounting to
approximately US $800,000, while SGS presents the estimate of US
$1.5 million), they involved the injection of funds into the territory of
Pakistan for the carrying out of SGS's engagements under the PSI
Agreement. 38
In SGS v Philippines, the tribunal addressed the issue more substantially. It
emphasized the importance of the territoriality requirement which was contained in
the Preamble as well as in a number of other provisions of the BIT.39 It established
that ‘[i]n accordance with normal principles of treaty interpretation, investments
made outside the territory of the Respondent State, however beneficial to it, would
not be covered by the BIT’.40
It then examined whether SGS's services under the contract were provided
within or outside of the Philippines. It declined, however, to subdivide the
activities of the investor and to determine whether each of them individually
was carried out inside or outside of the territory of the Philippines. Rather it
found that ‘a substantial and nonseverable aspect of the overall service was
provided in the Philippines’. 41 In particular, it emphasized that the operations
were organized through a Liaison Office in Manila, that this office performed
substantial coordination efforts, and that it had a considerable number of
employees. 42 Further, it considered the fact that the majority of the costs for
providing the service was incurred outside of the Philippines as well as the fact
that for tax purposes the services provided by the investor were treated as being
performed abroad as not decisive. 43 The tribunal also referred to earlier
decisions in Fedax and in CSOB, but it found that these decisions were not of
much relevance or assistance since the circumstances in these cases were
considerably different from the facts of this case. 44 It did, however, find
support for its reasoning in the decision rendered in SGS v Pakistan one year
earlier, in which, as indicated above, the tribunal considered it sufficient for
the purposes of deciding whether the investment had been made within the
territory of the host State that funds were injected into the territory of
Pakistan. 45 In the end, the tribunal reached the conclusion that ‘[t]here was not
distinct or separate investment made elsewhere than in the territory of the
Philippines but a single integrated process of inspection arranged through the
Manila Liaison Office, itself unquestionably an investment “in the territory” of
the Philippines’. 46
In LESI Dipenta v Algeria, 47 the tribunal also addressed the question as to
what kinds of activities of an investor had to be performed within the territory
of the host State in order to fulfil the territoriality requirement. It stated that
[w]ith respect to contributions: there can be no investment unless a
portion of the contribution is made in the country concerned and brings
with it economic value. This would (p.51) presumably involve financial
commitments, in the first place, but it would be too restrictive an
interpretation not to admit other sacrifices. These contributions could,
then, consist of loans, materials, works, or services, provided they have
an economic value. In other words, the Contractor must have committed
outlays, in some way, in order to pursue an economic objective. It is
often the case that these investments are made in the country concerned,
but that again is not an absolute condition. Nothing prevents
investments from being committed, in part at least, from the
contractor's home country, as long as they are allocated to the project to
be carried out abroad. […] Indeed, experience shows that in contracts of
this kind the initial expenditures required to prepare the project and the
worksite consist of material and intangible contributions that can and
must often be made in the home country, but that are nevertheless
destined for the country concerned. 48
Thus, according to the tribunal it was unproblematic and not uncommon that at
least certain parts of an investment were carried out outside of the territory of the
host State. As long as the activities at issue could be allocated to the investment
and were destined for the host country, this would suffice in order to meet the
territoriality requirement.
F. Relevance of the Territoriality Requirement in Investment
Arbitration
The notion that investments have to be made within the territory of the host
State has traditionally not been of central importance in investment arbitration.
Nonetheless the issue has certainly gained significance in light of the two
recent NAFTA cases in which the tribunals declined jurisdiction on that
ground.
