This blog post is going to concentrate on debt related financial instruments in light of the “investment” definition by investor-state tribunals. I will first very briefly address decisions, which have dealt with these questions before (II.). I will then present the view of the Deutsche tribunal [Deutsche Bank AG v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/09/2, Award of 23 October 2012 (“Deutsche”)] and comment on it (III.).
II. Previous Awards
It was firstly the Fedax tribunal [Fedax N.V. v. The Republic of Venezuela, ICSID Case No. ARB/96/3, Decision on Jurisdiction of 11 July 1997 (“Fedax”)], which had to deal with promissory notes as a type of debt obligation in light of the investment criterion under the Netherlands/Venezuela BIT. The tribunal found that the endorsement of the promissory notes to Claimant did not deprive it of its investment-like nature. It is however important to note that promissory notes in Fedax were issued in connection with a contract made with a Venezuelan corporation Industrias Metalúrgicas Van Dam C.A. and thus were linked to a specific enterprise in the respondent state- Venezuela.
Secondly, the CSOB tribunal [Ceskoslovenska Obchodni Banka, A.S. v. The Slovak Republic, ICSID Case No. ARB/97/4, Decision on Jurisdiction of 24 May 1999 (“CSOB”)] similarly concluded that loans were an investment although they were not expressly included in article 1 of the Slovakia/Czech BIT. These loans were important to the Slovak banking system because without them, the privatization of one of the most influential banks would not have been possible. They were therefore also very closely linked to an undertaking in the host state- a collection company, which was the recipient of CSOB’s loan portfolio receivables.
Thirdly, it is the Abaclat [Abaclat and others v. Argentina, ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility of 4 August 2011 (“Abaclat”)] and Ambiente Ufficio awards [Ambiente Ufficio S.p.A. and others v. Argentina, ICSID Case No. ARB/08/9, Decision on Jurisdiction and Admissibility of 8 February 2013 (“Ambiente Ufficio”)], which emanated from the same set of facts. The claimants in these cases purchased security entitlements related to bonds issued by Argentina. Argentina, affected by a financial crises, offered its bondholders new bonds with a significant haircut. The ones who held on to their bonds (i.e. security entitlements) were then affected by state legislation depriving them of significant parts of their investments brought a claim against Argentina under the Italy/Argentina BIT. The tribunals in both cases concluded that they had jurisdiction because security entitlements constituted investments. It is perhaps noteworthy that the Ambiente Ufficio tribunal extensively relied on the reasoning of the Abaclat tribunal.
III. Interpretation of Investment in Deutsche
There were no bonds involved in Deutsche, the tribunal was faced with a question whether the Hedging agreement concluded between Deutsche Bank and the Ceylon Petroleum Corporation (“CPC”), which is a state entity of Sri Lanka, constituted an investment. The aim of this derivative agreement was to protect Sri Lanka from the impact of the rising prices in oil. In the words of the tribunal:
“Where the Monthly Oil Price was greater than the Strike Price, Deutsche Bank was obliged to pay CPC the difference between the Strike Price and the Monthly Oil Price (up to a maximum price difference of USD10 per barrel), multiplied by the Strike Volume. Where the Monthly Oil Price was lower than the Strike Price, CPC was obliged to pay Deutsche Bank the difference between the Strike Price and the Monthly Oil Price multiplied by the Strike Volume.” (Deutsche, par. 14)
Sri Lanka had breached this contract. Apart from the breach of contract, the Supreme Court of Sri Lanka ordered CPC to suspend all payments under the Hedging Agreement. Additionally, the Central Bank of Sri Lanka instigated investigations where it questioned the propriety of the Hedging Agreement. After this development, an ICSID claim by Deutsche Bank soon followed.
Now I have the chance to turn to the point, where the tribunal tackled the Hedging Agreement against the definition of investment in the Germany/Sri Lanka BIT (a) and in light of article 25 of ICSID (b) (Deutsche, par. 283 et seq.).
a. Germany/Sri Lanka BIT
Article 1 of the Germany/Sri Lanka BIT provides that “investments” include “every kind of asset” and introduces a non-exclusive list of illustrative categories including “c) claims to money which have been used to create an economic value or claims to any performance having an economic value and associated with an investment”. The tribunal did not agree with Sri Lanka that a claim to money must be associated with a separate investment because it would lead to a circular reasoning (Deutsche, par. 286).
