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Biwater, Classic Investment

Bases: Input, Risk, Duration

A
rticle 25(1) of the Convention p. 349), it was not until the decisions in
on the Settlement of Investment Fedax and Salini that tribunals
Disputes between States and By conducted a more in-depth analysis of
Nationals of Other States (the Emmanuel the parameters of the term investment
convention) sets out the parameters of the Gaillard under Article 25(1) (see Fedax N.V. v.
jurisdiction of the International Centre for The Republic of Venezuela, Decision on
the Settlement of Investment Disputes (the Objections to Jurisdiction, July 11,
centre) and thus of arbitral tribunals 1997, para. 25; Republic of Venezuela
performing their duties under its aegis. Directors states in that respect: and Salini Construttori SpA and
No attempt was made to define the term
The interpretation of those jurisdictional investment given the essential Italstrade SpA v. Kingdom of Morocco,
requirements has been intensely debated in requirement of consent by the parties, and Decision on Jurisdiction, July 23, 2001,
academic writings and in case law. In the mechanism through which para. 52; both decisions are available on the
particular, the requirement that the dispute Contracting States can make known in Investment Treaty Arbitration Web site).
aris[e] directly out of an investment, and advance, if they so desire, the class of More recent ICSID arbitral decisions
more specifically the notion of investment disputes which would or would not dealing with the notion of investment
under Article 25(1) of the convention, is consider submitting to the centre within the meaning of Article 25(1)
currently one of the most controversial (Art 25 (4)). range from adopting a very liberal
topics in ICSID arbitration. Against that background one might have approach to exhibiting a strict and
It is in the context of such controversies expected that when a state has expressed narrow vision of what should be
that, on July 24, 2008, was rendered one of consent in a bilateral investment treaty, the understood as an investment. Although
the latest awards contributing to the notion terms of that treaty would define what the it is difficult to categorize arbitral
of investment in Biwater Gauff (Tanzania) parties to the treaty understood to decisions based on the conceptual
Ltd. v. United Republic of Tanzania constitute the scope of matters covered by approach adopted by each tribunal, it is
(Decision available on the ICSID Web site). the term investment. In that sense, as possible to point to two main lines of
long as the requirement of an investment reasoning and an intermediate approach
No Definition of Investment under the treaty is satisfied, the notion of in arbitral case law.
investment within the meaning of the The first line of decisions, which
Despite its central character in a ICSID convention should not give rise to
convention specifically designed to deal any particular difficulty. Nevertheless, the could be described as liberal, favors
with investment disputes, the notion of lack of a definition of the term using typical characteristics as
investment was not defined within the investment in the ICSID convention has guidance in finding an investment. By
meaning of Article 25(1) of the convention. given rise to conflicting decisions adopting contrast, the second line underscores the
Instead, the drafters concluded that it would sometimes radically opposite views. need for a given transaction to satisfy
be preferable to leave it to the contracting cumulative conditions to qualify as an
states to determine the definition of an Finding an Investment investment. Adopting somewhat a
investment and to exclude certain kinds of middle ground, a third line of decisions
disputes from the scope of the convention if Early ICSID arbitral decisions barely recognizes the need for objective
they so desired when providing their addressed the question of whether the criteria to determine the existence of an
consent to the centres jurisdiction. requirement of an investment was met investment, but considers such criteria
Paragraph 27 of the Report of the Executive within the meaning of Article 25(1) of the to be limited in number and scope (for
convention. Although a number of arbitral an in-depth analysis of the genesis and
___________________________________ decisions tangentially touched on the point evolution of these trends, see
EMMANUEL GAILLARD is head of the (see, inter alia, Kaiser Bauxite Company v. E. Gaillard, Identify or define?
international arbitration group of Jamaica, Decision on Jurisdiction and Reflection on the evolution of the
Shearman & Sterling and also is a Competence, July 6, 1975, YB Comm. concept of investment in the ICSID
professor of law at University of Paris XII. Arb., Vol. IV, p. 207; Liberian Eastern practice, Liber Amicorum Christoph
YAS BANIFATEMI, a partner of the firms Timber Corporation (LETCO) v. Schreurer, forthcoming 2009). Each of
international arbitration group in Paris, Government of the Republic of Liberia, these approaches will be examined in
assisted in the preparation of this article. Award, March 31, 1986, 2 ICSID Reports, turn.
WEDNESDAY, DECEMBER 31, 2008

Liberal Approach Tanzania) in relation to the expropriation [T]here is no basis for a rote, or
of the investment of the Tanzanian overly strict, application of the five
company in a project for the improvement Salini criteria in every case. These
Based on Characteristics
and provision of water and sewerage criteria are not fixed or mandatory as a
The first trend of arbitral decisions leans matter of law. They do not appear in
toward a liberal and flexible approach in services in Dar Es Salaam. Biwater alleged the ICSID convention. On the
finding an investment under Article 25(1). that the actions of the Tanzanian authorities contrary, it is clear from the travaux
This line of reasoning emphasizes the violated the applicable BIT. prparatoires of the convention that
deliberate decision of the conventions Tanzania objected to the arbitral several attempts to incorporate a
drafters not to define investment, a tribunals jurisdiction on the ground that definition of investment were made,
decision intended to avoid undue the dispute was not in relation to an but ultimately did not succeed. In the
restrictions on the parties understanding of investment. It argued that the internal rate end, the term was left intentionally
what should constitute an investment. of return of the project was too low to undefined, with the exception (inter
make it profitable on its own. Thus, there alia) that a definition could be the
Accordingly, the arbitrators should not subject of agreement as between
impose fixed criteria to determine the could not be any expectation on the part of Contracting States [] (Award,
existence of an investment, but rather the investor of a regular return on para. 312).