The awards rendered by the tribunals in Bayview and in the Canadian
Cattlemen Claim are noteworthy due to their thorough examination of an issue
that has so far not been dealt with in detail but nonetheless seems worth
investigating. There are already numerous decisions on jurisdiction in the
context of both ICSID as well as NAFTA Chapter 11 arbitration in which
tribunals have addressed the question of what constitutes an ‘investment’ and
whether in the particular circumstances of each case there was in fact an
investment which deserved protection under the applicable bilateral or
multilateral investment protection treaty. Until recently, however, the specific
issue of investments having to be made in the territory of the host State and
what exactly the implications of this requirement would be has not been highly
controversial. Although, as pointed out above, some tribunals have addressed
the issue and have also provided some clarification in this regard, it was not
until Bayview in 2007 and the Canadian Cattlemen Claim in 2008 that the
respondent States have based their main objection to the tribunals’ jurisdiction
on this ground and tribunals have for the first time declined jurisdiction on the
basis of the territoriality requirement of the investments.
Both tribunals focused on interpreting Articles 1101 and 1139 NAFTA,
emphasizing the wording of these provisions as well as the object and purpose
not only of these Articles but of the NAFTA as a whole. They arrived at the
same conclusion that, despite not expressly providing that investments had to
be made in ‘another’ NAFTA Party, it would be clear that only the protection
of foreign investments, that is, those made in another (p.52) NAFTA Party, was
intended. This result does not seem highly controversial. What seems to be
more difficult is to establish in each individual case whether the investment at
issue can in fact been considered as ‘foreign’, in particular in the context of
NAFTA. The tribunals in Bayview and in the Canadian Cattlemen Claim
alerted to the fact that the purpose of NAFTA as a whole was to promote
economic integration and that Chapter 11 had to be interpreted not as
independent from but rather within the context of the entire treaty of which it
forms one part. The Bayview tribunal established that in order to qualify as a
foreign investment, there had to be a ‘legally significant connection’ with the
State enacting the measures being complained about; the mere fact that an
enterprise was somehow affected by measures enacted by another NAFTA
Party will not suffice. This restriction seems helpful to distinguish exporters
into the market of another NAFTA Party who can be negatively affected by
measures in that market but would not be able to bring claims under Chapter
11, from foreign investors who are intended to receive protection under
Chapter 11. As the situation in the Canadian Cattlemen Claim has
demonstrated, this distinction is a relevant one in the context of NAFTA and
one that will not always be easy to make in a particular case. The reasoning
and the findings of the tribunals in Bayview and in the Canadian Cattlemen
Claim have certainly contributed to clarifying a thus far only marginally
touchedupon issue in investment arbitration under Chapter 11 of NAFTA.
Nonetheless there are a number of questions that remain unanswered.
Investments can take place in various different forms and while in some
instances it will be easy to determine whether an investment has been made in
the territory of the host State, it will be much more difficult in others. In cases
of immovable property, it will be hardly controversial to determine where the
investment has been made. Much more difficult are, on the other hand,
investments involving monetary obligations, financial transactions, or
shareholdings. The limited number of cases that have dealt with this question
thus far does not provide a ‘one size fits all’ answer. It seems that tribunals
will have to take into consideration the particular form of the investment in
each case before them and establish on a casebycase basis if there is sufficient
territorial nexus. What criteria tribunals should apply in making such a
determination has also not yet been answered conclusively. The decisions in
Fedax and in CSOB demonstrate that financial transactions can in principle be
considered as investments meeting the territoriality requirement without being
physically in the territory of the host State. In light of the nature of this
particular form of investment, this seems to be the right approach; requiring
physical presence in the host country would not make sense in this
connection. 49
Further, the Fedax tribunal took into consideration whether the money
transferred would be used for the benefit of the host State, for example, to
finance various governmental tasks. Although it might not be appropriate in all
cases, it does not seem too farfetched to apply such a criterion with regard to
the connection of a financial transaction and the host State and to conclude that
the territoriality requirement is met if the transaction fulfils its purpose in the
host country.