Here a distinction must be drawn between Fedax and CSOB on the one hand and investment in Deutsche on the other hand. I believe that loans in the former cases would fit the “claims to money which have been used to create an economic value” because they were connected with a legitimate undertaking in the host state. More importantly, it can also be distinguished from Abaclat of Ambiente Ufficio where a significant payment was made to the host state when the investment started, i.e. at the time of the issuance of bonds. All of these investment created “an economic value”. The same cannot be said about the investment in Deutsche, where no money was invested under the Hedging Agreement. It only regarded potential payments based on changes in the prices of oil.
Therefore I believe that the definition under article 1 of the Germany/Sri Lanka BIT was stretched too far. It would not catch the eye so much, had there been a proper reasoning, however referring to Sri Lanka’s argument as “circular” does not seem to be enough.
The same can be said about analysis of the territoriality argument. The Deutsche tribunal adopted the reasoning from Abaclat, where financial instruments are involved as investments, a territorial nexus must be interpreted accordingly. In other words:
“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 where (sic) the invested funds ultimately made available to the Host State and did they support the latter’s economic development.” (Abaclat, par. 374)
Again, a significant contribution to Argentina’s economy happened because payments for the purchased bonds were in a lump sum at the time of their issuance. Deutsche Bank has made single payment of USD 35,523.81 because the oil prices went above the agreed “strike” price. After that, the prices plummeted and it was CPS’s turn to make payments until it ran out of money. This, in my opinion, cannot be analogous to the payments for bonds made in Abaclat or Ambiente Ufficio (although these were originally made by underwriters, not the investors themselves). There can be no question that there is no impact of Deutsche Bank’s investment in the territory of Sri Lanka or that there were “funds made available“.
Article 25 of ICSID
The tribunal held that the Salini criteria are not of jurisdictional nature and only offer benchmarks in determining whether there is an investment in each case (Deutsche, par. 294 and 295). It then considered three of them, which it analyzed in detail: contribution, risk and duration (similarly in Saba Fakes v. The Republic of Turkey, ICSID Case No. ARB/07/20, Award of 14 July 2010 or Consorzio Groupement L.E.S.I.-Dipenta v. People’s Democratic Republic of Algeria, ICSID Case No. ARB/03/08, Award of 10 January 2005). I fully endorse this view and feel that there is a reason why the ICSID Convention does not contain a definition of investment- the authors did not want to include one. There is therefore no need to apply specific criteria as jurisdictional bars. I argue that each business activity must be analysed on a case-by-case basis and if a tribunal is in doubt as to whether an investment under a specific BIT would be in line with the decisions of previous investment treaty tribunals, it should check it against the Salini criteria. But again, use them merely as benchmarks like it was done by the Deutsche tribunal.
Although I am no expert in the field, I again have to address the contribution “benchmark”. In the words of the tribunal “Deutsche Bank immediately committed to pay USD 2.5 million if CPC’s costs of importing oil remained above USD 112.50 per barrel” (Deutsche, par. 298). However, in reality, it has only contributed by USD 35,523.81 and then profited from the Hedging Agreement. Moreover, contributing resources by engaging in “over two years of regular meetings, negotiations and correspondence with CPC and the Central Bank“ (Deutsche, par. 300) is, in my opinion, not relevant for the determination of investment. A mega-institution like Deutsche Bank surely conducts many negotiations of commercial contracts around the world and it is only logical that not all of them are successfully closed in the end. To state that such negotiations constitute contribution in this sense seems a bit of a stretch to me.
Lastly, the tribunal noted that the Hedging agreement contained “special features”, which distinguish it from ordinary commercial contracts (Deutsche, par. 310). At this point I have to endorse the view of Makhdoom Ali Khan from his dissenting opinion, who has stated that almost all commercial contracts contain some special features and not all of them would be considered as investments (Makhdoom Ali Khan, Dissenting opinion in Deutsche, par. 71).
I am convinced that I have shown the differences between the underlying facts of Deutsche on the one hand and other cases dealing with similar situations on the other hand. The facts that Deutsche Bank has not made a real contribution in Sri Lanka through the Hedging Agreement, that even if there was some contribution, it was not in the territory of Sri Lanka and then lastly that its financial activities were not linked to a certain business undertaking in Sri Lanka were not fully analyzed by the tribunal. All of the issues were mentioned but the reasoning lacks persuasiveness and for me stretches the interpretation of the term investment a step further than previous tribunals.
written by Peter Plachy