A. The trend towards an objective meaning in the practice of investment tribunals

• 6. Investment tribunals have increasingly accepted that the meaning of investment in Article 25 ICSID Convention is objective and cannot be varied by the two parties to a bilateral investment treaty.Footnote ⁵ Even though a few tribunals continue to adhere to the “subjective” meaning of investment,Footnote ⁶ an increasing line of decisions finds that Article 25 ICSID Convention contains an “objective” meaning of investment,Footnote ⁷ including 12 of the 25 decisions summarised in this volume.Footnote ⁸ Accordingly, ICSID tribunals assess whether a transaction falls within Article 25 ICSID Convention’s own notion of “investment”. Some regard Article 25 ICSID Convention as a device to prevent the floodgates to ICSID arbitration from being opened.Footnote ⁹

• [Page 29] 7. This approach is also known as the “outer limits” test,Footnote ¹⁰ or a “double-barrelled test”.Footnote ¹¹ This is because tribunals assess, over and above the applicable investment treaty, whether the transaction qualifies as an investment under Article 25 ICSID Convention. The first leg (or barrel) is the investment treaty, whereas the second is Article 25 ICSID Convention. Accordingly, an investment treaty can restrict the subject matter scope of the ICSID Convention as regards the requirement of an investment but cannot expand it.Footnote ¹²

• 8. Table 1 summarises the cases reported in this volume. For each of the 21 cases (column 1), organised by year of the decision or award in ascending order (column 2), Table 1 shows:

  • a. the economic activity that the investor contended amounted to an investment (column 3);

  • b. whether the tribunal affirmed or declined jurisdiction (column 4);

  • c. the applicable arbitration rules, other than the ICSID Arbitration Rules (column 5);

  • d. whether an arbitrator dissented on jurisdiction (column 6); and

  • e. whether an ad hoc annulment committee annulled the jurisdictional finding of the tribunal (column 7).

    Table 1 Decisions of investment tribunals on the notion of investment

    

• 9. A few important awards on the notion of investment do not appear in this volume because they have already appeared in previous volumes of the ICSID Reports.Footnote ¹³ Examples include Fedax v. Venezuela,Footnote ¹⁴ Salini v. Morocco Footnote ¹⁵ – the originator of the Salini criteria examined below – and Joy Mining v. Egypt.Footnote ¹⁶

• 10. Whether there is a second barrel is significant because many investment treaties (mostly concluded in the 1990s and the 2000s) adopt a broad, asset-backed definition of investment with illustrative examples. This contrasts with the ICSID Convention of 1965. Depending on one’s views, either the ICSID Convention adopted a narrower view of what constitutes investment than the one found in most investment treaties, or the Convention did not adopt any definition at all.Footnote ¹⁷ Notably, investment treaties often include in their definition of investment [Page 32] “every kind of asset” and “claims to money”Footnote ¹⁸ or “obligations” and “any right of an economic nature granted by law or by contract”.Footnote ¹⁹ Remarkably, the definitions of investment in some investment treaties are circular,Footnote ²⁰ or mix forms of investment with rights associated with them.Footnote ²¹ The qualification of financial instruments as an investment by some tribunals illustrates the breadth of the typical definition found in investment treaties (see paras. 111–20 below).

• 11. Some investment treaties concluded in recent years expressly exclude certain transactions from the notion of investment. A good example is the “investment” definition in Article 8.1 of the EU–Canada Comprehensive Economic and Trade Agreement (CETA):Footnote ²²

  investment means every kind of asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, which includes a certain duration and other characteristics such as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk. Forms that an investment may take include:

  • (a) an enterprise;

  • (b) shares, stocks and other forms of equity participation in an enterprise;

  • (c) bonds, debentures and other debt instruments of an enterprise;

  • (d) a loan to an enterprise;

  • (e) any other kind of interest in an enterprise;

  • (f) an interest arising from:

    • (i) a concession conferred pursuant to the law of a Party or under a contract, including to search for, cultivate, extract or exploit natural resources,

    • (ii) a turnkey, construction, production or revenue-sharing contract; or

    • (iii) other similar contracts;

  • [Page 33] (g) intellectual property rights;

  • (h) other moveable property, tangible or intangible, or immovable property and related rights;

    • (i) claims to money or claims to performance under a contract.

  For greater certainty, claims to money does not include:

  • (a) claims to money that arise solely from commercial contracts for the sale of goods or services by a natural person or enterprise in the territory of a Party to a natural person or enterprise in the territory of the other Party.

  • (b) the domestic financing of such contracts; or

  • (c) any order, judgment, or arbitral award related to sub-subparagraph (a) or (b).

  Returns that are invested shall be treated as investments. Any alteration of the form in which assets are invested or reinvested does not affect their qualification as investment;

  investor means a Party, a natural person or an enterprise of a Party, other than a branch or a representative office, that seeks to make, is making or has made an investment in the territory of the other Party;

• 12. Article 8.1 CETA uses an asset-backed definition of investment (“every kind of asset”), coupled with illustrative examples of investments. However, it also contains some exclusions such as claims to money related to the delivery of goods or services, and associated judgments and awards. The definition also relies on characteristics of investments that Schreuer and the Salini tribunal identified (see below para. 47). In a similar vein, Article 14.1 United States–Mexico–Canada Agreement (USMCA) refers to “every asset … that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk”.Footnote ²³ That article further adds illustrative examples and exclusions such as “commercial contracts for the sale of goods or services”:

  investment means every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk. An investment may include:

  • (a) an enterprise;

  • (b) shares, stock and other forms of equity participation in an enterprise;

  • (c) bonds, debentures, other debt instruments, and loans;

    • [Footnote fn. 1: Some forms of debt, such as bonds, debentures, and long-term notes or loans, are more likely to have the characteristics of an investment, while other forms of debt, such as claims to payment that are immediately due, are less likely to have these characteristics.]

  • (d) futures, options, and other derivatives;

  • (e) turnkey, construction, management, production, concession, revenue-sharing, and other similar contracts;

  • (f) intellectual property rights;

  • [Page 34] (g) licenses, authorizations, permits, and similar rights conferred pursuant to a Party’s law; and

    • [Footnote fn. 2: Whether a particular type of license, authorization, permit, or similar instrument (including a concession to the extent that it has the nature of such an instrument) has the characteristics of an investment depends on such factors as the nature and extent of the rights that the holder has under a Party’s law. For greater certainty, among such instruments that do not have the characteristics of an investment are those that do not create any rights protected under the Party’s law. For greater certainty, the foregoing is without prejudice to whether any asset associated with such instruments has the characteristics of an investment.]

