My last post described the ongoing controversy about the proper scope of “investment” under Article 25 of the ICSID Convention. The next two posts will draw on my recent article to argue that this controversy should be resolved consistently with the historical understanding of the term. Far from incorporating the limitations exemplified by the Salini test, the Article 25 understanding of “investment” in fact incorporated profound deference to state definitions of the term. As I will explain, the compromise hammered out by the drafters was that the “investment” requirement of Article 25 would include any plausibly economic activity or asset, full stop.
As described at length in the article, the debate over the definition of investment was probably the most inflammatory issue facing the ICSID Convention during its multi-year drafting process. Many commentators and diplomats had long argued (often stridently) that no investment convention should protect more than a few narrow categories of economic activity. Many others had disagreed (often vehemently), urging that states should be free to encourage any form of economic activity they wanted to. This issue was at the core of a multi-year fight about the very identity of this nascent regime, and on that score it is hard to overstate its significance.
Despite profound disagreement about which approach was best, both sides of the debate agreed for years about one thing: the bare term “investment” (if it were adopted) would throw the ICSID door wide open to a spectacularly vast range of assets and activities, leaving the consent of signatory states as the sole limit on investment jurisdiction. Some worried about that prospect; others embraced it. For but one example, the Indian delegate to one of the earliest meetings said that failing to define the word “investment” would leave “[o]nly one limitation … explicitly stated, namely the consent of parties, and … would probably expose States to pressure to consent to arbitrate disputes which would not be arbitrable under any [current] international law or understanding.” It was precisely this understanding of the bare term “investment” that led capital-importing states like India to push so fiercely for a narrowing definition.
If the two sides agreed on anything, in other words, it was that adopting the bare term “investment” would let states make use of ICSID in any way they saw fit. This was true in internal debates at the World Bank before a draft proposal was submitted to the world. It was true at a series of regional conferences that debated the World Bank proposal once it was finally drafted. And it was true throughout the preliminary debates at the drafting convention that finalized the treaty for promulgation by the World Bank. The next and final post will explain how a concrete political bargain led to the adoption of precisely that bare term “investment” as the touchstone for ICSID jurisdiction.
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The Abaclat decision may add some interesting points to this discussion. I submit a piece of writing that refers not only to the interesting issue of the definition of investment at article 25 ICSID convention, but also to the difficult issues arising from the definitions of investment drafted at different Bilateral Investment Treaties (BITs).
Foreign Investment in Colombia … “Maverick” at ICSID ? Some thoughts on the impact that the Abaclat case may have on the Bilateral Investment Agreements (BITs).
By: Liliana Maria Rodriguez-Retamoso
LL.M. in Banking & Finance
Queen Mary and Westfield College –
University of London
LL.M. in Maritime Law,
International Trade and European Union –
University of Southampton
Partner – Retamoso Rodriguez & Associates
E-mail: liliana.rodriguez@rodriguezretamoso.com
This article, using a term coined by a renowned expert in capital markets, Lee C. Buccheit , will refer to some bondholders that could become to sovereign debtors true “Mavericks” … “Mavericks” that can mean an indisputable gamble to sovereigns, as exemplified by the Argentine case. A “Maverick” is a bondholder that acts unconventionally, without regard for the interests of the majority. In the case of sovereign debt, i.e. debt acquired by a sovereign in the international markets, a “Maverick” usually acts without weighing the interests that must measure a State when issuing new debt or restructuring it.
A State can go through an economic fiscal or exchange crisis. The government can be subjected to political pressures. Consequently, its debt may, in extreme cases, be restructured to address certain factors that are not equivalent to the ones faced by a common debtor. However, when sovereign bonds are issued, as has been the trend since the late 80’s, after the Brady bonds , debt is not necessarily held by other countries, multilateral institutions or major international banks with whom a State can make a direct and private negotiation. The sovereign bonds can be acquired by any “Maverick” who can disregard the criteria of the majority, who does pay little or does not care of the circumstances of a State. A “Maverick” bondholder can generate costly litigation proceedings as has been the case of Peru and more recently with the Abaclat case against the Argentine Government.
Although Colombia is a country that has been characterized by honoring its international commitments, as evidenced by the recent upgrade of the country by the Rating Agencies, these decisions generate a latent risk in emergency situations that even the best borrowers should consider before issuing bonds.
To understand more about the idiosyncrasies of a bondholder, it may be possible to compare them to the public attending a theatre play. Seated in front of the stage may be plenty of people with multiple interests whose common goal is to do attend the same play. The situation can be compared to that of bondholders . There are plenty of buyers of bonds whose only common interest is to obtain payment of the obligation. Many times, although agreement is reached with the majority, the dissenting minority can have enormous legal power.
