INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES
WASHINGTON, D.C.

DEUTSCHE BANK AG

V.

DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA
ICSID CASE NO. ARB/09/02

DISSENTING OPINION OF MAKHDOOM ALI KHAN

 Table of Contents
I.

Introduction............................................................................................................................... 2

II.

Does the Hedging Agreement constitute an “investment”? .................................................... 3
A. The Treaty ........................................................................................................................... 4
(i)

Claim to Money Used to Create an Economic Value ..................................................... 9

(ii) Associated with an investment ...................................................................................... 11
B.

The ICSID Convention ...................................................................................................... 12
(i)

III.

Substantial Commitment or Contribution ..................................................................... 18

Expropriation ....................................................................................................................... 28

IV. Fair and Equitable Treatment .............................................................................................. 40
A. Interim Order of the Supreme Court ............................................................................. 40
B.

Actions of the Central Bank .......................................................................................... 46

V. Capacity of CPC to enter into the Hedging Agreement ........................................................ 48
VI. Attribution ............................................................................................................................ 49
VII.

Conclusion .......................................................................................................................... 50

I.

Introduction

1.

I have had the benefit of reading the majority award (“Majority Award”) authored by my
distinguished colleagues. I have respect for their erudition and experience. I regret,
however, that I find myself unable to agree with some of the reasons given and
conclusions reached by them. I am, therefore, compelled to write this dissent.

2.

In particular, I do not agree that:
(i)

the Hedging Agreement (“Hedging Agreement”) constitutes an investment for the
purposes of the Germany-Sri Lanka BIT (“Treaty”), I discuss this in Section II. A;

(ii)

the Hedging Agreement (“Hedging Agreement”) constitutes an investment for the
purposes of the ICSID Convention (“Convention”), I discuss this in Section II. B;

(iii)

the debt owed to the Claimant by the Ceylon Petroleum Corporation (“CPC”)
was expropriated in violation of Article 3 of the Treaty and that the Claimant is,
therefore, entitled to damages, I discuss this in Section III;
2

 (iv)

the Interim Order issued by the Supreme Court of Sri Lanka (“Supreme Court”)
on 28 November 2008 violated the Respondent’s obligation under Article 2 of the
Germany-Sri Lanka BIT to accord fair and equitable treatment to investments
under the Treaty, I discuss this in Section IV.A; and

(v)

the actions of the Central Bank of Sri Lanka (“Central Bank”) violated the
Respondent’s obligation under Article 2 of the Germany-Sri Lanka BIT to accord
fair and equitable treatment to investments under the Treaty justifying an award
of damages of USD 60,368,993 plus interest in favour of the Claimant, , I discuss
this in Section IV.B.

3.

The identification of these five areas of disagreement does not mean that I agree with the
Majority Award in all other respects. For instance, while I agree with the finding that CPC
had the capacity to enter into the Hedging Agreement, I am not in agreement with some of
the reasons offered to support this conclusion. I discuss this in Section V. Similarly, while
I agree with paragraph 404 of the Majority Award that this Tribunal is not required to
decide the issue of attribution, I disagree with the observations made in paragraph 405 and
some of the observations made in paragraph 407 of the Majority Award. I address this in
Section VI.

4.

My conclusions are in Section VII.

5.

The Majority Award sets out the facts, as stated by the parties, I, therefore, do not restate
these here.

II. Does the Hedging Agreement constitute an “investment”?
6.

In order to determine whether the Hedging Agreement constitutes an investment, the
majority employs the double-barrel test. First, it considers whether the Hedging
Agreement falls within the definition of the term “investment” in the Treaty, and then
whether it falls within the scope of the term as used in the Convention. I follow the same
order.

3

 A.
7.

The Treaty

The preamble to the Treaty states that its purpose is “to create favourable conditions for
investments by nationals and companies of either State in the territory of the other State”.
The term ‘investment’ is defined in Article 1 of the Treaty:

1. The term “investments” comprises every kind of asset, in particular:
…
(c) claims to money which has been used to create an economic value or claims
to any performance having an economic value and associated with an
investment;

8.

The definition of “investment” in the Treaty as comprising every kind of asset is followed
by a partial list which enumerates some assets “in particular”. According to the Majority
Award, “[t]he categories enumerated are just an illustrative list of assets, every kind of
which is considered to be an investment.” 1 I am of the view that for a harmonious
construction of Article 1, the general description of “investment” as comprising “every
kind of asset” must be read with the categories enumerated in the partial list. 2 As stated by
Kenneth J. Vandevelde, such a “list provides an irreducible core of meaning while
indicating through illustration some sense of the overall scope of the term.” 3

9.

Further, Article 1.1 (c) of the Treaty requires that a claim to money must have been “used
to create an economic value”. As such, simply showing that the Claimant has a claim to
money will not be enough to qualify it as an investment, given the language of the Treaty.

1

Majority Award, para.286.
As McLachlan, Campbell, Shore, Laurence and Weiniger, Matthew note in their book International Investment
Arbitration: Substantive Principles, OUP, NY, 2007, p. 172,
“Tribunals have been reluctant to base decisions solely on the wide inclusive phrase of definitions of
‘investment’. Petrobart v Kyrgyz Republic and Jan de Nul v Egypt are two cases where tribunals have found
an investment to exist by reference to the detailed criteria contained in the ECT and Belgo-Luxemburg
Economic Union-Egypt BIT respectively. It is, however, noteworthy that in neither case did the Tribunals base
their decisions on the wide opening words of the treaty definitions, ‘every kind of asset’ and ‘any kind of
assets’ respectively. Before deciding that the asset in dispute was an ‘investment’, the Tribunals sought
confirmation from the non-exhaustive list following the introductory phrase.”
3
Vandevelde, Kenneth, J., U.S. International Investment Agreements, OUP, N.Y, 2009, p. 115.
2

4

 To succeed, the Claimant must also establish that this money was used to create an
economic value. 4

10.

