Schreuer's guide to nationality planning

Fordham Law Conference on International Arbitration and Mediation in Global Arbitration Review, May 11, 2012

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Timing is key for obtaining the right nationality for BIT protection, Austrian arbitrator and academic Christoph Schreuer told a recent conference in London.


Addressing a Fordham Law School event, Schreuer said that there is a strange paradox about nationality in investment arbitration law. When it comes to access to rights under treaties, nationality is of the utmost importance; yet when a case reaches the merits stage, distinctions based on nationality are taboo.


This leads to the question of to what extent an investor can avoid the limitations imposed by its nationality and structure its investment so as to enjoy benefits under an investment treaty.


A prudent investor will organise its investment in a way that affords maximum protection under existing treaties, said Schreuer - usually by establishing a company in a state that has favourable treaty relations with the host state and accepts incorporation as a basis for corporate nationality. That company will then be used as a conduit for the investment.


This is done frequently in the case of the Netherlands, which has a wide network of investment treaties and usually offers incorporation as a basis for nationality, he explained.


In principle, there is nothing wrong with this. "It is neither illegal nor improper for an investor of one nationality to establish a new entity so as to obtain benefits from domestic law and treaties. Indeed, this is standard practice in international economic relations, and has become as much a standard feature of diligent management as tax
planning."

Schreuer noted the statements of recent BIT tribunals on the topic. In the UNCITRAL case of HICEE v Slovak Republic, the tribunal said that the structuring of investments is "not unusual nor is there anything in the least reprehensible about it. The advantages anticipated often include the protection of a particular bilateral or other treaty covering foreign investments."


In the ICSID case of Aguas del Tunari v Bolivia, the tribunal said that "the language of the definition of national in many BITs evidences that such national routing of investments is entirely in keeping with the purpose of the instruments and motivations of the state parties".


However, Schreuer observed that there are some limitations to nationality planning that have been addressed in a number of cases, including Phoenix v Czech Republic.


In that case, a Czech investor transferred ownership of its investment to an Israeli company, Phoenix, which began an ICSID arbitration against the Czech state under the Israel-Czech Republic BIT.

The tribunal found that it had no jurisdiction to consider claims that had arisen prior to the alleged investment by the Israeli company and that the claim constituted an abusive attempt to access to the system of investment protection under the ICSID Convention. It said the claimant had made an investment not for the purpose of engaging in economic activity but for the sole purpose of bringing international arbitration against the Czech Republic.


The tribunal did not, however, dismiss nationality planning outright - it said investors can "structure their investments in a manner that best fits their needs for international protection", but cannot "modify the protection granted once the acts damaging its investment have already been committed."


There are other examples at ICSID where investors have belatedly attempted to gain access to treaty privileges and failed, he observed, including Banro American Resources v Democratic Republic of the Congo and Cementownia v Turkey.


"Is the timing of the effort to obtain the right nationality the answer to the problem?" Schreuer asked. He said the ICSID case of Mobil v Venezuela is particularly instructive on this point.


Exxon Mobil had structured its investment through holding companies in Delaware and the Bahamas. After difficulties arose with the Venezuelan government regarding income tax, the US oil company restructured its investment, interposing a Netherlands holding company. After Venezuela nationalised its assets, the Dutch entity brought an ICSID claim under the Netherlands-Venezuela BIT.


Despite Venezuela's vigorous objections, the tribunal found that the corporate structure was permissible. It said: "The aim of the restructuring of the investments in Venezuela, through a Dutch holding, was to protect those investments against breaches of their rights by the Venezuelan authorities by getting access to international arbitration through the BIT. The tribunal considers that this was a perfectly legitimate goal as far as it concerned future disputes."


The tribunal continued, "With respect to pre-existing disputes, the situation is different and the tribunal considers that to restructure investments only in order to gain jurisdiction under a BIT for such disputes would constitute, to take the words of the Phoenix Tribunal, 'an abusive manipulation of the system of international investment protection under the ICSID Convention and the BITs.'"

Therefore, Schreuer said, according to the Mobil decision, prospective planning is acceptable but it is not possible to remedy a pre-existing dispute by arranging for a desirable nationality.


"The solution rewards foresight and punishes those who are surprised by events and act too late," he said.

But there are "some pitfalls" to such planning, he added. The exact date on which the dispute arose is "not always easy to determine". Is the relevant date that of the dispute or the adverse acts leading up to it? What happens when you have a series of acts?


Alternatives to nationality planning?


Schreuer acknowledged that making distinctions on the basis of nationality is "unsavoury" from an ethical standpoint. "Why should individuals and corporations have widely different rights depending on the accidents of their nationality? Such distinctions are not only arbitrary but are also subject to manipulation if done early
enough."


He said there are two theoretical - but not very realistic - alternatives.


The first is a widely ratified multilateral agreement on investment that grants substantive and procedural rights to investors from all participating countries. Efforts to draft such an agreement have been made at least twice but without success. And even if a text was agreed, universal ratification would be highly unlikely.


The second would be to emulate the solution in human rights law whereby human rights are enjoyed by nationals of any country, regardless of nationality. "But we are a very long distance from that," he said.


Speaking at the same conference, British barrister Philippe Sands QC, of Matrix Chambers in London, reiterated his long held view that to preserve the integrity of investment treaty arbitration, lawyers must refrain from acting as both arbitrator and counsel in such cases.


Another British barrister, Sam Wordsworth, of Essex Court Chambers in London, spoke on the subject of applicable law and interpretation in investment arbitration, while Ruth Wedgwood - of The Johns Hopkins University, in Washington, DC - discussed 'National Insolvency and Good Faith Investors - Problems and Solutions'.


The Seventh Annual Fordham Law School Conference on International Arbitration and Mediation was held at King's College London on 26 and 27 April.