Jurisdiction is an essential precondition to an arbitral tribunal’s ability to resolve an investment dispute between an investor and a host state. The issue of jurisdiction is primarily determined by reference to the relevant investment instrument that gives authority to the tribunal (i.e., an investment treaty, domestic foreign investment law or the parties’ arbitration agreement). Some elements are important in establishing the jurisdiction of an arbitral tribunal. For example, the tribunal is expected to determine whether the parties (i.e., the investor and host state) have consented to submit the dispute to arbitration, whether the party instituting the claim is a covered investor, and whether the transactions that give rise to the claim qualify as a covered investment in the territory of the host state. These elements are discussed in this chapter.
Establishing consent to arbitration
The consent of the host state and investor is the bedrock of the arbitral tribunal’s jurisdiction and lies in the parties’ common intention and agreement to submit any dispute arising in their relationship to arbitration. In simple words, the parties’ consent confers jurisdiction to the arbitral tribunal. It must, therefore, be established that the host state and investor have given their unequivocal consent to submit a dispute to arbitration.
Consent to arbitration can take varying forms so long as it is clear and free from coercion, fraudulent inducement or mistake. Also, consent shall not be presumed in the face of ambiguity – it must, instead, be established – and it has been held that the burden of establishing consent ‘lies primarily upon the claimant’.
The consent of the host state typically takes the form of an offer in an investment treaty, a domestic investment law or an arbitration agreement between the parties. Indeed, the host state can provide conditions under which consent will be given (for example, a good-faith attempt by the investor to settle the dispute amicably) or limit its consent to specific investments or disputes that meet the characteristics indicated by it (for instance, limiting its consent to disputes arising out of an alleged act of expropriation).
Also, it must be determined that the investor has given its consent to arbitrate. Normally, the request for arbitration (or notice of arbitration) is considered to qualify as the consent of the investor. Therefore, when a request or notice is delivered by the investor, it is deemed that the investor has accepted the offer to arbitrate by the host state contained in an investment treaty, domestic foreign investment law or an arbitration agreement.
Note that neither the investor nor the host state can unilaterally rescind or withdraw consent once it has been granted and perfected. The unilateral irrevocability rule is founded on the idea that once a contract is finalised, it becomes a binding agreement between the parties. The irrevocability of consent, however, applies once the consent has been completed and does not prohibit the parties from mutually rescinding their consent.
Personal jurisdiction: ‘covered investor’
Another important element that goes to the root of an arbitral tribunal’s jurisdiction is the determination of whether the investment dispute arises between the proper parties (i.e., a covered investor and a host state). If, for instance, the proposed claimant does not qualify as an investor under the relevant instrument (i.e., an investment treaty, investment law or contract), the arbitral tribunal would lack the jurisdiction to act.
The covered investor can either be a natural or a juridical person. In relation to natural investors, most investment treaties define a qualified investor by reference to the person’s state of origin or nationality, while others define a covered investor by reference to either the nationality or permanent residency of the individual. Hence, to qualify as a covered investor under the relevant investment treaty, it suffices for the investor to be a national of or (if applicable) permanently reside in the other contracting party’s state (i.e., the home state). A natural person, that is a national of the host state, generally cannot bring a claim against the host state on the basis of an investment treaty.
Regarding corporate or juridical investors, most investment treaties provide all or either of the following yardsticks for assessing the nationality of a corporate investor: the place of incorporation; the place of constitution in accordance with the law in force in the country; the nationality of the controlling persons; and the location of the place of administration or management (or the seat of the corporation). Satisfying one criterion, or a combination of two or more, would suffice to establish nationality.
It is also important to establish that the respondent state is the host state where the investment was made and a contracting party to the applicable investment treaty or, if applicable, a party to the relevant investment agreement with the investor. Hence, if a host state is not one of the contracting parties to an investment treaty or contract the tribunal may have no jurisdiction to determine the dispute.
Subject-matter jurisdiction: ‘covered investment’
To ascertain whether the arbitral tribunal has subject-matter jurisdiction, it must be determined that there is a dispute or disagreement between an investor and a host state relating to a legal right or obligation contained in a relevant instrument (i.e., an investment treaty, investment legislation or a contract) that arises directly out of a covered investment. There must, therefore, be a connection between the parties’ dispute and the prospective claimant’s investment.
As a first step, it is important to establish that the interests of the investor qualify as a covered investment under the relevant instrument. If the qualifying investor’s interests in the host state do not qualify as an investment under the relevant instrument, the arbitral tribunal lacks the jurisdiction to act in relation to the claims.
