ICSID award annulled because claimant's business did not constitute an investment  Patrick Mitchell v. The Democratic Republic of Congo: an investment must contribute to the economic development of the host state

On 1 November 2006, an ICSID ad-hoc annulment committee ("ad-hoc Committee") set aside the award of an ICSID tribunal in the case of Patrick Mitchell v. The Democratic Republic of Congo. The ad-hoc Committee's reasoning reaffirms the importance, for the purposes of establishing jurisdiction, of satisfying not only the definition of "investment" in the relevant agreement or bilateral investment treaty ("BIT"), but also the concept of "investment" under the ICSID Convention ("Convention"), including the requirement that the investment contribute to the economic development of the host state. The ad-hoc Committee's decision is the first to annul an ICSID award on the basis that it did not establish that the claimant's interest constituted an investment for the purposes of the Convention.

Background

In March 1999, pursuant to an order of the Military Court of the Democratic Republic of Congo ("DRC"), the premises of Mr Mitchell's DRC based law firm, Mitchell & Associates ("Firm"), were sealed, documents seized, and two of the Firm's lawyers imprisoned. The tribunal found in its award that Mr Mitchell, an American citizen, was an investor with an investment in the DRC which was protected by the DRC/US BIT, and that the DRC had breached the BIT by expropriating Mr Mitchell's investment. The DRC sought to have the award annulled pursuant to the annulment procedure at Article 52 of the Convention. This does not operate as an appeal on the merits, but allows, at either parties' request, an ad-hoc committee to annul, in whole or in part, an award pursuant to one of only five limited grounds, including failure to state reasons and manifest excess of powers.

What constitutes an investment? The ad-hoc Committee's analysis

In the ad-hoc Committee's view, given the absence in the Convention of a definition of investment, one should first look to any definition in the parties' agreement or the applicable BIT. However, having done so, one must then verify the conformity of the concept of investment as set out in the parties' agreement or the applicable BIT with the concept of investment in the Convention and ICSID case law. In the case of a conflict, the ad-hoc Committee expressly affirmed the supremacy, before ICSID arbitration tribunals, of the Convention over any agreement of the parties or relevant BIT.

The tribunal had identified a number of elements of the Firm's business as constituting Mr Mitchell's investment, including: (i) the moveable property and documents, files, records and similar items of the Firm; and (ii) rights with respect to know-how and goodwill. The ad-hoc Committee accepted that these elements fell within the definition of investment in the DRC/US BIT, but was unconvinced that they brought it within the concept of investment under the Convention. In its analysis the ad-hoc Committee, while recognising that previous writers have identified five essential characteristics of an investment, considered that only four characteristics are identified by ICSID case law, and that they are in reality interdependent: (i) commitment by the investor; (ii) duration of the project; (iii) assumption of risk; and (iv) a contribution to the economic development of the host state. It was the last element that was critical to the ad-hoc Committee's considerations.

Contribution to the host state's economic development

The ad-hoc Committee reaffirmed that a contribution to the economic development of the host state was a fundamental characteristic of an investment which must be present for an investor to qualify for protection under the Convention, rejecting Mr Mitchell's argument that this was merely a supplementary condition used in previous cases to justify the broadening of the concept of an investment. The ad-hoc Committee noted that contribution to the economic development of the host state was the only objective characteristic, preventing the parties to an agreement or BIT opening up ICSID jurisdiction to any operation they might arbitrarily designate as an investment. The ad-hoc Committee did, however, emphasise that the contribution to the host state's development did not need to be "sizeable" or "successful".

The ad-hoc Committee emphasised the importance of distinguishing the assessment of the economic operation or project as a whole to determine whether it constitutes an investment, from the analysis of the individual rights and assets that, once the project or operation as a whole is determined to be an investment, are protected as part of that investment. The ad-hoc Committee considered that it was the services provided by the Firm that would have to constitute an investment, not the minimal investment in the economic sense that Mr Mitchell had made establishing his business in the DRC (nor, by implication, the elements identified by the tribunal).

As it is not common for a legal consulting firm to be put forward as an investment, the ad-hoc Committee concluded that a contribution to the economic development or at least the interests of the state must be present. If this could be shown to be the case (for example, by way of legal services provided to the host state's government) such a legal consulting firm might qualify as an investment. However, the tribunal's award had said nothing about the content of the services of the Firm that would justify a decision that it qualified as an investment, and the ad-hoc Committee therefore concluded that the award was tainted by a failure to state reasons.

The tribunal's award had also identified, as a further element of Mr Mitchell's investment in the DRC, payments registered on his accounts in the US in respect of fees for legal consultations provided within the DRC. However, these payments had not been reinvested in the DRC, and because the relevant part of the definition of investment under the DRC/US BIT referred expressly to "returns which are reinvested", the ad-hoc Committee found that in relying on these payments as constituting an element of the investment, the tribunal had acted in manifest excess of its powers.

Conclusion

The ad-hoc Committee therefore annulled the award in its entirety on the basis that the tribunal had: (i) failed to state its reasons; and (ii) manifestly exceeded its powers in finding that the Firm constituted an investment for the purposes of the Convention. Article 52(6) of the Convention now allows Mr Mitchell, should he wish to do so, to request that the dispute be submitted to a new tribunal and the proceedings re-commenced