The Settlement of Disputes Under The United Kingdom-Peru Bilateral Investment Treaty
*Enrique Miguel Chávez Bardales
*Attorney-at-Law; Catholic University of Peru; PG University of Bologna; LL.M. Liverpool University. Thanks are due to professor Amazu Asouzu, King´s College, University of London, for his valuable comments on earlier drafts of this paper.
1. General Introduction
The Peruvian President’s last British visit, in July 1998, attracted the attention of hundreds of potential investors at the Confederation of British Industry. He believes Peru has struck the right balance to encourage wider overseas investment in the country. In fact, the economical relationship between both countries has become more important in the recent years. For instance, British investment is currently the third largest investor in Peru and, further, the United Kingdom was the country to whom Peru had the highest favourable commercial balance within the European Union in 1997. (1)
While a country may offer foreign investors legislation that is flexible, open and conducive to investment, if the government is to provide investors with the safeguards they need to invest in a country like Peru, it must also assure the international community a series of internationally recognised guarantees and rights. To this end, Bilateral Investment Treaties (2) are just one more part in the overall mechanism of investment promotion. This work will concentrate on the United Kingdom-Peru bilateral investment treaty(3) regarding the provisions related to the right to submit investment disputes to international arbitration through the International Centre for the Settlement of Investment Disputes (4). Considering that Peru is the country where the overwhelming investment is made between both nations, major reference will be made to its relevant national legislation.
Thus, a principal objective of the present study is to highlight the above feature of the BIT and then to explain in a critical analysis the way in which British investors can rely on the treaty provisions that give them a direct access to an international forum for protecting their investments. The work has three main sections. The first part presents a wider analysis of the treaty provisions and the jurisdiction establishing the connection that it has with the ICSID convention. The next chapter outlines the issue of insurance compensation as a ground for alleging objections to the proceedings. The final section discusses the policy implications of the BIT which will be followed by the conclusions.
2. The Treaty Provisions and the Jurisdiction of the ICSID
2.1 Introduction
Article 10 of the BIT provides the legal framework within which parties to a dispute can mobilise the treaty’s mechanisms. This article states that there must cumulatively exist the following conditions:
1) A legal dispute concerning an investment;
2) A contracting party (to the treaty);
3) A national or a company of the other contracting party (to the treaty);
4) Consent by the parties to the dispute being referred to the ICSID for settlement by conciliation or arbitration.
As the BIT stipulates for the reference of disputes arising therefrom to ICSID, this work will take into consideration the relevant provisions of both regulations and awards made under the auspices of the ICSID in order to shed some light on the most common problems. However, a critical point is that in order for the Centre to be seized of jurisdiction in a dispute, they must be compatible with the BIT provisions bearing in mind that in case the BIT regulations go beyond the ICSID provisions, there cannot be a valid reference to the Centre,(5) rendering it useless as a means of solving disputes. For convenience, the inner elements of article 10 are considered separately.
2.2 Legal Dispute (Ratione Materiae)
2.2.1 Existence.
Article 10(1) of the BIT limits its scope by providing that its jurisdiction is focused on any legal dispute arising between one contracting party and a national or company of the other contracting party. From the definition of the existence of such a legal dispute arises a conceptual requirement that is further qualified in time: article 13(2) sets out the time period over which the treaty is enforceable and ,(6) disputes that have arisen otherwise cannot benefit from its provisions. On the other hand, the existence in time of a legal dispute requires a minimal standard of conflict. Although this is not described in the BIT, some commentators have remarked that there should be a difference in opinion sufficiently significant to amount to a dispute that is suitable for conciliation or arbitration.(7) This would mean that general statements not addressed to the other party and which further do not create the sufficient arena for a legal conflict may not be considered in the spirit of the treaty. In addition, it is suggested that "failure to respond to a specific demand within a reasonable time would be sufficient" (8) to create, even indirectly, the necessary dispute. Thus, an open letter to the other party published on the media could be the initial step leading to a dispute.
2.2.2 Previous Stage.
Article 10(1) of the BIT should be read in accordance with article 10(2). The latter provides for the prior use of other means of settlement such as "amicable settlement, pursuit of local remedies or otherwise". These can be considered as a preliminary stage that -if an agreement is not reached within 3 months -can be followed by the jurisdiction of the ICSID.