consider various characteristics or investment. It also argued that there was no
In addition to the support it found in
features for guidance in identifying the assumption of risk or a substantial the drafters unequivocal decision not to
existence of an investment. Under this line commitment by the investor. Each of these
define investment, the tribunal
of approach, the characteristics of an criteria, claimed Tanzania, must be met
warned against the perils of arbitrarily
investment may vary from one case to in order for the project to qualify as an
excluding certain transactions from the
another. investment under Article 25(1). Whether scope of the convention by misguidedly
It is argued that the liberal approach the project qualified as an investment under
elevating various characteristics, as
allows for flexibility and gives weight to the BIT was irrelevant, because it did not
found by the tribunals in individual
the parties understanding of the concept of first meet the objective definition of cases, to the level of fixed and required
investment, consistent with the spirit of the investment under Article 25(1). categories. Such an approach, the
convention as expressed in the Report of tribunal cautioned, leads to a definition
the Executive Directors. The risk, however, that may contradict individual
is that when taken to the extreme, this Jurisdiction terms have been agreements (as here), as well as
approach ultimately places the concept of developing consensus in parts of the
investment in Article 25(1) as secondary to debated. The requirements that
world as to the meaning of investment
and dependent upon the concept of consent the dispute aris[e] directly out of (as expressed, e.g., in bilateral
of the parties. The danger of determining an investment and the notion of investment treaties). (Award,
the concept of investment under in-vestment under Article 25(1) para. 314).
Article 25(1) exclusively on the basis of the of the convention are the hottest Instead, the tribunal advocated a
parties agreement is that it conflates the
topics in ICSID arbitration. more flexible and pragmatic
objective requirement of jurisdiction under approach. Such an approach would take
Article 25(1) with the subjective into account the features of the Salini
requirement of consent given in the In response, Biwater contended that the test. It would also integrate the content
bilateral investment treaty (BIT), the formerfive elements identified by investment of the instrument where the consent is
being subsumed in the latter. arbitration commentators as common expressed. The tribunal stated:
Among the arbitral decisions that follow features of projects or transactions that over the years, many tribunals have
this liberal approach is the decision of the qualify as investment in ICSID case law approached the issue of the meaning
ad hoc Committee in CMS Gas namely, duration, regularity of profit and of investment by reference to the
Transmission Company v. Argentina return, risk, substantial commitment, and parties agreement, rather than
(Decision of the ad hoc Committee on the significance to the host states economic imposing a strict autonomous
developmentwere present. Consequen- definition, as per the Salini Test.
application of Annulment, Sept. 25, 2007,
para. 71; available on the ICSID Web site), tly, the project qualified as an investment To this end, even if the Republic
as well as the decisions of the Arbitral under Article 25(1). Also, Biwater relied could demonstrate that any, or all, of the
Tribunals in Fraport AG Frankfurt Airport on the broad definition of investment in Salini criteria are not satisfied in this
Services Worldwide v. Republic of the the Tanzania-U.K. BIT to argue that the case, this would not necessarily be
Philippines and M.C.I. Power Group, L.C. project and Biwaters interest in the sufficientin and of itselfto deny
and New Turbine Inc. v. Republic of underlying contracts qualified as an jurisdiction. (Award, paras. 317 and
Ecuador (Award, Aug. 16, 2007, para. 305, investment under the BIT (Award, 318).
and Award, July 31, 2007, para. 165, para. 288). The tribunal concluded to the
respectively, both available on the existence of an investment under
Investment Treaty Arbitration Web site). The Tribunals Analysis Article 25(1) based on an overall
The tribunals award in Biwater also analysis taking into account the scope
The tribunal characterized the parties of consent expressed in the BIT. In
follows this approach. arguments on this point as being drawn thoroughly analyzing the elements that
from the test established in Salini v. militate in favor of the liberal approach,
The Biwater Arbitration Morocco under which strict criteria should it also underscored the risk created by a
In that case, a British company that was the be met (see below). It did not accept the narrow and nonflexible definition of
majority shareholder in a Tanzanian parties respective position as to the Salini investment: the arbitrary exclusion of
company resorted to ICSID arbitration in its test, concluding that Article 25(1) did not disputes relating to certain transactions
dispute with the Republic of Tanzania (or contain a strict criteria test: from the jurisdiction of the centre.
WEDNESDAY, DECEMBER 31, 2008

Strict Cumulative Terms size was not comparable to that of other does not purport to introduce another
investments observed in previous ICSID element in the definition of investment.
