International Investment Law Symposium Online Publications

Public vs. Private: State-Owned Enterprises as Claimants in ICSID Arbitration

Introduction:

The International Center for Settlement of Investment Disputes (“ICSID”) Convention is intended to encourage private investment internationally by providing a forum for the resolution of investment disputes between a Contracting State and “national[s] of another Contracting State.”01Convention on the Settlement of Investment Disputes between States and Nationals of Other States art. 25(1), entry into force Oct. 14, 1966, 17 U.S.T. 1270, 575 U.N.T.S. 159 (“ICSID Convention”). The definitions of “private investment”02Private international investment is not defined in the ICSID Convention. and “national[s]”03ICSID Convention, supra note 1, at art. 25(2) defines a national as:
(a) any natural person who had the nationality of a Contracting State other than the State party to the dispute on the date on which the parties consented to submit such dispute to conciliation or arbitration as well as on the date on which the request was registered pursuant to paragraph (3) of Article 28 or paragraph (3) of Article 36, but does not include any person who on either date also had the nationality
of the Contracting State party to the dispute; and
(b) any juridical person which had the nationality of a Contracting State other than the State party to the dispute on the date on which the parties consented to submit such dispute to conciliation or arbitration and any juridical person which had the nationality of the Contracting State party to the dispute on that date and which, because of foreign control, the parties have agreed should be treated as a national of another Contracting State for the purposes of this Convention.
under the ICSID Convention, however, are nonexistent or sufficiently vague to create uncertainty about the status of partially or wholly state-owned enterprises (“SOEs”) and Sovereign Wealth Funds (“SWFs”) under the ICSID Convention. Although disputes between two States or two private parties cannot be brought under the ICSID Convention, most commentators agree that “in today’s world the classical distinction between private and public investment, based on the source of the capital, is no longer meaningful.”04Aron Broches, The Convention on the Settlement of Investment Disputes between States and Nationals
of Other States
, 136 Recueil des Cours 331, 354 (1972-II).
For these reasons, the ICSID Convention’s “principal architect,” Aron Broches, proposed the following test: “for purposes of the Convention a mixed economy company or government-owned corporation should not be disqualified as a ‘national of another Contracting State’ unless it is acting as an agent for the government or is discharging an essentially governmental function.”05Id. at 355.

Although Broches’ test has gained widespread acceptance, substantial controversy remains over how to apply this test. The combination of the ICSID Convention’s history and limited jurisdictional mandate with the paramount importance of State consent in international adjudication has led to particular disagreement over two issues: (1) whether both the purpose and nature, as opposed to merely the commercial or governmental character of a SOE’s actions, is relevant; and (2) the extent that tribunals should defer to States’ advanced determinations (usually contained in Bilateral Investment Treaties or “BITs”) of what entities can properly bring claims against them under the ICSID Convention. Considering the extent and expansion of SOE and SWF international investments, tribunals are likely to be faced with an increasing number of cases involving this jurisdictional issue. Thus, it is important to develop an analytical framework that appropriately takes into account both the interests reflected by the ICSID Convention’s history, purpose, and jurisdictional clauses and the strong weight given to State consent in the international legal sphere. This comment lays out a proposal for such a system.
The first section discusses the important role of SOEs in international investment and the surprising relative paucity of tribunal decisions. Additionally, it introduces an analytical framework that accounts for both the values embodied in the ICSID Convention and the importance of consent in international law. In the second section, the history, purpose, and text of the ICSID Convention and the common understanding of its authors is described, as well as how these factors support adoption of the proposed analytical framework. Third, the framework’s consistency with customary international law, particularly involving State consent and attribution, is discussed. Finally, the proposed framework is shown to be consistent with more recent developments in States’ approaches to private international investment funded by sovereigns.

I. Prominence of SOE and SWF International Investment and Treatment by Tribunals:

A. SOEs, SWFs, and International Investment

SOEs are increasingly becoming leaders in international investment; as of 2014, there were at least 550 State-owned transnational corporations with more than $2 trillion in assets.06UNCTAD, World Investment Report 2014, Investing in the SDGs: An Action Plan (United Nations 2014) 20. Consequently, several claims by SOEs against States have been submitted to investor-State arbitration.07Mark Feldman, State-Owned Enterprises as Claimants in International Investment Arbitration, 31 ICSID Review 24, 2425 (2016). It is therefore surprising that few ICSID tribunals have confronted the jurisdictional questions of SOE’s uncertain status as investors related to these claims. In fact, in only one case has an ICSID tribunal directly addressed and analyzed such an objection to jurisdiction:08As of the writing of this comment. Several other cases have found that an entity qualifies as a claimant under the ICSID Convention without conducting an analysis under art. 25. See, e.g., Hrvatska Elekroprivreda DD v. Republic of Slovenia, ICSID Case No. ARB/05/24, Decision on the Treaty Interpretation Issue ¶¶ 168–69 (June 12, 2009) (concluding that jurisdiction over a case brought the national electricity company of Croatia was appropriate without referencing or considering the relevance of ICSID Convention art. 25); CDC Group plc v. Seychelles, ICSID Case No. ARB/02/14, award ¶ 6 (Dec. 17, 2003) (finding that the elements of Article 25(1) of the ICSID Convention had been met based solely on the respondent’s withdrawal of its jurisdictional objection, without further analysis); Telenor Mobile Communications AS v. Hungary, ICSID Case No. ARB/04/15, award (June 22, 2006) (dismissing on other jurisdictional grounds, without consideration of Article 25, a case brought by a 75% State-owned company). See also Rumeli Telekom AS and Telsim Mobil Telekomikasyon Hizmetleri AS v. Kazakhstan, ICSID Case No. ARB/05/16, award ¶¶ 326–27 (July 21, 2008) (permitting a claim to be brought by a private company that had been seized and was now managed by a State). Ceskoslovenska Obchodni Banka, A.S. v. the Slovak Republic (“CSOB”).09Ceskoslovenska Obchodni Banka, A.S. vs. the Slovak Republic, ICSID Case No. ARB/97/4 [hereinafter “CSOB”].