However, what it is significant is that the use of these preliminary devices supports the argument that the legal dispute can only be said to exist if it is capable of being solved by amicable settlement, pursuit of local remedies or otherwise. Clearly, these would not be available if the dispute had not matured into a dispute of legal character between the parties, specifically as regards to the clarity, certainty and reality. Accordingly, "the dispute must go beyond general grievances and must be susceptible of being stated in terms of a concrete claim." (9)
2.2.3 Meaning of Legal
Although the BIT does not define the expression ‘legal dispute’, it has been pointed out that "mere conflicts of interests are outside its purpose" (10). This lack of clarity caused a particular debate during the ICSID Convention’s preparation whereby a number of delegates from capital-exporting countries found the reference to legal disputes too limiting or too confusing and suggested its deletion. However, the risk of assuming such a position in an investment treaty would have created too broad an arena including political or commercial disputes which may amount to an unexpected invasion of the state’s sovereignty. For instance, the fact that a British company is located in a particular area of Peruvian territory does not entitle it to claim that that province should be included in the Peruvian government’s plans to create a free zone area: this kind of decision is clearly outside the jurisdiction of individuals and, although being of vital importance for such a company, it is a political matter that can only be decided by the sovereign state and which cannot be challenged by the private investor. Should that company be located within such free zone area however, a discriminatory treatment against it would be enough to support the existence of a legal dispute within the meaning of the treaty.
In reference to the nature of a ‘legal dispute’, the report of the ICSID Executive Directors states that "the dispute must concern the existence or scope of a legal right or obligation, or the nature or extent of the reparation to be made for breach of a legal obligation". (11) However, it was noted that the dispute "will only qualify as legal if legal remedies such as restitution or damages are sought and if legal rights based on, for example, treaties or legislation are claimed." (12) Further, in the AMT v Zaire case, the tribunal held that there was a legal dispute in the sense that the legal dispute required the application of rules of law and called for legal solutions (13)
On the other hand, a dispute that has as its central point the existence or not of questions of fact would qualify as a legal one if judgement results in legal consequences for the parties. In fact, "the nature of the dispute is determined not by the facts leading to it but by the legal claims they trigger." (14) For instance, the existence or not of reserves of oil may entitle a British company to a concession agreement with the Peruvian government as many types of exploration licence include such a clause.
2.3 Subject Matter of Investment.
2.3.1 Definition under the United Kingdom-Peru BIT
The United Kingdom-Peru treaty, as in most of the BITs, contains a specific definition of investment which sets out the purpose of its regime. In fact, it covers an open-ended list of matters that are found repeatedly in BIT models. (15) Article 1(a) of the BIT establishes that for the purposes of the treaty ‘investment’ means
"every kind of asset defined in accordance with the laws and regulations of the contracting party in whose territory the investment is made and in particular, though not exclusively, includes:
1) Movable and immovable property and any other property rights such as mortgages, liens or pledged;
2) Shares, stock or debentures and other forms of participation in companies or joint ventures;
3) Claims to money or to any performance under contract having a financial value
4) Intellectual property and industrial property rights such as copyrights, patents, utility models, industrial models and designs, marks, trade names, goodwill and know-how;
5) Concessions conferred by law or under contract for the performance of an economic activity, including concessions for prospecting, exploration and exploitation of natural resources;
A change in the form in which assets are invested does not affect their character as investments. The term "investment" includes all investments whether made before or after the date of entry into force of this agreement."
The wording of this provision shows an important innovation not included in the British model but specifically stated in the Peruvian one. According to the former, no matter what the state recipient laws define as investment: this is an unnecessary qualification which would permit the investor to invoke a broader definition of investment according to the law of his own country and yet one not contained in the laws of the host state. However such reasoning goes beyond the interest of the recipient state and it could therefore be said that the final draft of the BIT reflects a more balanced result supported by the Peruvian delegates. Finally, relevant to this chapter are the provisions of article 1 of the Peruvian Foreign Investment Law which allows the following forms of foreign investment:
1) Capital contributions;
2) Investments made in national currency from funds to be remitted abroad;
3) The conversion of bonds into stock;
4) Reinvestments;
5) Investments in goods physically located in the national territory;
6) Intangible technological contributions;
7) Portfolio investments;
8) Joint ventures
9)Any other form of foreign investment that contributes to the country’s development.
2.3.2 Definition Under the ICSID
As regards the ICSID Convention, it does not offer any definition of investment. It is significant that during the discussions about the inclusion of such a reference in the multilateral convention, the British position was against a conceptual delimitation. In fact, the British delegate considered "that a definition would only create jurisdictional difficulties." (16) Therefore, the policy of the United Kingdom varied when the term was incorporated in the BIT. This may partly be explained by the fact that at the bilateral negotiations, it was far more possible to reach an agreement -at least in broader terms- as to the significance of the concept. (17)
The SPP award made an important comment on the meaning of investment in the convention. So, it was pointed out that reference to investment anywhere in the convention should be accorded a significance which consists in the flow of international capital to the host state. (18) This interpretation could have been deduced from the wording of the preamble of the convention which states the need for international co-operation for economic development and the role of private international investment therein. The above holdings are supported by the report of the Executive Directors which says that the ICSID Convention was "prompted by the desire to strengthen the partnership between countries in the cause of economic development." (19) Interestingly, the Peruvian Foreign Investment Law states at the end of article 1 that it is allowed as a foreign investment "any other form of it [investment] that contributes to the country’s development."