  • (h) other tangible or intangible, movable or immovable property, and related property rights, such as liens, mortgages, pledges, and leases,

  but investment does not mean:

  • (i) an order or judgment entered in a judicial or administrative action;

  • (j) claims to money that arise solely from:

    • (i) commercial contracts for the sale of goods or services by a natural person or enterprise in the territory of a Party to an enterprise in the territory of another Party, or

    • (ii) the extension of credit in connection with a commercial contract referred to in subparagraph (j)(i);

• 13. A similar approach can be found in definition of investment under the EU–Vietnam Investment Protection Agreement,Footnote ²⁴ which excludes “claims to money that arise solely from commercial contracts for the sale of goods or services … or any related order, judgement, or arbitral award”.Footnote ²⁵

• 14. By contrast, the India Model BIT excludes a wider range of transactions, including portfolio investment.Footnote ²⁶ For example, Article 2.4.1(iv) of the Brazil–India [Page 35] BIT states that “investment” does not include “portfolio investments of the enterprise or in another enterprise”.Footnote ²⁷ The India–Taiwan BIT also contains a similar definition and categorises portfolio investments as an ownership interest of less than 10 per cent.Footnote ²⁸ Similar to the above treaties, the India Model BIT and India’s treaties concluded thereafter rely on the elements of investments that Schreuer and the Salini tribunal identified or a variant thereof. Provided the purchases of shares amount to foreign direct investment, rather than portfolio investment, such transactions qualify as investments under these investment treaties.Footnote ²⁹

• 15. At bottom, there are two different conceptions of “investment” that tribunals and the literature use. The first conception considers that States have the freedom to customise what counts as an investment in their BITs, without limitation. There is no numerus clausus principle in international investment law – the definition of investment is akin to contract.Footnote ³⁰ The second conception considers that the notion of “investment” in Article 25 ICSID Convention is akin to property. A numerus clausus applies, and hence only interests that conform to a limited number of standard forms are protected.Footnote ³¹

B. Evolving the meaning of investment through interpretation

• 16. As the next subsection below shows, the drafters of the ICSID Convention left the notion of “investment” ambiguous. And even if the meaning of “investment” in Article 25 ICSID Convention was narrower than the definition of investment in modern investment treaties, it does not necessarily follow that this notion of investment remains the same today as in 1965. The “objective” meaning of investment could assume a broader, more modern meaning through interpretation. The meaning of treaty terms such as “investment” is not necessarily static but could evolve over time.

• 17. While there are no known examples of investment tribunals expressly applying evolutionary interpretation in the specific context of the definition of investment, there is no doubt that the meaning of terms such as “investment” can [Page 36] evolve.Footnote ³² Other international courts and tribunals, including the ICJ, have relied on evolutionary interpretation.Footnote ³³ In the Dispute regarding Navigational and Related Rights, the ICJ considered whether the meaning of terms in an 1858 bilateral treaty between Costa Rica and Nicaragua concerning the San Juan River had evolved over the last 150 years.Footnote ³⁴ Considering some subsequent practice of the two disputing States, the ICJ opted for a dynamic interpretation of another economic term, namely “libre navegación … con objetos de comercio”, albeit of a right rather than a jurisdictional title. The ICJ explained:

  [the Court’s practice of interpreting clauses in line with their meaning at the time of conclusion] does not however signify that, where a term’s meaning is no longer the same as it was at the date of conclusion, no account should ever be taken of its meaning at the time when the treaty is to be interpreted for purposes of applying it.Footnote ³⁵

• 18. Similarly, the term “investment” in Article 25 ICSID Convention could be found to have an evolutionary character. With respect to treaties concluded for a long period of time, such as the ICSID Convention, “the parties’ intent upon conclusion of the treaty was, or may be presumed to have been, to give the terms used – or some of them – a meaning or content capable of evolving, not one fixed once and for all, so as to make allowance for, among other things, developments in international law”.Footnote ³⁶

• 19. Even though no investment tribunal thus far has expressly couched its analysis of “investment” in these terms, in some awards – such as Abaclat Footnote ³⁷ – tribunals arguably adopted the view that “investment” has an evolutionary meaning.Footnote ³⁸ Arbitrator Abi-Saab dissented vigorously on this point, referring to the [Page 37] “tenuous and untenable interpretations, particularly of jurisdictional titles, over-stretching the text beyond the breaking point, in order to extend jurisdiction to where it does not exist”.Footnote ³⁹ The Salini tribunal’s finding on the “contribution to economic development of the host State” could also be seen as evolutionary interpretation because the tribunal did not pay regard to what this phrase meant in 1965.Footnote ⁴⁰ The annulment committee in Mitchell v. DRC acknowledged that some cases “broadened” the meaning of investment compared to the 1965 meaning of investment, but concluded that this did not change the meaning in the instant case.Footnote ⁴¹

• 20. The tribunal in HICEE v. Slovakia, a non-ICSID arbitration, adopted an anticipatory, rather than evolutionary, approach to investment treaty interpretation. The dispute concerned shares in two Slovak health insurance companies. The tribunal was open to interpret the investment treaty based not on the conditions at the time of its negotiation but rather the economic transition that the parties anticipated for the future:

  The Tribunal only feels it necessary to observe that BITs are, by definition, concluded for the future not just for the present, and that there was nothing to prevent either side – i.e. the Dutch side quite as much as the Czechoslovak side – wanting to provide in advance for a more liberal economic regime that was on its way.Footnote ⁴²

• 21. As a matter of treaty interpretation, the definition of “investment” in an investment treaty can affect the interpretation of “investment” in Article 25 ICSID Convention in three ways. A first possibility is that the investment treaty qualifies as a subsequent agreement or subsequent practice under Article 31(3)(a) or (b) VCLT between two States both of which are parties to the ICSID Convention.Footnote ⁴³ Investment treaties could impact the meaning of “investment” in Article 25 ICSID Convention through subsequent agreement (subparagraph (a) of Article 31(3) VCLT) or subsequent practice (subparagraph (b) of Article 31(3) VCLT). However, the insurmountable hurdle for both is that subsequent agreements and practice need to be common to all parties to the treaty, and that the rules need to be applicable in the relationship between all the parties.Footnote ⁴⁴ As Pahis notes, “BITs are [Page 38] neither of these. An agreement between two of the State parties to the ICSID Convention cannot ‘establish the agreement of the parties regarding [the] interpretation’ by all the other [ICSID State parties].”Footnote ⁴⁵

• 22. A second possibility is that the investment treaty is “relevant rules applicable in the relations between the parties” under Article 31(3)(c) VCLT. Accordingly, the definition of investment in the investment treaty could be relevant for interpreting the notion of “investment” in Article 25 ICSID Convention in so far as the two parties inter se are concerned. In this respect, Article 31(3)(c) is concerned with “the extent to which other treaty relations between the parties may have an interpretative role”.Footnote ⁴⁶ Gardiner finds some support in the preparatory works of the VCLT that treaties, including bilateral ones, are within the scope of the “rules” that Article 31(3)(c) envisages, but cautions that practice is only “gradually emerging”.Footnote ⁴⁷ Unlike subsequent agreement or practice above, it is not established that congruence of membership between the treaty that one seeks to interpret and the second treaty that is used to interpret the first treaty is necessary.