This is not the end of the matter, however. In my opinion, not only does the Treaty require
that the claim to money must have been “used to create an economic value” but also that it
be “associated with an investment”. The Majority Award does not accept that clause (c)
requires a claim to money, which has been used to create an economic value, to be
“associated with an investment”. It states that “[d]efining an investment by reference to an
investment would be a circular reasoning” 5. In my opinion such an interpretation seeks to
read away a key phrase of Article 1.1 (c) of the Treaty. In effect, the majority is positing
that the entire phrase “associated with an investment” is redundant.

11.

Words are the means by which a State party to a treaty communicates its intention. As
stated by the Wintershall Tribunal “[t]he carefully-worded formulation in Article 31 [of
the Vienna Convention on the Law of Treaties] is based on the view that the text must be
presumed to be the authentic expression of the intention of the parties.” 6 Every word or
phrase must, therefore, be given its ordinary meaning. None can be disregarded or held
redundant. 7 The phrase “associated with an investment” cannot, therefore, be regarded as
superfluous. It has to be given a meaning.

12.

A departure from this norm may be justified may be justified in circumstances where it
would lead to absurd results or make a provision of the treaty meaningless or defeat the

4

This is a more stringent requirement than that stated in a large number of other bilateral investment treaties
(“BITs”) executed by Germany. For instance in the Agreement between the Federal Republic of Germany and the
People’s Republic of Bangladesh concerning the Promotion and Reciprocal Protection of Investments (entered into
force on 14 September 1986) and Treaty between the Federal Republic of Germany and the Republic of Turkey
concerning the Reciprocal Promotion and Reciprocal Protection of Investments (entry into force, 16 December
1965) Article 8.1(c) in both treaties uses the words “claims to money or to any performance having an economic
value”. As is obvious, the words “claims to money” have been used without any qualification and are of much wider
import... See also: Agreement between the Federal Republic of Germany and the Arab Republic of Egypt
concerning the Encouragement and Reciprocal Protection of Investments (entered into force on 16 June 2005)
Article 1.1(c) to the same effect. See also Dolzer, R. and Stevens, M., Bilateral Investment Treaties, Kluwer, The
Hague, 1995, pp. 28-29.
5
Majority Award, para. 286.
6
Wintershall Aktiengesellschaft v. Argentine Republic (ICSID Case No. ARB/04/14), Award, 8 December 2008,
para. 78.
7
Jennings, Sir Robert and Watts, Sir Arthur, Oppenheim’s International Law, 9th ed, vol 1, Parts 2 to 4, pp.1271-2
refer to the “many pronouncements of the International Court of Justice, which has…emphasized that:
…interpretation is not a matter of revising treaties or reading into them what they do not expressly or by
necessary implication contain or of applying a rule of interpretation so as to produce a result contrary to
the letter or spirit of the treaty’s text.”

5

 object and purpose of the treaty. That not being the case here, the phrase “associated with
an investment” cannot be regarded as redundant.

13.

An examination of the language of some of the earlier BITs, to which Germany was a
party, as well as the later German Model BITs, establish that this phrase was used
intentionally in the Treaty and is not superfluous. The 2005 and 2008 German Model
BITs, 8 and many BITs concluded by Germany, 9 do not use the phrase “associated with an
investment” to qualify “claims to money which has been used to create an economic

value”. This suggests that the Contracting Parties to the Germany-Sri Lanka BIT were
familiar with an expansive version of clause (c). They chose not to use it in this case. The
use of limiting language in this clause is not without significance. It suggests that the
qualifying phrase “associated with an investment” was deliberately inserted. It confirms
that the State parties intended clause (c) of the Treaty to have a relatively narrower
meaning.

14.

Alternatively, the Majority Award states that if the phrase “associated with an investment
were to receive the meaning proposed by Respondent…[it] would only apply to claims to
performance and not to claims to money”. 10 The Majority Award, however, does not
explain why, applying the phrase “associated with an investment” to claims for money
would lead to circular reasoning, but applying this phrase to claims to performance would
not.

15.

In the Treaty, the two kinds of claims, i.e., for money and for performance, have been
separated with the word “or”. The word “or” has been used to link two alternatives. The
phrase “associated with an investment” has been used after the second alternative but
separated from it by the use of the word “and”. The use of the word “and” is not without
significance. It demonstrates that the phrase “associated with an investment” applies to
both “claims to money which has been used to create an economic value” and “claims to

8

Germany Model BIT (2005):
“(c) claims to money which has been used to create an economic value or claims to any performance
having an economic value;”
Germany Model BIT (2008):
“(c) claims to money which has been used to create an economic value or claims to any
performance having an economic value”.
9
See for instance the Treaty between the Federal Republic of Germany and the Islamic Republic of
Afghanistan concerning the Encouragement and Reciprocal Protection of Investments (entry into force on 12
October 2007) Article 1.1 (c) which uses language identical to the 2005 and 2008 German Model BITs.
10
Majority Award, para.286.

6

 any performance having an economic value”. If the word “and” in Article 1.1 (c) of the
Treaty was intended to apply only to the second limb and not the first, it could have been
omitted and the provision could simply have read as “any performance having an
economic value associated with an investment”. Both Sri Lanka and Germany are parties
to BITs where the word “and” has not been used. 11 In the Treaty, both State Parties chose
to use this word and its inclusion must, therefore, be regarded as intentional. The
conclusion reached in the Majority Award makes the word “and” in clause (c) redundant
which, in my opinion, is simply not permissible.

16.

Any claim to money used to create an economic value must, therefore, be associated with
an investment to fall within Article 1.1 (c) of the Germany-Sri Lanka BIT. Even the
Claimant admits as much, 12 though it disputes the significance and interpretation of this
phrase.

17.

I am of the view that the two Contracting States, having the latitude and authority to
restrict the meaning of the term “investment” 13 in the Treaty, decided to exclude certain
economic activities from its scope. They made it clear that a claim for money which has
not been “used to create an economic value” or lacks the essential connecting feature of
being “associated with an investment” will fall outside the Treaty’s definition of
“investment”. The use of restrictive language by the two State Parties to the Treaty was
intentional. These words, therefore, have to be given due weight. They cannot be stripped
of their ordinary meaning.

