Transnational Construction Arbitration

Renato Nazzini

Document

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CHAPTER 8 Construction contracts as ‘investments’ for the purposes of investment treaty arbitrations

Virginie Colaiuta William Laurence Craig

Introduction

8.1 Bilateral and multilateral investment treaties confer on foreign investors and investments important protections and rights. By relying on investment treaties, investors are offered an alternative avenue of redress when they operate in foreign countries and suffer damages as a result of government interference and unfair measures defined in the treaty. Most investment treaties allow foreign investors the right to bring a claim for compensation directly against the host state in arbitration proceedings whenever the latter has violated the protections promised in the treaty with respect to foreign investments. Arbitration proceedings may be commenced even if the investor is not a party to a contract with the host state or a state entity. As construction companies are increasingly involved in projects located outside of their home countries, investment treaties may significantly improve the protection of their businesses. 8.2 Whether a construction contract would constitute a foreign ‘investment’ thus entitling construction companies to bring a claim against the host state on the basis of investment treaties has long been the subject of dispute. This chapter addresses the circumstances in which construction contracts may or may not meet the important and crucial jurisdictional threshold of being deemed foreign ‘investments’ for the purposes of commencing arbitration proceedings based on investment treaties. More specifically, the methodology employed for the purposes of ICSID arbitration proceedings will be explored. 8.3 Paragraphs 8.4–8.25 look at the relevant definitions of ‘investment’ generally in bilateral investment treaties and in the ICSID Convention, while paragraphs 8.26–8.45 examine the application of such definitions to claims relating to construction contracts and, in particular, the circumstances in which such contracts have been deemed to be an investment, and others where they have not, or risk not being, considered as investments. Paragraphs 8.46–8.48 set out the conclusions of the analysis.

Definition of ‘investment’

Foreign investments in proceedings conducted according to the ICSID Convention

8.4 The biggest contribution to secure a foreign investor’s right to bring arbitral proceedings against the foreign state was the entering into effect in 1966 of the Convention on the Settlement of Investment Dispute between States and Nationals of Other States

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(the Washington Convention or ICSID Convention). That convention (to which there are now 161 signatories) established an International Centre for the Settlement of Investment Disputes, whose seat is in Washington DC, and whose purpose is to provide a binding arbitration process exempt from any review or contact from national courts. Moreover, the awards are required to be treated by national courts as if they had been final judgments of the courts of a constituent state.1 Such a forum provided a procedural gateway, until then missing, for investment disputes between a state and a foreign national.2 8.5 According to Article 25 of the Convention, the jurisdiction of the Centre extends to ‘any legal dispute, arising directly out of an investment, between a Contracting State … and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre’.3 8.6 Accordingly, it was made perfectly clear in the text of the Convention and in its travaux préparatoires that the mere signature and adherence by the state to the Washington Convention did not constitute consent to arbitrate by itself. Something more was needed. It was intended at the time that, by a separate arbitration clause in the investment agreement, the parties would specifically agree to submit their dispute to ICSID arbitration.4 Moreover, such inclusion would imply that the contracted-for agreement would relate to an ‘investment’.5 8.7 While parties may occasionally agree to submit their dispute to ICSID in a bilateral agreement, the greatest source of adhesion to ICSID arbitration may be found in state-to-state investment treaties (bilateral investment agreements or BITs) in which a state will secure for its national investors the right to bring ICSID arbitration against the host state. These investment treaties will supply their own definitions of and protection for protected investments. 8.8 More than 2,000 BITs as well as numerous multilateral investment agreements (like the Energy Charter for instance) are estimated to be in force today. 8.9 For the purposes of ICSID arbitration proceedings, the tribunal will generally adopt a twofold analysis to establish whether the requirements for an ‘investment’ have been satisfied. This analysis has been referred to as the ‘double keyhole approach’.6 Under this analysis, to determine whether an investment exists, a tribunal must determine both:

(a) whether the activity falls within the scope of an ‘investment’ as defined in the relevant treaty; and
(b) whether the activity constitute an ‘investment’ within the criteria developed for the purposes of the ICSID Convention.7

8.10 Accordingly, the term ‘investment’ as defined in investment treaties and as understood by the ICSID Convention will be examined in more detail below.

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Definitions of foreign investment in investment treaties

8.11 Only foreign ‘investments’ and ‘investors’ within the definitions given by investment treaties are entitled to protection under the treaties.8 Due to the differences in the definition provided by each investment treaty, a case-by-case analysis is necessary to establish whether a particular activity constitutes an investment.9 8.12 Bilateral and multilateral treaties have defined foreign ‘investments’ in a variety of ways. For example Article 1(6) of the Energy Charter Treaty provides that investment means:

(a) every kind of asset (e.g. shares, claims to money, intellectual property, licenses, concession) owned or controlled directly or indirectly by an Investor and includes:
- (i) tangible and intangible, and movable and immovable, property, and any property rights such as leases, mortgages, liens, and pledges;
- (ii) a company or business enterprise, or shares, stock, or other forms of equity participation in a company or business enterprise, and bonds and other debt of a company or business enterprise;
- (iii) claims to money and claims to performance pursuant to contract having an economic value and associated with an Investment;
- (iv) Intellectual Property;
- (v) Returns;
- (vi) any right conferred by law or contract or by virtue of any licences and permits granted pursuant to law to undertake any Economic Activity in the Energy Sector.

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