The implications of Romak v Uzbekistan for defining the concept of investment.

• Author: Musurmanov, Ilyas U.
• Position: 2009 International Centre for Settlement of Investment Disputes decision

Abstract

The definition of 'investment' has become one of the most controversial issues in the determination of jurisdiction on investment arbitration. Several approaches to interpreting the term 'have appeared in international investment arbitration. This article traces recent developments and discusses the case of Romak v Uzbekistan, where the respondent argued that delivery of more than 40 000 tons of cereal did not constitute investment in accordance with the applicable Bilateral Investment Treaty ('BIT'). The tribunal in Romak advanced a new approach to the interpretation of the term 'investment'. This article analyses the implications of the case for BIT-making, legal doctrine, and international investment arbitration. It argues that the approach applied by the tribunal in Romak evinces the likelihood of smoothing differences in various tribunals' interpretation of the term 'investment'.

I Introduction

On 26 November 2009, a panel of arbitrators in the case of Romak v Uzbekistan, (1) operating under the United Nations Commission on International Trade Law's UNCITRAL Arbitral Rules, stated that a long-running dispute over non-payment for shipments of wheat was not susceptible to arbitration under the corresponding Switzerland-Uzbekistan BIT. (2) The Tribunal rejected jurisdiction over a claim by holding that Romak's claim failed to qualify as investment within both the BIT and the 'inherent meaning' of the term 'investment'.

The definition of investment is of crucial importance to both parties to an investment regime--the host state and the foreign investor. The history of BIT making and dispute resolution evidence is that on the one hand '[i]t may be tempting for a defendant State to argue, as a basis for an objection to jurisdiction, that either there was no investment whatever or no investment under the definition of the BIT or under the particular contract'. (3) On the other hand, an excessively broad definition brought up by the foreign investor would trigger a host state's undue loss of control over assets in its territory. (4) Consequently, legal certainty as to what can be considered as an 'investment' pursuant to the relevant agreement is in the interests of both the host state and the foreign investor.

This article aims to examine the implications of the Romak tribunal's interpretation of the concept of investment. First, it analyses the current situation with respect to the interpretation of the concept. Second, it outlines the Romak case and analyses the Romak tribunal's approach to interpretation of the concept. Third, it explores the implications of Romak for BIT drafting, legal doctrine, international investment arbitration, and for potential disputing parties that may face arbitration under non-ICSID arbitration proceedings.

II Divergent Definitions of Investment

A Divergence in Interpretation of the Term 'Investment'

The notion of investment is one of the most disputable issues in the law. (5) Although it is described variously in the sources, (6) it is still very important as it determines whether the asset or transaction is protected by the applicable tool. Most importantly, the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (7) accepts claims only if the dispute arises directly out of 'an investment'. (8) It is trite to reiterate that the ICSID Convention did not set out the meaning of this central condition. (9) During the drafting of the ICSID Convention, there were extensive debates regarding the necessity of the notion of investment. (10) In the end, the drafters decided not to define the term 'investment'. (11) This lack of definition has caused confusion. First, arbitrators have not been consistent with their interpretation of the term. (12) Second, case law shows that a specific asset can be considered as an investment under BIT but not under art 25 of the ICSID Convention. While non-ICSID arbitrations have only tended to require the asset to correspond to the requirements of the BIT, (13) the arbitrations held under the ICSID Convention might require the asset or transaction to qualify as investment, not only under the BITs, but also under the ICSID Convention--called by some a 'dual approach'. (14)

