THE MEANING OF ‘INVESTMENT’ IN INTERNATIONAL INVESTMENT LAW
Critical Analysis of the Meaning of ‘Investment’ in International Investment Law
Prompt: Regarding relevant guidelines, treaties and case law, explain and critically discuss the meaning of ‘investment’ in international investment law.
Currently, there exist controversial notions that range from the definition of investment in both business and legal terms, especially in the cases of jurisdictional requirements that revolve around finances between states. Many investors have often raised the question of the meaning of investment besides the apparent economic standpoint but the legal arena, as Mortenson stated in his book “The Meaning of Investment: ICSID’s Travaux and the Domain of International Investment Law.” In this light, studies have indicated that the term investment must find meaning mainly because of the jurisdictional matters that often arise from investment treaty arbitration among various individuals or states that have signed investment agreements. Schreuer, in his book, “Jurisdiction and Applicable Law in Investment Treaty Arbitration,” highlights that the term investment pertains to the art of committing money with an end goal expectation of gaining profit or recouping back an additional amount. In the same article, the author expresses that international investment reflects on the process of acquiring securities from different countries and mainly involves cases of mutual funds, exchange of traded funds (ETFs), and depository receipts. According to research, investments agreement which revolves mostly on bilateral investment treaties (BITs) has not been entirely defined. Failure to determine the relationship between the parties seeking protection under the investment treaties and the contracting states is a result of a crash. It is a treaty that uses both the investors and the investments made to analyze the qualification for coverage under the provisions put across by the contracting states.
At the same time, Schreuer (2014) notes the existence of varieties of objects and purposes of investment agreements; therefore, determining the primary constructs that make up foreign investments has been deemed complex. There is no alternative notion that has been developed to counter the existing setbacks that prevail on investors and contracting states in defining the various aspects involved in an investment. In this light, Schreuer, in his book, “Jurisdiction and Applicable Law in Investment Treaty Arbitration,” has attributed such a case as a result of the complexity that governs investment as a topic which is hard for parties involved in the economic and legal sectors. Also, he indicates that due to the multiplication of various definitions based on the term, the proliferation of sources has prevailed. Further, in the same book, the author established that in customary international law, the term investment was not often revered. Still, instead, a similar appropriate term of the foreign property was applied. In this case, the overseas property was used to refer to imported foreign capital and assets of residents of foreign nationalities.
More so, in the same book, Schreuer (2014) establishes that over the past decades, probably during the enigmatic world wars, investments were classified as either direct or portfolio. Firstly, portfolio investments encompassed bonds mainly issued by governments of the developing states that usually remained afloat in the financial markets. As a result of the two world wars, there emerged a massive stagnation of direct investments that subsequently resulted in an imminent collapse of portfolio investments. In the same article, Schreuer (2014) highlights that the situation was experienced mostly by third world countries. However, the period after the war saw a rise in most world economies, which constituted investments by various investors as a direct economic standpoint. There was immense growth of both national and multinational corporations, which were either majorly owned or operated as subsidiaries by both foreign and domestic investors. This period has been attributed as the source of direct investment, which has also led to the evolution of other types of investments. In this context, the current international investment instruments, such as the Organisation for Economic and Co-operation Development (OECD) and the International Investment Agreements (IIAs), have adopted a broader perspective of defining investments. This is as observed by Malik in his paper “Definition of investment in international investment agreements. International Institute for Sustainable Development/Best Practices Series.”
According to the OECD Code of Liberalization of Capital Movements, the definition of investment is based on a broad nexus constituting the direct investments, investor’s control over the company where he/she has a direct influence over the management. In the OECD journal on, “Definition of Investor and Investment in International Investment Agreements,” in International Investment Law: Understanding Concepts and Tracking Innovations,” investment is defined as a creation of a whole or partial enterprise, often called a subsidiary or involvement in an existing business as a direct investment. However, in the same journal, the OECD restricts direct investments in this juncture to be limited to contribution advanced in the form of capital, establishment of strong and lasting relations between the investor and the business, and the investor’s ability to be impactful in the oversight role in the whole institution.