B. CSOB

After the “Velvet Revolution,” Ceskoslovenska Obchodni Banka (“the Bank”) entered into a Consolidation Agreement with the Ministries of Finance of the Slovak and Czech Republics as part of a transition away from “exclusive economic dependence on the State.”10CSOB, Decision on Objections to Jurisdiction ¶¶ 1–2, 21 (May 24, 1999). This Consolidation Agreement involved the assignment to two “Collection Companies” (one each created by the Czech and Slovak Republics) of certain non-performing loan portfolios originating prior to the Bank’s move towards privatization.11Id. ¶¶ 1–2. The Bank alleged that the Slovak Republic violated this Consolidation Agreement and submitted the dispute for ICSID arbitration.

The Slovak Republic argued that the Bank was “a state agency of the Czech Republic rather than an independent commercial entity,” that consequently the Czech Republic was the real party in interest, and that therefore the tribunal should refuse to hear the dispute based on the jurisdictional limitations contained in Article 25 of the ICSID Convention.12Id. ¶ 15. In this case, the tribunal stated that Broches’ test – allowing the Bank to bring a claim “unless it is acting as an agent for the government or is discharging an essentially governmental function” – was the proper standard to apply when evaluating this objection.13Id. ¶ 17. Although the tribunal determined that the Bank had been acting as a governmental agent,14Id. ¶ 20. it still refused to deny jurisdiction because the Bank’s actions were commercial in nature.15Id. ¶¶ 20–21.

This decision has been criticized on various grounds. Some scholars argue that the tribunal incorrectly applied Broches’ disjunctive test by requiring that the claimant meet both prongs of the test, instead of just one, to be disqualified from bringing suit.16Mark Feldman, for example, argues:
By finding that “for much of its existence,” CSOB had been an agent of the State, and then moving on to the issue of whether CSOB discharged an essentially governmental function, the CSOB v. The Slovak Republic tribunal failed to acknowledge that under Mr. Broches’ test, an agency relationship with the State, standing alone, defeats standing under Article 25(1).
The Standing of State-Owned Entities Under Investment Treaties, 2010–11 Y.B. Int’l Inv. & Pol’y, 615, 630 (Karl Sauvant, ed.).
In a similar vein, some believe that the tribunal should have required that both the nature and purpose of the Bank’s actions, rather than just the nature, be commercial in order to uphold jurisdiction.17Id. (“The agency part of Mr. Broches’ test — under which a State-owned enterprise does not qualify as a “national” of Contracting State if it is acting as an agent of the State — contemplates consideration of the goals driving a State-owned enterprise’s activities”). Still others contend that the tribunal was mistaken in not first consulting the definition of “investor” in the relevant BIT to see whether the Bank fit within the definitions agreed upon by the States.18See, e.g., Claudia Annacker, Protection and Admission of Sovereign Investment under Investment Treaties, 10 Chinese J. Int’l L. 531, 542 (stating with disapproval that “the tribunal upheld jurisdiction without even mentioning the definition of ‘investor’ in the BIT between the Czech Republic and the Slovak Republic”).

All of these criticisms are valid in light of ICSID’s limited jurisdiction and reliance on party consent, and the following analytical framework addresses these concerns.

C. An Analytical Framework for Determining Jurisdiction

When confronted with this jurisdictional issue, ICSID tribunals should first consult the relevant BIT’s definition of covered investors. If the type of entity is explicitly excluded from investor protection, then the tribunal cannot hear the claim. If the type of entity is explicitly included within the definition of covered investors, then the tribunal should hear the claim except in an extreme case where the entity clearly falls outside of ICSID’s jurisdiction. If the definition of covered investors does not clearly include or exclude the type of entity bringing a claim, the tribunal should apply Broches’ test: it should allow claims made by an entity “unless it is acting as an agent for the government or is discharging an essentially governmental function.” When applying this test, tribunals should consider both the purpose (embodied in the phrase “acting as an agent for the government”) and the nature of the action (“an essentially governmental function” or commercial one). With regards to the “acting as an agent for the government” factor, tribunals should only disqualify SOEs based on this criterion if the State actively exerts control over the entity, as determined by reference to international law more generally. Disqualification based on “an essentially governmental function” should also be determined according to commercial-government distinctions established by international law.

