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Pre-Investment Expenditure

I. Definition


Pre-investment or pre-contract1 expenditures may generally be defined as costs incurred in preparatory work for the making of an investment.2 Among other things, pre-investment expenditures may arise out of financing, negotiating, engineering, environmental, legal, and financial advisory work.3

II. Treaty practice


International Investment Agreements (“IIAs”) do not usually explicitly address pre-investment expenditures. However, IIAs like the USMCA have broadly defined an investor to include those that “ha[ve] taken concrete action or actions to make an investment, such as channelling resources or capital in order to set up a business, or applying for a permit or license”.4 Such broad definitions appear to encompass pre-investment expenditures in the IIA’s protective ambit.5


As regards to Article 25 of the ICSID Convention, it appears that its drafters had not considered the possibility that pre-investment expenditures should in themselves constitute an investment.6 See further Definition of Investment

III. Case law on whether pre-investment expenditures are recoverable


In the absence of an admitted investment,7 tribunals have held that State consent – or an agreement between the disputing parties8 – is required in order for investors to recover pre-investment expenditures.9 Tribunals have distinguished between cases where the relevant contract had become effective and cases where it had not – or, in the words of Professor Schreuer, “[s]teps preparatory to an investment will not by themselves be accepted as an investment”.10 In short, tribunals seem to consider pre-investment expenditures are recoverable only when they form part of the “investment”,11 namely, when they have led to the execution of a valid and binding contract.12

A. In the absence of a characterized investment


The tribunal in Mihaly v. Sri Lanka was the first to rule on the status of pre-investment expenditures.13 In Mihaly, the claimant sought damages for a proposed project that never came to fruition.14 Preliminarily, the tribunal found that the amount of the expenditure was not relevant in determining whether the expenditure qualified as an investment or not15 – the tribunal in RSM Production Corporation v. Grenada confirmed this reasoning.16 


The Mihaly tribunal continued to point out that the parties had expressly considered that it was only when the contract was executed that an investment would exist. The tribunal found a lack of jurisdiction ratione materiae since no investment had taken place17 and thus dismissed claims to the claimant’s pre-investment expenditures.


In the same vein, the tribunal in Zhinvali v. Georgia declined jurisdiction, finding that the claimant’s pre-investment expenditures – arising out of its exclusion from a hydro-electricity plant after three years of negotiations with the host state – did not qualify as an investment.18 Other tribunals have held a similar stance.19


However, at least one tribunal has posited that it may be possible under certain circumstances for an investor to recover pre-investment expenditures made in anticipation of a contract even if it never comes to fruition.20

B. In the presence of an effective investment contract


In PSEG v. Turkey, the parties had concluded a valid contract, but the underlying project was not carried out.21 The tribunal distinguished the case with Mihaly and Zhinvali, given that the contract in PSEG had already become effective.22 Other tribunals reached a similar conclusion23 and national courts have also upheld this reasoning.24

IV. Commentators’ discussions on whether pre-investment expenditures should be recoverable


Despite the aforementioned jurisprudential considerations, the issue of pre-investment expenditures has generated some discussion among commentators.25 For instance, the claimant-appointed arbitrator in Mihaly issued a concurring opinion stating that PIEs generate “economic value” and, for this reason, investment treaty protection should apply to those encouraged to engage in such expensive exercises.26 Some commentators consider this a sensible approach, arguing that the existence of a contract need not be the central question in circumstances where investments in an economic sense have been made.27


Others (including some tribunals) seem less convinced,28 noting instead that:29 (i) extending treaty protection to pre-investment expenditures would excessively increase the number of claimants that could pursue investment claims against states;30 and (ii) cases involving pre-investment expenditures might involve sensitive issues relating to bribery and corruption, which would be more appropriately reviewed by national courts applying domestic law.


Chatterjee, C., When Pre-Investment or Development Costs May or May Not be Regarded as Part of “Investment” under Article 25(1) of the ICSID Convention - The Mihaly Case, Journal of World Investment, 2003, pp. 909–924.

Fouret, J., Gerbay, R. and Alvarez, G.M. (eds.), The ICSID Convention, Regulations and Rules – A Practical Commentary, 2019.

Hamida, W.B., The Mihaly v. Sri Lanka case: Some Thoughts Relating to the Status of Pre-Investment Expenditures, in Weiler, T. (ed.), International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law, 2005.

Hornick, R.N., The Mihaly Arbitration Pre-Investment Expenditure as a Basis for ICSID Jurisdiction, Journal of International Arbitration, 2003, pp. 189–197.

McLachlan, C., Shore, L. and Weiniger, M., International Investment Arbitration: Substantive Principles, 2nd ed., 2017.

Reed, L., Scanlon, Z. and Atanasova, D., Protected Investment, in Fabri, H.R. (ed.), Max Planck Encyclopedia of International Procedural Law, 2018.

Schreuer, C., H., Malintoppi, L., Reinisch, A. and Sinclair, A., The ICSID Convention – A Commentary, 2nd ed., 2009.

Yannaca-Small, K. and Katsikis, D., The Meaning of ‘Investment’ in Investment Treaty Arbitration, in Yannaca-Small, K. (ed.), Arbitration Under International Investment Agreements: A Guide to the Key Issues, 2nd ed., 2018.

Yannaca-Small, C., Definition of Investor and Investment in International Investment Agreements, in International Investment Law – Understanding Concepts and Tracking Innovations, 2008.

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