International Challenges in Investment Arbitration

Mesut Akbaba, Giancarlo Capurro

• Publisher: Routledge
• Year: 2018
• Print ISBN: 9781138298729
• eBook ISBN: 9781351580120
• Edition: 1
• Topic: Law
• Subtopic: Investments & Securities
• Index: Law

As the proverbial workhorse of international economic law, investment arbitration is heavily relied upon around the globe. It has to cope with the demands of increasingly complex proceedings. At the same time, investment arbitration has come under close public scrutiny in the midst of heated political debate. Both of these factors have led to the field of investment protection being subject to continuous changes. Therefore, it presents an abundance of challenges in its interpretation and application. While these challenges are often deeply rooted in the doctrinal foundations of international law, they similarly surface during live arbitral proceedings.

International Challenges in Investment Arbitration serves not only as a collection of recently debated issues in investment law; it also deals with the underlying fundamental questions at the intersection of investment arbitration and international law. The book is the product of the 1st Bucerius Law Journal Conference on International Investment Law & Arbitration. It combines the current state of knowledge, new perspectives on the topic as well as practical issues and will be of interest to researchers, academics and practitioners in the fields of international investment law, international economic law, regulation and comparative law.

Part I

The State in International and Investment Law

1 Rethinking the Relevance of Customary International Law to Issues of Nationality in Investment Treaty Arbitration

Javier García Olmedo ¹

A. Introduction

The investor-state arbitration regime is based on the principle that its protections only extend to individuals and corporations who are nationals of the home state. The nationality of the investor is therefore decisive to determine the jurisdiction ratione personae of arbitral tribunals and the entitlement to benefit from the treaty. However, despite being a necessary condition to enforce treaty obligations, most investment treaties contain broad nationality definitions only requiring that an individual be a national of his or her putative home state, or that a company be incorporated in that state. ²

The often-sparse wording of nationality requirements increases the risk that investors push the boundaries of legitimate investment protection in the event of a dispute with the host state. This may occur in cases where, for instance, a company based on a third state or the host state incorporates a shell company in the home state to gain access to the dispute settlement mechanisms available in the relevant investment treaty. Broad nationality requirements may also allow an individual to benefit from treaty protection even though he or she simultaneously holds the nationality of the respondent host state (ie a dual national) and has overwhelmingly stronger links with that state. In such cases, it becomes apparent that treaty protection would ultimately be afforded to nationals that were not intended to be covered by the treaty. It should be reminded that the purpose of investment treaties is to protect reciprocal flows of investments made by nationals of the home state, that is to say, foreign investors.

In cases where the claimant’s ties to its purported home state have been attenuated, respondent states have objected to the jurisdiction of arbitral tribunals. In doing so, states have argued that nationality requirements under investment treaties need to be supplemented by other sources of international law, such as the rules of customary international law governing nationality in the context of diplomatic protection. These rules provide a higher threshold for the nationality of corporations and individuals by requiring, for instance, the existence of a ‘genuine connection’ between the home state and the corporation or by limiting protection in cases where an individual investor holds the nationality of the host state.

If the customary law principles of nationality were to be applied in investor-state arbitration, investors whose (foreign) nationality is more nominal than real would probably be denied access to international arbitration. This leads into the much-debated question of whether, and if so to what extent, the formalistic conception of nationality for juridical and natural persons employed in most investment treaties should be understood to encompass the same objectives as for the nationality rules of diplomatic protection.

All too frequently, this question has been examined by reference to the distinct nature of diplomatic protection and investor-state arbitration. In this respect, arbitral tribunals have generally considered that the rules deriving from the inter-state system of diplomatic protection cannot be imported into a field where investors are entitled to enforce their own rights without the intervention of states. That is, investment treaties constitute a lex specialis which, by enabling investors to directly access dispute settlement in the form of arbitration, departs from the customary law of diplomatic protection.

A recent example of arbitrators’ general reluctance to import the customary rules of nationality into the investment regime includes a claim brought by Turkish national Cem Cengiz Uzan against Turkey under the Energy Charter Treaty (ECT). ³ In that case, unsurprisingly, Turkey objected the tribunal’s jurisdiction on the grounds that, pursuant to the customary international law of diplomatic protection, a natural person is precluded from bringing a treaty claim against a state of which he is a national. The tribunal rejected this objection and found that, since there was no explicit provision in the ECT expressly excluding claims against the state of nationality, Mr Uzan was entitled to sue his own state. In other words, the tribunal considered that the determination of nationality for investment treaty purposes should be examined solely by reference to the terms of the treaty.