The definition of ‘investment’ is, indeed, an important element of an arbitral tribunal’s jurisdiction and a key feature in determining whether the substantive protections contained in the relevant instrument are applicable. However, there is no generally accepted definition of investment under international investment law because investment treaties adopt varying approaches. Many adopt an open-ended, asset-based definition of investment, usually starting with ‘every kind of asset’ and followed by an illustrative, non-exhaustive list comprising different examples of assets. For instance, Article 1 of the China–Turkey Bilateral Investment Treaty (BIT) (2015) provides as follows:
The term ‘investment’ means every kind of asset, connected with business activities, invested by an investor of one Contracting Party in the territory of the other Contracting Party in conformity with its laws and regulations, and shall include in particular, but not exclusively: (a) movable and immovable property, as well as any other rights as mortgages, liens, pledges and any other similar rights; (b) reinvested returns, claims to money or any other rights having financial value related to an investment; (c) shares, stocks or any other form of participation in companies; (d) industrial and intellectual property rights such as patents, industrial designs, technical processes, as well as trademarks, goodwill, know-how and other similar rights; (e) business concessions conferred by law or by contract, including concessions related to natural resources; (f) rights under contracts, including turnkey, construction, management, production, or revenue sharing contracts . . .
Other investment treaties adopt an enterprise-based definition of investment. For example, Article 1 of the Morocco–Nigeria BIT (2016) defines investment as:
[a]n enterprise within the territory of one State established, acquired, expanded or operated, in good faith, by an investor of the other State in accordance with law of the Party in whose territory the investment is made taken together with the asset of the enterprise which contribute sustainable development of that Party and has the characteristics of an investment involving a commitment of capital or other similar resources, pending profit, risk-taking and certain duration. An enterprise will possess the following assets: a) Shares, stocks, debentures and other instruments of the enterprise or another enterprise; b) A debt security of another enterprise; c) Loans to an enterprise; d) Movable or immovable property and other property rights such as mortgages, liens or pledges; e) Claims to money or to any performance under contract having a financial value; f) Copyrights and intellectual property rights such as patents, trademarks, industrial designs and trade names, to the extent they are recognized under the law of the Host State; g) Rights conferred by law or under contract, including licenses to cultivate, extract or exploit natural resources.
Newer investment treaties also require the investment to have specified characteristics by seeking to limit the scope of covered investments, instead of embracing broad, open-ended definitions. For example, Article 1 of the Slovakia Model BIT (2019) provides that investment means a specified list of assets that:
[a]n investor owns or controls, directly or indirectly, that has the characteristics of an investment, inter alia, the commitment of capital or other resources, the expectation of gain or profit the assumption of risk, a certain duration and the investor performs via its investment substantial business activities in the Host State . . .
Some investment treaties expressly provide that the investment must be in accordance with the law of the host state. Hence, to the extent that the investment is contrary to the laws of the host state, some tribunals will not accept that it is covered and will declare lack of jurisdiction to act. However, other tribunals have taken the opposite view, insisting that conforming with the law of the host state is not an element of the definition of investment that affects the subject-matter jurisdiction of the tribunal.
Having established that the interests of the investor qualify as an investment under the relevant instrument, it must also be established that a dispute (i.e., a disagreement on a point of fact or law between an investor and a host state in relation to a covered investment) has arisen. Put differently, the investor and the host state must hold conflicting legal or factual views, or both, relating to the question of the performance or non-performance of a legal obligation arising in relation to an investment in the host state.
To sum up, the notion of investment and the existence of a legal dispute in relation to the investment are crucial in conferring or divesting arbitral tribunals of subject-matter jurisdiction.
Most investment treaties provide that a qualified investment is one that is made in the territory of the respondent host state. For example, Article 1(f) of the Canada–Venezuela BIT (1996) provides that investment ‘means any kind of asset owned or controlled by an investor of one Contracting Party either directly or indirectly, including through an investor of a third state, in the territory of the other Contracting Party in accordance with the latter’s laws’.
Although some investment treaties do not expressly require that the investment will be made in the territory of the host state, a holistic interpretation of these treaties usually reveals that there is an implicit requirement that the investments need to be in the territory of the host state to enjoy the protections of the treaty. For example, although Article 1(1) of the Sweden–Egypt BIT (1978) does not expressly require that a protected investment needs to be made within the territory of the host state, Article 2(2) of the treaty provides that ‘investments by nationals or companies of either Contracting State on the territory of the other Contracting State shall not be subjected to a treatment less favourable than that accorded to investments by nationals or companies of third States’. Therefore, establishing that the investment in question was made in the territory of the respondent host state is generally crucial in determining whether an arbitral tribunal can assume jurisdiction in relation to the claim.
Sovereignty over the boundaries of the host state is usually relevant in determining whether the investment was, indeed, made in the territory of the respondent host state, particularly in instances where the boundaries of the host state are subject to disputes arising from succession, annexation or other territorial issues. The specific ways that arbitral tribunals address these disputes vary. For example, a tribunal may take the view that no territorial dispute arises in the circumstances and proceed on that basis, or that ‘territory’ should be interpreted by reference to the time when the applicable investment treaty was signed or came into force, or interpret ‘territory’ as the jurisdiction where the host state has control over, in line with the object and purpose of the relevant investment treaty, among others. In any event, it is important for a tribunal to approach these issues with care, given that delving into a territorial dispute between state parties, in whole or in part, instead of an investment dispute between a covered investor and the relevant host state, will amount to a tribunal acting outside its subject-matter and personal jurisdiction.
