An update on Romak SA v Uzbekistan (PCA Case No AA280) which concerned the meaning of "investment" for the purposes of establishing the tribunal's jurisdiction in a non-ICSID case.
In Romak SA v Uzbekistan (PCA Case No AA280), the tribunal held that there was no "investment" for the purposes of establishing jurisdiction in an investment treaty arbitration under UNCITRAL rules.
The award is of interest because it considers the notion of "investment" outside the ICSID context. Although not bound by previous ICSID awards, the tribunal adopted a similarly pragmatic approach, holding that the duration and risks of a transaction were relevant to the issue of whether an investment (as opposed to a purely commercial transaction) existed. The tribunal also addressed the issue of whether an arbitration award might form part of a transaction which qualified as an investment.Close speedread
On 16 April 1993, Switzerland and Uzbekistan concluded the Bilateral Investment Treaty on the Promotion and the Reciprocal Protection of Investments (the BIT).
At the same time, Switzerland and Uzbekistan negotiated and concluded a further treaty governing the two states' relations with respect to sales of goods, the Agreement on Trade and Economic Cooperation (ATEC).
Article 9 of the BIT provides a mechanism for the resolution of "disputes with respect to investments between a Contracting Party and an investor of the other Contracting Party". Article 9(4) provides for "the submission of an investment dispute to international arbitration", with the arbitration to be conducted either under the UNCITRAL Rules, or under ICSID.
Article 1(2) of the BIT defines "investments" as follows:
"The term "investments" shall include every kind of assets and particularly:a. movable and immovable property as well as any other rights in rem, such as servitudes, mortgages, liens, pledges;b. shares, parts or any other kind of participation in companies;c. claims to money or to any performance having an economic value;d. copyrights, industrial property rights (such as patents, utility models, industrial designs or models, trade or service marks, trade names, indications of origin), technical processes, know-how and goodwill;e. concessions under public law, including concession to search for, extract or exploit natural resources as well as all other rights given by law, by contract or by decision of the authority in accordance with the law."
In Salini v Morocco (ICSID Case No Arb/00/04) (Decision on Jurisdiction of 23 July 2001), the ICSID tribunal identified a number of criteria indicative of the existence of an investment for these purposes, as follows:
Regularity of profit and return.
Assumption of risk by both parties.
Substantial commitment in money or expenditure.
Significant contribution to the host state's development.
Tribunals frequently apply the so-called Salini criteria to determine whether or not an investment is established for the purposes of ICSID jurisdiction. However, more recently, tribunals have emphasised that the Salini criteria are not fixed or mandatory, and that a pragmatic approach is appropriate in most cases. For further discussion of this issue, see Practice note, Investment treaty arbitration: legal issues (www.practicallaw.com/9-205-5048).
The claimant (Romak) was a Swiss company engaged in grain trading. It concluded several contracts with Uzbek companies, including a supply contract with an Uzbek state-established company for the importation of grain to Uzbekistan. Romak was not paid under the supply contract, and commenced GAFTA arbitration against the Uzbek purchaser. The GAFTA arbitration tribunal issued an award in Romak's favour, but Romak's attempts to enforce it in the Uzbek courts were unsuccessful. The courts held that the awards could not be enforced pursuant to the New York Convention.
Romak commenced arbitration at the Permanent Court of Arbitration (PCA) pursuant to Article 9 of the BIT, alleging breaches of the BIT arising from the refusal to enforce the GAFTA award and by reason of the Uzbek purchaser's conduct.
Uzbekistan argued that the tribunal lacked jurisdiction, because there was no "investment" for the purposes of Articles 1 and 9 of the BIT.
The tribunal held that it had no jurisdiction because there was no "investment".
The GAFTA award (and the Uzbek courts' refusal to enforce it) could not be viewed separately from the underlying supply transaction. The tribunal would consider the transaction (including the award) as a whole, to determine whether or not it amounted to an "investment".
Romak had argued that, if it could bring itself within one of the lettered sub-paragraphs of Article 1(2) of the BIT, then that sufficed to establish an "investment". So, for example, a "claim to money" (within sub-paragraph (c)) would be an "investment". The tribunal disagreed. The term "investment" was not limited to the lettered sub-paragraphs, but had an inherent meaning, based on the ordinary meaning of that word.
Furthermore, when determining what "investment" meant, it was necessary to have regard to the context, and the object and purpose of the BIT. In this regard, the preamble of the BIT referred to the promotion and protection of foreign investments. By contrast, the ATEC (concluded on the same day as the BIT) was concerned with the sale of goods and trade. The tribunal concluded that the state parties had adopted a distinction between trade and investment, and had concluded a special and discrete treaty to govern the former. To mechanically apply the lettered sub-paragraphs would effectively destroy the distinction for which they had bargained.
The tribunal observed that, giving "investment" its ordinary meaning, one would expect to see the commitment of funds or assets over a period of time and entailing some risk, with the purpose of receiving a profit in return. Here, the short duration and purely commercial risk of the supply transaction indicated that it was a one-off commercial transaction, and did not qualify as an "investment" for these purposes. Although it would be possible for contracting States to deem any kind of asset or transaction as an investment (including even a one-off sale contract), it would be necessary in such cases for the wording to leave no doubt that this was the parties' intention.
The tribunal's award is of interest in a number of respects.
The meaning of "investment" for jurisdictional purposes is, as the tribunal noted, an area of some controversy in investment treaty arbitration. However, it is an issue which has, for the most part, been considered in the context of ICSID arbitration. Here, although noting that it was not bound by ICSID awards, the tribunal adopted an approach similar to the more pragmatic post-Salini strand of authority, having regard to certain benchmarks such as duration and risk, but in a flexible way.
Note, further, that the tribunal was clearly influenced by the fact that Romak's approach could create a new avenue for the review of commercial arbitral awards, whereby claimants could argue that a commercial transaction amounted to an investment and, therefore, that a refusal to enforce an arbitral award amounted to breach of BIT protections. That would clearly be a most undesirable consequence (paragraphs 186-187).