Energy trading houses have progressively emerged as major players in the worldwide energy sector, matching supply and demand by purchasing, reselling, and shipping commodities across the globe. While "traditional" energy companies are the largest users of investor-state arbitration, only a handful of investment disputes have involved energy traders. A major reason behind the scant use of this investment protection mechanism is the difficulty of equating the commercial nature of trading operations with the necessity to demonstrate the existence of a sufficient investment, a pre-requisite to gaining access to investor-state arbitration. The widely-shared view has held that trading constitutes an inherently transactional activity that does not generally entail any direct investment in a foreign country's territory.

Two recent arbitral decisions have challenged this view by finding that two of the energy trade's essential components—oil price hedging instruments and bareboat charter-party operations—contributed to the requirements to what constituted a protected investment under the applicable bilateral investment treaties and Article 25(1) of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the "ICSID Convention"). Investor-state arbitral awards do not constitute binding precedents, and future arbitral tribunals deciding on the basis of different treaties may reach a different conclusion on these issues. These two decisions nevertheless constitute a welcome and important development for energy traders, whose activities may now fall under the protection afforded by a network of over 3,000 international investment agreements ("IIAs").

Investment Treaty Protection and Investor-State Arbitration

IIAs are treaties between two or more countries that protect investments made by nationals or companies from one of the countries in the territory of the other. The treaties protect foreign investors from governmental action (and in certain cases failure to act) that could adversely impact the value of their investments. They also generally establish the host countries' consent to the resolution of disputes with investors of the other contracting state through binding international arbitration. The International Centre for Settlement of Investment Disputes ("ICSID") is the principal forum for investor-state arbitration proceedings.

The vast majority of IIAs have been concluded as bilateral investment treaties, or "BITs", where only two state-parties agree to afford reciprocal protection to investors or investments from the other party. However, a number of multilateral treaties also establish investment protection and recourse to investor-state arbitration. Amongst these multilateral investment treaties, the Energy Charter Treaty ("ECT") has been ratified by approximately fifty countries and the European Union. The ECT is particularly interesting for energy traders in that it provides a set of rules that cover the entire energy chain, including not only investments in production and generation, but also the terms under which energy can be traded and transported across various national jurisdictions to international markets.

IIAs have proved a valuable tool for energy investors. Thus, awards rendered by investor-state tribunals have allowed energy companies to recover billions of dollars for investments treated unfairly, discriminated against, or expropriated by host governments. An important characteristic of the IIAs under consideration is that they do not require the existence of a direct contractual relationship between foreign investors and host states. Instead, liability for host states is based on their failure to treat foreign investments in accordance with their international obligations under the relevant agreements. This protective mechanism has proved very beneficial to foreign investors, and one may expect that energy traders will increasingly rely on the protection afforded by IIAs.

Deutsche Bank v. Sri Lanka [1]

Deutsche Bank ("DB"), a global financial institution with a prominent energy trading arm, created a specific derivative instrument allowing Sri Lanka's state-owned Ceylon Petroleum Company ("CPC") to limit (or "hedge") its exposure to oil price increases and variations over one year. In late 2008, a few months after the hedging agreement's entry into force, worldwide oil prices marked a considerable drop. Under the hedging agreement, CPC had to make significant monthly payments to DB in order to cover these price variations. CPC subsequently defaulted, prompting DB to terminate the agreement and initiate ICSID arbitration proceedings, claiming that Sri Lanka breached the Germany-Sri Lanka BIT.

Sri Lanka objected to the tribunal's jurisdiction, arguing that the hedging agreement did not constitute a protected investment under the applicable BIT. Amongst other arguments, Sri Lanka claimed (i) that DB had not made any contribution to the hedging agreement, (ii) that the agreement only constituted an ordinary commercial transaction, and (iii) that the agreement presented no territorial nexus with Sri Lanka. The arbitral tribunal rejected Sri Lanka's arguments, concluding instead that it had jurisdiction over the dispute and that Sri Lanka had violated its obligations under the applicable BIT. It subsequently awarded DB its entire US $60 million damages claim.