• 23. With respect to the “parties” that need to share the interpretation, Pauwelyn argues in the context of the WTO agreements that all the parties to the treaty under interpretation must have assented, at least implicitly, to the second treaty used to interpret the first.Footnote ⁴⁸ Gardiner, however, notes that practice and academic writing do not lead to “any firm outcome”.Footnote ⁴⁹ He takes the view that the “omission of ‘all’ combined with the phrase ‘applicable in the relations between the parties’ … makes more sense if referring to relations between the parties having an immediate interest in the issue of interpretation, rather than all states parties to the treaty that is being interpreted”.Footnote ⁵⁰ The implication is that the definition of investment in the investment treaty may shed light on the meaning of investment in Article 25 ICSID Convention.

• 24. A third and much more far-fetched possibility is that the investment treaty’s definition represents an inter se agreement under Article 41 VCLT between two parties to the ICSID Convention in respect of the definition of investment in Article 25 ICSID Convention.Footnote ⁵¹ This argument is likely to fail because the [Page 39] requirements of Article 41 VCLT are not met. Specifically, Article 41(1)(b)(i) requires that the purported modification “does not affect the enjoyment by the other parties [ICSID member States] of their rights under the treaty or the performance of their obligations”. But if the class of investments covered by Article 25 ICSID Convention were to be amended by inter se agreement, the enforcement obligations of all ICSID member States would increase.Footnote ⁵² And even if the requirements were met, it would be difficult to show that the investment treaty amounts to a modification. In practice, parties to investment treaties do not notify all the parties to the ICSID Convention that their investment treaty modifies the ICSID Convention, pursuant to the procedural obligation to notify in Article 41(2) VCLT.

C. The inconclusive travaux préparatoires on the definition of investment

• 25. During the period from the 1960s to the 1980s, when investment contracts were the primary instrument of consent for ICSID arbitration, ICSID subject matter jurisdiction was much more straightforward compared with the era of arbitration without privity, from the 1990s until the present, in which investment treaties are the main instrument of consent.Footnote ⁵³ By agreeing to include an ICSID arbitration clause in the investment contract, the host State expressed its view that the specific investment at issue in this particular investment contract qualifies as an investment. By contrast, investment treaties (as well as domestic investment codes) cover a wide range of transactions that are not specified in advance.

• 26. When the ICSID Convention was drafted, no one could foresee the explosion in investment treaty making that followed, particularly in the 1990s.Footnote ⁵⁴ States had signed only 26 treaties when the Consultative Meeting of Legal Experts that was tasked with drafting the ICSID Convention first met in Addis Ababa in December 1963, and had signed only 39 investment treaties when they signed the ICSID Convention on 18 March 1965.Footnote ⁵⁵ At the time, only two traditionally capital-exporting States (Germany and Switzerland) had begun their investment [Page 40] treaty programmes: only two of the 26 treaties signed by 20 December 1963, and only five of the 39 treaties signed by 18 March 1965, had neither Germany nor Switzerland as a party.Footnote ⁵⁶

• 27. The proper interpretation of the travaux préparatoires to Article 25 ICSID Convention on the definition of investment has given rise to sustained controversy. While negotiating the ICSID Convention, States made multiple attempts to define investment but failed due to divergent views on the scope of investment.Footnote ⁵⁷ It was not surprising that developed and developing countries split on this point.Footnote ⁵⁸ The lack of a definition of “investment” in Article 25 ICSID Convention was not due to happenstance. Until the end of the negotiations of the ICSID Convention, States had different understandings of “investment”.Footnote ⁵⁹

• 28. Notwithstanding, the Report of the Executive Directors 1965 expressly noted that “[n]o attempt was made to define the term ‘investment’”.Footnote ⁶⁰ The same sentence explains that delegates chose not to define “investment” given “the essential requirements of consent by the parties”.Footnote ⁶¹ However, the 1965 Report does not mention the wider context of divergent views among the delegates on the notion of “investment” during the negotiations.Footnote ⁶²

• 29. On 9 August 1963, the Executive Directors of the World Bank discussed a “First Preliminary Draft of a Convention on the Settlement of Investment Disputes between States and Nationals of Other States”. This first draft did not contain a reference to “investment”, or more generally, to subject matter jurisdiction. The second draft, the “Preliminary Draft Convention” of 15 October 1963, contained a reference to “investment” as a limitation. State experts discussed this draft between December 1963 and May 1964 in four Consultative Meetings of Legal Experts. Based on these meetings, the World Bank prepared a third draft, the “Draft [Page 41] Convention” dated 11 September 1964. The third draft provided the basis for discussions with States in the Legal Committee. This draft also contained a reference to “investment” as a limitation. It defined this notion as follows:

  any contribution of money or other asset of economic value for an indefinite period or, if the period be defined, for not less than five years.Footnote ⁶³

• 30. These discussions led to the adopted text of the ICSID Convention, signed on 18 March 1965.Footnote ⁶⁴ The final version of the text contains the term “investment” but does not offer a definition. All proposals on the meaning of “investment” during the drafting history did not make it into the final text. An unapproved record of the Meeting of the Committee of the Whole on 16 February 1965 reads:

  Mr. Broches [World Bank General Counsel and Chairman of the Legal Committee] said that the staff had prepared a definition of “investment” and had also brought to the attention of the Legal Committee a number of examples of definitions of that term taken from legislation and bilateral agreements. None of these had proved acceptable. The large majority had, moreover, agreed that while it might be difficult to define “investment” an investment was in fact readily recognizable. The Report would say that the Executive Directors did not think it necessary or desirable to attempt to define the term “investment” given the essential requirement of consent of the parties and the fact that Contracting States could make known in advance within what limits they would consider making use of the facilities of the Centre. Thus each Contracting State could, in effect, write its own definition.Footnote ⁶⁵

• 31. Earlier, however, on 25 November 1963, Broches stated the notion of “investment” was not equivalent to State consent to the Centre’s jurisdiction:

  [I]n the context of this Convention, the term “jurisdiction” does not mean compulsory jurisdiction, but rather the outer limits within which use can be made of the facilities provided for by the Center. In other words, one is here only concerned with a limitation of the scope of the Convention. Such a limitation is necessary in spite of the fact that the submission of disputes was subject to the consent of the parties concerned, since this Convention was intended to deal, first with a specific field, namely investments, and second with a particular category of disputes, namely disputes between Contracting States and nationals of other Contracting States. This explained why some of the definitions might lack the precision which would be quite essential if one dealt with a case of compulsory jurisdiction.Footnote ⁶⁶

• 32. These two statements by Broches provide no clear answer on the notion of investment. The unapproved minutes capture the inconclusiveness of the [Page 42] discussions during the drafting of the ICSID Convention. Like the discussions themselves, this summary of the discussion showed that State delegates diverged on the meaning of investment. On the one hand, this summary states that an investment is “readily recognizable” without furnishing a definition (implying that there is an objective meaning of investment). On the other hand, States could write their own definitions (the subjective meaning of investment).