Hober expressed a thought in his Journal of International Dispute Settlement that the international Energy Charter Treaty (ECT) perceives investments as “any asset associated with economic activity in the energy sector owned either directly or indirectly by an investor.” In the same journal, the author indicates that the ECT further explains that the assets may be in the form of “property or any property rights such as leases and mortgages, tangible or intangibles, companies or businesses, claims to money and performance under a contract bearing an economic value or an Intellectual Property. Also, Schreuer notes in his journal “Jurisdiction and Applicable Law in Investment Treaty Arbitration,” that the North American Free Trade Agreement (NAFTA), article 1139, has revolutionized the meaning of investments as a broad business activity connected to a list of assets bearing a particular exclusion. Under this notion, NAFTA’s definition constitutes foreign direct investments (FDI), tangible and intangible properties acquired in anticipation of a return of economic advantage, and portfolio investments like equity securities.
At the same time, the Bilateral International Agreements (BIAs) and the IIAshave further developed a different approach towards defining investment. Research indicates that most BITs adopt a broad dimension of the definition of investments based on four facets like the form of the venture, location of the economic activity, the period of the investment, and the relationship between the investor and the contracting party. Schreuer, in his book “Jurisdiction and Applicable Law in Investment Treaty Arbitration,” clarifies that the definition is to ensure that the agreements are binding and engaging between the contracting parties. In the same context, the author notes that the tribunal will have a chance to decide on the case based on its merits in the event of a dispute; however, there is no provision of automatic protection of investments or the states liable on such disagreements. Simultaneously, it is empirical to note that both BITs and IIAs are individually negotiated; therefore, there is no coherent mechanism of defining investment that has been developed.
Also, Pellet (2013) notes in his book, “The case-law of the ICJ in investment arbitration. ICSID Review, 28(2)”, that the International Center for Settlement of Investment Disputes (ICSID) has no definite reference for the term investment. Still, several case laws solved as per its acts provide a clearer glimpse of the term. For instance, Schreuer, in his article “Jurisdiction and Applicable Law in Investment Treaty Arbitration,” considers the case law on Fedax v Venezuela. It entailed failure of Venezuela to honor the promissory notes presented by Fedax, a company on the island of Curagao in an argument that the records did not makeup investment as stipulated by the ICSID. The discussion indicated that “the transaction does not amount to an FDI involving a longterm transfer of capital from one state to another to acquire interests incorporation and normally involves risks to the potential investor.” However, in rejection of the argument, the panel did not define investment but laid out principles such as duration and economic benefit to the host state, which formed a foundation for the subsequent investment cases.
Also, Burger, in his paper “The trouble with Salini (Criticism of and Alternatives to the Famous Test),” indicates that the case law on Salini Costruttori S.P.A and Italstrade S.P.A v Morocco reflected on the failure of the Moroccan government to reimburse the two contractors after they prolonged the period of the contract by four months. Grabowski, in his journal on “The definition of investment under the ICSID Convention: A defense of Salini,” shows that as per the ICSID, the Salini test for investment defined the four constructs on an investment. That is, it contained a contribution of significant capital investments, based on a specified duration of 36 months, involved an element of risk and had an economic contribution to the infrastructural development of the Moroccan state. In the same journal, the author establishes that the recognition of financial contribution was a clear indication of a hallmark of any investment as per the ICSID tribunal.
According to the international investment arbitration, there is no other doctrine on investment definition; therefore, it is empirical to follow the already laid down procedures on the previous cases. In this stance, previous case laws have been referenced by arbitrators to make merit considerations such as the case between Joy v Egypt where the tribunal referenced the elements of an order for it to qualify for an investment like duration, continuity of profits and returns, and a part of the risk. Mortenson, in his 2013 journal, “Quiborax SA et al. v Plurinational State of Bolivia: The Uneasy Role of Precedent in Defining Investment”, states that the Quiborax V Saba Flakes case was contrary to the Salini. He notes that the tribunal rejected the fourth element arguing that the ICSID only said economic development as a goal of investment but not a feature. Further, Schreuer’s book “Jurisdiction and Applicable Law in Investment Treaty Arbitration,” spotlights that the tribunal drifted from the fourth element of the Salini test in the case of Malaysian Historical Salvors SDN BHD v Malaysia. In this stance, the tribunal felt that items presented in the case were not comparable to the Salini. More so, other panels felt that the Salini extended far enough. Therefore, another crucial construct was that investment was to be made in good faith, just as mentioned in the case of Phoenix Action v Czech Republic.
In conclusion, there is no essential definition of the term investment. However, the above cases have presented a more significant notion that infiltrates flexibility to arbitral tribunals for future cases in the case of different forms of investment issues that may arise.