When can a state-linked entity bring an investment treaty claim?

An entity connected to a state must meet the requirements of the relevant treaty, including the investor definition. It should also be seen to act commercially. This depends on the facts and context.

Does the investment treaty cover the entity?

To see if a claim can be brought, start with the treaty’s definitions.

Some treaties list governments or entities that states own or control as qualifying investors. The same might be true for official agencies, authorities, public bodies, development funds or similar. Some treaties exclude state-owned businesses.

Many treaties, however, do neither. Reference to state affiliation is infrequent. Corporate entities will often be investors of a state depending on where they are incorporated, where they have their seat or management, or who controls them. Occasionally, a mix of these.

Is that enough?

That’s a matter of treaty interpretation. Arbitral tribunals trot out rules of interpretation in nearly every investment dispute. “A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.” Now, a dictionary is not the law. The treaty is. But if there is no lexical mismatch, that may be enough. At the very least, the other side might have to argue the opposite.

Tribunals can indeed be content if the entity seems to fit the definition and is not expressly barred from claiming. Anything else would add to the treaty, so the reasoning.

If it’s a close-run thing on the text, consider beefing up your position:

• Get the right tribunal for the job. A tribunal that does not think that there is no international forum unless consent is obvious can make life easier for a claimant.
• Does the rest of the treaty support a claim? Related treaty practice? The context of the investor definition and investor-state provision matter. Substantive protections typically benefit investors against states. That might suggest a difference. And international law reserves special rules for states, like immunity. On the procedural side, a redundant state-state mechanism could be awkward. Focusing on the proper parties, subject matter, aims and procedures can help.
• Does the treaty’s object and purpose support a claim? It’s sometimes said that investment treaties should depoliticise disputes. Or level the playing field against sovereigns. The ICSID Convention was made for claims by nationals, not states. It encourages flows of private capital. But BITs and FTAs usually leave this open. Perhaps the preamble hints one way or another. A state-linked entity should be ready to explain why its investment deserves protection.

Why acting commercially helps

A claimant should not give the impression of doing a state’s bidding.

Tribunals have looked at whether an entity acted as an agent of a state or fulfilled governmental functions. Regardless of separate legal personality. And especially in ICSID arbitration. The investment activity should rather be commercial in nature. If it was, access to arbitration would follow. But carrying the state’s flag into foreign territory may raise eyebrows. The focus tends to be narrow and transactional, which can favour a claimant.

And if business-related aspects dominate, this could also bypass a discussion whether non-commercial or governmental entities are covered by the treaty.

This borrows from public international law. What’s the state’s real involvement? It’s a question of substance rather than form. Is the claimant so close to be an instrument or alter ego of the state? Consider state responsibility, which looks to governments empowering, directing or controlling proxies. In the law of armed conflict, a state is an occupying power if it in fact exercises authority in the area. And some treaty obligations apply when a state has effective control outside its own territory.

Identifying sovereign or non-commercial conduct turns on the evidence. It can be tricky to establish. Reported cases have often concerned businesses that were at least partly state-owned but essentially independent and free from government control.

The more competitive and less coddled a state firm appears, the better for it. Things that help can include:

• mixed or foreign ownership
• no formal appointment procedures for senior staff
• self-directed planning
• a lack of pre-set performance targets
• bidding and transacting on commercial merit
• self-sufficiency
• separate accounts and finances
• transparency and adopting international reporting standards

An entity is less likely to qualify if it:

• was instructed to make the investment
• is run by state leaders
• has embedded officials, maybe to gather intelligence or influence foreign actions
• performs public services
• collects taxes
• manages the economy at home
• regulates the sector it operates in
• helps write local rules
• has its own set of rules
• has a monopoly
• pleads immunity in court proceedings
• enjoys guaranteed profits, state backing, subsidies or tax breaks

Remember, ignoring government participation in economic life would cast a shadow, but so would anger over misuse of the investor-state system. Investment by state firms is huge. Yet reticence to open strategic industries like energy or tech to private capital can smack of unfair competition if international investment protection is invoked. State giants assaulting global markets is a worry.

The points above can draw the sting out of this or make it worse.