• 33. The formulation “did not think it necessary or desirable to attempt to define the term ‘investment’” in the extract of the minutes above, which also featured in the Draft Report of the Executive Directors,Footnote ⁶⁷ ended up only a month later in the official Report of the Executive Directors but in the following variation: “[n]o attempt was made to define the term ‘investment’”.Footnote ⁶⁸ However, the reference to the lack of need and the undesirability of defining “investment” disappeared. To some delegates, the reason for not defining investment was strategic – it was unnecessary and undesirable. However, for others it was the divergent views among States that led an inability to define the term, even though a definition was desirable.Footnote ⁶⁹ In sum, the travaux to the ICSID Convention shed limited light on the notion of investment, beyond showing that there was much disagreement over what this notion referred to.

• 34. This controversy over whether the meaning of “investment” in Article 25 ICSID Convention is subjective or objective is important in practice: the more constraining the elements for determining objectively whether a transaction amounts to an investment (to which Section III now turns), the more limited the discretion enjoyed by ICSID tribunals on this matter. Conversely, the more degrees of freedom tribunals enjoy as regards these elements, the less relevant the controversy over the subjective or objective meaning of investment. If tribunals apply the elements very pragmatically, the objective or subjective view changes little to nothing with respect to the jurisdiction of ICSID tribunals.

A. Objective elements of investments in the negotiations of the ICSID Convention

• 36. Countries disagreed on the need for, and desirability of, a definition of objective elements of an investment during the negotiation of the ICSID Convention, similar to the fault lines that emerged during the negotiations on whether the meaning of investment was objective or subjective (see Section II above). As a rule, developed countries tended to favour a subjective meaning and developing countries an objective meaning of investments.Footnote ⁷⁰ The travaux préparatoires of the ICSID Convention show that there was no agreement on what the objective elements for identifying investment could or should be – leaving the task of coming up with elements to investment tribunals from the 1990s onwards, and to scholars (the first award where the host State objected to the transaction qualifying as an investment under Article 25 ICSID Convention, and where an ICSID tribunal thus analysed this question in some detail, was Fedax v. Venezuela in 1997).Footnote ⁷¹ More fundamentally, during the drafting of the ICSID Convention, countries also disagreed on whether such elements were desirable in the first place.

• 37. Countries have also adopted divergent approaches on the elements for defining investments in their bilateral investment treaty programmes. For example, the UK emphasised the desirability of a definition that was as wide as possible in its bilateral investment treaty negotiations from the 1980s onwards. It also insisted to its prospective treaty partners that the non-exhaustive character of the definition of investment be preserved.Footnote ⁷² There are no indications that the UK contemplated any implicit objective definition of investment that would require transactions between host States and foreign investors to display certain inherent features.

• 38. In the negotiations on the ICSID Convention, Australia suggested the following definition: “Investment means every mode or application of money [Page 44] which is intended to return interest for profit.”Footnote ⁷³ Germany, which at the time of discussions had already signed around a dozen bilateral investment treaties, which accounted for approximately half of all investment treaties at the time, suggested that the delegates look to existing treaties which “refer to the term ‘property, rights and interests’”.Footnote ⁷⁴ Mr. Broches rejected this suggestion, as existing “definitions had convinced the draftsmen that they could hardly use them as models since they were always directed towards particular facts or situations”.Footnote ⁷⁵

• 39. Austria favoured “as general an application as possible”Footnote ⁷⁶ but also acknowledged the difficulty of having a precise definition of the term.Footnote ⁷⁷ It underscored the desirability “for the Convention to indicate the meaning of this term in order to define which disputes could be brought before the Centre. A descriptive list might be suitable … public loans or bonds should not be included – but on the other hand, the Convention should cover guarantees given by States to contracts of investment.”Footnote ⁷⁸ The Austrian delegate explained further:

  the definition “legal disputes arising out of or in connection with any investment” is rather vague. It will, of course, be difficult to define precisely the disputes which would fall within the jurisdiction of the Center. Pursuant to Article 26, paragraph 2, the jurisdiction of the Center depends on the consent of both parties to the dispute, and in particular also the consent of the defendant State (same as in the first draft). The new draft, however, no longer provides explicitly the possibility of general statements of submission, as contained in Article 2, paragraph 2 of the first draft. It is doubtful whether the new formulation is an improvement since it should be the goal of the Convention to allow as general an application as possible.Footnote ⁷⁹

• 40. The five Nordic countries opposed a definition, referring to the futility of attempting a definition. They forecast that few jurisdictional difficulties would arise, and those that did arise could safely be delegated by the parties to ICSID tribunals. Their joint statement shows what also appears to be the final result of the ICSID Convention: States, even if they rejected a definition, still had their own views of what the term “investment” means:

  [B]ecause of the condition of consent, there would be no need for complicated definitions. With respect to the term “investment”, the examples circulated by the Secretariat proved how futile it would be to attempt a definition. Since the parties would be free to submit their disputes to the Centre … difficulties would [not] arise in practice and that, should difficulties arise, they should be dealt with by the tribunal. Therefore, [it is preferable that] no definition of the term “investment” be provided for in the Convention. In any case, … the definition included in the present draft suffered from various defects, being both too wide (for instance, seems to include portfolio investments) and too narrow (provides for time limits).Footnote ⁸⁰

• [Page 45] 41. Nevertheless, most developing countries underscored the desirability of a definition. For example, China considered the attempt of the World Bank staff to define investment in the Draft Convention of 11 September 1964 “too imprecise and that the condition of consent was too weak to exclude certain undesirable matters from submission to the Center”.Footnote ⁸¹ India favoured including “only ‘substantial’ investments” relating “to the total value of the investment rather than to the duration of it”.Footnote ⁸²

• 42. Towards the end of the discussions, the two main proposals – the British and the Spanish proposals – lacked a definition of investment.Footnote ⁸³ Rather than including a narrowly defined list of investments,Footnote ⁸⁴ the Spanish proposal itself stated that it did not define investment but rather sought a limitation of ICSID’s jurisdiction through other means:

  The delegation submitting this proposal understands that to define the concept of investment, in view of the multiple legal economic and financial aspects that it may contain, is a well-nigh impossible task, and it thinks it would be more logical to delimit the action of the Centre, not on a definition of investment, but rather on a definition of competence.Footnote ⁸⁵

• 43. According to the British proposal, ICSID jurisdiction was limited to investment disputes. Crucially, “investment” was left undefined. To the British proponents, a definition was unnecessary because of an innovative feature that allows each State – at any time – to opt into or out of those disputes which in its view are unsuitable for adjudication by ICSID:Footnote ⁸⁶

  (1) The jurisdiction of the Centre shall extend to investment disputes 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. When the parties have given their consent, no party may withdraw its consent unilaterally. (2) Any Contracting State may at the time of ratification or accession or at any time thereafter notify to the Centre the class or classes of investment disputes in respect of which it would in [Page 46] principle consider submitting or not submitting to the jurisdiction of the Centre. Such notification shall not constitute the consent required by paragraph (1).Footnote ⁸⁷