The term “Maverick” comes from Samuel Augustus Maverick M., a farmer who settled near San Antonio, Texas in the county now known as “Maverick.” Maverick gained some cattle in a poker game and decided not to mark them as was the custom in the area, but let them walk free by the county creating a new idiom. Soon everyone free, not following conventional tags nor traditional guidelines was known in U.S. slang as a “Maverick.” The “Maverick” are the misunderstood, the dissenters and independents.
Recently, an arbitration tribunal organized under the auspices of ICSID, in the case Abaclat and others, decided to grant these “Maverick” bondholders the position of “investors.” This is an unexpected pronouncement. It was not expected that the Tribunal would acknowledge this claim. This is an interim decision that implies for governments, like Colombia, who submit their investment disputes to this institution, a certain risk, due to the effects that an ICSID ruling can have. This approach may involve a profound change in global sovereign debt markets and an imminent risk to ICSID member States.
In the Abaclat case, the Arbitration Tribunal decided to admit a claim by 180,000 bondholders of sovereign debt issued by the Argentine government based on a Bilateral Investment Treaty (BIT) signed between the Republic of Argentina and the Italian State. This decision involves a risky precedent for countries, like Colombia, which have signed a large number of treaties of investment protection with many countries containing clauses similar to that used by the ICSID tribunal to consider a sovereign bond as a foreign investment subject to its jurisdiction.
The case establishes criteria under which sovereign foreign bonds can be considered a type of foreign investment. This creates the risk that any national who holds a bond issued at the international markets by a country which has signed a BIT could initiate an arbitration at ICSID on grounds of a breach of the obligations contained in these instruments. Although this decision seems to be following the criterion contained in FEDAX against the Republic of Venezuela in which a promissory note was given the category of investment, it is a much more relevant case because it is an issuance of sovereign bonds in the international market.
The case presents three issues of great concern for an issuer country that is a member of ICSID or that submits its disputes to that institution: The first is to recognize the status of “foreign investor” to the holder of a bond. The second consists to grant the category of “foreign investment” to bonds issued by at a foreign forum with no obvious territorial link with that State. The third weighs in ignoring the Collective Action Clauses (CACs) that preclude arbitration under ICSID and the jurisdiction clauses establishing that the bonds are ruled by municipal law. This decision is not an award, it is an interim decision. Finally, this preliminary decision is the subject of dissent by one of the arbitrators. The dissenting opinion has not yet been published and it would be important to analyze its grounds.
International scholarly research led by Michael Waibel from the University of Cambridge, considered a ruling on sovereign debt bonds, completely outside of the scope of the jurisdiction of ICSID tribunal. Professor Waibel believes that the obligations arising from bonds cannot be considered foreign direct investment due to its special legal characteristics. In this regard, he mentions the case Du Pont against Mexico in 1868 when a judge located in Texas, United States, rejected the claim of this multinational against the Mexican state on the grounds that the admission of such claim could result in “a Pandora box”, i.e. decisions with multiple unknown consequences for a sovereign state given the obvious differences between a state and an individual. The judge decided to reject the admission of this legal claim. Unfortunately, the approach of this judge has not been applied by the ICSID arbitration tribunal that despite being formed within a multilateral institution seems to move away from considerations of sovereignty and the basic definitions of the concept of foreign investment.
Although the rulings handed down by ICSID tribunals do not necessarily have the status of a binding precedent, they create a line of thinking that can lead to other decisions with the same approach. These rulings mean for the international market of sovereign debt a serious risk because, henceforth, any “Maverick” who has never set foot in the country may initiate a proceeding before a Court of Arbitration at the ICSID that may accept the claim as the one of a foreign investor located in the respective country. Therefore, the case raises concerns about the modification of investment protection agreements signed by countries like Colombia, the treaty and conventions that give rise to ICSID and to the mechanisms for debt issuance.
The most worrying fact is that arbitration tribunals acting under the auspices of ICSID, an institution of the World Bank group, are in charge of settling disputes in most of the investment dispute mechanisms devised by Colombia’s BITs. Therefore, the country should be aware of the risks that may cause some of these “Maverick.” bondholders. This decision, which gives the bondholder a category of “investor” provides a risk that the country must take into account when issuing bonds abroad. Given the numerous BITs and investment chapters included in Free Trade Agreements signed by Colombia with clauses that define investment broadly, with expressions similar to those used in the BIT signed between Argentina and the Italian State, it should be considered the amendment of the definition of investment contained in those agreements. Therefore this piece of writing concludes raising this concern: Is it the right time to initiate a policy of review and modification of the definitions of foreign investment included in these treaties?