18.

The Tribunal in the Global Trading case was called upon to interpret similar language in
the Treaty between the United States of America and Ukraine Concerning the
Encouragement and Reciprocal Protection of Investment (entry into force 16 November
1996). Article I(1)(a)(iii) of that Treaty reads as follows:

11

See for instance Agreement between the Federal Republic of Germany and the United Arab Emirates for the
Promotion and the Reciprocal Protection of Investments (entry into force 2 July 1999) Article 1.1 (c):
claims to money or to any performance having economic value associated with an investment.
See also Agreement on the Promotion and Protection of Investments between the Democratic Socialist Republic of
Sri Lanka and the Government of the Arab Republic of Egypt (entry into force 10 March 1998) Article 1.1 (c):
Claims to money or to any performance having an economic value associated with an investment.
12
Claimant’s Post-Hearing Brief, para. 68.
13
Phoenix Action Limited v. Czech Republic (ICSID Case No. ARB/06/5), Award, 15 April 2009, para. 96.

7

 a claim to money or a claim to performance having economic value, and
associated with an investment;

19.

After an examination of this provision the Tribunal observed that it:
…does not find that it needs to go beyond the text itself of Article I(1)(a) of
the BIT. And, under the text of Article I(1)(a), the Tribunal finds that (as
here) claims to money alleged to be due can only fall within the scope of
Article I, and therefore of the BIT as a whole, whatever the circumstances,
if they are (as sub-paragraph (a)(iii) says in plain words) “associated
with an investment.” 14

20.

The claim was rejected with the observation that “[i]n the Tribunal’s view, the Claimants’
case under this sub-paragraph founders on the fact that their contracts were simply
contracts which lacked the essential connecting factor of being ‘associated with an
investment.” 15 That reasoning, in my opinion, applies to the language of this Treaty and
therefore, this case.

21.

While Article 1 of the Treaty lists other categories of investments such as:

(a) moveable and immoveable property and other rights in rem;
(b) shares, stocks, debentures and other similar interests in companies;
(d) intellectual property rights; and
(e) business concessions under public law or contract;

the Hedging Agreement clearly does not fall within any of these categories. Neither the
parties nor the Majority Award suggest otherwise. The only clause in Article 1.1 which
may accommodate such a claim is clause (c) and that too if the Claimant establishes that it
has been used to create an economic value and is associated with an investment.

22.

In accordance with Article 1.1 (c), a “claim to money” can only be considered to be an
“investment” under the BIT if it meets two criteria. The claim must be:

14

Global Trading Resource Corp. and Globex International, Inc. v. Ukraine (ICSID Case No. ARB/09/11), Award,
1 December 2010, para. 50.
15
Ibid, para.51.

8

 (i)

for “money used to create an economic value” and

(ii)

it must be “associated with an investment”.

The Claimant’s claim to money is for a debt arising out of the Hedging Agreement. The
first question, therefore, is whether this debt was used to create an economic value. In
order to answer this question, we have to examine the Hedging Agreement and the claim
being made by the Claimant.

(i)

23.

Claim to Money Used to Create an Economic Value

The Majority Award states that “the Hedging Agreement is an asset. It is a legal property
with economic value for Deutsche Bank. It is a claim to money which has been used to
create an economic value for Deutsche Bank.” 16 It does not state how or why that is so.
Article 1.1 (c) does not require that the “claim to money” have an economic value for the
Claimant. All claims, made by any person, will always have an economic value for that
person. That is not the requirement of the Treaty. The requirement is that the claim should
be for “money used to create an economic value”.

24.

At the time the Hedging Agreement was executed, no money was paid by either party to
the other. The outcome of the Hedging Agreement, and any payments to be made by one
party to the other, were contingent on the price of oil on each payment date.

25.

The Strike Volume or the number of barrels of oil that the Hedging Agreement applied to
was set at 100,000 barrels for each of the parties. The agreed strike price was USD 112.50
per barrel. Where the Monthly Oil Price was greater than the Strike Price, the Claimant
was to pay CPC the difference between the Strike Price and the Monthly Oil Price (up to a
maximum price difference of USD 10 per barrel) multiplied by the Strike Volume. Where
the Monthly Oil Price was lower than the Strike Price, CPC was obliged to pay the
Claimant the difference between the Strike Price and the Monthly Oil Price multiplied by
the Strike Volume. CPC’s Target Price Level was set at USD 2,500,000 and the trade
terminated if payout by the Claimant reached that level. 17 The Hedging Agreement limited

16
17

Majority Award, para. 285.
Majority Award, para. 30.

9

 the payments to be made by the Claimant to CPC. If the price of oil fell, there was no limit
on the payments, which CPC had to make to the Claimant.

26.

The price of oil fell and, therefore, on 17 October 2008 and 14 November 2008, CPC
made payments of USD 1,659,636.36 and USD 4,597,857.14 respectively to the Claimant.
On 3 December 2008, the Claimant terminated the Hedging Agreement on the ground that
CPC had failed to execute the ISDA Master Agreement within 90 days of the Trade Date
as defined in the Confirmation. 18 By its letter of 10 December 2008, the Claimant, based
on the early termination, calculated the close-out amount payable to it by CPC as USD
60,368,993. 19

27.

This amount, which the Claimant now seeks to recover, is the sum calculated on the basis
of the Early Termination. It is not the money that the Claimant paid to CPC. It is also not
the current economic value of any money that the Claimant has ever used or that it paid to
CPC. Had the Claimant used a smaller amount, and its economic value had grown to USD
60,368,993, then it could be argued that this amount was the current economic value of the
money, which the Claimant had earlier invested. That is not the case here.

28.

