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Mr Dimitrios Andriopoulos

Associate - Koutalidis Law Firm

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Pre-Investment Expenditure

I. Definition


Pre-investment or pre-contract1 expenditures (“PIEs”) 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 explicitly address pre-investment expenditures. However, IIAs like NAFTA 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. As regards Article 25 of the ICSID Convention, it appears its drafters had not considered the possibility that PIEs should in themselves constitute an investment.5

III. Case law


In the absence of an admitted investment,6 tribunals have held that state consent – or an agreement between the disputing parties7 – is required in order for investors to recover pre-investment expenditures.8 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”.9 In short, tribunals seem to consider pre-investment expenditures are recoverable only when they form part of the “investment”,10 namely, when they have led to the execution of a valid and binding contract.11

A. The Mihaly v. Sri Lanka approach


The tribunal in Mihaly v. Sri Lanka was the first to rule on the status of pre-investment expenditures.12 In Mihaly, the claimant sought damages for a proposed project that never came to fruition.13 The tribunal found that the amount of the expenditure is not relevant in determining whether the expenditure qualifies as an investment or not14 – the tribunal in RSM Production Corporation v. Grenada confirmed this reasoning.15 Accordingly, the Mihaly tribunal found a lack of jurisdiction ratione materiae since no investment had taken place.16 In the same vein, the tribunal in Zhinvali v. Georgia declined jurisdiction, finding that the claimant’s PIEs – 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.17 Other tribunals have held a similar stance.18

B. The PSEG v. Turkey approach


In PSEG v. Turkey, the parties had concluded a valid contract, but the underlying project was not carried out.19 The tribunal distinguished the case with Mihaly and Zhinvali, given that the contract in PSEG had already become effective.20 The tribunal in Malicorp v. Egypt reached a similar conclusion.21

IV. Criticism


Despite the aforementioned jurisprudential consistency, the issue of pre-investment expenditures has generated some discussion among commentators.22 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.23


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.24 Others are less convinced, noting instead that:25 (i) extending treaty protection to pre-investment expenditures would excessively increase the number of claimants that could pursue investment claims against states; 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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