This analytical framework permits a tribunal to give the greatest deference to States’ consent to be sued and advanced determinations that a type of investor is covered by the ICSID Convention while still respecting ICSID’s outer jurisdictional boundaries.19Similar tests have been applied when deference within a specific set of boundaries is desirable. For instance, Chevron deference in the U.S. is used to evaluate rule-making by government agencies. Deference to agency interpretations is considered preferable because of agency technocratic expertise and because Congress intentionally delegated such interpretive power to these agencies; however, if agencies exceed this Congressional delegation, it can create separation of powers concerns under U.S. Constitutional law. Hence, courts must defer to “reasonable” agency interpretations, but must strike down regulations employing or based on unreasonable interpretations. Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). Further, this method is consistent with the history, purpose, and structure of the ICSID Convention and the common understanding of its authors; international legal principles regarding the paramount importance of State consent and attribution to States; and subsequent developments in States’ approaches to private international investment funded by sovereigns.

II. History, Purpose, Text, and Common Understanding:

A. History, Purpose, Text, and Structure of the ICSID Convention

The history, purpose, and text of the ICSID Convention support an approach that is deferential to State parties’ determinations of what types of entities are eligible to bring suit but still allows tribunals to police the outer bounds of ICSID’s jurisdiction. Traditionally, investors have had very little recourse when legally wronged by States; often times, Host State domestic court systems were insufficiently sophisticated or biased against foreign investors, and investors would have to rely on espousal by their Home State to access international legal institutions and remedies.20See Commentary to the Draft Articles on Diplomatic Protection, ILC Ybk. 2006/II(2), art. 1, para 4:
In the early years of international law the individual had no place, no rights in the international legal order. Consequently if a national injured abroad was to be protected this could be done only by means of a fiction – that an injury to the national was an injury to the State itself.
Home States had full discretion when choosing whether or not to espouse claims, meaning that politics and other concerns outside the merits of an investor’s claim often prevented Home States from bringing these claims.21Id. at art. 2, para 2; Case concerning the Barcelona Traction Light and Power Company Limited (Belgium v. Spain), Second Phase, Judgment, 1970 I.C.J. 4, 44 (Feb. 5). Additionally, even if a State brought and won an investor’s case internationally, the State was not obligated to give any of the award to the investor.22Commentary to the Draft Articles on Diplomatic Protection, supra note 20, at art. 19, para 5.

ICSID was created to address these specific problems related to investment disputes between States and investors; by allowing investors to sue consenting States directly in an international forum, investors would have access to a more competent and fair adjudication and the suit would be depoliticized.23Broches, supra note 4, at 343. These goals are also reflected in the structure and text of the ICSID Convention itself. The Preamble24ICSID Convention, supra note 1, at pmbl. It is accepted practice to look at the Preamble to determine the purpose of a treaty in order to interpret later provisions and the treaty as a whole. Vienna Convention on the Law of Treaties art. 31, opened for signature on May 23, 1969, 1155 U.N.T.S. 331:
1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.
2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes. . .
specifically mentions the importance of “private investment,” and Article 25 explicitly limits ICSID’s jurisdiction to disputes between “Contracting States” and “national[s] of another Contracting State.”25ICSID Convention, supra note 1, at art. 25. Further, the consent of parties to the dispute cannot cure a lack of jurisdiction.26ICSID, Report of the Executive Directors on the Convention, ¶ 25 (“Report”); see also Broches, supra note 4, at 352 (“But consent is not enough. The Centre is an institution of limited jurisdiction, limited by the character of the parties and by the nature of the dispute”); C.F. Amerasinghe, Dispute Settlement Machinery in Relations Between States and Multinational Enterprises — with Particular Reference to the International Centre for Settlement of Investment Disputes, 11 Int’l Law. 45, 48 (1977) (“Because of their constitutional nature, various jurisdictional limitations [under the ICSID Convention] cannot be waived by the parties, acting either individually or jointly”).

However, the ICSID Convention is also highly deferential to State preference and consent. Ratification of the ICSID Convention is not sufficient to make a State amenable to suit; the State must also provide written consent for a specific suit to be brought,27ICSID Convention, supra note 1, at art. 25. often provided in advance as part of a BIT with another Contracting State.28Id.; Report, supra note 26, ¶ 24. Consent need not be given by both parties at the same time; however, once both parties have consented, the State cannot unilaterally withdraw consent. ICSID Convention art. 25; Report, supra note 26, ¶¶ 11, 23–24. For more on how “compulsory jurisdiction” functions in international fora, see generally Stanimir A. Alexandrov, The Compulsory Jurisdiction of the International Court of Justice: How Compulsory Is It?, 5 Chinese J. Int’l L. 29 (2006). Further, terms like “private investment” and “national of another Contracting State” are not clearly defined,29See supra, note 2–3. permitting States to delineate these categories largely as they see fit.30ICSID Convention, supra note 1, at art. 25(4).

B. The Common Understanding of the Authors

Although the ICSID Convention itself does not address the status of SOEs as investors, its principal architect, Aron Broches, did, and his assertions have been accepted and relied upon extensively by most scholars.31See, e.g., Annacker, supra note 18, at 555, note 133; Feldman, supra note 7, at 27. Acknowledging the ambiguity surrounding SOEs, he stated:

The broad purpose of the Convention is the promotion of private foreign investment and the first preambular clause of the Convention uses the term private international investment. On the other hand, it was recognized in the discussions leading up to the formulation of the Convention that in today’s world the classical distinction between private and public investment, based on the source of the capital, is no longer meaningful, if not outdated. There are many companies which combine capital from private and governmental sources and corporations all of whose shares are owned by the government, but who are practically indistinguishable from the completely privately owned enterprise both in their legal characteristics and in their activities. It would seem, therefore, that for purposes of the Convention a mixed economy company or government-owned corporation should not be disqualified as a “national of another Contracting State” unless it is acting as an agent for the government or is discharging an essentially governmental function. I believe that it is fair to say that there was a consensus on this point among those participating in the preparation of the Convention.32Broches, supra note 4, at 354–55.