It is easier to determine the ‘territory’ in which a tangible investment (for example, factories and oil fields) is made than it is to determine the territory for intangible assets. In identifying the territorial requirement in relation to monetary investments, for instance, the tribunal in Abaclat v. Argentina observed that:
With regard to an investment of a purely financial nature, the relevant criteria cannot be the same as those applying to an investment consisting of business operations and/or involving manpower and property. With regard to investments of a purely financial nature, the relevant criteria should be where and/or for the benefit of whom the funds are ultimately used, and not the place where the funds were paid out or transferred. Thus, the relevant question is were the invested funds ultimately made available to the Host State and did they support the latter’s economic development? This is also the view taken by other arbitral tribunals.
Tribunals have therefore held that indirect investments are generally protected and can satisfy the territoriality requirement. Also, there is no requirement for a movement or flow of capital or value into the host state’s borders, so long as the ultimate beneficiary of the investment is the host state.
Overall, satisfying the temporal jurisdiction of an arbitral tribunal depends on the nature and definition of the investment under the relevant instrument.
The period within which the alleged breach of an obligation occurred and the time of instituting a claim are essential in determining whether an arbitral tribunal has the authority to adjudicate an investment dispute between an investor and a host state. In determining the role of timing in the jurisdiction of arbitral tribunals, reference is typically made to the wording of the relevant instrument (i.e., the investment treaty, investment legislation or investment contract) or customary international law.
For instance, most investment treaties expressly state that they cover investments made prior to the entry into force of the relevant treaty or after its entry into force. In circumstances where investment treaties do not contain express provisions in this regard, there is no consensus on whether investments are covered by the investment treaty. While some hold the view that these investments are covered, a few tribunals have held otherwise, insisting that investments made prior to the entry into force of the investment treaty are not covered by the provisions of the investment treaty. Further, if the investment did not exist before the host state’s alleged measure that amounted to a breach of the treaty, it is settled that a tribunal has no temporal jurisdiction to determine the dispute.
It has also been held that an investment treaty will not, in the absence of clear wording to the contrary in the treaty, apply retroactively to measures or acts that occurred before the treaty came into force. Nonetheless, facts that occurred before the entry into force of a treaty have, in certain instances, been taken into consideration in determining whether the treaty was subsequently breached (for example, for the purpose of understanding the background to the dispute, causal links and details of the alleged breach).
There are, however, generally accepted exceptions to the principle of non-retroactivity. For instance, the principle of retroactivity may not apply to an action of a host state that constitutes a continuous or composite act. A continuous act has been defined as a single act that extends over the entire time during which the act continues to breach an international obligation. A composite act is made up of a ‘series of actions or omissions defined in aggregate as wrongful’. Note, however, that a ‘composite act’ does not crystallise until the last portion of the series of acts or omissions that constitute the alleged breach under the investment treaty occurs. Nevertheless, there does not seem to be an agreed position on the extent of the relevance of continuous and composite acts. For instance, while some tribunals take the view that continuous or composite acts before the treaty enters into force are relevant only as factual background, others have opted for the opposite position and have appeared to give these acts more weight and relevance beyond merely setting out the factual background.
Some investment treaties provide a time frame within which a claim must be instituted against the host state in the event of an alleged breach. The recent United States–Mexico–Canada Agreement, for example, provides that ‘an investor may not claim if more than four years have elapsed from the date on which the investor first acquired, or should have first acquired knowledge of the alleged breach and knowledge that the investor has incurred loss or damage’. While some tribunals have enforced the limitation period strictly and held that it is ‘“clear and rigid” and it is not subject to any suspension, prolongation or other qualification’, others have hinted that the limitation period may be renewed (in relation to continuing breaches) or suspended for deserving circumstances. If an investment treaty is silent on the point, tribunals typically apply the principles of customary international law in deciding the issue, and lean towards allowing such claims unless the claimant was so dilatory and negligent that it would be inequitable to consider its claim.
A tribunal may also have jurisdiction over a claim arising after a treaty has been terminated. Usually, the termination of an investment treaty does not end its protections and obligations forthwith. Sunset clauses in investment treaties often offer continued protection for investment after the termination of a treaty, usually between 10 and 15 years, and can extend up to 20 years. For example, the Nigeria–China BIT (2001) stipulates post-treaty protection of 10 years, while the United Kingdom–China BIT (1986) provides for post-termination treaty protection of 15 years.
As seen in the foregoing discussions, the jurisdiction of the arbitral tribunal is a vital element in investment arbitration. All aspects of jurisdiction need to be considered, including subject-matter, personal, territorial and temporal jurisdiction. These varying facets of jurisdiction, including consent to arbitration, need to be analysed before taking steps to institute an arbitration claim, and that analysis should be carried out in a timely manner and with clarity against the backdrop of the relevant investment instrument upon which the prospective investment arbitration would be founded.