The Claimant only made a payment of USD 35,523.81 to CPC on 19 September 2008 as
the price of oil was above USD 112.50. The current economic value of that payment is not
USD 60,368,993. The sum of USD 35,523.81 was not “used to create an economic value”
of USD 60,368,993. Even if the price of oil had remained above USD 112.50 for the
duration of the Hedging Agreement, the Claimant’s payment to CPC would not have
exceeded USD 2,500,000. The Hedging Agreement could not have possibly created an
economic value in excess of this amount. It is, therefore, difficult to see how the current
claim of USD 60,368,993 is for money used to create an economic value.

29.

The claim to money by the Claimant, therefore, does not meet the first criteria of Article
1.1 (c) of the Treaty.

18

Core Bundle 5, Exhibit 246. The letter mentioned 9 December 2008 as the Early Termination Date.
Core Bundle 6, Exhibit 256. The Claimant followed this by a letter of demand of 13 January 2009: Core Bundle
6, Exhibit 284
19

10

 (ii)

30.

Associated with an investment

I now turn to the second criteria. The Claimant’s claim to money is a debt arising out of
the Hedging Agreement. For this debt to qualify as an investment under the BIT, it must be
“associated with an investment.” The debt is associated with the Hedging Agreement. The
question then is whether the Hedging Agreement itself constitutes an investment, which is
separate and distinct from the debt arising thereunder. For this, I proceed to examine the
definition of “investment” in the Treaty.

31.

Article 1.1 of the Treaty lists several categories of investments. These are:

(a)

moveable and immoveable property and other rights in rem;

(b)

shares, stocks, debentures and other similar interests in companies;

(c)

claims to money which has been used to create an economic value or
performance having an economic value and associated with an investment;

32.

(d)

intellectual property rights; and

(e)

business concessions under public law or contract.

The Hedging Agreement clearly does not fall within categories (a), (b), (d) or (e). Neither
the parties nor the Majority Award suggest otherwise. With regard to category (c), it is the
debt arising out of the Hedging Agreement, which is a claim to money. The Hedging
Agreement itself is not a claim to money. It is a financial instrument. The Hedging
Agreement is a contract and a contract without more (for instance unless it is related to
moveable, immoveable or intellectual property) is not enumerated in the categories which,
“in particular”, are regarded as assets and therefore, an “investment” for the purposes of
the BIT. Further, even if it were assumed that the Hedging Agreement was a “claim for
money” referred to in category (c), it cannot at the same time also be an investment for the
purpose of the phrase “associated with an investment” as used in category (c). An
instrument cannot be a claim for money, and also an investment with which that claim for
money is associated. The Hedging Agreement is, therefore, not associated with a separate
investment as required by clause (c), and, therefore, does not qualify as an investment
under clause 1.1 (c) of the Treaty.

11

 33.

In view of the above, I do not agree with the Majority Award and am of the opinion that
the Claimant did not make any “investment” within the meaning of the Treaty. I now turn
to the Convention.

B.
34.

The ICSID Convention

While the Convention does not define the term “investment”, its outer limits have been
demarcated in ICSID jurisprudence. 20 The result is that not every economic activity is an

20

See Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan (ICSID Case No. ARB/01/13),
Decision on Jurisdiction, 6 August 2003, para. 133:
“...investment...embod[ies] certain core meaning which distinguishes it from ‘an ordinary commercial
transaction such as a simple, stand alone, sale of goods or services”;
Joy Mining v. Arab Republic of Egypt (ICSID Case No. ARB/03/11), Award on Jurisdiction, 6 August 2004, para.
50:
“The parties to a dispute cannot by contract or treaty define as investment, for the purpose of ICSID
jurisdiction, something which does not satisfy the objective requirements of Article 25 of the Convention.
Otherwise Article 25 and its reliance on the concept of investment, even if not specifically defined, would be
turned into a meaningless provision”;
Romak S.A. v. Republic of Uzbekistan (PCA Case No. AA280), Award, 26 November 2009, paras. 180 and 207:
“The term ―investment has a meaning in itself that cannot be ignored when considering the list contained in
Article 1(2) of the [Germany – Ukraine] BIT…The Arbitral Tribunal therefore considers that the term
―investments under the BIT has an inherent meaning (irrespective of whether the investor resorts to ICSID
or UNCITRAL arbitral proceedings) entailing a contribution that extends over a certain period of time and
that involves some risk . . . . By their nature, asset types enumerated in the BIT‘s non-exhaustive list may
exhibit these hallmarks. But if an asset does not correspond to the inherent definition of investment the fact
that it falls within one of the categories listed in Article 1 does not transform it into an investment.”
Douglas, Z., The International Law of Investment Claims, Cambridge University Press, United Kingdom, 2009,
para. 342:
“The term ‘investment’, however, is a term of art: its ordinary meaning cannot be extended to bring any rights
having an economic value within its scope, for otherwise violence would be done to that ordinary meaning, in
contradiction to Article 31 of the Vienna Convention on the Law of Treaties”.
Schreuer, C. H., The ICSID Convention: A Commentary, 2d ed., Cambridge University Press, Cambridge, 2009, p.
117:
“Therefore, while it is clear that the parties have much freedom in describing their transaction as an
investment, they cannot designate an activity as an investment that is squarely outside the objective meaning
of that concept.”
Contra. Abaclat and others v. Argentine Republic (ICSID Case No. ARB/07/5), Decision on Jurisdiction and
Admissibility, 4 August 2011, para. 364:
“If Claimants‘ contributions were to fail the Salini test, those contributions – according to the followers of this
test – would not qualify as investment under Article 25 ICSID Convention, which would in turn mean that
Claimants‘ contributions would not be given the procedural protection afforded by the ICSID Convention. The
Tribunal finds that such a result would be contradictory to the ICSID Convention‘s aim, which is to encourage
private investment while giving the Parties the tools to further define what kind of investment they want to
promote. It would further make no sense in view of Argentina‘s and Italy‘s express agreement to protect the
value generated by these kinds of contributions. In other words – and from the value perspective – there would
be an investment, which Argentina and Italy wanted to protect and to submit to ICSID arbitration, but it could
not be given any protection because – from the perspective of the contribution – the investment does not meet
certain criteria. Considering that these criteria were never included in the ICSID Convention, while being
controversial and having been applied by tribunals in varying manners and degrees, the Tribunal does not see
any merit in following and copying the Salini criteria. The Salini criteria may be useful to further describe what
characteristics contributions may or should have. They should, however, not serve to create a limit, which the
Convention itself nor the Contracting Parties to a specific BIT intended to create.”

