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Mme Salma Selim

Associate in International Arbitration - White & Case LLP

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Territoriality of Investment

I. Introduction


Many international investment agreements (“IIA”) require that investments be made “in the territory of” the host State to qualify for treaty protection.1 This requirement can be easily assessed for tangible assets, such as buildings or land, and, as such, has not drawn the attention of investment treaty tribunals.2 For intangible assets, such as financial instruments and contractual rights, however, the issue is less straightforward.3

II. The territoriality requirement in international investment treaties


While the ICSID Convention and certain IIAs are silent on whether there should be a territorial nexus between the investment and the host State,4 many other treaties contain explicit references to the territoriality of the investment.5

A. IIAs requiring the investment to be made “in the territory of” the host State


Some IIAs include the territoriality requirement in the definition of “investment”.6 The Argentina-US Bilateral Investment Treaty (“BIT”), for example, defines investments as “every kind of investment in the territory of one Party owned or controlled directly or indirectly by nationals or companies of the other Party”.7


Furthermore, other IIAs include the territorial nexus requirement in the definition of “investor”. For instance, the recently adopted Brazil-India BIT defines an investor as a “natural person” or an “enterprise” of one Party that “makes an investment in the territory of the other Party”.8

B. IIAs delimiting the scope of their application to investments which are “in the territory of” the host State


Other IIAs specify that the treaty’s provisions only apply to investments in the territory of the host State.9 The Energy Charter Treaty, for example, provides that “[d]isputes between a Contracting Party and an Investor of another Contracting Party relating to an Investment of the latter in the Area of the former” can be submitted to international arbitration.10 Similarly, Article 1101(1) of the NAFTA provides that Chapter 11 “applies to measures adopted or maintained by a Party relating to: … (b) investments of investors of another Party in the territory of the Party”.11

C. An implicit requirement of territoriality


Many IIAs implicitly refer to a territorial nexus in their preambular or substantive provisions. For example, Article IV of the Philippines-Switzerland BIT states that “[e]ach Contracting Party shall in its territory accord investments or returns of investors of the other Contracting Party treatment not less favourable than that which it accords to investments or returns of its own investors or investments or returns of investors of any third State, whichever is more favourable to the investor concerned.”12


A review of relevant investment treaty case-law reveals that the requirement that the investment be located “in the territory of” the host State is inherent to the definition of an investment, irrespective of the specific language of underlying IIA.13

III. The assessment of territoriality in investment treaty case law

A. Tangible investment interests


In the case of tangible investment interests, such as the provision of services or the operation of a business, the emphasis is on whether the “focal point” of the investment is located in the host State, irrespective of whether the services are provided from abroad,14 without the need for a “direct transfer of funds” into the host State.15 Indeed, investment tribunals have emphasised that there was no “absolute condition” that the investments be made in the host State and that it was possible that the investments be made, partly, from the investor’s home country, provided that they are made for the purposes of the project to be carried out abroad.16 Tribunals have also considered, in determining the locus of an investment, whether the “transaction accrues to the benefit of the State itself.”17

B. Intangible assets


In the case of intangible assets (such as debt instruments or contractual rights), similarly to tangible investment interests, there is no requirement for a “physical transfer of funds” into the host State.18 Further, certain tribunals have posited that the relevant test for determining the location of the investment is whether the ultimate beneficiary of the intangible asset is the host State, even where the financial instruments in question did not cause a transfer of money into the host State or were governed by foreign forum selection and governing law clauses.19 The provision of financial services from abroad has also been considered to satisfy the territorial nexus requirement, even in the presence of foreign forum selection and governing law clauses in the underlying agreement, provided that the funds associated with the agreement served to finance the host State’s economy.20 This over expansive interpretation of the territoriality requirement has, however, sparked virulent dissent from certain eminent arbitrators.21 In the same vein, the dissenting arbitrator in Teinver v. Argentina found that the claimants’ indirect shareholding in Argentine entities failed to meet the territoriality requirement in the underlying IIA.22

C. The more restrictive assessment of territoriality under NAFTA Chapter 11 case law


Despite the absence of an explicit territoriality requirement in NAFTA Chapter 11,23 consistent with prevailing case law, NAFTA tribunals have found that investors initiating NAFTA proceedings must have made an investment “in the territory of” the respondent State.24 Conversely, NAFTA tribunals have not considered the criteria identified by non-NAFTA tribunals in assessing the requirement of territoriality and, as such, seem to have adopted a more restrictive assessment of the requirement of a territorial nexus between the investment and the host State. Tellingly, only tribunals constituted under NAFTA have denied jurisdiction on the basis of a lack of territorial nexus between the investment and the host State. 


