McLachlan, C., Shore, L. and Weiniger, M., International Investment Arbitration: Substantive Principles, 2nd ed., 2017, paras. 6.79–6.87.
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, pp. 50–51.
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, p. 51.
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
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. 918–919.
Notion of Investment, in Sabahi, B., Rubins, N., et al. (eds.), Investor-State Arbitration, 2nd ed., Oxford University Press, 2019, p. 336.
Treaty between the Government of the United States of America and the Government of the Hashemite Kingdom of Jordan concerning the encouragement and reciprocal protection of investment (1997), Article 2(1); Canada Model BIT, 2004, Article 3(1); Agreement between Japan and the Republic of Singapore for a new-age economic partnership (2007), Article 73; North American Free Trade Agreement (1992), Article 1102(1); Agreement between the United States of America, the United Mexican States, and Canada (2018), Article 14.4; UNCTAD, Investor-State Dispute Settlement and Impact on Investment Rule making, UNCTAD/ITE/IIA/2007/3, p. 38; Generation Ukraine Inc. v. Ukraine, ICSID Case No. ARB/00/9, Award, 16 September 2003, para. 8.6.
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
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, p. 74.
Joseph Houben v. Republic of Burundi, ICSID Case No. ARB/13/7, Award, 12 January 2016, para. 129; CC/Devas (Mauritius) Ltd., Devas Employees Mauritius Private Limited, and Telcom Devas Mauritius Limited v. Republic of India, PCA Case No. 2013-09, Award on Jurisdiction and Merits, 25 July 2016, paras. 201-210.
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, p. 74.
McLachlan, C., Shore, L. and Weiniger, M., International Investment Arbitration: Substantive Principles, 2nd ed., 2017, para. 6.79.
Reed, L., Scanlon, Z. and Atanasova, D., Protected Investment, in Fabri, H.R. (ed.), Max Planck Encyclopedia of International Procedural Law, 2018, para. 73.
Schreuer, C.H., Malintoppi, L., Reinisch, A. and Sinclair, A., The ICSID Convention – A Commentary, 2nd ed., 2009, p. 134, para. 175.
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 edition, 2018, p. 279, para. 11.45.
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
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 edition, 2018, p. 279, para. 11.44.
McLachlan, C., Shore, L. and Weiniger, M., International Investment Arbitration: Substantive Principles, 2nd ed., 2017, para. 6.80.
Reed, L., Scanlon, Z. and Atanasova, D., Protected Investment, in Fabri, H.R. (ed.), Max Planck Encyclopedia of International Procedural Law, 2018, para. 74.
McLachlan, C., Shore, L. and Weiniger, M., International Investment Arbitration: Substantive Principles, 2nd ed., 2017, para. 6.82.
Schreuer, C. H., Malintoppi, L., Reinisch, A. and Sinclair, A., The ICSID Convention – A Commentary, 2nd ed., 2009, p. 135, para. 178.
Zhinvali Development Ltd. v. Republic of Georgia, ICSID Case No. ARB/00/1, Award, 24 January 2003, para. 417; Yannaca-Small,C., Definition of Investor and Investment in International Investment Agreements, in International Investment Law – Understanding Concepts and Tracking Innovations, 2008, p. 74.
Raymond Charles Eyre and Montrose Developments (Private) Limited v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/16/25, Award, 5 March 2020, paras. 301–302; Christian Doutremepuich and Antoine Doutremepuich v. Republic of Mauritius, PCA Case No. 2018-37, Award on Jurisdiction, 23 August 2019, paras. 149–150; Nordzucker AG v. The Republic of Poland, Partial Award (Jurisdiction), 10 December 2008, paras. 185, 198, 218; Petrobart Limited v. The Kyrgyz Republic (II), SCC Case No. 126/2003, Award, 29 March 2005, paras. 69, 378; Thomas Gosling and others v. Republic of Mauritius, ICSID Case No. ARB/16/32, Award, 18 February 2020, paras. 145-146; William Nagel v. The Czech Republic, SCC Case No. 049/2002, Final Award, 9 September 2003, para. 328.
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
McLachlan, C., Shore, L. and Weiniger, M., International Investment Arbitration: Substantive Principles, 2nd ed., 2017, para. 6.81.
Schreuer, C. H. Malintoppi, L., Reinisch, A. and Sinclair, A., The ICSID Convention – A Commentary, 2nd ed., 2009, p. 135, para. 179.
Reed, L., Scanlon, Z. and Atanasova, D., Protected Investment, in Fabri, H.R. (ed.), Max Planck Encyclopedia of International Procedural Law, 2018, para. 74.
PSEG Global Inc. and Konya Ilgin Elektrik Üretim ve Ticaret Limited Sirketi v. Republic of Turkey, ICSID Case No. ARB/02/5, Award, 19 January 2007, paras. 302, 316-317; Fouret, J., Gerbay, R., and Alvarez, G. M. (eds.), The ICSID Convention, Regulations and Rules – A Practical Commentary, 2019, pp. 137–138, para. 2.58, n. 138.
Malicorp Limited v. Arab Republic of Egypt, ICSID Case No. ARB/08/18, Award, 7 February 2011, paras. 113–114; Fouret, J., Gerbay, R., and Alvarez, G. M. (eds.), The ICSID Convention, Regulations and Rules – A Practical Commentary, 2019, pp. 137–138, para. 2.58, n. 138; Deutsche Telekom v. India, PCA Case No. 2014-10, Interim Award, 13 December 2017, paras. 181-182; SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/01/13, Decision on Jurisdiction, 6 August 2003, paras. 136-140; Luigiterzo Bosca v. Republic of Lithuania, PCA Case No. 2011-05, Award, 17 May 2013, paras. 158-159, 166; Pawlowski AG and Project Sever s.r.o. v. Czech Republic, ICSID Case No. ARB/17/11, Award, 1 November 2021, para. 256.
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.
McLachlan, C., Shore, L. and Weiniger, M., International Investment Arbitration: Substantive Principles, 2nd ed., 2017, para. 6.84.
Reed, L., Scanlon, Z. and Atanasova, D., Protected Investment, in Fabri, H.R. (ed.), Max Planck Encyclopedia of International Procedural Law, 2018, para. 75.
McLachlan, C., Shore, L. and Weiniger, M., International Investment Arbitration: Substantive Principles, 2nd ed., 2017, para. 6.85.
Reed, L., Scanlon, Z. and Atanasova, D., Protected Investment, in Fabri, H.R. (ed.), Max Planck Encyclopedia of International Procedural Law, 2018, para. 75.
Hornick, R.N., The Mihaly Arbitration Pre-Investment Expenditure as a Basis for ICSID Jurisdiction, Journal of International Arbitration, 2003, pp. 192–193.
McLachlan, C., Shore, L. and Weiniger, M., International Investment Arbitration: Substantive Principles, 2nd ed., 2017, para. 6.87.
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.
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.
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.
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