This oft-quoted declaration provides support for the relatively wide-held agreement33See, e.g., Annacker, supra note 18, at 555, note 133; Feldman, supra note 7, at 27. that a SOE should not be excluded from bringing claims as an investor under the ICSID Convention “unless it is acting as an agent for the government or is discharging an essentially governmental function.”

Although there is significant dispute as to whether this test requires tribunals to consider both the nature and purpose of a SOE’s conduct relevant to the dispute, a textual analysis of the test suggests that either a non-commercial nature or purpose should disqualify an investor from bringing a claim under ICSID. According to the Merriam-Webster Dictionary, an “agent” is defined as “one who is authorized to act for or in place of another as a) a representative, emissary, or official of a government.”34Merriam-Webster Dictionary, available at http://www.merriam-webster.com/dictionary/agent. Reliance on the “ordinary meaning” is part of accepted treaty interpretation practice. VCLT, art. 31(1). Black’s Law Dictionary provides a similar definition for an agent: “someone who is authorized to act for or in place of another; a representative.”35Black’s Law Dictionary (10th ed. 2014). Thus, determining whether an entity is “acting as an agent for the government” necessitates a purposive inquiry. Additionally, disqualification based on a governmental purpose would further the ICSID Convention’s objective of providing a forum of limited jurisdiction for only State-to-investor disputes and thus avoiding the politicization of investment disputes.

In other, frequently overlooked commentary on this subject, Broches further suggests that tribunals should generally defer to States’ advance determinations of what entities are eligible claimants under this standard: “the consensual character of the Convention as a whole [which] justified leaving a large measure of discretion to the parties. But this is not to say that in an extreme case the Secretary-General or a Commission or Tribunal, each within the sphere of their own competence, could not review the soundness of the exercise of that discretion.”36Broches, supra note 4, at 355. In other words, tribunals should defer to parties’ determinations of whether jurisdictional requirements are met, except in “an extreme case” where a dispute is clearly outside ICSID’s jurisdiction.

Thus, the history and text of the ICSID Convention support an approach that is deferential to State parties’ determinations of what types of entities are eligible to bring suit but still allows tribunals to police the outer bounds of ICSID’s jurisdiction. Further, the common understanding of its authors, as conveyed by its principal architect Aron Broches, was that tribunals would analyze jurisdictional questions pertaining to SOE standing in such a way. In fact, the proposed framework in this comment is derived from and conforms to Broches’ suggestions: tribunals should apply Broches’ “acting as an agent or governmental function” test, but defer to party determinations that this jurisdictional requirement has been fulfilled except in the most extreme cases where jurisdiction is clearly lacking.

III. International Legal Principles Related to Immunity, Attribution, and Consent:

A. Immunity

The proposed analytical framework also reflects broader international legal principles regarding State immunity, attribution, and consent. Generally speaking, States are immune from domestic court judgments and suits when acting jure imperii, or executing traditional State functions; this immunity does not exist to the same extent when acting jure gestionis, or in a commercial capacity.37See Annacker, supra note 18, at 534–35. State entities with distinct legal personalities such as SOEs do not enjoy immunity under this test and, like fully private corporations, their claims for injuries can be espoused by States, lending support to the idea that SOEs can sometimes be sufficiently distant from the State to avoid running afoul of the ICSID Convention’s jurisdictional provisions.38Id. at 540–41; see also Commentary to the Draft Articles of Diplomatic Protection, supra note 20, at art. 13 (“The principles contained in this chapter shall be applicable, as appropriate, to the diplomatic protection of legal persons other than corporations”; C. F. Amerasinghe, Diplomatic Protection 139–40 (2008). These principles provide a footing for the commercial-governmental nature consideration within Broches’ test and this comment’s proposed framework. Further, although much of the immunity analysis focuses on the commercial or governmental nature of an action, in some situations purpose is also relevant; for example, the purchase and possession of property for an embassy.

B. Attribution

The principles and situations involving determinations of State attribution are even more analogous to the jurisdictional considerations related to SOEs; after all, the intention of the jurisdictional analysis under the ICSID Convention is to disqualify SOEs that are acting on behalf of States and whose actions can essentially be attributed to States. Further, the two jurisdictional disqualifying factors suggested by Broches – acting as an agent for the government or discharging an essentially governmental function – also closely parallel to and may be derived from the customary international law principles related to state attribution for wrongful acts.39Feldman, supra note 7, at 27. Despite substantial disagreement over whether these attribution principles should be imported wholesale into a test for ICSID jurisdiction,40Id. at note 18. nonetheless these principles are at the very least persuasive because of the important gap-filling role of international law in ICSID adjudication.41See ICSID Convention, supra note 1, at art. 42(1):

The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable. Under these attribution principles, embodied in the International Law Commission’s Draft Articles on State Responsibility, the “conduct of a person” is attributable to a State if said person: (i) “is in fact acting on the instructions of, or under the direction or control of, that State in carrying out the conduct”42Draft Articles on Responsibility of States for Internationally Wrongful Acts, with Commentaries, in Report of the International Law Commission on the Work of its Fifty-third Session, UN Doc A/56/10 (2001) art. 8 (ILC Articles). or (ii) “is empowered by the law of that State to exercise elements of the governmental authority . . . provided the person . . . is acting in that capacity in the particular instance.”43Id. at art. 5; see also Feldman, supra note 7, at 27.