NAFTA tribunals have consistently refused to afford treaty protection to cross-border trade interests, and in particular where the investor’s manufacturing or production facilities were not located in the host State. This was the case where the investor exported beef and cattle,25 cigarettes,26 or pharmaceutical products, irrespective of whether the investor incurred costs associated with commercialising its products in the host State.27 These findings were often coloured by NAFTA Article 1139’s definition of “investment”,28 which excludes, inter alia, “commercial contracts for the sale of goods or services by a national or enterprise in the territory of a Party to an enterprise in the territory of another Party” from NAFTA protection.29 Furthermore, the tribunal in Bayview v. Mexico denied its jurisdiction on the basis of the territoriality requirement, where the American claimants initiated NAFTA proceedings against Mexico for allegedly diverting the water flowing into the Rio Grande River, finding that the claimants’ rights to water from the Rio Grande River were granted by the State of Texas and thus were not an investment made in the territory of Mexico.30

D. The definition of “territory”


Whether an investor has made an investment “in the territory of” the host State will depend upon the boundaries of the said territory. This question has proven particularly crucial in investment disputes touching upon issues of State succession and annexation, such as in the case of the recent claims by Ukrainian investors against Russia in connection with investments located in the territory of Crimea, which was a part of Ukraine before it was annexed by Russia in 2014.31


While none of the said arbitration claims against Russia have been made public, the Swiss Federal Tribunal, which was seized of a request to set aside a Geneva-seated award on jurisdiction against Russia, offers insight on the tribunal’s approach with regard to the territoriality issue. In a judgment of 16 October 2018, the Swiss Federal Court dismissed Russia’s request to set a Geneva-seated partial award that had upheld the tribunal’s jurisdiction on claims brought against Russia in connection with investments made in Crimea.32 First, the Swiss Federal Tribunal endorsed the arbitral tribunal’s interpretation of the term “territory” in the applicable BIT as referring to territories over which the State has jurisdiction in accordance with principles of international law.33 The Swiss Federal Tribunal further agreed with the tribunal’s approach in abstaining from ruling on the legality of the incorporation of Crimea into the Russian Federation and upheld the tribunal’s (uncontested) finding that Russia had acquired effective or de facto control of the Crimean peninsula.34 On the other hand, the Swiss Federal Tribunal dismissed the Russian Federation’s contention that the term “territory” should be understood as the territory at the time of the conclusion of the BIT, finding that the principles of treaty interpretation do not support the “static” interpretation maintained by the Russian Federation.35


Baltag, C., Territoriality under the ICSID Convention: Two Issues, Transnational Dispute Management, 2007.

Dolzer, R. and Schreuer, C., Principles of International Investment Law, Oxford University Press, 2012.

Douglas, Z., Property, Investment, and the Scope of Investment Protection Obligations, in Douglas, Z., Pauwelyn, J. and Vinuales, J.E. (eds.), The Foundations of International Investment Law: Bringing Theory into Practice, Oxford University Press, 2014.

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, 2018.

Kleiner, C. and Costamagna, F., Territoriality in Investment Arbitration: The Case of Financial Instruments, Journal of International Dispute Settlement, 2018.

Knahr, C., Investments ‘in the Territory’ of the Host State, in Binder, C., Kriebaum, U., Reinisch A. and Wittich, S. (eds.), International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer, Oxford University Press, 2009.

Reinisch, A., Investment Disputes and Their Boundaries in The Law of International Borders – Journées franco-allemandes, Société française pour le droit international / Pedone, 2016.

Ryan, M.C., Is There a "Nationality" of Investment? Origin of Funds and Territorial Link to the Host State in Banifatemi, Y. (ed.), Jurisdiction in Investment Treaty Arbitration – IAI Series No. 8, JurisNet LLC / International Arbitration Institute (IAI), 2018

Schreuer, C.H. et al., The ICSID Convention: A Commentary, Cambridge University Press, 2009. 

Zheng, C.R., The Territoriality Requirement in Investment Treaties: A Constraint on Jurisdictional Expansionism, Singapore Law Review, 2016.

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