Sovereign Investor

Sovereign investors are those investors that are either sovereign States themselves or are intrinsically linked to a sovereign state, the most common types of which are State-owned enterprises (SOEs) and sovereign wealth funds (SWFs).¹ Recent decades have seen a significant increase in foreign direct investment activities by sovereign investors, which has led to questions about the implications with regard to investor-State arbitration.² The core of the issue is whether or not entities such as State-owned enterprises or sovereign wealth funds have standing to bring claims under International Investment Treaties, as the investor-State arbitration system had originally been created precisely to move away from the traditional inter-State dispute resolution process.³

The possibility for sovereign investors to raise a claim under an International Investment Treaty depends first and foremost on the specific wording of that particular treaty.⁴ Certain treaties expressly provide for this possibility, such as the Kuwait-South Africa BIT which covers State-owned enterprises, sovereign wealth funds and the contracting States themselves under the definition of investors.⁵ Other treaties, albeit very few, expressly exclude sovereigns from the definition of investors.⁶ Where no express mention of sovereign investors is made, it is up to the arbitrators to interpret whether or not the sovereign investors has standing under the BIT.⁷ Cases such as Vattenfall v. Germany⁸ and CSOB v. Slovakia,⁹ both brought by companies wholly owned by sovereign States, indicate that arbitrators have welcomed claims made by sovereign investors even where the applicable treaty makes no express mention of them under the definition of investors. However, States themselves might not have standing as investors where they are not expressly included under the definitions of the applicable treaty, which could also mean that sovereign wealth funds with no distinct juridical personality could be precluded from bringing a claim unless the treaty in question covers non-physical investors lacking juridical personality.¹⁰

It has been suggested that sovereign investors may not have standing under the ICSID Convention as the tribunal would lack ratione personae jurisdiction given that the travaux préparatoires of the convention clearly demonstrate that it was created in order to depoliticize disputes and move away from inter-State approaches.¹¹ Aron Broches, the main architect of the ICSID Convention, posited that State-owned enterprises could resort to the ICSID Convention if it elects to assimilate to a private enterprise rather than a government agency.¹² This proposition has been dubbed the “Broches Test” and has been applied in at least three arbitrations, all of which concluded that the sovereign investor satisfied the ICSID Convention’s ratione personae requirements.¹³ The test has been applied in a circumstance-specific manner, i.e. tribunals have looked at whether the sovereign investor acted as a government agent in making and maintaining the litigious investment itself, not whether it acts as a government agent in discharging its functions in the territory of its home State or otherwise.¹⁴

ICSID, History of the ICSID Convention: Documents Concerning the Origin and the Formulation of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, Vol. II-1, 1968 reprinted in 2009.

Bassan, F., The Law of Sovereign Wealth Funds, Edward Elgar Publishing, 2011.

Skovgaard Poulsen, L.N., Investment Treaties and the Globalisation of State Capitalism: Opportunities and Constraints for Host States, in Echandi, R. and Sauvé, R. (ed.), Prospects in International Investment Law and Policy: World Trade Forum, Cambridge University Press, 2013. 

Shima, Y., The Policy Landscape for International Investment by Government-controlled Investors: A Fact Finding Survey, OECD Working Papers on International Investment, OECD Publishing (2015/01), 2015.

Mohtashami, R. and El-Hosseny, F., State-Owned Enterprises as Claimants before ICSID: Is the Broches Test on the Ebb?, in Ziadé, N. (ed.), BCDR International Arbitration Review, Kluwer Law International, Vol. 3, 2016.

Skovgaard Poulsen, L.N., States as foreign investors, diplomatic disputes and legal fictions, ICSID Review–Foreign Investment Law Journal, Vol. 31, No. 1, 2016.

Kovács, C., Attribution in International Investment Law, Kluwer Law International, Vol. 45, 2018.