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Jurisdiction of ICSID Tribunal to hear claim brought by foreign owned company

11 February 2009

In TSA Spectrum de Argentina SA v Argentine Republic (ICSID Case No. ARB/05/05), an ICSID (1) Tribunal declined jurisdiction to hear claims against Argentina brought by an Argentinian company.

The company failed to establish that it should be treated as having the nationality of another State because of foreign control.

The Tribunal found that although the company’s immediate owner was a Dutch company holding 100% of its shares, the Dutch company was an empty shell behind which stood an individual of Argentinian nationality. Although the test for foreign control set out in the relevant bilateral investment treaty was met, the Tribunal ruled that there was also an objective test of foreign control to establish ICSID’s jurisdiction. This objective test was not satisfied.

When is a locally incorporated company “foreign controlled”: when the parties agree it, or when the Tribunal finds it is so? That was the question addressed by the ICSID Tribunal (Hans Danelius, President, Georges Abi-Saab and Grant Aldonas, Arbitrators) in its Decision on Jurisdiction dated 19 December 2008.

Under the ICSID Convention, which establishes the ICSID facility for arbitration of investor-State disputes, jurisdiction extends only to disputes arising out of an investment between a Contracting State and a national of another Contracting State. The one exception to this requirement of diversity of nationality is that the parties may agree that “because of foreign control” a locally incorporated company should be deemed to be foreign so that it may avail itself of the facilities of ICSID. The exception exists since many States require foreign investors to implement their investments through a local entity, subject to local regulation. This decision concerns the application of that exception.

The claimant was an Argentinian company. It relied upon the fact that it was the wholly owned subsidiary of a Dutch company, and the terms of the offer to arbitrate disputes in the Netherlands-Argentina bilateral investment treaty (the BIT), to commence ICSID proceedings against Argentina itself. The BIT defined eligible Dutch investors to include companies incorporated in Argentina, but “controlled, directly or indirectly” by Dutch nationals. A protocol to the BIT specified that proof of the necessary control might include being an affiliate of a Dutch national, or the “direct or indirect participation in the capital of a company higher than 49% or the direct or indirect possession of the necessary votes to obtain a predominant position in assemblies or company organs”.

The approach taken by the Tribunal followed the view prevailing in ICSID jurisprudence that although the parties’ agreement (in this case manifested by the parties’ agreement to arbitrate in accordance with the BIT) is essential, the existence of foreign control must be established objectively. Whilst the satisfaction of the requirements for foreign control contained in the BIT created a strong presumption that the necessary foreign control exists, this is not necessarily sufficient for the purposes of jurisdiction under ICSID. The majority did not find the necessary foreign control to exist, as the Dutch company that owned the claimant was an empty holding company behind which there was an Argentinian businessman, who was the “real source” of control. ICSID jurisdiction was denied even though the terms of the BIT were met. If foreign control is not established, ICSID jurisdiction cannot exist. The dissenting arbitrator’s view was that the tribunal should defer to, and not look beyond, the criteria for control specified in the BIT.

Comment: The ICSID Convention does not specify the nature of, the direct or indirect, ultimate or effective, foreign control necessary for jurisdiction to extend to a local investment vehicle. Investors might therefore presume that, where they have agreed that a certain level of foreign shareholding translates into control, tribunals will not pierce the corporate veil of the foreign shareholder in a search for a more effective controller. Other tribunals have adhered to that view. However, the majority in this case did look behind the first tier of ownership in circumstances where that shareholder was an empty shell behind which stood an individual having Argentinian nationality seeking to sue his own country in what is intended to be an international forum. Although structuring investments to ensure treaty protection must be done with care (even more so after TSA Spectrum) the majority’s decision should be understood in the light of its particular facts. The decision is best explained by the fact that Argentinean control of the claim was at odds with a major premise of the Convention that its facility extends only to disputes between parties of diverse nationalities “to the exclusion of those between a State and its own national investors”.

(1) International Centre for Settlement of Investment Disputes

Further Information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution. For more information please contact Christabel Constance, or tel +44 (0)20 3088 3841.