Another issue that arises is to determine to what extent activities of an investor
actually have to be made within the territory of the host State. Frequently it is
not one single act (p.53) but a number of activities that collectively constitute
the investment. Thus it needs to be determined at what point sufficient activity
has taken place in the host country in order to meet the territoriality
requirement. The existing case law does not give a conclusive answer to this
question. According to the tribunal in SGS v Philippines, which referred to the
CSOB tribunal, the investment in its entirety should be decisive and not
whether particular aspects of it were performed inside or outside of the
territory of the host State. While this seems to be a sensible solution, in cases
where an investment consists of activities partly performed within and outside
of the host State it will most likely not always be easy to determine when ‘the
threshold was passed’ and the investment as a whole can in fact be considered
as meeting the territoriality requirement.
The final word has certainly not been spoken here. While the decisions
discussed in this contribution provided some clarification, one can expect that
the issue might come up again, and even more prominently, in future cases and
it does not seem unimaginable that also in the context of ICSID arbitration
there could be situations where tribunals decline jurisdiction on this ground.
Looking at the broader picture, it can be observed that respondent States in
general seem to get more ‘creative’ in their objections to jurisdiction and more
frequently focus their main arguments against jurisdiction on issues other than
the ‘usual suspects’, that is, the jurisdictional requirements contained in Article
25 ICSID Convention, thereby prompting tribunals to address questions that
have traditionally not been in the spotlight of arbitral practice. In Inceysa v El
Salvador50 in 2006 and in Fraport v Philippines?51 in 2007, for example,
respondent States successfully based their central argument opposing the
tribunals’ jurisdiction on the ground that the respective investors had not made
their investments ‘in accordance with the law of the host State’ as required in
the applicable BITs, and the tribunals for the first time rejected jurisdiction on
this ground. 52
The denial of jurisdiction in Bayview and the Canadian Cattlemen Claim also
evidences the trend of investment tribunals to become more restrictive in their
decisions on jurisdiction. Tribunals have recently tended to more narrowly
interpret the definitions of investor or investment contained in BITs and under
the ICSID Convention. 53 Thus it does not come as a surprise that the two
NAFTA tribunals applied the relevant NAFTA provisions restrictively and
denied jurisdiction. Nonetheless it can be expected that the decisions rendered
in Bayview and in the Canadian Cattlemen Claim, and in particular their
interpretation of Article 1139 NAFTA, will not remain without impact and
will provide guidance for subsequent tribunals.
Notes:
(1) Bayview Irrigation District et al v Mexico, ICSID Case No. ARB(AF)/05/1,
Award, 19 June 2007, <http://ita.law.uvic.ca/documents/bayview.pdf>.
(2) Canadian Cattlemen for Fair Trade v United States, NAFTA/UNCITRAL,
Award on Jurisdiction, 28 January 2008,
<http://ita.law.uvic.ca/documents/CCFTUSAAward.pdf>.
(3) Bayview v Mexico, above n. 1, para 40.
(4) Ibid, para 29.
(5) Article 1139 reads: ‘investment means:
((a)) an enterprise;
((b)) an equity security of an enterprise;
((c)) a debt security of an enterprise (i) that 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;
((d)) a loan to an enterprise, (i) that 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;
((e)) an interest in an enterprise that entitles the owner to share in the
income or profits;
((f)) an interest in an enterprise that entitles the owner to share in the
assets on dissolution, other than a debt security or a loan excluded
from subparagraph (c) or (d);
((g)) real estate or other property (tangible and intangible) acquired in
the expectation or used for the purpose of economic benefit or other
business purposes;
((h)) 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 (ii) contracts where the
remuneration depends substantially on the production, revenues or
profits of an enterprise.
But investment does not mean,
((i)) claims to money that arise solely from:
((ii)) commercial contracts for the sale of goods or services by a
national or enterprise in the territory of one Party to an enterprise in
the territory of another Party, or
((iii)) the extension of credit in connection with a commercial
transaction, such as trade financing, other than a loan covered by sub
paragraph (d), or
((iv)) any other claims to money, which do not involve the kinds of
interests set out in sub paragraphs (a) through (h).’
(6) Bayview v Mexico, above n. 1, para 96.
(7) Ibid, para 101.
(8) Ibid, para 105.
(9) Ibid, para 101.