This article argues that the time has come to provide a more balanced approach regarding the position of the diplomatic protection rules of nationality amidst the investment treaty regime. While it is true that the lex specialis language of investment treaties plays a fundamental role in resolving investment disputes, this does mean that non-treaty rules of general international law have become irrelevant. Broad nationality requirements may prove insufficient in fulfilling the objective of investment treaties to protect foreign investment. In this regard, the author is of the view that the (more restrictive) customary rules on nationality are better equipped to ensure compliance with this objective. When interpreting nationality definitions, arbitral tribunals may consider relying on these rules when necessary to prevent investors who have a tenuous connection to the home state from misusing the entitlements granted in the treaty.

To substantiate this proposition, this contribution attempts to show that diplomatic protection and investor-state arbitration share certain fundamental elements that integrate the rules established under both systems. For one, the right to diplomatic protection and the operation of investment treaties are both dependent upon the link of nationality between the investor and the home state. This means that investors claiming under investment treaties and those seeking diplomatic protection share a similar legal status in the international plane. More fundamentally, it will be suggested that, as with diplomatic protection, the rights asserted under investment treaties also belong to the home state of the investor. This is demonstrated, inter alia, by the fact that investment treaties enable states to bring diplomatic protection claims on behalf of investors.

These elements of integration show that the customary international law of diplomatic protection and international investment law co-exist in parallel. As such, derogation from the customary rules of nationality should be accepted to the extent that the contracting parties have so required in the treaty.

B. The International Recognition of Nationality: Diplomatic Protection and Investment Treaty Arbitration Compared

By way of introduction, nationality can be defined as the ‘legal bond [between an individual and a state] having as its basis a social fact of attachment, a genuine connection of existence, interests and sentiments, together with the existence of reciprocal rights and duties’. ⁴ It follows from this definition that the primary function of nationality is to determine who is a national of a given state. In this connection, the general rule is that a state has autonomy in conferring its nationality pursuant to its own domestic legislation. ⁵

Yet, in addition to linking an individual to a particular state, nationality may have international consequences. Examples include: entitlement to the exercise of diplomatic protection and the enforcement of treaty rights. The question then arises whether a nationality acquired at the domestic level is entitled to automatic recognition and effect on the international plane. Formulated differently, is the mere possession of a nationality sufficient to be protected under international law?

It is generally admitted that, whilst states are free to legislate matters concerning the attribution of nationality, it is for international law to determine the international effects of such attribution. ⁶ So what are the limits imposed by international law? The limitations that international law imposes on the recognition of nationality are those reflected in the reservation of Article 1 of the 1930 Hague Convention on Certain Questions Relating to the Conflict of Nationality Laws (the Hague Convention). This provision provides that the state’s discretion to confer its nationality ‘shall be recognised by other States in so far as it is consistent with international conventions, international custom, and the principles of law generally recognised with regard to nationality’. ⁷ The efficacy of nationality on an international level is therefore contingent upon the conformity of its attribution and invocation with international law requirements. ⁸ The following paragraphs are confined to a brief examination of these requirements for the purposes of diplomatic protection and investment treaty arbitration.

I. Nationality and Diplomatic Protection

It is a fundamental principle of customary international law that a state is entitled to protect its nationals when harmed by wrongful acts committed by other states. ⁹ Before the proliferation of investment treaties, the international remedy most commonly used for the protection of aliens and their property was diplomatic protection. This remedy may be defined as ‘the procedure employed by the State of nationality of the injured person to secure protection of that person and to obtain reparation for the internationally wrongful act inflicted’. ¹⁰

It follows from that definition that a state can only protect a person, whether a natural or juridical, that holds its nationality. ¹¹ This rule, commonly known as the nationality of claims rule, can be found in the Draft Articles on Diplomatic Protection adopted by the International Law Commission in 2006 (the ILC Draft Articles). ¹² These Articles codify existing customary international law on nationality and the exhaustion of local remedies. ¹³ Article 3 confirms that ‘the State entitled to exercise diplomatic protection is the State of nationality’. ¹⁴ For a natural person, ‘the State of nationality means the State whose nationality that person has acquired, in accordance with the law of that State’. ¹⁵ For a legal person, ‘the State of nationality means the State under whose law the corporation was incorporated’. ¹⁶ The ILC places particular emphasis on the bond of nationality between state and national as a fundamental requirement for the entitlement to diplomatic protection. ¹⁷

However, the fact that a person holds the nationality of the espousing state does not always result in that state being entitled to pursue a claim. International law may render unenforceable the right to diplomatic protection if the conferral or invocation of a nationality fails to abide by the relevant rules of international law. ¹⁸ The ILC Draft Articles deal with the requirements for the international recognition of nationality in Articles 4 to 7 (for natural persons) and 9 to 13 (for legal persons). Space constraints naturally preclude a comprehensive examination of all of these requirements. The focus here is ther...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of Figures
• List of Tables
• List of contributors
• Preface
• PART I: The State in International and Investment Law
• PART II: Investment Arbitration and the European Legal Order
• PART III: Practical Issues in Investor State Proceedings
• Index