State-owned enterprises and international investment treaties: when are state-owned entities and their investments protected?

• Author: Blyschak, Paul
• Position: P. 27-51

Art. 25 of the ICSID Convention and the "Broches Test"

As mentioned, a tribunal constituted in relation to an investment dispute under an IIT must confirm its jurisdiction not only under the IIT but also under the arbitration rules specific to it. Therefore, where the tribunal has been constituted before the International Chamber of Commerce's International Court of Arbitration or under the UNCITRAL Model Rules, it will be necessary for the tribunal to determine whether the jurisdictional provisions of these rules have been complied with. As these forums were designed to administer commercial disputes between private parties, their jurisdictional provisions are generally concerned with confirming that the parties have properly consented to arbitration and that the arbitral tribunal has been properly formed. However, tribunals constituted under the ICSID Convention will not only have to address these same issues of consent and formation; they will also have to deal with issues specific to ICSID's role as a forum designed to adjudicate disputes between private investors and sovereign states. Art. 25 of the ICSID Convention establishes the jurisdictional requirements for ICSID tribunals. Under Art. 25(1), "The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State ... and a national of another Contracting State."

The leading decision in respect of the standing of SOEs to bring arbitration under the ICSID Convention is currently the award of the Tribunal in Ceskoslovenska Obchodni Banka, A.S. v. The Slovak Republic. (140) At the time of the claim, CSOB was a bank owned by the government of the Czech Republic. (141) In 1993, CSOB entered into a series of agreements with the Slovak Republic, the Czech Republic, and two collection companies: one established in each of the involved states. In addition, CSOB entered into a loan agreement with the Slovak collection company; the obligations of the collection company were guaranteed by the Slovak Republic. When the Slovak collection company failed to honour its obligations under the loan and the Slovak Republic in turn failed to fulfil its guarantee, CSOB filed a claim for arbitration by an ICSID tribunal under the BIT between the Czech Republic and the Slovak Republic. (142) Several objections to the tribunal's jurisdiction under the BIT and the ICSID Convention were raised by the Slovak Republic. (143) Most important here, it was argued that CSOB did not qualify as an ICSID Convention Art. 25 "national of another Contracting State," and was in fact an organ of the Czech state. (144)

The tribunal in CSOB v. Slovakia began its analysis of the Slovak Republic's objection by stating that Art. 25 leaves no doubt that ICSID tribunals have no jurisdiction over disputes between two Contracting States. (145) However, this did not mean that the ICSID Convention was available only to privately owned companies. (146) Rather, citing the legislative history of the ICSID Convention and a study made by its principal drafter, Aron Broches, the Tribunal held that "for purposes of the Convention a mixed economy company or government-owned corporation should not be disqualified as a 'National of another Contracting State' unless it is acting as an agent for the government or is discharging an essentially governmental function." (147) Notably, both the Claimant and the Respondent accepted that this test--which has subsequently come to be known as the "Broches test"--was determinative. (148)

The Broches Test: "discharging an essentially governmental function"

In applying the Broches test to the facts of the case, the Tribunal made two observations. First, the Tribunal noted that 65% of CSOB was owned by the Czech Republic and that, according to the respondent, this majority ownership resulted in the bank being under the "absolute control" of its home state. (149) Second, the Tribunal took note of the fact that over the course of its existence most of the CSOB's work was undertaken on behalf of the Czech Republic, including facilitating foreign commercial operations and executing international banking transactions at the State's behest. (150)

However, the Tribunal emphasized that, in light of the Broches test, these observations could not be determinative. Rather, it held that assessing whether SOE investment represented the discharge of an "essentially governmental function" necessitated a focus on the nature of the acts rather than their purpose. (151) In other words, the Tribunal held that regardless of whether or not CSOB's actions functioned to "promote the government policies or purposes" of the Czech Republic, the ultimately crucial issue was whether the actions themselves "were essentially commercial rather than governmental in nature." (152)

Focussing exclusively on how to characterize the nature of the particular investment activity at issue, the Tribunal concluded that it mattered little that CSOB was publically owned and controlled. (153) Such public ownership and control was already provided for and accommodated by the ICSID Convention itself, as discussed above. What mattered was whether, in conducting its investment, the activities of CSOB ever crossed the line between those exercised by private commercial entities, and those exercised primarily by entities of a public nature. Therefore, it mattered not that CSOB's actions might be "driven by state policies," (154) nor that CSOB's activities were benefitting from the Czech government's policies and subsidies. (155) Instead, the determinative fact was that CSOB was not itself engaged in policy making or development, or in legislative or administrative action; (156) rather, its actions, strictly speaking and divorced from their greater context, were within the competency of a private commercial entity. Since they were not within the special and exclusive competency of a sovereign, its sub-state entities or state organs, it could not be said that CSOB's investments were the discharge of an essentially governmental function.

The Tribunal's decision in CSOB v. Slovak Republic represents a significant expansion of established international investment law, elaborating substantially on the requirements of Article 25 of the ICSID Convention. By concentrating entirely on the nature of the entity's activities without any consideration of their purpose, the Tribunal elevated form over substance, presumably in search of a bright-line test. This approach does have its advantages, among them greater certainty and predictability. The nature of an entity's investments will often be more easily determined than the purpose underlying those investments. This is particularly the case where one seeks merely to categorize investments as either public or private. It would appear that most if not all actions undertaken by a private entity that are not accompanied by some sort of puissance publique or public authority will be just that--private. The motivations or purposes behind investment, on the other hand, can be much more difficult to decipher: they can be masked, and there will often be multiple motivations underlying any one action. The issue of underlying motivation can also pose serious evidentiary problems, since much of the most pertinent information will be controlled by the entity that is the subject of the inquiry.

Nonetheless, for two reasons the bright-line "nature" test established in CSOB v. Slovak Republic should not receive unconditional acceptance by tribunals as the appropriate test for Art. 25 jurisdiction over SOEs. First, the decision is not entirely persuasive. The "commercial transaction" test has long been the accepted standard in the domestic law of many states for determining the jurisdiction of courts over the actions of foreign states and their instrumentalities: only where the activities of such entities are deemed to be "commercial" or non-sovereign (jure gestionis) rather than sovereign (jure imperii) will courts exercise jurisdiction over them. (157) The aim of this inquiry is in many respects analogous to the Broches test and its "essentially governmental function" limb. The "commercial transaction" test prevents courts from exercising jurisdiction over a state entity except where it is acting in a non-sovereign or commercial manner. Similarly, the "essentially governmental function" restricts the standing of SOEs before the ICSID to those circumstances where their investments have been conducted in a comparably non-sovereign or commercial manner. While it has previously been customary for courts to solely consider the nature of a state-controlled entity's activities when applying the "commercial transaction" test, it has more recently become the norm to consider both the nature and purpose of the entity's activities where appropriate. Article 2(2) of the United Nations Convention on Jurisdictional Immunities of States and their Property, (158) which has not yet entered into force but is nevertheless considered by many to be an expression of international consensus on the matter, (159) provides that:

In determining whether a contract or transaction is a "commercial transaction" ... reference should be made primarily to the nature of the contract or transaction, but its purpose should also be taken into account if the parties to the contract have so agreed, or if, in the practice of the state of the forum, that purpose is relevant to determining the non-commercial character of the contract or transaction. This follows the approach of many notable domestic courts in recent decades, which have increasingly recognized that consideration of the greater context in which activities take place, including their purpose, may be necessary to accurately determine their sovereign or non-sovereign nature. (160) As held by the Supreme Court of Canada, "an antiseptic distillation of a 'once-and-for-all' characterization of the activity in...