12

 “investment” within the meaning of the Convention. Different tribunals have set out the
general characteristics, which an investment typically possesses and the presence of which,
while not dispositive, suggests that an investment has been made. 21

35.

The Tribunal in Fedax N.V. v. Venzuela 22 identified five basic features of an investment:
“a certain duration, a certain regularity of profit and return, assumption of risk, a
substantial commitment and a significance for the host State’s development.” In recent
years, however, these characteristics have coalesced around those noted by the Tribunal in
Salini v. Morocco 23 . “[I]nvestment” noted that Tribunal “suggests payments, a certain
period of the execution of the deal and participation in the risks of the transaction … A
reading of the preamble of the Convention permits to add to these the criterion of
contribution to the economic development of the State receiving the investment.” The
Salini Tribunal pointed out that “these various elements can be interdependent” and that
“these various criteria must be appreciated together”. 24

36.

While dismissing attempts to define “investment” as unrealistic, Schreuer identifies “five
features that are typical to most of the operations in question”:

(i)

The projects have a certain duration.

(ii)

There is a certain regularity of profit and return.

(iii)

There is an assumption of risk usually by both sides (risk is in part a
function of duration and expectation of profit).

(iv)

The commitment is substantial.

(v)

The operation has a significance for the host State’s development.

21

“The weight of authority is … in favour of viewing the term ‘investment’ as having an objective definition within
the framework of the ICSID Convention.” Global Trading Resource Corporation and Globex International Inc. v.
Ukraine (ICSID Case No. ARB/09/11), Award, 1 December 2010, para. 43.
22
Fedax N.V. v. Republic of Venezuela (ICSID Case No. ARB/96/3), Decision on Objections to Jurisdiction, 11 July
1997, (2002) 5 ICSID Rep. 186, 194.
23
Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco (ICSID Case No. ARB/00/4), Decision on
Jurisdiction, 23 July 2001, (2004) 6 ICSID Reports 400, 413.
24
The Joy Mining Tribunal referred to essentially the same five features as the Fedax Tribunal to characterize an
investment. It also substituted “significance for the host country’s development” with a “significant contribution to
the host State’s development”: Joy Mining Machinery Limited v. Arab Republic of Egypt (ICSID Case No.
ARB/03/11), Award on Jurisdiction, 6 August 2004, (2008) 13 ICSID Rep. 123, 133, para. 53. This was followed in
Helnan International Hotels A/S v. Arab Republic of Egypt (ICSID Case No. ARB/05/19), Decision on Objections
to Jurisdiction, 17 October 2006, para. 77.

13

 These features are not to be “understood as jurisdictional requirements but merely as
typical characteristics of investment under the Convention.” 25

37.

The most obvious example of an investment, which fulfills these characteristics, is foreign
direct investment such as establishing an industry or enterprise in the host State. This type
of investment falls directly under the control of the host State’s legislative, executive and
judicial power and requires the protection afforded by the Convention.

38.

A more problematic area and one which has led to divergent decisions is indirect foreign
investment, in particular ‘portfolio investments’ such as shares, bonds and other financial
transactions and products. At times, the issue is directly addressed by the State parties by
specifically listing a particular transaction or product in the definition of “investment” in
the BIT. However, even if a given transaction or product qualifies as an investment under
the BIT, the preponderant view is that given the very broad and general language used
when defining “investment” in BITs it is necessary to examine whether the financial
transaction or product qualifies as an investment under the Convention. To quote Professor
Schreuer:

BITs contain definitions of investment, but if you examine the BIT
definition of investment you will see that these are extremely wide. They
include such terms as claims to money or any right conferred by law or
contract. I think most of us will agree, that this is so wide that it goes way
beyond what most of us understand by an investment. In particular, it
would cover an ordinary commercial transaction or a sales contract.
Actually it would cover me going into a restaurant in Washington and
ordering a meal for $30.00. That is obviously not what is meant. 26

39.

The majority notes that recent developments in the case law suggest that two of these five
characteristics, namely contribution to economic development 27 and regularity of profit
and return 28, introduce an unacceptable degree of subjectivity and, therefore, should be

25

Schreuer, Christoph H, The ICSID Convention: A Commentary, 2d ed., Cambridge University Press, Cambridge,
2009, p. 128.
26
“Are the ICSID Rules Governing Nationality & Investment Working?” Panel Discussion, Chapter 6, in Grierson
Weiler, TJ, Ed, Investment Treaty Arbitration and International Law, Vol. 1, Juris, NY, 2008, p. 119 at 125.
27
Majority Award, para.306.
28
Majority Award, para.305.

14

 abandoned. I agree that the regularity of profit and return is not a valid criterion. Even
typical direct foreign investments such as projects for the exploration and extraction of
natural resources or construction of highways, depending on their outcome, may not
generate regular profits or returns. As such, this characteristic cannot be considered as a
typical feature of an investment. Many tribunals have dispensed with it. It is best
discarded.

40.

With respect to “contribution to economic development”, my understanding of the recent
jurisprudence is different from that stated in the Majority Award. In my view, recent
decisions do not reject “contribution to economic development” as a typical characteristic
of investment. They either (i) observe that this characteristic is implicit in the other three
characteristics and does not necessarily need to be evaluated separately, 29 or (ii) modify
and supplement the Salini characteristics but in a manner which retains the essence of this
characteristic.

41.