• 44. The final version of Article 25 ICSID Convention contains a modified version of the British proposal. According to Mortenson, this compromise was “permissive”, charging individual States “with doing the tailoring themselves”.Footnote ⁸⁸ Based on additional archival research, however, St John shows that this was not the “final word” and that Broches’ (influential) view and the views of the Drafting Committee on this point did not necessarily coincide.Footnote ⁸⁹ British officials asked Broches for clarification on the definition of investment after the Convention’s entry into force, and in particular noted the lack of certainty on whether the ICSID Convention covered portfolio investors.Footnote ⁹⁰

• 45. Considering the “well-nigh impossible task” of defining investment,Footnote ⁹¹ delegates were unable to reach consensus – and they agreed to disagree.Footnote ⁹² They chose to include the term “investment” without providing a definition, without agreeing what was meant by the term, and without specifying by which elements investment tribunals should evaluate whether transactions amount to investments. Article 25 ICSID Convention is a good illustration of how States reduce their disagreement to writing.Footnote ⁹³

• 46. Against the ambiguity of Article 25 ICSID Convention on the meaning of investment, three approaches have emerged that we examine in turn: (i) Salini’s positive criteria for investment; (ii) an almost unlimited meaning of investment; and (iii) a negative definition of investments that distinguishes investments from commercial transactions. The following subsections examine these three approaches.

B. The Salini criteria and their critics

• 47. In July 2001, the tribunal in Salini held:

  The doctrine generally considers that investment infers: contributions, a certain duration of performance of the contract and a participation in the risks … In reading [Page 47] the Convention’s preamble, one may add the contribution to the economic development of the host State of the investment as an additional condition.Footnote ⁹⁴

• 48. Almost 20 years after this decision, tribunals have reduced or expanded these elements of investment, ranging from three to six.Footnote ⁹⁵ Table 2 provides an overview of which elements tribunals have considered to be relevant for the definition of investment in Article 25 ICSID Convention. The awards are in ascending chronological order. Column 2 indicates whether the tribunal affirmed its subject matter jurisdiction, and the remaining columns summarise the approach of the tribunal for each of the six elements: (i) contribution, (ii) duration, (iii) risk, (iv) economic development, (v) profit and return, and (vi) territoriality. The final column includes further observations that do not fit the six other elements.

  Table 2 Elements relevant for investments

  

• 49. There are some common strands of how investment tribunals approach the notion of “investment”: they commonly refer to the interpretive principles in Articles 31 and 32 VCLT when construing the notion of investment;Footnote ⁹⁶ they frequently invoke the Salini criteria, as well as those of previous decisions; and they emphasise the flexibility of the Salini criteria.Footnote ⁹⁷

• 50. Schreuer originally identified five elements in the first edition of his Commentary on the ICSID Convention: (i) a certain duration, (ii) a certain regularity of profit and return, (iii) the assumption of risk, (iv) substantial commitment, and (v) significance for the host State’s development. He referred to “characteristics” or “features”.Footnote ⁹⁸ The Salini tribunal refers mostly to “criteria”, but occasionally also refers to elements and conditions.Footnote ⁹⁹ This study refers to “elements” of investments. Irrespective of the precise terminology adopted, criteria, characteristics, features or elements are not the same as requirements.Footnote ¹⁰⁰ Investment tribunals enjoy some discretion within the bounds that the elements of investment provide.Footnote ¹⁰¹

• 51. This flexibility of investment tribunals means that the lack of a particular element is not fatal to qualifying a transaction as an investment.Footnote ¹⁰² With such flexibility comes some discretion for investment tribunals to decide on the [Page 52] contours of the word “investment”. A flexible approach is in keeping with Schreuer’s admonition that the characteristics “should not necessarily be understood as jurisdictional requirements but merely as typical characteristics of investments under the Convention”.Footnote ¹⁰³ The decisions in this volume illustrate the degrees of freedom that investment tribunals enjoy when it comes to defining the notion of investment:Footnote ¹⁰⁴ for example, tribunals rejected the investment character of the delivery of wheatFootnote ¹⁰⁵ or of poultry,Footnote ¹⁰⁶ but held that that an oil hedging agreement amounted to an investment.Footnote ¹⁰⁷

• 52. For those awards covered in this volume where investment tribunals denied jurisdiction for lack of an “investment”, Table 3 summarises the elements on which these tribunals reached this conclusion. The awards are in ascending chronological order. Five out of 25 decisions reported in this volume fall into this category (the only ad hoc annulment committee that annulled an award for lack of an investment, Mitchell v. DRC, is not shown because the committee by definition did not make any findings on investment; it merely annulled the tribunal’s award). Column 2 indicates whether the tribunal affirmed its subject matter jurisdiction, and an “x” in columns 3 to 8 indicates that the tribunal declined the investment character of the transaction based on the absence of the criterion concerned: contribution (column 3), duration (column 4), risk (column 5), economic development (column 6), profit and return (column 7) and territoriality (column 8).

  Table 3 Elements of investment based on which tribunals denied jurisdiction

  

C. The new objectivism: objective in name only

• 87. A second approach contends that the meaning of investment in Article 25 ICSID Convention is almost limitless. This new objectivism, of which Julian Mortenson is a leading exponent, argues against any positive elements for investment such as the Salini ones examined above. Mortenson construes investment as broadly as possible with “near-total deference to state definitions of ‘investment’” in investment treaties,Footnote ¹⁷⁷ excluding only “facially absurd” definitions.Footnote ¹⁷⁸ He concludes that “ICSID has jurisdiction over any plausibly economic asset or activity”.Footnote ¹⁷⁹ He gives the following example of an excluded transaction:

  [Page 64] If a teenage backpacker slips and falls on public streets during a summer trip to New Zealand, she should not be able to bring an ICSID claim based on her “investment” of time in the country.Footnote ¹⁸⁰

• 88. This illustration of a facially absurd investment is reminiscent of Douglas’ example of a metro ticket seemingly qualifying as an investment. He contends that qualification of the ticket as an investment would do violence to the economic meaning of investment, even if such a ticket could be said to fulfil the legal elements for an investment. Douglas, in contrast to Mortenson, contends that:

  “investment”, however, is a term of art: its ordinary meaning cannot be extended to bring any rights having an economic value within its scope, for otherwise violence would be done to that ordinary meaning, in contradiction to Article 31 of the Vienna Convention on the Law of Treaties. The right to performance embodied in a metro ticket cannot qualify as an investment.Footnote ¹⁸¹

• 89. Even investment treaties with broad, asset-backed definitions of investment – for instance by including “claims to money”,Footnote ¹⁸² “obligations” or “any right of an economic nature granted by law or by contract”Footnote ¹⁸³ in their definition of investment – probably do not cover such “absurd” definitions of investment. Such absurd examples apart, under this approach, it is the investment treaty that is decisive. The reference in Article 25 ICSID Convention to “investment” does little, if any, work, rendering it superfluous.