These factors are practically identical to those advocated by Broches; namely, that a SOE is an extension of the State rather than a separate entity when it is “acting as an agent for the government or is discharging an essentially governmental function.” Further, both the ILC Articles and the Broches test subsumed within this comment’s proposed analytical framework are disjunctive tests that include both a nature and purpose element.

Finally, it is worth noting that “the standard for ‘control’ under international law attribution rules is particularly demanding and would not extend to cases where a State does not actively exercise its right to control a corporation.”44Feldman, supra note 7, at 28. Thus, consistent with the previous discussion, most partially or wholly State-owned corporations would not meet this exacting standard and thus would not be barred from bringing a claim if these principles were incorporated into an analytical framework.45Id. at 28–29.

C. Consent

International legal principles related to the importance of State consent also support the deferential approach taken in the proposed analytical framework. Because all States are considered sovereign and equal, they are only required to fulfill obligations they accept willingly;46Alexandrov, supra note 28, at 29. once States consent, however, these commitments become binding and can (and should) be enforced consistent with relevant principles of international law.47See id. at 32–33 (discussing how compulsory jurisdiction functions in the context of international adjudication in front of the ICJ). States have wide latitude in choosing what obligations to accept, as long as any commitments made are within international legal limits.48States cannot agree to perpetrate slavery or genocide, for example.

These principles apply when States consent to an adjudicatory body’s jurisdiction over a dispute as well:49See generally, Alexandrov, supra note 28. a States consents, often well in advance,50For example, through ratification of a BIT or accession to a multilateral treaty or adjudicatory body, or through a contract to allow an adjudicatory body to hear certain types of disputes with the State as a party. Once this consent is granted, it cannot be unilaterally revoked.51See Alexandrov, supra note 28. This approach balances the values behind State sovereign equality while still respecting States’ decisions to make commitments and their interests in being bound to past obligations in the future.

In light of the role of consent in international law, many commentators emphatically encourage tribunals to defer to the definitions of “investors” agreed upon by States in the BIT relevant to any investment dispute when considering jurisdiction over claims brought by SOEs.52See, e.g., Feldman, supra note 7, at 28 (“The definition of ‘investor’ under the applicable treaty can, and should, provide substantial guidance”); Annacker, supra note 18, at 550–51 (“What matters is that the dispute is between an “investor”, as defined in an applicable investment treaty, and the host State”). Considering the importance of respecting States’ abilities to bind themselves consensually and only consensually, this approach is generally correct; but, if States include definitions of “investors” in the relevant BITs that clearly exceed the ICSID Convention’s jurisdictional limitations, the contradiction between these two legal instruments can appear problematic. However, this conflict is somewhat illusory: by including an entity within the definition of an investor in a BIT, a State is assuming responsibilities toward the entity, but not necessarily consenting to allow that entity to bring its claims in a particular forum. Although a BIT may provide consent for ICSID jurisdiction over investment disputes, by consenting to ICSID jurisdiction of a dispute, States are also agreeing to use the ICSID Convention’s rules including its jurisdictional limitations. Thus, disputes that clearly fall outside of ICSID’s jurisdiction can and should be adjudicated in other fora. For these reasons, ICSID tribunals should generally defer to party determinations that an entity is an “investor” and appropriate claimant, except in extreme cases where a case is clearly outside ICSID’s limited jurisdiction.

General consent principles also support including both purpose and nature considerations in cases where it is not clear that an entity is not a covered “investor” according to the relevant BIT. States should be bound by obligations they have made; but, considering the importance of consent, especially in the highly political context of possible State-to-State disputes,53See supra, Section II.A. it is better to err on the side of more limited jurisdiction.

Allowing a claim by a SOE “unless it is acting as an agent for the government or is discharging an essentially governmental function,” with the high bar of active governmental control for finding that a SOE is a government agent, balances these competing values. Under this test, States cannot use vague language to escape consequences for failing to uphold their responsibilities. But, this test also avoids assuming State consent to adjudication in the situations States are mostly likely to find presumed consent objectionable: those involving State-to-State adjudication, where there is heightened political and sovereignty concerns.

IV. Developments in State Approaches to Sovereign-Funded International Investment:

Recently, States have made efforts to clarify what entities are covered by investor protections and to promote commercial-centered approaches to international investment funded by sovereigns. This comment’s proposed analytical framework is consistent with these clarifications and principles.