Typical of the first category of decisions are those in L.E.S.I.-Dipenta v. People’s
Democratic Republic of Algeria 30 and Bayindir v. Islamic Republic of Pakistan 31 . In
L.E.S.I, the Tribunal stated that:

It would seem consistent with the objective of the Convention that a
contract, in order to be considered an investment within the meaning of
the provision, should fulfill the following three conditions:

(a)

the contracting party has made contributions in the host country;

(b)

those contributions had a certain duration; and

(c)

they involved some risks for the contributor.

29

Víctor Pey Casado and President Allende Foundation v. Republic of Chile (ICSID Case No. ARB/98/2), Award,
8 May 2008, para. 232:
“… the Convention foments the development of the host State. That does not mean that the development of
the host State is a constitutive element of the notion of investment. That is why, as has been pointed out by
certain arbitral tribunals, this fourth condition is in reality covered by the first three.”
30
Consortium Groupement L.E.S.I. - DIPENTA v. People's Democratic Republic of Algeria (ICSID Case No.
ARB/03/8), Award, 10 January 2005.
31
Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of Pakistan (ICSID Case No. ARB/03/29),
Decision on Jurisdiction, 14 November 2005.

15

 On the other hand, it is not necessary that the investment contribute more
specifically to the host country’s economic development, something that is
difficult to ascertain and that is implicitly covered by the other three
criteria. 32

42.

The Bayindir Tribunal confirmed this approach:

Lastly, relying on the preamble of the ICSID Convention, ICSID tribunals
generally consider that, to qualify as an investment, the project must
represent a significant contribution to the host State’s development. In
other words, investment should be significant to the State’s development.
As stated by the tribunal in L.E.S.I, often this condition is already included
in the three classical conditions set out in the ‘Salini test’. 33

43.

In my view, the Majority Award does not take this characteristic into account at all. It finds
that “this criteria is unworkable owing to its subjective nature.” 34 In fact the majority’s
reasoning, in my respectful view, is not even in consonance with the second type of
decisions such as those in Phoenix Action v. Czech Republic 35 and Biwater Gauff v.
Tanzania 36. These suggest that the Salini characteristics should, in fact, be modified and
supplemented rather than abandoned and that the contribution to economic development
should be taken into account. In Phoenix Action, the Tribunal listed six elements that have
to be taken into account for an investment to benefit from the international protection of
ICSID:

1 – a contribution in money or other assets;
2 – a certain duration;
3 – an element of risk;
4 – an operation made in order to develop an economic activity in the host
State;
32

L.E.S.I.-Dipenta v. People’s Democratic Republic of Algeria (ICSID Case No. ARB/03/08), Award, 10 January
2005, para. 13(iv).
33
Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of Pakistan (ICSID Case No. ARB/03/29),
Decision on Jurisdiction, 14 November 2005, para. 137.
34
Majority Award, para. 306.
35
Phoenix Action Ltd v. Czech Republic (ICSID Case No.ARB/06/5), Award, 15 April 2009, para 85.
36
Biwater Gauff (Tanzania) Limited v. United Republic of Tanzania (ICSID Case No. ARB/05/22), Award, 24 July
2008.

16

 5 – assets invested in accordance with the laws of the host State;
6 – assets invested bona fide. 37 (Emphasis supplied).

44.

The Phoenix Tribunal, like the L.E.S.I.-Dipenta and Bayindir Tribunals, also recognized
that:

“an extensive scrutiny of all these requirements is not always necessary,
as they are most often fulfilled on their face, ‘overlapping’ or implicitly
contained in others, and that they have to be analyzed with due
consideration to all circumstances”. 38

45.

The Tribunal in Biwater was of the view that:

“a more flexible and pragmatic approach to the meaning of ‘investment’
is appropriate, which takes into account the features identified in Salini,
but along with all the circumstances of the case, including the nature of
the instrument containing the relevant consent to ICSID” 39.

46.

Such an approach is to be preferred to the complete abandonment of the characteristic of
“contribution to economic development” as “unworkable”. While this characteristic is
arguably subjective, it is not devoid of all utility and in fact preserves a vital link between
an investment and the intended purpose of the Convention. This link, between investments
and economic development, is emphasized not only in the preamble to the Convention but
also in the Report of the Executive Directors of the World Bank accompanying the
Convention:

In submitting the attached Convention to governments, the Executive
Directors are prompted by the desire to strengthen the partnership
between countries in the cause of economic development. The creation of
an institution designed to facilitate the settlement of disputes between
States and foreign investors can be a major step toward promoting an
37

Phoenix Action Ltd v. Czech Republic (ICSID Case No.ARB/06/5), Award, 15 April 2009, para. 114.
Ibid. para. 115.
39
Biwater Gauff (Tanzania) Limited v. United Republic of Tanzania (ICSID Case No. ARB/05/22), Award, 24 July
2008, para. 316.
38

17

 atmosphere of mutual confidence and thus stimulating a larger flow of
private international capital into those countries which wish to attract it. 40

47.

To entirely abandon this characteristic would be to sever this link.

48.

As I am of the view that a contribution to economic development is implicitly recognized
and contained in the other Salini characteristics, I do not consider it necessary to discuss
this separately.

49.

I, therefore, turn to the discussion of the first characteristic in the Majority Award.

(i)

Substantial Commitment or Contribution

50.

The majority finds that the Hedging Agreement involved a substantial contribution to Sri
Lanka since such a contribution can take any form. 41 In reaching this conclusion, the
majority relies on three ICSID decisions, Consortium R.F.C.C. v. Kingdom of Morocco 42,
Bayindir v. Islamic Republic of Pakistan 43 and L.E.S.I. S.p.A. & Astaldi S.p.A. v. People’s
Democratic Republic of Algeria 44. Consortium R.F.C.C. and Bayindir relate to disputes
arising out of contracts for the construction of highways in Morocco and Pakistan
respectively. L.E.S.I. & Astaldi relates to a dispute arising out of a contract for the
construction of a dam in Algeria. In the first two decisions, disputes arose after the
respective claimants had already commenced construction of the highways. In the third
decision, no actual work on the construction of the dam had begun but the claimant had
committed considerable resources to the project. In my opinion all three cases are
distinguishable. What was under consideration in these cases was investment in
infrastructure projects. None recorded a finding that entering into a purely commercial or
financial transaction, without more, constituted a substantial contribution or commitment.