• 90. Mortenson’s analysis relies heavily on the common mischaracterisation of the statement in the Report of the Executive Directors 1965 that “[n]o attempt was made to define the term ‘investment’”.Footnote ¹⁸⁴ In contrast, as discussed above, there were multiple attempts to agree on a definition, but a consensus failed to emerge. According to Mortenson, the British proposal of including no definition of “investment”, but providing for a mechanism of excluding certain disputes under Article 25(4) ICSID Convention, shows that the drafters opted for an extremely broad definition of investmentFootnote ¹⁸⁵ that covers “any plausibly economic activity or asset”.Footnote ¹⁸⁶ Consequently, applying the Salini criteria (or any other substantive elements) for the second leg of the test for investment is mistaken. Based on the drafting history, there is no need for the second leg of the test.

• 91. The Ambiente Ufficio tribunal adopted this approach. It cited Mortenson several times in support of its broad interpretation of the term “investment”. In particular, the tribunal relied on Mortenson’s reading of the 1965 Report of the Executive Directors on the ICSID Convention and the possibilities for States to [Page 65] restrict the broad meaning of investment in Article 25 ICSID Convention through Article 25(4) notifications.Footnote ¹⁸⁷ The tribunal explained that

  The very citation from the Report of Directors referred to above testifies to this trade-off when it expressly links the lack of a definition of “investment”, first, to the “essential requirement of consent by the parties” and, second, to the “mechanism” of Art. 25(4) of the Convention. However, the Report’s wording is inaccurate inasmuch as the non-existence of a definition of “investment” in Art. 25(1) of the ICSID Convention was due to a deliberate abstention from including a definition rather than to a failure to agree on a definition. It is inaccurate inasmuch as the non-existence of a definition of “investment” in Art. 25(1) of the ICSID Convention was due to a deliberate abstention from including a definition rather than to a failure to agree on a definition.Footnote ¹⁸⁸

• 92. While not relevant to its decision, the tribunal did not adopt Mortenson’s expansive view of investment under Article 25 ICSID Convention as regarding “any plausibly economic activity or asset”. In obiter, the tribunal expressed a preference to exclude commercial transactions from the notion of investment (see paras. 97–103 below).

• 93. The mechanism in Article 25(4) ICSID Convention for excluding disputes does not mean that the notion of “investment” is “nonjusticiable” – that is, that the presence of this mechanism precludes ICSID tribunals from drawing “outer limits” of the term investment.Footnote ¹⁸⁹ Article 25(4) ICSID Convention speaks of disputes which can be excluded – not investments.Footnote ¹⁹⁰ The original, co-sponsored British proposal spoke of “investment disputes” for jurisdictional purposes (in what became Article 25(1) ICSID Convention) and of “class or classes of investment disputes” in relation to possible exclusions by notification (now Article 25(4) ICSID Convention).Footnote ¹⁹¹ At the time of writing, only seven ICSID member States – all developing countries – had made such notifications.Footnote ¹⁹² In some cases, States limited disputes to approved investments.Footnote ¹⁹³ Yet States also exclude sectors or they limit the applicability of treatment standards such as expropriation. [Page 66] Put differently, this mechanism of exclusion under Article 25(4) ICSID Convention is not limited to transactions that do not qualify, in the view of the excluding State, as an investment.

• 94. The same reasoning applies to the two other methods which States could use to limit their exposure to investment arbitrations: (i) reservations to the ICSID Convention;Footnote ¹⁹⁴ and (ii) narrow definitions of “investment” in their investment treaties.Footnote ¹⁹⁵ Just because States can exclude certain disputes under Article 25(4) ICSID Convention, because they may enter a reservation, or because they may define investment in their investment treaties narrowly, does not imply that “investment” in Article 25 ICSID Convention needs to be interpreted narrowly or broadly. The possibility of excluding certain disputes does not substitute for State consent.Footnote ¹⁹⁶ This first approach renders “investment” in Article 25 ICSID Convention superfluous and deprives it of any real meaning – which is not in keeping with Article 31 VCLT.Footnote ¹⁹⁷

• 95. Moreover, just because the drafters failed to agree on a particular definition of investment and because they compromised by leaving the term undefined does not mean that “investment” has no ordinary meaning. The travaux préparatoires to the ICSID Convention show that there was no consensus regarding the definition of investment. By contrast, they do not demonstrate that the term “investment” has no ordinary meaning. The drafting technique of omitting a definition of “investment” delegates the task of identifying the ordinary meaning to interpreters and appliers of the ICSID Convention, such as States and ICSID tribunals.Footnote ¹⁹⁸ They are not free to come up with the meaning of “investment” ab initio.

• 96. The argument that the drafters of the ICSID Convention rejected some objective characteristic, and that therefore ICSID tribunals cannot use it, fails to persuade. This argument would only apply if the drafters of the Convention agreed on alternative elements, or explicitly said that no elements applied. For example, that the drafters rejected a five-year minimum duration requirementFootnote ¹⁹⁹ does not mean that a tribunal is now not allowed to look at the duration of an alleged investment. In domestic law, just because a legislature fails to agree on the circumstances that render a shareholder a controlling shareholder – such as certain percentage of shares, certain voting rights, or a specific form of economic [Page 67] influence – does not mean that a court called upon to interpret the term “controlling shareholder” cannot consider those elements. What the rejection of specific elements during the drafting process does tell us is that the specifics of potential elements are not set in stone. Tribunals ought to apply them with some flexibility.

D. The commercial transaction test: distinguishing investments from commercial transactions

• 97. A third approach distinguishes between two mutually exclusive categories: commercial transactions and investments (the commercial transaction test).Footnote ²⁰⁰ If the facts support the qualification of a transaction as “commercial”, the transaction in question cannot at the same time be an investment. Vice versa, if a transaction is an investment, it follows that it cannot be a commercial transaction.

• 98. The distinction between commercial transactions and investments features prominently in the case law.Footnote ²⁰¹ For example, the tribunal in Ambiente Ufficio explained that:

  there are good reasons to leave a single commercial transaction such as the delivery of a single load of cars outside the concept of investment and thus outside the subject-matter jurisdiction of the Centre.Footnote ²⁰²

• 99. The Ambiente Ufficio tribunal did not expand on what these “good reasons” were and referred to existing cases and the academic literature. It found that “sovereign bonds and security entitlements [are] in no way comparable to single commercial transactions”.Footnote ²⁰³ It also said in the instant case there was no need to decide whether any “plausibly economic activity or asset” qualified as an investment, referring to Mortenson’s proposition that it did.Footnote ²⁰⁴

• 100. By contrast, Pahis favours jettisoning the commercial transaction test that the Ambiente Ufficio tribunal, among other tribunals, used altogether because of the very expansive meaning of the term “investment” in Article 25 ICSID Convention, and conceptual flaws and practical difficulties associated with this test.Footnote ²⁰⁵ He argues that basic economic definitions of “investment” cover a sale of goods (or any economic transaction that produces value in the future).Footnote ²⁰⁶ Yet under Article 31 VCLT, the ordinary meaning of the term “investment” needs to be interpreted in the context and in the light of the object and purpose of the ICSID Convention.

