Materialisation of investment

In addition to the definition of investment, it is necessary to consider when all of the elements of an investment have materialised.

As explained by Zachary Douglas, “[t]he legal materialisation of an investment is the acquisition of a bundle of rights in property that has the characteristics of one or more of the categories of an investment defined by the applicable investment treaty where such property is situated in the territory of the host state or is recognized by the rules of the host State’s private international law to be situated in the host state or is created by the municipal law of the host state.”¹

Tribunals may analyse when an investment materialised (i.e., did it occur before or after the obligations of the host State emerged), and where the investment materialised (i.e., was the investment in the territory of the host State).

Typically, investment treaties protect investments which materialised prior to the entry into force of that treaty.² But, even where the treaty is silent, tribunals and authorities tend to permit investments made before the treaty entered into force protections as well.³ (See also Jurisdiction Ratione Temporis)

Investments will only begin to benefit from a treaty’s protections after the treaty enters into force.⁴ Similarly, where an investment is seeking protection on the basis of national legislation, or a contract, it may be possible for the investment to materialise prior to the enactment of the relevant instrument; however, tribunals will adjudicate the alleged breach based on “obligations in force and binding upon the host contracting State at the time of the alleged breach.”⁵ See further Jurisdiction ratione temporis, Section III.

Tribunals may nonetheless take into account host State acts which predate the legal obligation.⁶ They may take into account continuous acts where State conduct began before the legal obligation came into effect, but continues afterwards,⁷ or it forms part of a several distinct actions that collectively constitute a breach as a “composite act.”⁸ See Jurisdiction ratione temporis, Section IV.B.

For an investment to be protected by a bilateral investment treaty, or other investment agreement, typically the investment must be “in the territory” of the contracting State.⁹ Tribunals have found an implied territorial requirement even where the text of the treaty does not provide one.¹⁰ Therefore, at the time the investment materialises, there must be a territorial nexus with the host State.¹¹ See further Territoriality of the investment, Section II.

It is also possible for indirect investments to be “in the territory” of the host State.¹² Tribunals have found a sufficient territorial nexus where a claimant acquires an indirect interest in a local company.¹³ They have also found it sufficient for a claimant to make a financial investment indirectly in the host State where it can show that the “center of gravity” of the investment or its “focal point” is in the host State.¹⁴ See further Territoriality of investment, Section III.

Tribunals look at the factual and legal circumstances surrounding the investment and determine whether the actions taken outside the territory of the host State “were treated as inseparable” from the activity in the host State.¹⁵

For example, the Inmaris tribunal found that “an investment may be made in the territory of a host State without a direct transfer of funds there, particularly if the transaction accrues to the benefit of the State itself.”¹⁶ Similarly, the Alpha Projektholding tribunal held that “for the purposes of the [treaty], it is the ‘activity’ that must take place ‘in the territory’ […] not necessarily the flow of the funds that allows that ‘activity’ to take place.”¹⁷

Tribunals do not require that size of the investment be large in order to qualify for protection.¹⁸ And the CSOB tribunal held that “a transaction can qualify as an investment even in the absence of a physical transfer of funds” into the host State.¹⁹ The Ambiente Ufficio tribunal went so far as to say that it is not “relevant whether the individual Claimants […] actually believed or were aware that they were making ‘an investment in [the host State]’.”²⁰

Conversely, tribunals have found that merely expending significant capital in the host State is not sufficient to show that the investor made an investment.²¹ See further Contribution of money or assets, Contribution to the development of the host State economy.

A few commentators²² and dissenting opinions²³ have criticized tribunals for adopting broad interpretations of BIT’s “in the territory” requirement, especially in the context of investments that concern capital market transactions, as this would extend ICSID tribunals jurisdiction into “a vast new field” and “would cover virtually all capital market transactions […] which have nothing to do […] [with] economic investment for the encouragement of which the ICSID Convention was concluded.”²⁴ 

This approach tends to propose analysing an investment based on the “situs” of the transaction at issue,²⁵ and is based on the theory that “[a]t least part of the contribution needs to physically occur in the territory of the host country”.²⁶ See further Territoriality of investment, Section III.B.

Douglas, Z., The International Law of Investment Claims, Cambridge University Press, 2009.

Dumberry, P., Requiem for Crimea: Why Tribunals Should Have Declined Jurisdiction over the Claims of Ukrainian Investors against Russian under the Ukraine-Russia BIT, Journal of International Dispute Settlement, Vo. 9, Issue 3, 2018, pp. 506-533.

Fecak, T., International Investment Agreements in EU Law, 2016, pp. 11-140.

Kleiner, C. and Costamagna F., Territoriality in Investment Arbitration: The Case of Financial Instruments, Journal of International Dispute Settlement, Vol. 9, Issue 2, 2018, pp. 315-338.

Ryan, M.C., Is There a “Nationality” of Investment? Origin of Funds and Territorial Link to the Host State, in Gaillard, E. and Banifatemi, Y. (eds.), Jurisdiction in Investment Treaty Arbitration, IAI Series No. 8, 2018, 97-126.

Sabahi, B., Rubins, N., Wallace, Jr., D., XII. Jurisdiction Ratione Temporis, in Sabahi, B., Rubins, N., Wallace, Jr., D. (eds.), Investor-State Arbitration, 2nd ed., 2019, pp. 412-431.

Waibel, M., Sovereign Defaults Before International Courts and Tribunals, Cambridge University Press, 2011.

Yeğinsu C. and Knoebel C., Covered Investment, in Legum B. (ed), The Investment Treaty Arbitration Review, 4th ed., 2019, pp. 3-16.

Zheng, C.R., The Territoriality Requirement in Investment Treaties: A Constraint on Jurisdictional Expansionism, Singapore Law Review, Vol. 34, 2016, pp. 139-171.