This article is an extract from The Investment Treaty Arbitration Review, 7th Edition. Click here for the full guide.
A critical threshold issue that an investment arbitration tribunal must address is whether the claimant qualifies as a covered investor under the applicable international investment agreement (IIA). Although it may sound straightforward, the analysis can be quite complicated and often lies at the heart of jurisdictional disputes.
At a high level, whether a particular investor is covered by an IIA depends on the treaty at issue and the rules governing the arbitration – and, of course, the underlying facts. In general, covered investors are (1) natural or juridical persons, (2) who are nationals of one contracting state and (3) own, control or make an investment in the territory of another contracting state. This chapter focuses on these three elements and explores current issues concerning the nationality of covered investors and the degree of control that an investor must have with respect to an investment to be protected by an IIA. The chapter does not take a position on the proper way to approach or resolve any of these questions for any particular dispute.
II Key sources to determine who is a covered investor
To determine whether an investor can bring an investment arbitration claim, the analysis generally starts with and largely depends on two sources: the applicable IIA and the rules governing the arbitration proceeding.
Most IIAs contain a section in which the terms 'investor' or 'national' are defined. Generally, the definitions are broad and include both natural and legal persons. With respect to defining the latter category of covered investors, instead of using the commonly used terms 'juridical persons' or 'legal entities', some IIAs use the term 'enterprise', which may be more inclusive to the extent that it is interpreted to comprise investors such as trusts or unincorporated consortiums that may not fall within the category of legal entities. For example, the bilateral investment treaty (BIT) of 2008 between the United States and Rwanda defines investor as 'a national or an enterprise of a Party'.2
Most arbitration rules do not contain restrictions as to who can bring claims. However, the International Centre for Settlement of Investment Disputes (ICSID) Convention provides that the jurisdiction of ICSID shall extend to disputes between a contracting state and a national of another contracting state.3 Under the ICSID Convention, the term 'national of another Contracting State' includes only natural or juridical persons.4 According to some scholars, this restriction means that a mere association of individuals or juridical persons cannot bring a claim under the ICSID Convention.5 Following this approach, some tribunals have declined to exercise jurisdiction, for example, over claims brought by a consortium of companies determined not to have a juridical personality.6
III Analysis of protected investors
To qualify for protection and bring a claim under most IIAs, an investor must be a national of a contracting state other than the host state of the investment.7 Therefore, nationality is a critical question. The analysis of whether an investor has the necessary link with the contracting states to justify protection differs for natural and legal persons.
i Natural persons
Criteria for determining the nationality of natural persons
The nationality of a natural person is typically established in the IIAs by reference to the domestic legislation of the state whose nationality is claimed.8 For example, the Czech Republic–Switzerland BIT defines investors as 'natural persons who are nationals of that Contracting Party in accordance with its laws'.9
Under domestic laws, there are generally two accepted criteria to determine the nationality of an individual: (1) the nationality of one or both parents of the natural person (ius sanguinis); or (2) the place of birth of the individual (ius soli).10 The domestic laws of most countries adhere to one or both of these criteria in regulating the concept of nationality.
Although some IIAs include a single definition of 'investor' or 'national', which applies to both parties, others have separate definitions for each contracting state. For example, the Netherlands–Panama BIT contains a single definition of 'investor',11 while the United States–Uruguay BIT contains a different definition of 'national' depending on whether the investor claims to be a national of the United States or of Uruguay.12
In some investor definitions, the contracting parties extend protection not only to their nationals but also to those who qualify as permanent residents under their domestic laws. For example, the Canada–Trinidad Tobago BIT defines 'investors from Canada' as 'any natural person possessing the citizenship of or permanently residing in Canada in accordance with its laws'.13
A few IIAs have included additional requirements that an investor must satisfy to meet the nationality definition, such as requirements of residence or domicile. For example, the Germany–Israel BIT provides that the term 'nationals' means, with respect to Israel, 'Israeli nationals being permanent residents of the State of Israel'.14
Natural persons who have the nationalities of both contracting states
One complicating factor that arises is investors having the nationality of both state parties to the treaty under their respective laws; for example, a dual national of Italy and Panama makes an investment in Panama and brings a claim under the Italy–Panama BIT. In those instances, there are two possibilities: (1) the applicable IIA addresses and resolves whether a dual national can bring claims against the host state; or (2) the IIA is silent on this issue. Where the IIA is silent, tribunals have applied different approaches and looked to the applicable IIA, the applicable arbitration rules and customary international law to determine whether a dual national is allowed to bring a claim against a state of one of its nationalities.