• [Page 68] 101. Pahis distinguishes between negative and positive definitions of “investment”.Footnote ²⁰⁷ The positive Salini criteria, on their own, have little bite, but the commercial transaction test does. However, he acknowledges that the negative commercial transaction test “ascribes certain positive attributes to investments – based on but distinct from the Salini criteria – in order to distinguish investments from commercial activities”.Footnote ²⁰⁸ But by construing the Salini criteria so broadly, there is little difference with the new objectivism described above. As Pahis acknowledges, “[i]f all or nearly all claims pass the Salini test, there is little practical difference between the Salini test and a subjective interpretation of Article 25 ‘investment’”.Footnote ²⁰⁹

• 102. A further reason for abandoning the commercial transaction test is that investment tribunals rarely apply the “commercial transaction test” without also applying the Salini criteria. The commercial transactions test adds bite to the Salini test.Footnote ²¹⁰ In six out of the eight awards that Pahis examines, tribunals apply both tests together to distinguish between commercial transactions and investment.Footnote ²¹¹ Among the two remaining ones, the tribunal in Global Trading Resource v. Ukraine applied only the commercial transactions test. But this was only because the tribunal decided that the claims were manifestly without legal merit due to the putative investment being a commercial transaction. As a result, the tribunal did not need to analyse the elements for investment in detail.Footnote ²¹² The second case, Tenaris v. Venezuela, is ambiguous. The tribunal held:

  The Tribunal accepts Venezuela’s submission [referring to Venezuela’s Post-Hearing Brief] that the Off-Take Agreement is not an “investment” in its own right. Nor does it consider that the Off-Take Agreement would constitute an investment, if an holistic approach were adopted: despite the context in which it was concluded, it remains, in essence, a commercial agreement in respect of the purchase and delivery of product at a known price, and in such a manner that Talta took off-shore Venezuela the benefit of the profit of the on-sale in the open market. To this end, the Tribunal considers that the Off-Take Agreement must be treated differently to the Talta Loan.Footnote ²¹³

• 103. The specific arguments that the tribunal accepted remain unknown. Venezuela argued against the qualification as investment based particularly on the elements of contribution and risk. Among others, it invoked Romak.Footnote ²¹⁴

E. Elements of investments in ICSID Additional Facility, UNCITRAL or SCC cases

• 104. Two reported awards of tribunals operating under non-ICSID arbitration rules found that “investment” has the same meaning in non-ICSID investment [Page 69] arbitrations, even though Article 25 ICSID Convention does not apply in these arbitrations. In MNSS v. Montenegro, in a dispute concerning shares and loans in an electric arc furnace steel mill, the tribunal held that an investment under Article 2(a) ICSID Additional Facility RulesFootnote ²¹⁵ needed to be an investment under the ICSID Convention.Footnote ²¹⁶ The tribunal based this reasoning on Article 4(2) ICSID Additional Facility Rules,Footnote ²¹⁷ without providing further reasons. The tribunal considered that the term “investment” was identical under both the ICSID Convention and the ICSID Additional Facility. The ICSID Additional Facility applied when ICSID tribunals lacked jurisdiction under the ICSID Convention because of the absence of consent. Such consent was missing if “either the State party to the dispute or the State whose national is a party to the dispute is not a Contracting State”, rather than because there was no “investment” under Article 25 ICSID Convention. Article 2(b) covers legal disputes that do not “arise directly out of an investment”.Footnote ²¹⁸

• 105. In Romak, the Switzerland–Uzbekistan BIT offered the investor a choice between arbitration under UNCITRAL Rules and under the ICSID Convention.Footnote ²¹⁹ The tribunal was constituted under the UNCITRAL Rules. The investor argued that only the BIT was relevant for interpreting the term “investment” and urged the tribunal not to adopt the double-barrelled test. The tribunal disagreed and held that the term “investment” is the same irrespective of whether the tribunal is constituted under UNCITRAL Rules or the ICSID Convention.Footnote ²²⁰ This is because “investment” has an inherent meaning under investment treaties, and applied three Salini criteria under the BIT. Otherwise the distinction between investments and purely [Page 70] commercial transactions (see above) would become nugatory.Footnote ²²¹ It justified that conclusion with effet utile and policy considerations, such as that otherwise significant and undesirable differences between ICSID and UNCITRAL arbitrations would

  lead to “unreasonable” results. This view would imply that the substantive protection offered by the BIT would be narrowed or widened, as the case may be, merely by virtue of a choice between the various dispute resolution mechanisms sponsored by the Treaty. This would be both absurd and unreasonable. Naturally, there are specific jurisdictional restrictions imposed by the ICSID Convention (for example, the limitation with respect to physical persons who are dual nationals, or to the existence of a “legal dispute”). However, said restrictions do not bear on the definition of “investment”. There is no dispute that the ICSID Convention’s drafters offered no definition for the term “investment.” There is no basis to suppose that this word had a different meaning in the context of the ICSID Convention than it bears in relation to the BIT. Indeed, the drafters appear to have excluded any specific definition from the ICSID Convention precisely to accord contracting parties a great deal of flexibility in their designation of transactions or disputes as investment-related in their instruments of consent.

  On this basis, it would be unreasonable to conclude that the Contracting Parties contemplated a definition of the term “investments” which would effectively exclude recourse to the ICSID Convention and therefore render meaningless – or without effet utile – the provision granting the investor a choice between ICSID or UNCITRAL Arbitration. As already noted, this would run counter to the rule of construction requiring the interpreter to infer that a State party to two or more treaties which employ the same term in the same (or a similar) context intended to give said term the same (or at least a compatible) meaning in all the treaties.Footnote ²²²

• 106. Notwithstanding, Article 2(b) ICSID Additional Facility Rules (which allows for ICSID conciliation/arbitration proceedings despite the lack of an investment under Article 25 ICSID Convention) requires that the underlying transaction displays “features which distinguish it from an ordinary commercial transaction”.Footnote ²²³

• 107. In contrast to MNSS and Romak, the Enkev Beheer v. Poland tribunal, in proceedings governed by the UNCITRAL Arbitration Rules, did not discuss whether any elements of an investment were required, and did not opine on whether the definition of investment in UNCITRAL arbitration was the same as in ICSID arbitration.Footnote ²²⁴ Presumably, there was no discussion because a 79% share ownership in a Polish company qualifies as an investment even under the most stringent Salini criteria. The investor’s argument that (i) the allocation of profits by the Polish company, (ii) the goodwill and know-how created by it, and (iii) the time and management effort by the investor, each qualified independently as [Page 71] investments failed because the tribunal regarded them as rights “derived from shares” rather than independent investments. The investor lacked standing to claim for harm suffered by the Polish company.Footnote ²²⁵

• 108. Similarly, in the SCC arbitration Quasar de Valors v. Russia, the tribunal limited itself to discussing the investment treaty’s definition of investment in arbitration concerning a type of financial instrument, namely American Depository Receipts traded on the New York stock exchange in Russian company Yukos.Footnote ²²⁶ Unlike in Enkev, the transaction in this arbitration was not straightforwardly an investment. The absence of a discussion in the award of Salini or other objective elements of investment appears to indicate that the tribunal did not consider that any such criteria applied in an SCC arbitration.