Mr Broches remarked that an investment protection treaty i.e. a BIT "could not effectively establish jurisdiction of the centre beyond this limitation ratione materiae." (20) If this is right, the definition contained in article 1(a) of the United Kingdom-Peru treaty would qualify as an investment as stated under the Convention only if it matches the objective criteria outlined above i.e. that "it must contribute to or stimulate the flow of private capital into the host state for the latter’s economic development". (21) Consequently, movable and immovable property without being connected to an investment based on "the consideration upon which the convention was elaborated" (22) would scarcely meet the jurisdictional criteria of the ICSID arbitration.
The above formula is followed by ICSID’s commentators who remarked that the term "investment" serves mainly to exclude disputes arising out of ordinary sales contracts. In fact, it has been noted that "in the past, the term has been interpreted in ICSID arbitrations to cover industrial investments, natural resource exploitation, hotel construction, management contracts, technical assistance contracts, and licensing agreements". (23) And more recently it has been criticised the submission of disputes in international engineering contracts to ICSID arbitration. On the whole it is alleged that they are in breach of the ICSID Convention "for the reason that such contracts do not involve any net transfer of capital resources to a developing state and are, therefore, commercial sales of goods and services and cannot be characterised as investments within the meaning of the convention." (24)
On the other hand, it has been questioned the fact that if private parties have the opportunity to provide that challenge in the investment setting, why should the same opportunity not be available in the trade setting? (25). The answer may be found on the fact that "governments are now the filters for these claims and they bring to the GATT (WTO) complaints which affect their national interests as a whole. A system in which private parties can bring GATT (WTO) cases directly would remove this power from governments and devolve it to private parties. It is not clear whether or not governments would be prepared to accept that." (26)
2.3.3 Unilateral Limitation.
The reference that article 1 (a) of the BIT makes to the "laws and regulations of the contracting party in whose territory that investment is made" allows for the possibility of altering and modifying the notion of investment which in turn may reduce the jurisdiction of the centre. Also, article 25-4 of the Convention offers the possibility to contracting states to do the same although they would have to notify the centre of the kinds of disputes they would not consider submitting to the jurisdiction of the Centre. Therefore, unilateral modification of the subject matter of investment under the BIT would not be enough, for it to have an effect there is still an obligation to notify the Centre.
One possible effect of the above argument is that any unilateral decision would amount to giving unlimited power to the state to modify the matters expressly included in article 1(a) of the BIT. This argument would render useless any attempt of giving certainty and predictability to the investors(27): the strength of the bilateral international treaty would be seriously compromised if no other alternative interpretation was given.
To shed some light on the problem, it may be pointed out that the matters expressly listed in article 1(a) represents a de minimis guarantee which cannot be unilaterally modified as far as the BIT is concerned. Secondly, it could be stated that the only possibility for modifying the subject matter of investment is reduced to the matters not referred to expressly on that list but contained in the national legislation. Consequently, parties to the ICSID can still determine a narrow meaning of investment by avoiding the objective criteria described above and notifying it to the centre. However, those matters referred to specifically in the definition of investment contained on the BIT where they are contracting party cannot be evaded.
2.3.4 Admission Requirements.
Paragraph 1 of article 1 of the treaty gives the right to the Contracting Party in whose territory the investment is made to draft its laws and regulations concerning investment.(28) This may involve a set of rules that may establish admission requirements. As stated in other BITs, there is a policy of giving the host state the function of approving the investment prior to its admission. This power is supported by the notion of state sovereignty and the fact that it can foresee the consequences of new investments in its territory. Of course, not all sectors are normally opened to investors: there are certain fields where the state has particular concerns and may decide not to allow foreign investors to compete against national industry.(29)
As far as the Peruvian Foreign Investment Laws are concerned, since the early 90s there has been structural reforms to encourage investment, national and foreign alike. "More than 130 statutes enacted in 1991 liberalised and eliminated all existing legislative and administrative controls over the economic activity of Peruvians and foreigners alike." (30) The law guarantees free private initiative, free competition, and free access to all sectors of the economy including the production and marketing of goods and the provision of services. All restrictions on the use of natural resources have been removed, except for those concerning protected natural resources which are held in the public interest.(31) As far as admission requirements are concerned, the Foreign Investment Law eliminates the need for government approval of foreign investment, transfer of technology and trade mark licensing agreements. A foreign investment must only be registered with the CONITE (Foreign Investment Commission) if the investor intends to repatriate capital, profits and royalties. In such a case, it is advisable to register the investment at the start-up of operations. No other government controls apply.