International investment agreements
IIAs that address the issue of dual nationals take different approaches. As detailed below, some IIAs expressly allow dual nationals to bring claims against the host state, others expressly forbid it and some are silent on the issue.
Following the international law principle of an effective link, one approach considers a person with dual nationality as a national of the country of his or her dominant and effective nationality.15 Under this approach, a dual national sharing the nationality of the host state may nevertheless bring a claim against the host state so long as it is not his or her 'dominant and effective' nationality. This approach is followed, for instance, by the United States–Uruguay BIT, which establishes 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'.16
Other IIAs consider a person who has both nationalities as a national only of the host state of the investment. This approach has the effect of excluding such individuals from the protections of the IIA.17 For instance, the Canada–Lebanon BIT states that 'in the case of persons who have both Canadian and Lebanese citizenship, they shall be considered Canadian citizens in Canada and Lebanese citizens in Lebanon'.18
Similar to the previous approach, other IIAs simply state that a protected investor cannot have the nationalities of both contracting states. For example, the Canada Model BIT (2004) states that a foreign investor who makes an investment in Canada is not protected if he or she is a national of Canada.19
Finally, where an IIA is silent on whether dual nationals are excluded, the tribunal may look to the treaty practice of the contracting states to see whether they excluded dual nationals from the scope of any of their other IIAs.20
With the exception of the ICSID Convention, arbitration rules generally do not address dual nationals. Accordingly, in a non-ICSID context, dual nationality is not precluded per se unless the relevant IIA so provides.21 When an IIA is silent on dual nationality in a non-ICSID context, the tribunal must address which nationality should prevail. In some instances, tribunals have followed an 'effective nationality' approach and allowed the investor to bring a claim if the effective nationality was different from the nationality of the host state.22 Other tribunals have concluded that investment treaty arbitration does not allow dual nationals of the contracting states to bring claims and disregarded the dominant and effective nationality test.23 Finally, some tribunals have applied the IIA as lex specialis and held that if the applicable treaty does not preclude a dual national from bringing a claim, the tribunal should not imply an exclusion for dual nationals into the IIA on the basis of customary international law.24
However, the ICSID Convention does regulate this issue. It defines 'national of another Contracting State' as 'any natural person who had the nationality of a Contracting State other than the State Party to the dispute'.25 Accordingly, under the ICSID Convention, the investor must pass a two-part test to bring a claim, which involves a positive requirement (to be a national of a contracting state) and a negative requirement (of not being a national of the host state).26 Therefore, under the ICSID Convention, a dual national who has the nationality of the host state would not be allowed to bring a claim. Further, ICSID tribunals have concluded that a dual national is excluded even when his or her nationality with the host state is no longer effective.27
Critical dates for assessing nationality
The critical dates for assessing an investor's nationality and, therefore, eligibility to bring a claim under an IIA will depend on the specific wording of the relevant IIA. In the absence of any provision in the IIA to the contrary, it is an accepted principle of international adjudication that the relevant date is the date the proceedings were instituted.28 The date of the alleged violations of the IIA has been identified by several tribunals as a second critical date under IIAs.29
In addition to any requirements under an IIA, to bring a claim under the ICSID Convention, a natural person must comply with the positive and negative requirements of nationality on two critical and separate dates.30 According to Article 25 of the ICSID Convention, an investor must be a national of a contracting state both at the time the parties consented to submit the dispute to ICSID's jurisdiction and on the date the request for arbitration is registered by ICSID.31 In addition, the investor must not be a national of the host state on either of these two dates.32
Typically, an IIA's dispute settlement provision contains an open offer to arbitrate investment disputes by the contracting states. Consent is achieved when the investor accepts the offer, which generally occurs when the investor files the request for arbitration. However, acceptance could happen at an earlier time; for example, in a notice of dispute or other communication between the investor and the host state.