(10) Ibid, paras 102, 103.
(11) Ibid, para 104.
(14) Ibid, paras 116, 117.
(16) Canadian Cattlemen for Fair Trade v United States, above n. 2, para 126.
(18) Article 1102(1) NAFTA reads: ‘Each Party shall accord to investors of
another Party treatment no less favorable than that it accords, in like
circumstances, to its own investors with respect to the establishment,
acquisition, expansion, management, conduct, operation, and sale or other
disposition of investments’.
(20) Article 1116(1) NAFTA provides: ‘An investor of a Party may submit to
arbitration under this Section a claim that another Party has breached an
obligation under:
((a)) Section A or Article 1503(2) (State Enterprises), or
((b)) Article 1502(3)(a) (Monopolies and State Enterprises) where the
monopoly has acted in a manner inconsistent with the Party's
obligations under Section A, and that the investor has incurred loss or
damage by reason of, or arising out of, that breach.’
(23) Article 1112(2) NAFTA reads: ‘A requirement by a Party that a service
provider of another Party post a bond or other form of financial security as a
condition of providing a service into its territory does not of itself make this
Chapter applicable to the provision of that crossborder service. This Chapter
applies to that Party's treatment of the posted bond or financial security.’
(28) Ibid, paras 164–6.
(30) Fedax NV v Venezuela, ICSID Case No. ARB/96/3, Decision on
Jurisdiction, 11 July 1997, 37 ILM (1998) 1378.
(31) Ibid, para 41.
(32) Ceskoslovenska Obchodni Banka v The Slovak Republic, ICSID Case No.
ARB/97/4, Decision on Jurisdiction, 24 May 1999, 5 ICSID Reports 335, para
78.
(33) Ibid, paras 79, 80.
(34) Ibid, para 89.
(35) SGS Société Générale de Surveillance SA v Republic of the Philippines,
ICSID Case No. ARB/02/6, Decision on Jurisdiction, 29 January 2004; 8
ICSID Reports 518.
(36) SGS Société Générale de Surveillance SA v Islamic Republic of Pakistan,
ICSID Case No. ARB/01/13, Decision on Jurisdiction, 6 August 2003, 42 ILM
(2003) 1290; 8 ICSID Reports 406.
(38) Ibid, paras 135, 136 (footnotes omitted).
(39) SGS v Philippines, above n. 35, para 99.
(40) Ibid, para 99 (footnote omitted).
(43) Ibid, paras 106, 107.
(47) LESI SpA et ASTALDI SpA v Algeria, ICSID Case No. ARB/05/3, Award,
10 January 2005, Decision on Jurisdiction, 12 July 2006.
(48) Ibid, para 73.
(49) R. Dolzer and C. Schreuer, Principles of International Investment Law
(2008) 67.
(50) Inceysa Vallisoletana SL v Republic of El Salvador, ICSID Case No.
ARB/03/26, Award, 2 August 2006,
<http://ita.law.uvic.ca/documents/Inceysa_Vallisoletana_en_000.pdf>.
(51) Fraport AG Frankfurt Airport Services Worldwide v Republic of the
Philippines, ICSID Case No. ARB/03/25, Award, 16 August 2007,
<http://ita.law.uvic.ca/documents/FraportAward.pdf>.
(52) For more on these cases, see C. Knahr, ‘Investments “in Accordance with
Host State Law”?’, in A. Reinisch and C. Knahr, International Investment Law
in Context (2008) 27–42; C. Borris and R. Hennecke, ‘Das Kriterium der
Einhaltung von Vorschriften nationalen Rechts in ICSID Schiedsverfahren—
Anmerkungen zum Schiedsspruch in der Sache Fraport v. Philippines’,
SchiedsVZ (2/2008) 49.
(53) See A. Reinisch, ‘Back to Basics: From the Notion of “Investment” to the
Purpose of Annulment—ICSID Arbitration in 2007’, The Global Community
Yearbook of International Law & Jurisprudence 2008 (forthcoming 2009).
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