40

Report of the Executive Directors on the Convention on the Settlement of Investment Disputes between States
and Nationals of Other States, 18 March 1965, 1 ICSID Rep 25, para. 9.
41
Majority Award, para. 297.
42
Consortium R.F.C.C. v. Kingdom of Morocco (ICSID Case No. ARB/00/6), Decision on Jurisdiction, 16 July
2001.
43
Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of Pakistan (ICSID Case No. ARB/03/29),
Decision on Jurisdiction, 14 November 2005.
44
LESI, S.p.A. and Astaldi, S.p.A. v. People's Democratic Republic of Algeria (ICSID Case No. ARB/05/3),
Decision on Jurisdiction, 12 July 2006.

18

 51.

The Majority Award then cites three instances to show the substantial contribution made
by the Claimant:

(i)

By concluding the Hedging Agreement the Claimant committed to pay USD 2.5
Million to CPC if the cost of importing oil remained above USD 112.50 per
barrel; 45

(ii)

The Claimant made a payment of USD 35,523.81 to CPC on 19 September
2008; 46 and

(iii)

The Claimant’s employees engaged in over two years of regular meetings,
negotiations and correspondence with CPC and the Central Bank of Sri Lanka. 47

52.

The phrase ‘substantial commitment or contribution’ cannot be considered in isolation,
particularly where contribution to economic development is not being considered as a
separate characteristic. The substantial commitment or contribution by the Claimant must
be made for economic development in the host State. Whether a financial transaction is an
investment must be judged at the time of its inception. 48 That it subsequently produces an
economic benefit for the host State is irrelevant. What is important is the purpose of the
commitment or contribution. The Majority Award states that “some transactions may
undoubtedly be qualified as investments, even though they do not result in a significant
contribution to economic development in a post hoc evaluation of the claimant’s activities.
This is for example the case of mergers and acquisitions or failed construction projects.”49
In my opinion the example does not support the conclusions of the Majority Award. A
merger or acquisition which does not produce beneficial results, or a construction project
which is subsequently aborted, would still be an investment since the purpose is to
contribute to the economic development of the host State.

53.

The Claimant and CPC entered into the Hedging Agreement under which the Claimant had
to pay CPC a maximum of USD 2.5 million if the price of oil remained above USD 112.50
for the duration of the Agreement. The majority reasons that this provided an immediate
benefit to CPC and the Respondent by reducing their exposure to oil price volatility and

45

Majority Award, para. 298.
Majority Award, para. 299.
47
Majority Award, para. 300.
48
Majority Award, para. 295: “the existence of an investment must be assessed at its inception and not with
hindsight.”
49
Majority Award, para. 306.
46

19

 improved the predictability of their cash flow. 50 The fact is that the Hedging Agreement
produced no immediate benefit to CPC or the Respondent.

54.

The Hedging Agreement could not possibly have benefitted both parties. Which one of the
two parties to the Hedging Agreement benefitted was contingent not on the execution of
the Hedging Agreement but on the rise or fall of the price of oil. At the time the Hedging
Agreement was made, it could not be predicted with certainty as to which party would
benefit. The very nature of the Hedging Agreement made that impossible. If the price of
oil had remained above the strike price of USD 112.50 during the currency of the Hedging
Agreement, CPC would have benefitted. If it fell the benefit was to go to the Claimant.
The price fell and, therefore, on 17 October 2008 and 14 November 2008, CPC made
payments of USD 1,659,636.36 and USD 4,597,857.14 respectively to the Claimant.

55.

I am of the view that the findings in the Majority Award are not supported even by the
decisions in Fedax N.V. v. Venezuela 51 and Abaclat and others v. Argentine Republic 52. In
Fedax, the Government of Venezuela issued promissory notes to a Venezuelan corporation
in return for services provided to it. The claimant was an endorsee of these promissory
notes and the Fedax Tribunal reasoned that had the claimant itself provided the services to
the respondent, then the transaction would have constituted an investment. The subsequent
endorsement did not change the character of the underlying transaction, which involved
the provision of valuable services to the Government of Venezuela. In Abaclat, the
Government of Argentina, in a bid to restructure its economy, raise funds, and stimulate
growth, issued bonds on the international market. These bonds were underwritten by
various banks that paid Argentina lump-sum amounts and then sold these to subsequent
purchasers, including the claimants, on the secondary bond market. The Abaclat Tribunal
found that since funds were made available to Argentina and financed its economic
development the security entitlements in the bonds constituted an investment.

56.

While both these decisions have been the subject of some criticism 53, even in these cases
the host States received a tangible and immediate benefit from the underlying transaction.

50

Majority Award, para. 298.
Fedax N.V. v. Republic of Venezuela (ICSID Case No. ARB/96/3), Decision on Objections to Jurisdiction, 11 July
1997, (2002) 5 ICSID Rep 183; Award, 9 March 1998, (2002) 5 ICSID Rep 200.
52
Abaclat and others v. Argentine Republic (ICSID Case No. ARB/07/5), Decision on Jurisdiction and
Admissibility, 4 August 2011.
53
See Douglas, Zachary, supra footnote 20, discussion of Fedax N.V. v. Republic of Venezuela, para. 378C:
51

20

 In Fedax, the benefit was in the form of services received by Venezuela, and in Abaclat,
Argentina received funds. In the present case, the Government of Sri Lanka received no
such benefit from the execution of the Hedging Agreement.

57.