One example of a State clarification is an opinion of the Swiss Federal Department of Foreign Affairs issued on November 20, 2007.54Swiss Federal Department of Foreign Affairs, Avis de droit du 20 Novembre 2007, Accords de promotion et protection des investissements: Qualité d’investisseur octroyée à un Etat et traitement à donner à ses investissements, JAAC (2008), 183; see also Annacker, supra note 18, at 534. Swiss BITs generally protect legal entities, organized under the law of a contracting party with real economic activities in that country, in the territory of that party (as well as reciprocal protections for Swiss entities).55Annacker, supra note 18, at 534–36. When faced with the question over whether protected entities included States and State entities investing abroad, the Swiss Federal Department of Foreign Affairs determined that such entities were covered by the BIT unless they were acting jure imperii.56Id. Although this opinion did not address the separate jurisdictional limitations associated with ICSID or any other particular dispute resolution mechanism,57Id. this opinion still indicates that the Swiss State, at least, views most SOEs as protected investors and likely eligible claimants, consistent with this comment’s suggested framework.

Other States have expressed concern about the purpose, and not just the nature, of international investment by SOEs. Canada, for instance, stated the following as part of a clarification of its Investment Canada Act:

In response to increased levels of global foreign SOE investment, in 2007 the Government released guidelines that outline some of the key considerations the Minister of Industry accounts for when reviewing foreign investments made by SOEs to determine if they are likely to be of net benefit to Canada. The considerations focus on concerns that foreign SOEs could present certain risks. First, foreign SOEs are, although to varying degrees, inherently susceptible to foreign government influence that may be inconsistent with Canadian national industrial and economic objectives.58Industry Canada, Statement Regarding Investment by Foreign State-owned Enterprises, Investment Canada Act Guidelines (Dec. 7, 2012), available at http://www.ic.gc.ca/eic/site/ica-lic.nsf/eng/lk81147.html (last visited May 4, 2016).

Such statements suggest that States like Canada are wary about providing investor protections for SOEs that may be used for non-commercial policy objectives, and would therefore likely prefer that tribunals be more hesitant to assume jurisdiction over investment disputes involving SOEs that reach the level of government agents. Such concerns reinforce the consideration of both a nature and purpose element, as contained within the proposed analytical framework here.

The Santiago Principles, created by the International Working Group of Sovereign Wealth Funds under the auspices of the International Monetary Fund, also emphasize that “the motivations driving SWF activities” – and not just the nature of the investment – “are of central importance” when developing sound practices related to international investment funded by States.59Feldman, supra note 16, at 635. As articulated by Mark Feldman:

Specifically, under Santiago Principle 19, SWF investment decisions “should aim to maximize risk-adjusted financial returns in a manner consistent with its investment policy and based on economic and financial grounds,” and if investment decisions are subject to considerations other than economic and financial factors, such considerations “should be clearly set out in the investment policy and be publicly disclosed.” The explanation and commentary section for Principle 19 further states that “[i]t is a core principle that SWF’s overarching objective is to maximize risk-adjusted financial returns, given the risk tolerance level of the owner. SWF’s investment decisions and activities, therefore, should be guided by and be consistent with this objective.” As illustrated by Santiago Principle 19 and its accompanying commentary, many governments have recognized the importance of determining whether SWF activities are grounded in commercial objectives.60Id.

A joint statement issued by the U.S., Abu Dhabi, and Singapore concisely expressed a similar principle: “SWF investment decisions should be based solely on commercial grounds, rather than to advance, directly or indirectly, the geopolitical goals of the controlling government.”61United States Treasury, Treasury Reaches Agreement on Principles for Sovereign Wealth Fund Investment with Singapore and Abu Dhabi, Press Release (Mar. 20, 2008), available at https://www.treasury.gov/press-center/press-releases/Pages/hp881.aspx (last visited May 4, 2016).

Thus, a jurisdictional test permitting disqualification based on either a governmental purpose or function, absent clear State consent to adjudication of entities in those categories, appropriately reflects States’ general concerns in the area and the preferences of State signatories to the ICSID Convention.

Conclusion:

SOEs and SWFs play a prominent role in international investment, and their influence is only likely to increase. Investment disputes involving claims by these types of entities against States, however, pose particular problems for ICSID adjudication. Although a categorical bar on SOEs bringing claims was not contemplated by the ICSID Convention’s authors and would not serve ICSID’s goal of promoting private investment, ICSID’s jurisdictional limitations and unique gap-filling role as a forum for specifically investor-State disputes cautions against tribunals hearing these claims indiscriminately. For these reasons, it is necessary to develop an analytical framework that balances these competing considerations for tribunals to apply when such jurisdictional issues arise.

This comment proposes such a framework: tribunals should defer to States’ advanced determinations (as embodied in definition of “investor” in the relevant BIT) of what entities can bring claims under ICSID jurisdiction except when such an interpretation is clearly unreasonable. When the definition is unclear with regards to a particular type of entity, apply Broches’ test and allow the SOE to bring claims unless it is acting as a government agent (with a governmental purpose) or involves a governmental function. Further, this methodology is supported by reference to the history, purpose, and text of the ICSID Convention and the common understanding of its authors; international legal principles related to immunity, attribution, and consent; and developments in State approaches to sovereign-funded international investment.

In the best of all possible worlds, States would clearly indicate what types of entities they believe qualify as protected investors by including more precise definitions in their BITs. Additionally, States should take steps to clarify definitions in existing BITs, perhaps through (preferably joint) statements addressing this issue or through agreements modifying the definitional provisions of these BITs. Until this ideal world materializes, however, this analytical framework equips tribunals to address both situations where State consent to jurisdiction is well articulated and when it is unclear and to appropriately balance the competing considerations prevalent in such cases.