2.3.5 Retroactive Limitation
It is worth mentioning that under the ICSID Convention it would not be possible for a state party to a dispute to attempt ex post facto to limit the scope of its original consent. This happened once in the case of Jamaica.(32) When that country ratified the ICSID Convention in 1966, it did so without qualification. In 1968 Jamaica and several foreign investors concluded agreements for the mining and the processing of bauxite. Each agreement made provision for ICSID arbitration. In 1974, contrary to a provision regarding the stabilisation of the relevant tax system, Jamaica decided unilaterally to increase the taxes payable by the investors. One month before that decision was published, Jamaica sent the ICSID a declaration purporting to exclude from its consent disputes, past and future regarding its mineral and other natural resources. After the enactment of the new tax legislation, the investors affected by it instituted ICSID arbitration proceedings. The arbitral tribunal held that since the initial consent of Jamaica was unconditional and unqualified, no retrospective effect could be given to the 1974 declaration.
2.3.6 Old and New Investments
Article 1 (a) of the BIT points out that the reference to ‘investment’ includes all investments whether made before or after the date the treaty came into force. This wording shows a general policy whereby the treaty may not necessary be linked only with the purpose of attracting new investments as would appear to be the general trend of developing countries such as Peru. In fact, there is some ambiguity as to what would be the position of the Contracting Parties at the time of dealing with this problem in the treaty. On the one hand, it is indicated that " recipient states [Peru] would typically see little reason to provide incentives to investments that had already been made . The capital-exporting states [Britain], on the other hand would normally endeavour to seek as wide protection as possible."(33) However the attitude of the Peruvian delegates, when making reference to this topic, was simply that "a BIT applies to investments made after it goes into effect, and in some cases to investments made before it went into effect, provided the dispute in question arises after the treaty has entered into force. Therefore, if a treaty goes into effect July 7, 1993, and a subsequent dispute arises between an investor and the government involving an investment made prior to the effective treaty date, the conflict resolution clause will apply to the dispute." (34)
The issue of attracting fresh investment would not necessarily be connected to the major purpose of a BIT. In general, other factors(35) may have more influence on a decision of investing abroad than a BIT by itself. The role of a BIT could mainly be focused on the creation of an "instrument that sets forth international law in respect of foreign investments, between the contracting parties."(36) By doing so, the host country gives certainty and predictability at the international level.
2.4 A Contracting State and a National or a Company of the other Contracting State (Ratione Personae).
2.4.1 A Contracting State
2.4.1.1 State Agencies
The United Kingdom-Peru BIT contains in article 10(2) an unconditional offer to submit any legal dispute concerning investment to ICSID arbitration. However, the treaty is generally reticent about the possibility of consent given by any constituent subdivision or agency of a Contracting state designated to the centre by that state as stated in article 25 of the ICSID convention.
The wording of article 12 of the BIT(37) seems to be insufficient regarding article 25 of the ICSID convention in order to establish jurisdiction. The same can be said as regards article XII of the United States Model Agreement(38). Indeed the fact that it appears in a different article not so connected to article 11 providing for ICSID arbitration implies that this provision is outside the intentions of article 25 of the ICSID convention. Further, it is only a provision that deals with the territorial application of the treaty which can be varied by special notice on an ad hoc basis in compliance with article 70 of the Convention.(39)
2.4.1.2 Logic of Agencies or Subdivisions
The only possibility for a constituent subdivision or agency of either the United Kingdom or Peru to give a valid consent and establish ICSID jurisdiction is by the express provision of article 25(3) of the ICSID convention.(40) However, this mechanism is based not on the BIT criterion but on the result of individual negotiations on whether or not to submit the disputes to the ICSID for arbitration between those agencies or subdivisions and investors, that is to say, not on the unconditional submission established in the United Kingdom-Peru treaty.
The designation made in accordance with article 25(3) of the ICSID convention "would create a very strong presumption that the entity in question is indeed a constituent subdivision or agency". Nevertheless, it is said that "the existence of a constituent subdivision or agency is ultimately for the conciliation commission or arbitral tribunal to decide. It is part of the convention objective criteria and must be determined, if necessary, in the framework of the commission’s or tribunal’s power to rule on matters of jurisdiction and competence in accordance with articles 32 and 41 of the convention."(41)
The reason for this requirement is evident from the fact that the states give the investor a guarantee on the competence of these agencies or constituent subdivisions, avoiding any doubt that may detract from the seriousness of the negotiations.(42) However, it has been observed that "contracts concluded by government agencies without sufficient authority and thus most likely in breach of material procedural rules, are ultra vires and therefore void."(43) The importance of this matter is therefore reflected in the certainty required by the investor to know exactly what are the legal powers of his government partner, "irrespective of the claim of the government partner to such powers."(44)
