Author: Wilson Wang**
Alvin Yeo,† Senior Counsel, is the Chairman and Senior Partner of WongPartnership LLP. During his “tag time” with Dr. Kabir Duggal and Amanda Lee (a.k.a. Mandy), Mr. Yeo discussed past, current and forward-looking issues about indirect investments in investor-state dispute settlement and in particular, a more recent phenomenon — treaty shopping.
Mr. Yeo first delivered a brief overview of investment protection under international treaties. To promote and attract foreign investment, states undertake to refrain from prejudicing foreign investors and crystalize such undertakings in their bilateral or multilateral investment treaties. If a host state fails to observe its obligation, such as expropriation, violation of fair and equitable treatment and most-favored-nation treatment, foreign investors whose rights have been impaired can resort to international arbitration for remedy.
Mr. Yeo then dove into the topic of indirect investments, with a central question being whether “indirect investments”, the form of which vary from case to case, fall within the scope of treaty protection. Mr. Yeo referred to investment arbitration cases to illustrate various disputed investment structures and tribunals’ approaches to treaty interpretation. On the one hand, many tribunals adopted a permissive and broad definition of “investment” so as to protect and encourage foreign investments. In the classic case, Fedax v. Venezuela, when construing the definition of “investment” under Article 25(1) of the ICSID Convention, the tribunal held that it is the dispute that is required to arise directly out of an investment, and that the investment can be direct or indirect. Certain bilateral investment treaties (“BITs”) have already incorporated some forms of indirect investment into the definition of “investment”. In AMT v. Zaire, the tribunal observed that Article 1(c) of the U.S.-Zaire BIT covers both direct and indirect investments, including holding shares of stock or other interests in a company. Another rationale of a foreign company setting up a local subsidiary is to comply with laws and regulations of the host state. In Siemens AG v. Argentina, Siemens, through its German subsidiary, established an Argentinian company to perform a project. Argentina raised a jurisdictional challenge based on this, arguing that there was no direct relationship between Siemens and the investment, but was rejected by the tribunal. Similarly, in CEMEX v. Venezuela, while the Netherlands-Venezuela BIT was applicable to “investment of Dutch nationals”, the tribunal concluded that this did not require investment to be directly owned by Dutch nationals.
On the other hand, some tribunals applied a more restrictive, or even opposite, approach. In Standard Chartered Bank v. Tanzania, although the U.K.-Tanzania BIT contained a similar definition to the Netherlands-Venezuela BIT, reading “investment of [a U.K. national or company]”, the tribunal held that an indirect chain of ownership did not in itself confer the status of investor under the BIT. Despite the discordant arbitral holdings, Mr. Yeo observed that in practice, most tribunals tended to follow a literal reading of treaties and for issues unaddressed in the treaties, many tribunals would construe it as “not prohibited” to confer an inclusive protection.
As a more specifical topic under indirect investment, Mr. Yeo moved on to discuss treaty shopping. As he defined it, treaty shopping refers to conduct of foreign investors deliberately seeking to acquire the benefits of an investment treaty by making investments into or bringing claims from third countries that have more favorable treaty terms with the target host state. For example, in Tokios Tokeles v. Ukraine, Tokios, a Lithuania-incorporated company, was 99% held by Ukrainian nationals, and the Ukraine-Lithuania BIT provided that any entity established in Lithuania is eligible as an investor. The majority opinion found in favor of a form-over-substance interpretation, holding that tribunals were not supposed to impose arbitrary limits on the scope of BITs. In contrast, Professor Prosper Weil, dissenting, disregarded the Lithuanian entity in between, and took it as decisive that the dispute was between Ukraine and a Ukrainian investor. Thus, it was outside the scope of the ICSID Convention. Mr. Yeo categorized treaty shopping into two types: “front-end” and “back-end”, the former being planned in advance to benefit from a favorable regulatory environment and the latter targeting an existing or foreseeable dispute. Phoenix Action v. Czech Republic presented an instance of back-end treaty shopping, which proved to be an unsuccessful attempt. The corporate restructure was carried out after the disputes had arisen, and took place two months before the claimant initiated the arbitration. The tribunal referenced the ICSID case law and held that “a corporation cannot modify the structure of its investment for the sole purpose of gaining access to ICSID jurisdiction, after damages have occurred.” The major difference between front-end and back-end treaty shopping rests on foreseeability. To articulate this concept, the Philip Morris Asia v. Australia tribunal opined that a dispute is foreseeable when there is a reasonable prospect that such dispute is materializing, and that a restructure happened at that time would constitute an abuse of right.
Such a phenomenon of treaty shopping has been gaining attention and complaints, especially from host states, and invites states to consider a rebalance between investor protection and states’ regulating rights. Mr. Yeo made several proposals for states to negotiate more stringent investment treaties:
- first, to impose stricter requirements on a company’s seat of business, allowing only “real investors” to bring claims, for example, those at the seat of management;
- second, to incorporate “denial of benefits” clauses, striking out attempts such as forming shell entities with no substantial business activities; and
- third, echoing the test under Salini Construction v. Morocco, to redefine “investment” with parameters including contributions to the economic development of host states, a certain duration of performance of the contract and assumption of risks from the investment.
