A Closer Look at the Meaning of ‘Investor’ in Investment Treaty Arbitration

Investment treaties are agreements between states aimed at encouraging their respective citizens to invest in another country by having the host country promise to protect their investment. Such treaties might be multilateral investment treaties between many states (‘MITs’), or bilateral investment treaties between two (‘BITs’). 

A notable feature of such treaties is that they usually allow the foreign investor to bring a claim in arbitration against the host state for compensation should the investment suffer as a result of the state failing to provide the protections promised in the investment treaty. For example, in Masdar Solar v Spain (2018) a Dutch company sued Spain under the Energy Charter Treaty after it’s investment in solar power plants was harmed by the Spanish government’s decision to remove a premium paid on renewable energy. It was awarded EUR80m in compensation. 

Given the powerful protections afforded by investment treaties, the first requirement for any potential claimant is to show that they are an investor for the purposes of the investment treaty they are seeking to rely on, and that they made an investment. In this article we look at the meaning of ‘investor’ in claims under investment treaties and at some of the issues that can arise.

No standard definitions

Each MIT and BIT is negotiated between the states involved. This means the terms of different treaties can vary greatly on how they define an ‘investor’. Some, such as the UK-Belize BIT (1982), do not contain a definition of ‘investor’ at all, but do define related terms such as ‘national’ and ‘company’.

Whilst the specific terms of the BIT or MIT will need to be reviewed, generally speaking an investor will be an individual or company from a state other than the host state, who has invested an asset in the host state for the return of profit. The investment could take various forms, such as spending money to create a factory or obtaining a right from the government to mine precious metals, and will usually persist even though the form of the investment may change (for example, from directly owning the factory, to owning shares in a company that owns the factory).  

The starting point is to consider the terms of the particular treaty under which the claim is to be brought. To take the US-Uruguay (2005) BIT as an example, an ‘investor’ under that BIT is defined broadly at article 1 as ‘a national or an enterprise of a Party [i.e. of either the US or Uruguay], 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’. 

In addition to the terms of the investment treaty, it will often be necessary to consider whether the claimant is an investor for the purposes of the ICSID Convention. This is because many investment treaties allow investors to sue contracting states in arbitration administered by ICSID (the International Centre for Settlement of Investment Disputes) an arbitral institution created in 1966 specifically to resolve disputes between investors and states. The Convention obliges signatory states to recognise and enforce ICSID arbitral awards. Over 150 states have signed the ICSID Convention (notable exceptions being Brazil, India, South Africa). 

The ICSID Convention does not use the word ‘investor’ when defining who can file claims before it, but instead defines its jurisdiction at article 25 with reference to whether the dispute arises from an investment made by a national of a contracting state. As regards companies, the definition simply refers to a company having the ‘nationality’ of a contracting state, without delving into how nationality is obtained. This gives ICSID a broad jurisdiction, and leaves it to the investment treaty to further define who an investor is. One point to note is that the Convention states that an investor can only sue a State that he or she is not a national of, meaning a person of dual nationality will not be able to refer disputes to ICSID.

Since investment disputes are often arbitrated, decisions on whether a claimant is an investor are found in arbitral awards, usually discrete awards issued early in the proceedings to determine whether the tribunal has jurisdiction. ICSID publish awards on their website and other awards come to light when enforcement action is taken in local courts, meaning that although non-binding, previous decisions by tribunals can be reviewed to determine how future tribunals may approach a similar issue.

Dual nationals

It will have been noted that the definition of ‘investor’ in the US-Uruguay BIT cited above immediately addresses the potential problem of dual citizens. The purpose of an investment treaty is to encourage foreign investment, it is not aimed at giving dual nationals an additional right to sue their home state that other nationals do not have. In the US-Uruguay BIT this issue is resolved by making it clear that dual nationals will be deemed a national of their ‘dominant and effective citizenship’, a question of fact that a tribunal my have to determine if it is disputed. Not all BITs take this approach. The UK-Colombia (2010) BIT states at article 1 that the BIT ‘shall not apply to investments made by natural persons who are nationals of both Contracting Parties’ – dual nationals are simply excluded, regardless of where their dominant and effective citizenship is.  

Companies

Companies (often referred to as ‘legal’ or ‘juridical’ persons) can create issues because an investor may try to artificially gain protection under the BIT by routing the investment through a ‘paper’ or ‘shell’ company created in one of the signatory states. Investment treaties often guard against this by stating that a legal entity must not only be constituted in a contracting state, but must also have ‘substantial business activities’ in that state (for example, see UK-Colombia BIT, article 1).

The India-UAE BIT goes so far as to provide guidance on what ‘substantial business activity means, stating at article 1.5(ii) that it should be determined via an ‘overall examination, on a case-by-case basis, of the relevant circumstances. These circumstances may include whether the entity (a) has a continuous physical presence, including through ownership or rental of premises, in the territory of that Party; (b) has its central administration in the territory of that Party; (c) employs staff in the territory of that Party; and (d) generates turnover and pays taxes in the territory of that Party’.

An alternative way to combat the problem is found in the US-Uruguay BIT which has at article 17 a ‘denial of benefits’ clause that enables a contracting state to refuse the benefit of the BIT to an investor if it has no substantial business activities in the state. 

Another issue is how far the ownership of a company should be taken into account when determining its nationality. In Tokios Tokeles v Ukraine (2004) a Lithuanian holding company brought a claim against Ukraine under a BIT between the two countries even though the majority of its shareholders were Ukrainian. The tribunal however accepted jurisdiction, stating that it was for states to detail in the BIT the scope of what investments would be protected and whether a test concerning control was needed (i.e. that the nationality of company should be determined by the nationality of those who control it rather than where it is legally constituted). In this case there was no such control test in the relevant BIT, the only relevant factor was whether the company was created under Lithuanian law, which it was. 

By contrast, in Renee Rose Levy v Peru (2015) an investment was restructured via a French national (the claimant) to take advantage of the BIT. The Tribunal held that although that would ordinarily be permissible, in the current circumstances it was an abuse of process because at the time of the restructuring it was already foreseeable that a claim would be made. 

In Hochtief AG v Argentina (2011) a claim was brought by a minority shareholder in a local company. Whilst the local company could not bring a claim as it was the same nationality of the state being sued, the tribunal held that the minority shareholder was a foreign investor and so was able to do bring a claim, shareholdings being a form of investment explicitly protected by the relevant BIT.

Another notable case on this issue is Perenco Ecuador Ltd v Ecuador (2014), which was an ICSID claim brought under the France-Ecuador BIT (1994). What was unusual was that the claimant was a company that was neither French nor Ecuadorian, but from the Bahamas. However it was indirectly controlled by French nationals and the tribunal held that was enough to fall within the meaning of investor under the BIT and therefore the tribunal had jurisdiction to hear the claim.

Conclusion

There are numerous MITs and over 2200 BITs, and this article has shown that their terms can materially differ on what an investor is. This means that nothing should be assumed and instead the particular terms of the treaty should be carefully reviewed. Arbitral awards issued in other disputes, although non-binding, can be persuasive and offer guidance on how to approach an issue. 

BITs remain a powerful tool for encouraging foreign investment, not least because of the ability of an investor to bring direct claims against the host state in the event their investment suffers due to breaches of the BIT. However the investor will need to be clear when structuring the investment that the definitions of the BIT or MIT it wishes to take advantage of have been considered and that the investment will be protected.

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