2.4.2 A National or a Company of the other Contracting State.
2.4.2.1 Introduction.
According to article 10 of the BIT, parties to the dispute consist of a Contracting State and a national or company of the other contracting party. Bearing in mind that the later is designed for investors, they may be granted direct access to an international forum such as the ICSID Convention. In fact, "this was said to be in harmony with the growing recognition of the individual as a subject of international law and was designed to obviate the espousal of individuals’ claims by their national governments."(45) According to this philosophy, investors are entitled to be a party to the proceedings either as claimant or defendant notwithstanding the willingness of his government to accept his arguments and therefore, represent him in the international litigation. This could be highlighted as one of the main innovations appearing in international law whereby, traditionally, a non-state party had no direct rights and obligations under a treaty.(46)
The wording of article 10 indicates that ICSID arbitration is not available for disputes between contracting parties. However, this would not mean that government-controlled entities have no access to the ICSID arbitration under the BIT. Although the ICSID convention speaks of the importance of private international investments,(47) there is no clear statement whereby wholly or partly government-controlled companies are excluded from the ICSID or the BIT. In relation to this problem, Mr. Broches put forward the argument 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."(48)
On the other hand, the United Kingdom-Peru BIT does not deny the fact that there should be only one party on the side of the investor.(49) This is so, despite the fact that the wording of article 10 of the treaty treats the investor as a single entity. This view is followed by some ICSID awards in which issues arose from one particular investment operation. In these cases, the appearance of more than one party on the investor’s side was the consequence of companies claiming jointly with their parent companies or their subsidiaries(50) and the assignment, in part, of the investor’s rights to an additional investor.(51) Further, one can think of the advantage of having multipartite arbitrations: in this way parties can avoid time expenses, fees and most importantly, they can have non contradictory awards arising from a common proceeding involving related evidence and therefore granting consistency to the final decision.
2.4.2.2 Individuals.
The nationality of individual investors is considered as one of the objective requirements for ICSID’s jurisdiction. Article 1(c) of the United Kingdom-Peru BIT addresses this topic by defining nationals as follows: i) in respect of the United Kingdom: physical persons deriving their status as British nationals from the law in force in Britain; ii) in respect of the Republic of Peru: physical persons possessing Peruvian nationality in accordance with its legislation.
In other words, what the treaty intends is to determine the issue of nationality by referring to the law of the state whose nationality is in question. Interestingly, compared to juridical persons, the list of ICSID cases involving individual investors is short. There are in fact five cases instituted by individuals non of them however, have had a final award at the time of writing.(52)
By stating that the investor must have the nationality of another contracting state, the ICSID convention solved the problem of enforcement of awards: "since the investor’s principal assets were likely to be under his national state’s jurisdiction, the enforcement of awards against the investor might be frustrated if his home state was not a contracting state."(53) On the other hand, on the basis that it would be illogical for a state to submit to an international tribunal with respect to its own national, the convention "sates categorically that the individual investor, to be eligible for party status, must not be a national of the host state."(54) This is so, even in the case of individuals who possess the nationality of another contracting state if they possess the host state’s nationality concurrently. It is significant that the Report of the Executive Directors stated that "under clause (a) of article 25(2) [ of the ICSID ] a natural person who was a national of the state party to the dispute would not be eligible to be a party to proceedings under the auspices of the Centre, even if at the same time he had the nationality of another state. This ineligibility is absolute and cannot be avoided even if the state party to the dispute had given its consent."(55)
The Convention provides that the nationality of the other contracting state must exist at the time of consent as well as at the time the request for conciliation or arbitration is registered but, the nationality of the host state must not exist at either date. No clear position was assumed as regards the intervening period that required proof of nationality to be maintained during the proceedings up to the final decision. In general, under the traditional law of diplomatic protection, some commentators state that "the nationality must exist at the date of the injury, and should continue at least until the date of the award settling the case."(56) However, no similar opinion was held by the Convention and hence by the BIT.(57)
2.4.2.3 Companies
Article 1 (d) of the BIT deals with the concept of company for which the nationality requirement is an objective ground under the ICSID provisions on jurisdiction. As occurs with most BITs, the United Kingdom-Peru BIT has a dual definition of company according to the country concerned:
i) in respect of the United Kingdom: [it means] corporations, firms, and associations incorporated or constituted under the law in force in any part of the United Kingdom or in any other territory to which this agreement is extended in accordance with the provisions of article 12.; ii) in respect of the Republic of Peru [it means] entities including private and commercial companies and any other association with or without legal representation which perform an economic activity within the scope of this agreement, and constituted in accordance with Peruvian legislation.(58)