The milestone decision of the arbitral tribunal decisions and therefore could not Illustrations of this approach can be
tribunal in Salini v. Morocco illustrates a constitute a contribution that would support found in Victor Pey Casado v. The
contrasting approach whereby fixed and the existence of an investment under Republic of Chile (Award, May 8, 2008,
cumulative criteria should be satisfied for Article 25(1). para. 232, available on the ICSID Web
a transaction to be considered an He also held that while the duration of site) and in LESI SpA and Astaldi SpA v.
investment within the meaning of the the contract complied in a quantitative Peoples Democratic Republic of
convention. The decision in Saipem SpA v. sense with the minimum of two to five Algeria (Decision on Jurisdiction,
Peoples Republic of Bangladesh also years set forth in Salini, the requirement July 12, 2006, para. 72, available in the
illustrates this approach (Decision on was not satisfied in a qualitative sense, as Investment Treaty Arbitration Web
Jurisdiction and Recommendation on the extension of the initial contract from site).
Provisional Measures, March 21, 2007, 18 months to four years was happenstance. This approach avoids the risk of
para. 99, available on the ICSID Web site). Further, MHS was found to satisfy the reducing the notion of investment to a
A similar line of reasoning was adopted by requirement of risk in a quantitative sense subjective test and rendering
the arbitral tribunals in Jan de Nul NV and in that there was a risk inherent to the superfluous the requirement of
Dredging International NVl v. Arab contract, but the commercial risk of the investment under the convention. It
Republic of Egypt and Ioannis salvage contract was found not to comply strikes the balance between, on the one
Kardassopoulos v. Georgia (Decision on with the qualitative aspect of the risk hand, not presenting the extreme
Jurisdiction, June 16, 2006, para. 91, requirement under ICSID jurisprudence. rigidity of the MHS or even the Salini
available on the Investment Treaty Finally, the sole arbitrator considered lines of reasoning and, on the other
Arbitration Web site, and Decision on that in assessing whether there was a hand, not contravening the object and
Jurisdiction, July 6, 2007, para. 116, significant contribution to the economic purpose of the ICSID convention by
available on the Energy Charter Web site, development of the host state, a political or giving excessive weight to the parties
respectively). cultural benefit should not be taken into understanding of the scope of
The proponents of this approach consider account. In that respect it was decided that investment, for example in situations
that there is a genuine definition of the contribution to the economic where the parties would want a mere
investment and thus the analysis of whether development of the host state should be not sale-purchase transaction to qualify as
there is an investment within the meaning only significant, but also positive and an investment under the convention.
of the convention cannot depend on the lasting.
recognition of variable characteristics or On this basis, the sole arbitrator Conclusion
features typically found in an investment. dismissed the claim and found that it had
The arbitral decisions that follow this line This is the reason why, in the
no jurisdiction under the convention. The authors view, this approach is the most
of reasoning observe that Article 25(1) has extreme positions adopted in this decision
an autonomous meaning under the faithful to both the text and the intention
have been generally criticized. It can be of the drafters of the ICSID convention.
convention and reject the purely subjective argued that the inclusion of the qualitative
approach, pursuant to which an investment and quantitative thresholds finds no
is whatever the parties understood it to be. support in the text of convention or in its
Following the test set forth by the travaux preparatoires. It can further be
arbitral tribunal in Salini v. Morocco, this argued that this extreme approach is
line of decisions require an investment contrary to the ordinary meaning of the
under Article 25(1) to meet several set term investment and is completely at
criteria. However, the number of criteria odds with the spirit as well as the object
vary from one decision to another. Some and purpose of the convention.
arbitral tribunals, adhering to the Salini test,
require that a transaction satisfy a four-fold Criteria Limited in Number
test, namely contribution, risk, duration and
contribution to the economic development The third line of reasoning can be
of the host state. Other decisions raise the characterized as a traditional or classical
number of elements to five by requiring that approach to the definition of investment. It
the contribution to the economic recognizes the need to satisfy both the
development of the host state be significant. objective requirement of an investment
The requirement of an ever-increasing within the meaning of the convention and
number of criteria has resulted in an the requirement of an investment under the
excessively restrictive definition of applicable instrument.
investment. The decision of the sole It considers that there are objective
arbitrator in Malaysian Historical Salvors criteria that must be satisfied to find an
(MHS), SDN, BHD v. Malaysia illustrates investment but that the analysis must be a ___________________________________
this point (Decision on Jurisdiction, nonrestrictive one. In this respect, it retains Reprinted with permission from the December 31,
May 17, 2007, paras. 119-146, available on the three following criteria: contribution, 2008 edition of the NEW YORK LAW
the ICSID Web site). The sole arbitrator in risk and a certain duration. JOURNAL 2008 ALM Properties, Inc. All
that case considered that he should not only Under this approach, the contribution to rights reserved. Further duplication without
follow the four-fold analysis in the Salini the economic development of the host state permission is prohibited. For information, contact
877-257-3382 or reprints-
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dimension to such analysis. He decided that the reference to the wording economic now Incisive Media, www.incisivemedia.com
although MHS had made a contribution, its development in the conventions preamble # 070-12-08-0039