References   [ + ]

01. Convention on the Settlement of Investment Disputes between States and Nationals of Other States art. 25(1), entry into force Oct. 14, 1966, 17 U.S.T. 1270, 575 U.N.T.S. 159 (“ICSID Convention”).
02. Private international investment is not defined in the ICSID Convention.
03. ICSID Convention, supra note 1, at art. 25(2) defines a national as:
(a) any natural person who had the nationality of a Contracting State other than the State party to the dispute on the date on which the parties consented to submit such dispute to conciliation or arbitration as well as on the date on which the request was registered pursuant to paragraph (3) of Article 28 or paragraph (3) of Article 36, but does not include any person who on either date also had the nationality
of the Contracting State party to the dispute; and
(b) any juridical person which had the nationality of a Contracting State other than the State party to the dispute on the date on which the parties consented to submit such dispute to conciliation or arbitration and any juridical person which had the nationality of the Contracting State party to the dispute on that date and which, because of foreign control, the parties have agreed should be treated as a national of another Contracting State for the purposes of this Convention.
04. Aron Broches, The Convention on the Settlement of Investment Disputes between States and Nationals
of Other States
, 136 Recueil des Cours 331, 354 (1972-II).
05. Id. at 355.
06. UNCTAD, World Investment Report 2014, Investing in the SDGs: An Action Plan (United Nations 2014) 20.
07. Mark Feldman, State-Owned Enterprises as Claimants in International Investment Arbitration, 31 ICSID Review 24, 2425 (2016).
08. As of the writing of this comment. Several other cases have found that an entity qualifies as a claimant under the ICSID Convention without conducting an analysis under art. 25. See, e.g., Hrvatska Elekroprivreda DD v. Republic of Slovenia, ICSID Case No. ARB/05/24, Decision on the Treaty Interpretation Issue ¶¶ 168–69 (June 12, 2009) (concluding that jurisdiction over a case brought the national electricity company of Croatia was appropriate without referencing or considering the relevance of ICSID Convention art. 25); CDC Group plc v. Seychelles, ICSID Case No. ARB/02/14, award ¶ 6 (Dec. 17, 2003) (finding that the elements of Article 25(1) of the ICSID Convention had been met based solely on the respondent’s withdrawal of its jurisdictional objection, without further analysis); Telenor Mobile Communications AS v. Hungary, ICSID Case No. ARB/04/15, award (June 22, 2006) (dismissing on other jurisdictional grounds, without consideration of Article 25, a case brought by a 75% State-owned company). See also Rumeli Telekom AS and Telsim Mobil Telekomikasyon Hizmetleri AS v. Kazakhstan, ICSID Case No. ARB/05/16, award ¶¶ 326–27 (July 21, 2008) (permitting a claim to be brought by a private company that had been seized and was now managed by a State).
09. Ceskoslovenska Obchodni Banka, A.S. vs. the Slovak Republic, ICSID Case No. ARB/97/4 [hereinafter “CSOB”].
10. CSOB, Decision on Objections to Jurisdiction ¶¶ 1–2, 21 (May 24, 1999).
11. Id. ¶¶ 1–2.
12. Id. ¶ 15.
13. Id. ¶ 17.
14. Id. ¶ 20.
15. Id. ¶¶ 20–21.
16. Mark Feldman, for example, argues:
By finding that “for much of its existence,” CSOB had been an agent of the State, and then moving on to the issue of whether CSOB discharged an essentially governmental function, the CSOB v. The Slovak Republic tribunal failed to acknowledge that under Mr. Broches’ test, an agency relationship with the State, standing alone, defeats standing under Article 25(1).
The Standing of State-Owned Entities Under Investment Treaties, 2010–11 Y.B. Int’l Inv. & Pol’y, 615, 630 (Karl Sauvant, ed.).
17. Id. (“The agency part of Mr. Broches’ test — under which a State-owned enterprise does not qualify as a “national” of Contracting State if it is acting as an agent of the State — contemplates consideration of the goals driving a State-owned enterprise’s activities”).
18. See, e.g., Claudia Annacker, Protection and Admission of Sovereign Investment under Investment Treaties, 10 Chinese J. Int’l L. 531, 542 (stating with disapproval that “the tribunal upheld jurisdiction without even mentioning the definition of ‘investor’ in the BIT between the Czech Republic and the Slovak Republic”).
19. Similar tests have been applied when deference within a specific set of boundaries is desirable. For instance, Chevron deference in the U.S. is used to evaluate rule-making by government agencies. Deference to agency interpretations is considered preferable because of agency technocratic expertise and because Congress intentionally delegated such interpretive power to these agencies; however, if agencies exceed this Congressional delegation, it can create separation of powers concerns under U.S. Constitutional law. Hence, courts must defer to “reasonable” agency interpretations, but must strike down regulations employing or based on unreasonable interpretations. Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).
20. See Commentary to the Draft Articles on Diplomatic Protection, ILC Ybk. 2006/II(2), art. 1, para 4:
In the early years of international law the individual had no place, no rights in the international legal order. Consequently if a national injured abroad was to be protected this could be done only by means of a fiction – that an injury to the national was an injury to the State itself.
21. Id. at art. 2, para 2; Case concerning the Barcelona Traction Light and Power Company Limited (Belgium v. Spain), Second Phase, Judgment, 1970 I.C.J. 4, 44 (Feb. 5).
22. Commentary to the Draft Articles on Diplomatic Protection, supra note 20, at art. 19, para 5.
23. Broches, supra note 4, at 343.
24. ICSID Convention, supra note 1, at pmbl. It is accepted practice to look at the Preamble to determine the purpose of a treaty in order to interpret later provisions and the treaty as a whole. Vienna Convention on the Law of Treaties art. 31, opened for signature on May 23, 1969, 1155 U.N.T.S. 331:
1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.
2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes. . .
25. ICSID Convention, supra note 1, at art. 25.
26. ICSID, Report of the Executive Directors on the Convention, ¶ 25 (“Report”); see also Broches, supra note 4, at 352 (“But consent is not enough. The Centre is an institution of limited jurisdiction, limited by the character of the parties and by the nature of the dispute”); C.F. Amerasinghe, Dispute Settlement Machinery in Relations Between States and Multinational Enterprises — with Particular Reference to the International Centre for Settlement of Investment Disputes, 11 Int’l Law. 45, 48 (1977) (“Because of their constitutional nature, various jurisdictional limitations [under the ICSID Convention] cannot be waived by the parties, acting either individually or jointly”).
27. ICSID Convention, supra note 1, at art. 25.
28. Id.; Report, supra note 26, ¶ 24. Consent need not be given by both parties at the same time; however, once both parties have consented, the State cannot unilaterally withdraw consent. ICSID Convention art. 25; Report, supra note 26, ¶¶ 11, 23–24. For more on how “compulsory jurisdiction” functions in international fora, see generally Stanimir A. Alexandrov, The Compulsory Jurisdiction of the International Court of Justice: How Compulsory Is It?, 5 Chinese J. Int’l L. 29 (2006).
29. See supra, note 2–3.
30. ICSID Convention, supra note 1, at art. 25(4).
31. See, e.g., Annacker, supra note 18, at 555, note 133; Feldman, supra note 7, at 27.
32. Broches, supra note 4, at 354–55.
33. See, e.g., Annacker, supra note 18, at 555, note 133; Feldman, supra note 7, at 27.
34. Merriam-Webster Dictionary, available at http://www.merriam-webster.com/dictionary/agent. Reliance on the “ordinary meaning” is part of accepted treaty interpretation practice. VCLT, art. 31(1).
35. Black’s Law Dictionary (10th ed. 2014).
36. Broches, supra note 4, at 355.
37. See Annacker, supra note 18, at 534–35.
38. Id. at 540–41; see also Commentary to the Draft Articles of Diplomatic Protection, supra note 20, at art. 13 (“The principles contained in this chapter shall be applicable, as appropriate, to the diplomatic protection of legal persons other than corporations”; C. F. Amerasinghe, Diplomatic Protection 139–40 (2008).
39. Feldman, supra note 7, at 27.
40. Id. at note 18.
41. See ICSID Convention, supra note 1, at art. 42(1):