In pursuing its claim, Sri Lanka argued that DB had no protected investment because it did not contribute any amount when entering into the hedging agreement, and because its subsequent payments were nominal (approximately US$50,000) when compared to its damages claim. After noting that a contribution can take any form and is not limited to financial terms, the tribunal concluded that initial contribution took the form of DB's irrevocable obligation to pay up to US $2.5 million if CPC's costs of importing oil remained above US$112.50 per barrel. That the actual performance of this obligation would require a pre-determined condition to occur (the price of oil exceeding a certain level) did not change the contributory nature of DB's obligation.

Sri Lanka also argued that the hedging agreement was a commercial transaction and could therefore not constitute a protected investment for the purpose of Article 25(1) of the ICSID Convention. Relying on the Pantechniki v. Albania award, the tribunal found that where a sales agreement includes special features such as a bespoke product, it will usually be considered an investment. The tribunal concluded that the hedging agreement was in no sense an ordinary commercial transaction because it had been negotiated over a period of two years and was instigated and approved by the highest authorities in Sri Lanka to further the national interest.

The tribunal relied on the test identified by the Abaclat v. Argentina tribunal in order to determine whether a territorial nexus exists in case of a financial investment. Under the Abaclat test, the relevant criteria for financial investments are necessarily different from those applying to business operations. The issue becomes where and/or for the benefit of whom the funds are ultimately used, and not the place where the funds are paid out or transferred. Applying these criteria, the Deutsche Bank tribunal concluded that the hedging agreement presented a territorial nexus with Sri Lanka because the funds to be paid by DB in execution of the hedging agreement were made available to Sri Lanka, were linked to an activity taking place in Sri Lanka, and served to finance its economy, which is oil dependent.

The Deutsche Bank award consecrates the idea that assets and rights do not have to be connected to a physical business operation in order to be considered a protected investment. This allows financial energy trading operations to be afforded the same guarantees as if they were directly connected to the ownership or use of energy assets, reflecting the changing nature of energy trading worldwide.

Inmaris v. Ukraine [2]

The second dispute involved a large sailing vessel owned by an Ukrainian public entity and operated by Inmaris—a German company—and its subsidiaries. Under the terms of their agreement, the vessel was to be used part of the year for the education of Ukrainian sailors and for recreational and tourism purposes for the remainder of the year. After three years of operations, the parties agreed that Inmaris would pay for the vessel's extensive renovation. In return, Inmaris received the right to operate the vessel under a bareboat charter contract. After the renovation was completed, Ukraine demanded additional payments from Inmaris. When the latter refused, Ukraine prohibited the vessel from leaving its territorial waters, and the various Inmaris companies subsequently initiated ICSID arbitration proceedings against Ukraine under the Germany-Ukraine BIT.

Ukraine objected to the tribunal's jurisdiction, arguing that Inmaris' bareboat charter contract did not constitute a protected investment under the applicable BIT. In particular, Ukraine contended that Inmaris' "claim to performance" under the charter contract did not constitute an investment but merely reflected an ordinary commercial transaction. In so arguing, Ukraine adopted the position that the contractual rights of each Inmaris company had to be analyzed individually and separately, emphasizing their strictly commercial nature. Instead, the tribunal confirmed that a BIT claim could be based on a group of integrated contracts which would collectively constitute an "investment" when taken as a whole. By focusing on substance rather than form, the tribunal concluded that Inmaris' operation of the vessel constituted a protected investment under the BIT, noting that the charter-party was for a period of years, for Inmaris' profit, and entailed a significant contribution from Inmaris in the form of the vessel's renovation. The Inmaris decision represents a positive development for energy traders chartering tankers and carriers in the course of their activities.


International investment law is continuously developing. These two cases highlight its adaptation to the evolving realities of the international energy business. By confirming that two key aspects of modern energy trading fall within the scope of investment treaty protection, the Deutsche Bank and Inmaris decisions will undoubtedly have a lasting impact on the structure of international energy transactions and investments.