Authority to decide questions of nationality
Even though each state has the sovereign right and power to determine who its nationals are, an international investment tribunal has authority to decide whether the investor is a national of the state in question for purposes of the arbitration. It follows that a tribunal's determination of whether an investor qualifies as a national may contradict a state's own findings.33 The threshold to override the state's decision to confer its nationality on a natural person is a high one, requiring clear and convincing evidence that the nationality was fraudulently acquired or that the acquisition resulted from a material error.34
In some instances, tribunals have ignored a state's rules on nationality on the grounds that the nationality was conferred in the absence of any effective link between the state conferring the nationality and the individual. Such 'nationalit[ies] of convenience', which may be obtained from certain countries through mere compliance with specified procedural steps,35 are subject to challenge by host states.
ii Juridical persons
Criteria for determining the nationality of juridical persons
Determining the nationality of a corporation can be similarly complicated.36 Different criteria have been used in IIAs to define the nationality of a legal entity, including (1) the place of incorporation, (2) the location of the company's seat (siège social or principal place of business) and (3) the nationality of ownership or control. IIAs use these criteria alone, in combination or as alternatives. Accordingly, there is no single test to define the link required between a juridical person seeking protection under an IIA and the contracting state.
Several IIAs use the place of incorporation to determine the nationality of a juridical person. For example, the incorporation approach is followed by the 2008 UK Model BIT, whereby UK companies are 'corporations, firms and associations incorporated or constituted under the law in force in any part of the United Kingdom'.37
Other IIAs look at the corporate seat or siège social to determine the nationality of a legal entity. Under these IIAs, to be a protected investor, the corporate seat or the effective management should be in the territory of one of the contracting states. For instance, the Germany–China BIT defines 'company' to include, with respect to Germany, 'any juridical person as well as any commercial or other company or association with or without legal personality having its seat in the territory of the Federal Republic of Germany'.38 The particular meaning of siège social within a given agreement, however, may be the subject of debate. Some tribunals have held that the phrase is not a legal term of art with a singular meaning. Instead, it can be 'susceptible of either a formal or substantive meaning'39 because it can refer to the seat appearing in a company's by-laws or statutes, or to the effective seat where the company is actually managed.40 In one case, the tribunal defined the corporate seat as the 'effective center of administration' and found that an evidentiary showing would be required, such as the place where the company's board of directors regularly meets, the place where the company has a considerable number of employees, or the company's address and physical location.41
Other IIAs adopt a control test and define 'investor' to cover companies not incorporated under the laws of any of the contracting states, but controlled, directly or indirectly, by natural persons or by legal persons incorporated in the state of one contracting party.42
A few IIAs require a bond of economic substance between a corporate investor and the state of its purported nationality. This bond might consist of 'real economic activity' within the state of the purported nationality.43
Some BITs combine two or more approaches. For example, the Iran–Sri Lanka BIT requires that juridical persons be 'formed and incorporated under the laws of one Contracting Party and have their seat together with their substantial economic activities in the territory of that same Contracting Party'.44
When an IIA is silent as to the method of determining the nationality of a legal entity, ICSID tribunals typically rely on the place of incorporation or principal place of business. ICSID case law demonstrates a reluctance to adopt the control test in defining nationality of a juridical person.45
Exception to the rule: juridical persons with the nationality of the host state
Although, typically, only foreign juridical persons can initiate an arbitration against a host state, certain IIAs include provisions allowing companies incorporated in the host state to file an arbitration against that state. This exception exists because states often require that foreign investments be channelled through locally incorporated companies,46 and barring such foreign investors from bringing claims against the host state might be viewed as unjust.