• 109. In sum, of the 21 reported decisions in this volume, 11 adopt at least some of the Salini criteria. In this group of cases, most tribunals concentrated on three elements of an investment: contribution, duration and risk. Contribution as an element of investment features in 11 cases; duration in eight cases; and risk in 10 (see Table 2).Footnote ²²⁷ The three elements of economic development, profit and return, and territoriality play only a minor role. There is little agreement among tribunals on how to assess the presence of an investment.

A. Financial instruments: lack of legal certainty

• 111. The question whether portfolio investment in general, and financial instruments in particular, count as investment for purposes of Article 25 ICSID [Page 72] Convention and under investment treaties remains contentious.Footnote ²²⁸ The sovereign debt crises in Argentina (2001) and Greece (2012) led to four known investment arbitrations related to sovereign debt. In three of those four disputes, ICSID tribunals upheld their jurisdiction over sovereign bonds.Footnote ²²⁹ However, in Poštová banka v. Greece, another ICSID tribunal declined jurisdiction.Footnote ²³⁰ In addition to sovereign bonds, investment tribunals have qualified other financial instruments, such as promissory notes, American Depository Receipts and hedging agreements, as investments.Footnote ²³¹ In future, investors may also argue that sovereign insurance, crypto financial instruments or central bank issued digital currencies count as investments.Footnote ²³²

• 112. Financial instruments are not foreign direct investment but portfolio investment. Many investment treaties expressly include certain forms of portfolio investments in their investment definitions. With respect to sovereign bonds and loans specifically, States opted for different strategies on the inclusion of bonds and loans in their bilateral investment treaties. Compare the positions of the UK and Germany in their early investment treaties in the 1960s and 1970s. The UK took the view that financial instruments were included in the definition of investment in British investment treaties, even though they did not say so explicitly, and resisted attempts by counterparties to exclude them.Footnote ²³³ By contrast, Germany seemingly differentiated between foreign direct investment (covered) and financial or portfolio investment (excluded).Footnote ²³⁴

• 113. In the disputes concerning financial instruments to date, two Salini criteria – risk and contribution – have been significant battle grounds (see the discussion [Page 73] above).Footnote ²³⁵ The main issue is whether financial instruments involve more than ordinary commercial risk, which some tribunals require to have jurisdiction. With respect to contribution, the main issues are whether financial instruments – which are not typically governed by the law of the host country or subject to the jurisdiction of its courts – “contribute” to the host State (occasionally, tribunals link this element to whether there is an investment “in the territory” of the host country).

• 114. In Ambiente Ufficio, the tribunal found that the “broad” meaning of “investment” in Article 25 ICSID Convention covered bonds and security entitlements.Footnote ²³⁶ Departing from the three Argentine bond cases, the tribunal in Poštová banka held that a bond needs to be distinguished from a loan. While the applicable BIT covered a loan, the same did not apply to a bond, because a bond – in contrast to a loan – was tradable.Footnote ²³⁷ In obiter dicta, the tribunal stated on Article 25 ICSID Convention:

  If an “objective” test is applied, in the absence of a contribution to an economic venture, there could be no investment. An investment, in the economic sense, is linked with a process of creation of value, which distinguishes it clearly from a sale, which is a process of exchange of values or a subscription to sovereign bonds which is also a process of exchange of values i.e. a process of providing money for a given amount of money in return … the contribution, as an element of investment, has to be involved in an economic operation creating value …Footnote ²³⁸

• 115. Moreover, investment tribunals are split on whether there is a distinction between bonds (loans) that are associated with an investment because they fund an investment, and free-standing loans or bonds.Footnote ²³⁹ In addition to the three Argentine sovereign bonds cases,Footnote ²⁴⁰ the tribunal in Deutsche Bank v. Sri Lanka found that a free-standing oil hedging agreement between a European bank and a State-owned company in Sri Lanka amounted to an investment.

• [Page 74] 116. In Portigon v. Spain, the majority of the tribunal considered that financial instruments (loans and hedging instruments) related to the financing of Spanish renewable projects were investments under the ICSID Convention and the ECT.Footnote ²⁴¹ The tribunal recognised this distinction between free-standing loans and those associated with an investment. The tribunal did not rule on whether free-standing loans could amount to an investment. The MNSS tribunal stated that a loan itself did not qualify as an investment, but did so if connected to an economic operation.Footnote ²⁴² Similarly, the tribunal in Global Trading Resource v. Ukraine decided that a claim to money needed to be associated with an investment with respect to the specific definition of a “claim to money” in the Ukraine–US BIT.Footnote ²⁴³ The delivery of poultry, despite the outlay of money, was not an investment under Article 25(1) ICSID Convention. The outlay of money was a common feature of supply contracts.Footnote ²⁴⁴

• 117. The tribunals in Romak and Poštová banka also differentiated between investment risk and commercial risk (see Section III.B.iii above). If one applies the reasoning of Romak and Poštová banka, an oil hedging agreement on closer inspection only displays the risk of an ordinary commercial transaction (market price and contractual non-performance), rather than an investment risk. There is a known method for calculating the profitability of the transaction, even if, of course, the amount itself is unknown when the agreement is concluded. Compare this to the sale and delivery of oil, which most tribunals do not qualify as an investment. Yet the tribunal in Deutsche Bank v. Sri Lanka decided otherwise.

• 118. An oil hedging agreement provides insurance to the insuree against the price of oil rising. Based on the ratio of the Deutsche Bank tribunal, flood insurance provided by an insurance company such as AIG or Allianz to a country would also qualify as an investment. The risk of non-performance or default is not a useful standard to qualify transactions as investments.Footnote ²⁴⁵ The implication is that almost all transactions amount to investments.Footnote ²⁴⁶

• [Page 75] 119. Among other reasons, dissenting arbitrator Torres Bernárdez in Ambiente Ufficio v. Argentina stated that the sale had been a commercial transaction and pointed to the lack of a “host State” for the sovereign bonds:

  Neither the Argentine Republic acted as the host State of an investment when selling the sovereign bonds nor, for the matter, the placement banks (underwriters) were acting as foreign private investors in the territory of Argentin[a] when purchasing the sovereign bonds in the primary market.

  The Republic of Argentina was “hosting” nothing as a result of the transactions considered, but making a commercial dealing of a financial product of its own outside the Republic in international markets as could be the selling of any other eventual kind of Argentine governmental goods, getting a price in return. Then, the security entitlements holding by the Claimants cannot have acquired as concluded by the majority a non-existent “investment” quality of those sovereign bonds, because no one could transfer a better title than what he really has (nemo dat quod non habet) …Footnote ²⁴⁷

• 120. Differences among tribunals as to whether to qualify financial instruments as investments, and the unresolved issues set out below, have generated uncertainty for investors and host States.Footnote ²⁴⁸ The absence of a jurisprudence constante Footnote ²⁴⁹ leaves considerable room for manoeuvre to an investment tribunal called upon to decide disputes arising out of financial instruments.

B. Arbitral awards and judgments as investments