There could be some troubles from the Peruvian definition as it includes "entities with or without legal representation." In fact, article 25-2-b of the Convention seems to be categorical when it refers to "juridical person". "This indicates that legal personality is a requirement for the application of article 25-2-b and that a mere association of individuals or of juridical persons would not qualify. In such a case, the individuals might be brought under article 25-2-a or the juridical persons forming the association would have to be brought separately under article 25-2-b."(59) Therefore, the Peruvian standard does not appear to be in accord with this objective requirement for jurisdiction of the ICSID arbitration. Consequently, "for purposes of the Convention the quality of legal personality is inherent in the concept of juridical person and is part of the objective requirements for jurisdiction."(60)
On the other hand, it is clear that the treaty uses the place of incorporation for British corporations, and the place of incorporation in conjunction with the place of effective exercise of economic activities for Peruvian companies. However, the determination of a company’s nationality is not expressed in the ICSID Convention. It was indicated that "ICSID tribunals have uniformly adopted the test of incorporation or seat rather than control when determining the nationality of a juridical person." In Kaiser Bauxite v. Jamaica, the tribunal held that the claimant was a national of another contracting state on the basis of the finding that " Kaiser was a private corporation organised under the laws of the state of Nevada in the United States of America."(61) In SOABI v Senegal, the tribunal said "a juridical person which had the nationality of the contracting state party to the dispute", the phrase used in article 25-2-b of the convention, "is a juridical person which in accordance with the laws of the state in question has its head office or has been incorporated in that state"(62) In Amco v Indonesia, "the tribunal simply relied on the classical concept of nationality based on incorporation and the social seat."(63)
The question of a company’s nationality may be raised in the case of a company which has not been incorporated in United Kingdom or in Peru but its actual control is connected with one of them. From the Peru-United Kingdom BIT’s point of view, such an entity may not have jurisdiction based in article 10 because the treaty criterion is not met.(64) Nevertheless, the only possibility of attracting ICSID jurisdiction would be by an agreement between the parties (a host state party and the investor) on the investor’s nationality. This agreement on nationality "will carry much weight, but it cannot create a nationality that does not exist."(65) In particular, it is said that "mere control of the corporation should be sufficient in such a case."(66) In MINE v Guinea, the tribunal "appears to have accepted the view that an agreement on nationality based on actual control is decisive."(67)
For a company to benefit from the United Kingdom-Peru BIT, it must have the nationality of a contracting party other than the host state contracting party. What would happen if it has a plurality of nationalities, all of them under the common criterion established in article 1(d) of the BIT? "The possession of the nationality of a non Contracting State in addition to that of a contracting state (either Britain or Peru) would not as such be a bar to becoming a party to ICSID proceedings. The concurrent possession of the nationality of a non contracting state, established on the basis of the same criteria, would not exclude jurisdiction."(68)
The time for assessing the nationality of the company is given by article 25-2-b whereby the requirement of nationality only applies at the date of consent. Therefore, the test of time for natural persons does not apply to companies. The only reason for this different treatment can be found from Mr Broches’s interpretation that " favoured a double test of time for natural persons but did not think it necessary to apply this principle to companies since he thought it unlikely that a company could become incorporated in another country without being dissolved."(69)
It is stated that "any change in the juridical person’s personality after the date of consent is immaterial for jurisdiction."(70) However, if this new nationality is one of a non-contracting state, this would constitute a big dilemma for the recognition and enforcement of awards as this non-contracting state is under no obligation to carry on the ICSID award.
"All the above considerations concerning multiple nationality are premised on the assumption that the juridical person does not have the nationality of the host state. Nationality of the host state leads to the applicability of the second clause of article 25-2-b requiring a special agreement based on foreign control."(71)
2.4.2.4 Locally Incorporated Companies.
Traditionally, "a corporation has the nationality of the state under the laws of which it was created."(72) In this respect, "different cases have pointed to different factors ranging from incorporation of the company in a particular state to the maintenance of the administrative center of the company in the state and the existence of substantial holdings by nationals in the company."(73)
Article 10-3 of the United Kingdom-Peru BIT deals with the case of locally incorporated but foreign controlled companies and, as such, they have been given special consideration in order to be covered by the BIT. It runs as follows, "A company which is incorporated or constituted under the law in force in the territory of one contracting party and in which, before such a dispute arises, the majority of shares are owned by nationals or companies of the other contracting party shall, in accordance with article 25-2-b of the Convention, be treated for the purposes of the convention as a company of the other contracting party."