The ICSID Convention allows a locally incorporated company with the nationality of the respondent state to bring an arbitration if, because of foreign control, the parties have agreed that it should be treated as a national of another contracting state for the purposes of the ICSID Convention.47 In other words, some IIAs will treat a local company as a foreign investor (i.e., as eligible to bring an investment arbitration claim) if it is foreign-controlled and the respondent state consents to it. States may consent in either a direct contract with the investor or by a blanket offer of consent via the IIA. In the latter case, the IIA usually will state more broadly that local companies controlled by nationals of the other state will be treated as nationals of that state.48 Several IIAs explicitly provide for this type of consent. For instance, the Ethiopia–Malaysia BIT states that '[a] company which is incorporated or constituted under the laws in force in the territory of one Contracting Party and in which before such a dispute arises the majority of shares are owned by investors of the other Contracting Party shall in accordance with Article 25(2) (b) of the Convention be treated for the purpose of this Convention as a company of the other Contracting Party'.49
Tribunals have noted that Article 25(2)(b) of the ICSID Convention 'separately establishes a subjective test and an objective test'.50 Even where the parties agree 'to treat the company as a national of another Contracting State for the purposes of this Convention', ICSID jurisdiction is not satisfied unless the company is actually subject to foreign control – the 'objective test is not satisfied by mere agreement by the Parties'.51
The ICSID Convention requires control and, therefore, the status of minority shareholders remains an open question that requires careful review under the specific facts of a case. For example, one tribunal confronted whether, through a shareholders' agreement, a foreign investor might aggregate its ownership share of a local company with other investors to achieve the requisite degree of 'foreign control' under Article 25(2)(b) of the ICSID Convention. It found such aggregation permissible in some circumstances but not in others.52
Critical dates for assessing nationality
The critical dates for assessing the nationality of juridical persons will typically be, subject to the specific wording of the IIA, the date of the alleged breach and the date of the initiation of the arbitration.53 In addition to the requirements under the relevant IIA, for the purposes of registration of their claims at ICSID, the critical date for the claimant is the date on which the parties consented to submit the dispute to arbitration.54 As discussed above, in most cases, consent is deemed to occur when the claimant files its request for arbitration. However, the claimant may accept the offer to arbitrate contained in a BIT prior to the filing of such a request.55
Nationality planning and abuse of process
Given that the nationality of the investor is critical for the enjoyment of rights under treaties, and the jurisdiction of a tribunal is determined by the claimant's nationality, among other considerations, a prudent investor may structure or restructure an investment to obtain the benefits of a specific IIA.56 This can be achieved through the incorporation of a company in a state that has an IIA in force with the host state of the investment provided that the relevant treaty accepts incorporation as the basis for corporate nationality.57
The desire or need for an investor to alter its nationality can arise when the investment protection provided in a particular state is removed because of the state's termination of a BIT or its withdrawal from a multilateral investment treaty. For example, in light of the agreement by European Union Member States to terminate all intra-EU BITs (130 in total), many EU-based investors have had to consider taking steps to restructure their investments, including by interposing one or more subsidiaries based outside the European Union in their investment structures, so as to maximise their investment protection.58
Nationality planning, or treaty shopping, is not prohibited, in principle, under international investment law, which aims to encourage investment.59 However, the distinction between a protected investor and an abuse of process through corporate planning can be a fine one. The specific facts of the case and the timing of the corporate (re)structuring are paramount to the validity determination. Under ICSID case law, the validity of nationality planning is primarily dependent on the time of the restructuring in relation to the dispute. In that sense, if the restructuring was undertaken before the dispute was foreseeable, the newly acquired nationality is likely to be honoured. However, a change of nationality after the dispute became foreseeable is likely to be rejected and viewed as an abusive manipulation of the system of international investment protection. In such cases, the tribunal will decline jurisdiction.60
Several new treaties address the issue of abuse of process and state that an investor may not submit a claim if the investment has been made through 'conduct amounting to an abuse of process'.61