As an overall comment, Mr. Yeo noted that while counsel who act for states or investors may have different views on it, treaty shopping admittedly brings more uncertainty to the arena. Going forward, states’ responses and reforms will depend a lot on their own particular positioning, varying from developed countries welcoming investments on their terms to less developed countries trying to attract foreign investors with preferential policies and protection. “At the end of the day, the fight in this world is all about capital,” Mr. Yeo concluded his talk with this profound remark.
 Alvin Yeo, Indirect Investments in Investor-State Dispute Settlement, TagTime (Oct. 7, 2020), available at https://member-delosdr.org/video-tagtime-alvin-yeo-sc-on-indirect-investments-in-investor-state-dispute-settlement/.
 Convention on the Settlement of Investment Disputes between States and Nationals of other States, art. 25(1), Oct. 17, 1966, 575 U.N.T.S. 159.
 Fedax N.V. v. Republic of Venez, ICSID Case No. ARB/96/3, Decisions of the Tribunal on Objections to Jurisdiction (July 11, 1997), 37 ILM 1378.
 Treaty Concerning the Reciprocal Encouragement and Protection of Investment, U.S.-Zaire, Aug. 3, 1984, available at https://agoa.info/images/documents/5135/Congo%20DRC-US%20BIT.pdf.
 Am. Mfg. & Trading, Inc. v. Republic of Zaire, ICSID Case No. ARB/93/1, Award (Feb. 21, 1997), 36 ILM 1534.
 Siemens A.G. v. Argentine Republic, ICSID Case No. ARB/02/8, Decision on Jurisdiction (Aug. 3, 2004), https://www.italaw.com/sites/default/files/case-documents/ita0788.pdf.
 Agreement on encouragement and reciprocal protection of investments, Neth.-Venez., Oct. 22, 1991, available athttps://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/2094/download.
 CEMEX Caracas Invs. B.V. v. Bolivarian Republic of Venez., ICSID Case No. ARB/08/15, Decision on Jurisdiction (Dec. 30, 2010) (emphasis added), https://www.italaw.com/sites/default/files/case-documents/ita0142.pdf.
 Agreement for the Promotion and Protection of Investments, U.K.-Tanz., Jan. 7, 1994, available at https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/2343/download.
 Standard Chartered Bank v. United Republic of Tanz., ICSID Case No. ARB/10/12, Award (Nov. 2, 2012) (emphasis added), https://www.italaw.com/sites/default/files/case-documents/italaw1184.pdf.
 Agreement for the promotion and reciprocal protection of investments, Lith.-Ukr., Feb. 8, 1994, available athttps://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/5033/download.
 Tokios Tokelés v. Ukr., ICSID Case No. ARB/02/18, Decision on Jurisdiction (Apr. 29, 2004), https://www.italaw.com/sites/default/files/case-documents/ita0863.pdf.
 Phoenix Action v. Czech Republic, ICSID Case No. ARB/06/5, Award (Apr. 15, 2009), https://www.italaw.com/sites/default/files/case-documents/ita0668.pdf.
 Philip Morris Asia v. Commonwealth of Austl., Case No. 2012-12, Award on Jurisdiction and Admissibility (Perm. Ct. Arb. 2015), https://www.italaw.com/sites/default/files/case-documents/italaw7303_0.pdf.
 Salini Construttori S.P.A. v. Kingdom of Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction (July 31, 2001), 6 ICSID Rep. 400 (2004).
* This post is part of a series summarizing episodes of Delos Disputes Resolution TagTime webinars. A list of past TagTime webinars is available at https://delosdr.org/index.php/past-webinars/.
** LL.M. Candidate 2021, Columbia Law School.
† Alvin Yeo was appointed Senior Counsel of the Supreme Court of Singapore in 2000 at the age of 37, the youngest ever to be so appointed. Mr. Yeo graduated from King’s College London, University of London, and was admitted to the English Bar (Gray’s Inn) in 1987 and the Singapore Bar in 1988. His main areas of practice are litigation and arbitration in banking, corporate/commercial, investment and infrastructure disputes. Alvin is a member of the Court of the SIAC, the ICC Commission and a fellow of the Asian Institute of Alternative Dispute Resolution, the Singapore Institute of Arbitrators and the Singapore Institute of Directors, and a former member of the LCIA Court and the IBA Arbitration Committee. He is also on the panel of arbitrators in various arbitral institutions, including the HKIAC, ICDR, KCAB, SCIETAC and the Singapore Institute of Arbitrators’ Panel for Sports in Singapore. Mr. Yeo is also appointed to the Governing Board of the Centre for International Law at the National University of Singapore.