The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable.

42. Draft Articles on Responsibility of States for Internationally Wrongful Acts, with Commentaries, in Report of the International Law Commission on the Work of its Fifty-third Session, UN Doc A/56/10 (2001) art. 8 (ILC Articles).
43. Id. at art. 5; see also Feldman, supra note 7, at 27.
44. Feldman, supra note 7, at 28.
45. Id. at 28–29.
46. Alexandrov, supra note 28, at 29.
47. See id. at 32–33 (discussing how compulsory jurisdiction functions in the context of international adjudication in front of the ICJ).
48. States cannot agree to perpetrate slavery or genocide, for example.
49. See generally, Alexandrov, supra note 28.
50. For example, through ratification of a BIT or accession to a multilateral treaty or adjudicatory body, or through a contract
51. See Alexandrov, supra note 28.
52. See, e.g., Feldman, supra note 7, at 28 (“The definition of ‘investor’ under the applicable treaty can, and should, provide substantial guidance”); Annacker, supra note 18, at 550–51 (“What matters is that the dispute is between an “investor”, as defined in an applicable investment treaty, and the host State”).
53. See supra, Section II.A.
54. Swiss Federal Department of Foreign Affairs, Avis de droit du 20 Novembre 2007, Accords de promotion et protection des investissements: Qualité d’investisseur octroyée à un Etat et traitement à donner à ses investissements, JAAC (2008), 183; see also Annacker, supra note 18, at 534.
55. Annacker, supra note 18, at 534–36.
56. Id.
57. Id.
58. Industry Canada, Statement Regarding Investment by Foreign State-owned Enterprises, Investment Canada Act Guidelines (Dec. 7, 2012), available at http://www.ic.gc.ca/eic/site/ica-lic.nsf/eng/lk81147.html (last visited May 4, 2016).
59. Feldman, supra note 16, at 635.
60. Id.
61. United States Treasury, Treasury Reaches Agreement on Principles for Sovereign Wealth Fund Investment with Singapore and Abu Dhabi, Press Release (Mar. 20, 2008), available at https://www.treasury.gov/press-center/press-releases/Pages/hp881.aspx (last visited May 4, 2016).

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