As noted earlier, nationality of companies is determined by article 1-d of the BIT. If this rule is applied for locally incorporated but foreign controlled companies a large part of foreign investment would be outside the treaty’s scope. This is because normally capital importing states may require that "foreign direct investment be held through locally incorporated subsidiaries."(74) On the other hand, the practice of running investment abroad through subsidiaries is considered a key strategy for many multinational companies because of the advantages they may derive from it. So, "the main reasons leading to the formation of a subsidiary might be to minimise the tax burden on the parent company or group and to take advantage of corporate entity and the attributes that flow from it, such as limiting the financial or business risks to which the parent or group is exposed"(75). Furthermore, on the side of the host state, "the purpose of this requirement is a better supervision of the investor’s activities."(76) For the purpose of this research, it is important to remark that "in a survey conducted in 1976(77) it was found that 1,588 British companies had more than 50,000 subsidiaries, of which more than 9,000 were dormant and about 20,000 were associated companies. While British-based groups had an average of 44 subsidiaries or associates all other European Community countries together had an average of 19 and the United States only 10"(78).
The wording of article 10-3 of the BIT has a close link with that of article 25-2-b second clause of the ICSID convention, whereby a national of another contracting state means: "any juridical person which had the nationality of the contracting state party to the dispute on that date and which, because of foreign control, the parties have agreed should be treated as a national of another contracting state for the purposes of this convention." "This definition is not inconsistent with the convention which uses the term ‘national’ for both national and juridical persons but does not define it. The convention, however, clearly assumes that the law governing the constitution of a company, or the company’s place of establishment, will or may be held to determine its nationality and therefore contains a special provision permitting parties to a dispute to stipulate that a subsidiary of a ‘national of another contracting state’ which is incorporated in the host state will be treated as itself a ‘national of another contracting state.’(79) So, in this particular case, article 10-3 of the BIT is one of the ways a contracting state to the ICSID convention can give locally incorporated but foreign owned companies treatment such as to consider them as companies of the other contracting party. Similarly, to explain the logic of these provisions, most commentators have agreed that "if no exception were made for foreign-owned but locally incorporated companies, a large and important sector of foreign investment [of nationals of a contracting state] would be outside the scope of the convention."(80) The final version of the Convention opted for a solution which gave the host state a choice whereby, if it wishes to treat those companies as foreign nationals it should be done by an agreement based on the foreign control over that company.
2.4.2.5 Foreign Control
Article 25-2-b second clause of the Convention speaks of ‘foreign control’ as a reason to give a locally incorporated but foreign owned company treatment as a company of the other contracting state. On the other hand, article 10-3 of the BIT does not mention ‘foreign control’, instead it assumes a more specific criteria of control based on shares ownership. Clearly, as it happens with other BITs(81), the later equates majority shares ownership with ‘foreign control’ under article 25-2-b of the Convention. The problem with such an approach is that it may fall short of explaining one of the objective criterias set by the Convention or, further, it may exceed a flexible approach that some ICSID tribunals have given to that item(82).
Commentators on the ICSID Convention have remarked at the objective requirement of ‘foreign control’. However, there is no agreement on what can amount to satisfy this criteria. "But there seems to be consensus that control is a factual element that may be examined by a tribunal independently of the agreement on nationality."(83)
ICSID tribunals have assessed the issue of foreign control by looking at the actual existence of foreign control over the local company. Sometimes they have focused on the nationality of the immediate controller and sometimes they have gone beyond. The variety of the analysis shows that there is still a ground for security whereas a solution based on objective criteria may not be enough: further clarification is required.
"In the case of Klockner v Cameroon, the tribunal held that at the time of the agreement, containing the ICSID clause, between the local joint venture company, SOCAME, and Cameroon, "SOCAME was a Cameroonian company, but subject to the majority control of foreign interests". "The tribunal emphasised its holdings by taking into account an agreement which stipulated that Klockner and its European partners would subscribe to 51% of SOCAME’s capital."(84)
In the LETCO v Liberia case, the tribunal had no problem in justifying its decision that the locally incorporated company was under French control at the time of consent to ICSID’s jurisdiction, because of the 100% French ownership.
In an important decision in the "Vacuum Salt v Ghana case, the factual question of foreign control turned out to be decisive. In this case, there had been a lease agreement of 1988 between Vacuum Salt and Ghana providing for the development of salt production and mining facility. The agreement contained an ICSID clause."(85) The tribunal pointed out that "the parties’ agreement to treat claimant as a foreign national ‘because of foreign control’ does not ipso jure confer jurisdiction."(86) Moreover, the tribunal concluded that "the existence of consent to an arbitration clause such as paragraph 36(a) of the 1988 lease agreement in circumstances such that jurisdiction could be premised only on the second clause of article 25-2-b, raises a rebuttable presumption that the ‘foreign control’ criterion of the second clause of article 25-2-b has been satisfied on the date of consent."(87) Due to the circumstances of this case, this presumption was rebutted.