Two cases that faced challenges to the existence of an investment were Fedax (15) and CSOB (16) respectively. In those cases, the matter was settled relatively easily. For instance, in Fedax, the jurisdiction of the ICSID Tribunal was disputed on the grounds that the underlying transaction did not meet the requirements of an 'investment' under the ICSID Convention, (17) While respecting to a significant degree the discretion of the parties in defining the meaning of the term 'investment', the arbitrators referred in a subtle way to certain objective criteria to determine the definition of 'investment' for the aims of the ICSID Convention. As a result, the tribunal ruled that that a loan could constitute an investment under the ICSID Convention. However, the tribunal's depiction of basic characteristics of investment (18) as 'a certain duration, a certain regularity of profit and return, assumption of risk, a substantial commitment and a significance for the host State's development' (19) has exerted far-reaching influence on subsequent cases. In this regard, CSOB is also of a special importance as the tribunal there applied the finding of Fedax and supported the claimant's claims that a loan meets a qualification of an 'investment' within the ICSID Convention. In its ruling, the CSOB tribunal stressed that 'an international transaction which contributes to cooperation designed to promote the economic development of a Contracting State may be deemed to be an investment as that term is understood in the Convention'. (20) It is essential to mention that these tribunals made their rulings without engaging in a vast debate on the notion of investment. The situation has changed since Salmi, (21) which is considered as an 'important milestone' (22) in the evolution of the ICSID case law on the concept of investment and has led to the emergence of the so-called 'Salini test'. In this case, the tribunal, admitting that contracting parties could come to agreement on the type of disputes that could be submitted to arbitration within the agreement, went a step further than Fedax and explicitly recognised the existence of objective criteria that should be met if a specific asset needs to qualify as an investment to meet the aims of the ICSID Convention. Salini was important for ICSID case law because it was the first case that decided to refer to the characteristics of investment while dealing with the definition of investment. The tribunal's four-element definition of investment (contribution, duration, risk, and contribution to development) (23) was subsequently depicted as the 'Salini test'. (24)

The Salini tribunal combined two fundamentally diverging approaches that existed hitherto in the academic literature with respect to the definition of investment within the ICSID Convention. According to the first approach, 'investment' should contain three characteristics: contribution, risk, and duration. The second approach added one more characteristic to the aforementioned three: contribution to development.25 The Salini tribunal's interpretation of the characteristics of the notion of investment has given rise to uncertainty, as evidenced in the decisions of a number of tribunals. Some decisions have been radically opposite to others.

B Three Main Approaches to Define 'Investment'

As the ICSID Convention does not define the term 'investment', a number of conflicting decisions have been made by tribunals. Gaillard lists three main lines of decision-making: 'two main lines of reasoning and an intermediate approach'. (26)

The first approach--the 'liberal' approach--avoids all generalisations. It just identifies characteristics that have already been reviewed in scholarly writings or previous decisions of arbitral tribunals that have accepted the existence of an investment. The tribunals (27) that leaned towards a liberal and flexible approach in finding an investment under art 25(1) stressed that the drafters of the ICSID Convention decided not to define the term 'investment' so as to avoid undue restrictions on the parties' understanding of what should constitute an investment. Adjudicators should not apply certain characteristics to define the existence of an investment. On the contrary, they need to consider different characteristics for guidance in identifying the existence of an investment. According to the liberal approach, the characteristics of investment may differ from one case to another. This permits flexibility and gives weight to the parties' understanding of the notion of investment, and is also compatible with the object and purpose of the ICSID Convention as expressed in the Report of the Executive Directors.

Professor Schreuer--an active follower of this approach--after reviewing a number of cases, stated that it 'would not be realistic to attempt yet another definition of investment on the basis of ICSID's experience. But it seems possible to identify certain features that are typical to most of the operations in question'. (28) Further, relying on ICSID case law, he stated that in order for the project to meet the requirements of investment, it should first, have a certain duration; second, involve a certain regularity of profit and return; third, possess typically an element of risk for both sides; fourth, involve substantial commitment; and fifth, include an operation which is significant for the host state's development. However, he clarified that these characteristics 'should not be understood as jurisdictional requirements but merely as typical characteristics of an investment'. (29)

In contrast, Gaillard notes that 'this approach ultimately places the concept of investment in art 25(1) as secondary to and...