Marc J. Goldstein Arbitrator & Mediator NYC
December 08, 2009

“Investments” in Investment Arbitration: A New Installment in the Jurisprudence

What liberty of contract do State parties to a bilateral investment treaty have to define broadly the category of “investments” that may be the subject of arbitration between one Contracting State and an investor of the other? The arbitral tribunal in Romak S.A. v. Republic of Uzbekistan (PCA Case No. AA280, available at Permanent Court of Arbitration website, appears to fix limitations on such freedom of contract in its award, issued November 26, 2009, dismissing the Claimant’s claims on the basis that an account receivable arising from the sale of tens of thousands of tons of grain was not an “investment” under the Switzerland-Uzbekistan BIT.

One may readily agree that a one-off sale of goods transaction fails to qualify under the ordinary meaning of the term “investment,” normally lacking the basic and well-understood attributes of an “investment”: an economic contribution by the investor, a certain duration of the contribution, and an element of economic risk.

But what should be the outcome when the BIT defines “investment” to be “every kind of assets, and particularly. . . claims to money or to any performance having an economic value” ?

The Tribunal acknowledged that its mission, in observance of the Vienna Convention on the Law of Treaties Article 31(1), was to “resort to the ‘ordinary meaning’ of the terms of the BIT ‘in their context and in the light of its object and purpose.'” What seems curious in the reasoning of the Tribunal is that its point of departure was to seek out the ordinary meaning of “investment” — in the first instance, from Black’s Law Dictionary — notwithstanding that the Treaty established “investment” as a defined term, rather than turn immediately to the ordinary meaning of the words used in the definition. The central definitional phrase — “every kind of asset….” — appears to offer relatively clear guidance, albeit guidance that may be at loggerheads with evolving investment law conceptions of “investment,” and of what investment lawyers and arbitrators may regard as a sensible allocation of jurisdiction among State courts and BIT arbitral tribunals.

Just as provocative of debate is the Tribunal’s handling of the “object and purpose” and the “context” of the defined term “investment” in this BIT. The Tribunal refers to recitals in the preamble of the Treaty, wherein the parties declare that they are “[r]ecognizing the need to promote and protect foreign investments with the aim to foster economic prosperity of both States,” and “[d]esiring to intensify economic cooperation to the mutual benefit of both States.” The Tribunal thought it self-evident that these recitals contradict the notion that “every kind of asset” including a “claim for money” can sensibly include the account receivable arising from a large grain supply contract between a Swiss supplier and a State-owned Uzbek buyer. And the Tribunal took as guidance to the “context” of the BIT’s definition of “investment” the fact that, on the same day the BIT was signed, Switzerland and Uzbekistan also entered into an Agreement on Trade and Economic Cooperation. The Tribunal, making no specific findings, apart from the date of signature, as to whether, for purposes of Vienna Convention on the Law of Treaties Article 32((2), the Trade Agreement was an “agreement relating to the treaty which was made … in connection with the conclusion of the treaty,” nevertheless concluded that the two agreements, juxtaposed, raised an inference that sales of goods transactions were intended to be excluded from the BIT definition of “investments.”

The Tribunal also considered that it would be “manifestly absurd and unreasonable” (Vienna Treaties Convention Article 32(2)) to make a literal application of “every kind of asset” including a “claim for money,” as to do so would create a broad swath of concurrent jurisdiction, between domestic courts and international arbitral tribunals, over commercial transactions between private actors of one Contracting State and State entities of the other.
But the case stated for absurdity is not cast in terms of the Contracting States’ objectives — one can well understand why a developing country with an unstable judiciary might create such concurrent jurisdiction as an inducement to investment. Rather, the absurdity is said to lie in the prospect of a broad domain of concurrent jurisdiction over commercial matters — a conception that sales contracts “‘are not investment contracts, except in exceptional circumstances, and are to be kept separate and distinct for the sake of a stable legal order.'” (Award Par. 185, quoting from the ICSID Tribunal award in Joy Mining Machinery Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/03/11, Award on Jurisdiction, August 6, 20045, par. 58).

Perhaps more analytically convincing is the Tribunal’s reliance on the fact that the Swiss-Uzbek BIT adopted two arbitration alternatives from which the investor might choose: ad hoc UNCITRAL Arbitration and ICSID Arbitration. For that choice to be an effective one, the Tribunal reasoned, the “investments” qualifying for arbitration under either mechanism should be the same, and thus an interpretation should be avoided that would make “investments” eligible for UNCITRAL arbitration but not ICSID Arbitration. Correspondingly, ICSID jurisprudence was held to provide suitable inspiration and guidance (but not precedent in a stare decisis sense) for deciding the treaty interpretation issue here. Of course, here again there was at least one other way of looking at things: that ad hoc arbitration under the UNCITRAL Rules was included to ensure that disputes that would not jurisdictionally qualify for ICSID arbitration under the ICSID Convention conception of “investment,” but were intended to be arbitrable under the BIT, would find their way to an arbitral forum.

With these analytical premises in place, the Tribunal proceeded to rely on ICSID jurisprudence for its conclusion that “the term ‘investments’ under the BIT has an inherent meaning (irrespective of whether the investor resorts to ICSIDE or UNCITRAL arbitral proceedings) entailing a contribution that extends over a certain period of time and that involves some risk.” And the Tribunal took pains to insist that it was completely accepting of the notion that State parties to a BIT have freedom of contract to decide what scope to give to the term “investments” — but that the parties here had not, at least not in sufficiently plain terms, elected to treat sales of goods transactions as such. This latter declaration by the Tribunal might well have been included to anticipate that some readers would raise the concern stated in the first sentence of this commentary. And the reasoning in this award appears to underscore that, in the jurisprudence of arbitral jurisdiction under investment treaties, there is an unresolved tension for arbitrators between engaging in principled treaty interpretation and choreographing a “sensible” transnational system for the resolution of disputes.

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