In reference to the above cases, especially Vacuum Salt, it can be said that "foreign control at the time of consent is an objective requirement which must be examined by the tribunal in order to establish jurisdiction."(88)
All these considerations apply to the Peru-United Kingdom BIT, notwithstanding the manner in which the idea of foreign control is arisen, that is to say that in all the above cases the issue emerged from an agreement and not from a provision of a BIT.(89) In fact, "a provision in a treaty or in national legislation does not amount to an agreement between the parties to the dispute."(90) "A clause in a treaty or in national legislation providing for ICSID’s jurisdiction is no more than an offer to the investor, which may be accepted by the later. The proviso that a local company, because of foreign control, would be treated as a national of another contracting state is part of the terms of the offer made by the host state. When the offer to submit disputes to ICSID is accepted by the investor, that proviso becomes part of the consent agreement between the parties to the dispute."(91)
As to the exact meaning of "foreign control" required for qualifying to an ICSID arbitration, there are different solutions given by the ICSID tribunals. Some of them have focused the analysis on the shares, others have examined other possible elements of control such as management and the mixing of different factors. In the case of the United Kingdom-Peru BIT, complications may arise if control is exercised by investors of either Britain or Peru and by investors of different nationalities. It is said that "If control is exercised jointly by shareholders of several contracting states it is still possible to regard the local company as being under foreign control for purposes of the second clause of article 25-2-b of the Convention. Even if the nationals of one contracting state cannot be said to be in a position of control, it would be sufficient if they can exercise control together with nationals of other contracting states. The mere existence among the shareholders of nationals of non-contracting states or of nationals of the host state would not by itself oust the centre’s jurisdiction. But it must be shown that the combined influence of the nationals of contracting states other than the host state can be described as controlling."(92)
This position is clearly in contrast with the one that justifies not only effective and decisive control but also any reasonable amount of control. The argument observes that "article 25-2-b does not refer to ‘effective control’ but to control and, just as a flexible approach has been taken with regard to the search for the controlling interests, it is proper that a flexible approach be taken to the issue of control, particularly where there are competing controlling nationalities and an agreement has been reached on a particular foreign nationality."(93) Therefore, the argument says, "even though nationals of non-contracting states or of the host state may have greater control, there would be good reasons for not rejecting an agreement on nationality as long as there is an adequate control by nationals of contracting states."(94) However, to sustain this interpretation, it has to be taken into account that there could be unwanted effects that may affect the entire purpose of the Convention. So, if nationals of the host state or of non-contracting states have decisive control of the company, they could benefit from ICSID arbitration just by saying that there are foreign nationals of contracting states other than the host state having some control on the company. To attain this, they could show that some issues of the company (not the more important ones) are taken by this group and therefore they can be protected by the ICSID provisions. Therefore, this could be an easy way to elude the jurisdiction requirements of the convention. Consequently, in our estimation, a clear reading of the Convention would suggest that the degree of control should be qualified as to amount to have a decisive role in the important issues of the company that deals specifically with the foreign investment and not merely the administrative or bourocratic problems of the corporation. In this respect, the Peru-United Kingdom BIT establishes a very straight rule that links control with the possession of majority of shares and, therefore, speculations as to the degree of control are eliminated.
It is significant to note that article 10-3 of the BIT does not qualify the meaning of majority of shares. There could be two interpretations: first, an absolute majority, for which the treaty requires 50% plus 1 of the shares to be owned by the nationals or by the companies of the other contracting party. Second, a relative majority, for which even if a figure of 50% plus 1 is not reached, it is still -when compared with the other shareholders- the dominant shareholder in terms of proportionality. However, it is hardly possible to state that a non dominant shareholder considered alone would be considered as having the majority of shares if it is shown that the combined influence of the nationals of contracting states other than the host state could reach the controlling position of the company. Again, for this position to be successful, the basis of jurisdiction has to be based not on the Peru-United Kingdom BIT but on a specific agreement whereby the parties to the dispute agree that the requirement of foreign control is met and the company is to be treated as a company of the other contracting state (either Peru or Britain).
Although there is no ICSID case where the situation has arisen, it is advisable that, when a foreign investor participates in a joint venture with the nationals of the host state or the nationals of a non contracting state, it should be stated that that foreign investor is party to an agreement containing an ICSID arbitration and not only that the joint venture is a party to a similar agreement. This separate agreement would give the foreign investor an independent status from the joint venture and thus the foreign investor would not need to depend on its dominant role on the joint venture corporation.(95) This position is enhanced when the joint venture does not amount to an independent company but to an agreement between investors, a form that is a very common practice in the Peruvian experience.