Some IIAs explicitly protect entities owned or controlled by a state.62 However, even when IIAs are silent, state-owned enterprises may receive investor protection in certain circumstances. Applying the Broches test,63 ICSID tribunals have stated that state-owned entities can bring claims if certain requirements are met. In that sense, a state-owned entity could qualify as a 'national of another Contracting State' and bring a claim under an IIA if the legal entity does not act as an agent for the government and is not discharging an essentially governmental function.64
IV Denial of benefits
Some IIAs contain 'denial of benefits' clauses to preclude nationals of a third state – typically, those with no meaningful connection with a contracting state – from taking advantage of an IIA's protections.65 Under such a clause, states reserve the right to deny a legal entity of the other party the benefits of the IIA in certain circumstances, such as if a legal entity has no substantial business activities within the state party of its incorporation. For instance, Article 9.15 of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership states that a party:
may deny the benefits . . . to an investor of another Party that is an enterprise of that other Party and to investments of that investor if the enterprise: (a) is owned or controlled by a person of a non-Party or of the denying Party; and (b) has no substantial business activities in the territory of any Party other than the denying Party.66
The Comprehensive Economic and Trade Agreement between the European Union and Canada has a denial of benefits clause allowing contracting states to deny benefits to a corporate investor if the investor's owners are nationals of a third-party state that is subject to sanctions. Article 8.16 states that a party:
may deny the benefits . . . to an investor of the other Party that is an enterprise of that Party and to investments of that investor if: (a) an investor of a third country owns or controls the enterprise; and (b) the denying Party adopts or maintains a measure with respect to the third country that: (i) relates to the maintenance of international peace and security; and (ii) prohibits transactions with the enterprise or would be violated or circumvented if the benefits of this Chapter were accorded to the enterprise or to its investments.
Tribunals have differed as to whether a denial of benefits clause must be invoked before arbitration has been sought and there appears to be no definite answer.67 The language of the IIA in question, and the length of time between the commencement of arbitration by an investor and the denial of benefits by the state, are important factors to consider in assessing this question.68 Although a denial of benefits clause may be substantively similar to a restricted definition of 'investor' based on bonds of economic substance, the burden of proof can be different. Although a claimant generally has the burden of proving that it falls within the definition of 'investor' for jurisdictional purposes, tribunals diverge on which party bears the burden of proof once a state invokes a denial of benefit clause.69
V The link between the investment and the investor
Foreign investment is often carried out through complex structures with several layers of entities and shareholders, which may be nationals of several countries. Some IIAs protect investors that make, own or control an investment either directly or indirectly; meaning that an investor of a contracting state would be protected even if multiple corporate layers exist between him or her and the investment. Some BITs are silent as to whether a direct link between the investor and the investment must exist or whether an indirect link is sufficient for protection. Some scholars argue that, when a treaty is silent, only a direct link is protected. In other words, the investor must directly make, own or control the investment.70 However, various tribunals have determined that when an IIA is silent, indirect investments are protected.71
In addition, the terms used by the applicable IIA are critical for determining the required link between the investor and the investment. For instance, some IIAs state that an investor must 'own or control' the investment, while others require that the investor 'made' the investment. Some tribunals have held that when the IIA uses the word 'made' in reference to the link between the investor and the investment, it requires an active contribution by the investor or that only active investors are protected. In that case, the claimant must show that the investment was made at the claimant's direction, that the claimant funded the investment or that the claimant controlled the investment in an active and direct manner.72
It is axiomatic that if an investor is not covered by an IIA, that IIA generally does not provide the investor with substantive protections. Determining this status is central to any investor-state dispute and requires careful analysis – it will turn on the particular language of the applicable IIA, the applicable rules and on the facts at hand, which can often involve complex corporate structures or searching enquiries into how a person has lived. Should a dispute arise between an investor and a state, both parties must develop a view on the issues early in the proceedings.