To quote from the Majority Award “the transaction in the present case involved CPC
buying a call option at a strike price of $112.50 and selling a put option at the same strike
price” 54 A call or a put option is an economic activity but it cannot be regarded as making
a substantial contribution or commitment of resources to the economic development of the
Host State. It cannot be equated with an “investment”. On the contrary it may be regarded
as having an adverse impact on economic stability and development. As noted elsewhere
by one of my distinguished colleagues:

Until the mid twentieth century … no distinction was made between
investments and other forms of property and economic activity…Various
analytical reasons have been proposed for the distinction. However, the
general perception tends to be that certain ‘investment’ is a ‘catalyst for
development and prosperity’, which it helps by ‘expanding welfare around
the world’. It is in this context that investment protection treaties are
concluded and provide for a conscious derogation of State sovereignty.
However, certain capital flows, usually of a transient nature, do not
promote welfare or economic development; indeed those involving
speculation in debt or currency may cause economic instability. In those
circumstances, the derogation from State sovereignty provided for in the
relevant treaty is not worth undertaking. It is the concept of ‘investment’
that seeks to delineate between the constructive capital flow that a State

“The difficulty with this reasoning is that the tribunal has aggregated certain aspects of the underlying
transaction with certain aspects of the endorsement in order to justify the existence of an investment.
The original contract for the provision of services by a Venezuelan company to the Venezuelan
Government may have evidenced the necessary attributes of an investment but Fedax was not privy to
that arrangement and hence cannot rely upon those attributes to establish its investment in Venezuela. It
is difficult to accept that those attributes can be invoked by one of the subsequent endorsees to the
promissory notes issued by the Government to the Venezuelan company in the event that the endorsee
has the requisite foreign nationality to benefit from the protection of an investment treaty”;
and Abaclat and others v. Argentine Republic(ICSID Case No. ARB/07/15), Decision of Jurisdiction and
Admissibility, 4 August 2011, Dissent of Professor Georges Abi-Saab.
54
Majority Award, para. 324.

21

 wishes to attract (and therefore protect) and the transient transaction that
it does not. 55

58.

I am also of the view that in order for a financial transaction to be considered an
investment, it must constitute an investment at the moment of its execution. Future events
are irrelevant. At the time the Hedging Agreement was signed, there was no immediate or
guaranteed future contribution or commitment of resources or funds to Sri Lanka or to its
economic development.

59.

In PSEG Global Incorporated and another v. Republic of Turkey 56 the claimant’s
argument that an option was ‘a claim for money or a claim to performance having
economic value, and associated with an investment’ was rejected by the Tribunal. The
Tribunal found that:
“the Respondent’s argument that the definition of investment does not
include an option is persuasive as a general approach. Broad as many
definitions of investment are in treaties of this kind, there is a limit to what
they can reasonably encompass as an investment. Options such as this
particular one cannot, in the view of the Tribunal be interpreted as an
‘investment’ …Professor Dolzer’s Rejoinder Opinion to the effect that the
Treaty definition of investment refers to any right, even one that can be
exercised at any time in the future, is not persuasive.” 57

While the PSEG Tribunal did not give elaborate reasons for its decision, it stands to reason
that an option which is not protected by the BIT and is contingent in nature, and does not
involve contribution or commitment of resources to the host State, lacks the typical
characteristics of an investment.

55

Williams, David A. R QC and Foote, Simon, “Recent developments in the approach to identifying an
‘investment’ pursuant to Article 25(1) of the ICSID Convention” in Brown, Chester and Miles, Kate, Evolution in
Investment Treaty Law and Arbitration, Cambridge, Cambridge University Press, 2011, p.44.
56
PSEG Global Inc. and Konya Ilgin Elektrik Üretim ve Ticaret Limited Sirketi v. Republic of Turkey (ICSID Case
No. ARB/02/5).
57
PSEG Global Inc. and Konya Ilgin Elektrik Üretim ve Ticaret Limited Sirketi v. Republic of Turkey (ICSID Case
No. ARB/02/5), Decision on Jurisdiction, 4 June 2004, (2004) 11 ICSID Rep. 434, 469, paras. 189-190. Case cited
by the Respondent in its Objections to Jurisdiction, para. 86.

22

 60.

The payment of USD 35,523.81 by the Claimant to CPC on 19 September 2008 must be
viewed in this context. This payment was made because the strike price of oil at the
relevant time was above USD 112.50. If the price of oil fell below the strike price of USD
112.50 the moment the Hedging Agreement was signed and remained there throughout its
duration, CPC would have received nothing from the Claimant. It would have been
obliged to make continuous payments to the Claimant. Whether the Hedging Agreement is
an investment cannot depend on the eventual outcome of the transaction. Otherwise, the
status of the Hedging Agreement as an investment, at any moment, would depend on the
price of oil. Any payment made by either party to the other under the Hedging Agreement
due to fluctuations in the price of oil, therefore, is irrelevant for determining whether the
Hedging Agreement constituted an investment at its inception.

61.

The majority also seeks support from the fact that the employees of the Claimant engaged
in two years of negotiations, correspondence and meetings with the CPC prior to the
execution of the Hedging Agreement. 58 I am of the view that to determine whether a
particular financial instrument – in this case the Hedging Agreement – entails a substantial
contribution or commitment, it is the financial instrument itself, which must be evaluated.
Any activity – in this case negotiations, correspondence and meetings between the
Claimant and CPC – preceding the execution of the financial instrument is irrelevant for
this purpose.

62.

In view of the above, it is difficult to see how the Hedging Agreement involved any
contribution or commitment let alone any substantial contribution or commitment for the
purpose of economic development in Sri Lanka. The Majority Award states that there is
“no doubt that the hedging program was designed and implemented in the national
interest, as was repeatedly attested by the Sri Lankan authorities” 59. The view of the Sri
Lankan authorities that a hedging programme may be beneficial to the State is in my
opinion not determinative. The Hedging Agreement cannot be transformed into an
investment simply because the authorities in Sri Lanka regarded it to be in the national
interest. For instance, if instead of the Hedging Agreement, the parties had entered into an
agreement to purchase oil and the Claimant had offered CPC a USD 10 discount on each
barrel of oil purchased up to a maximum of 100,000 barrels, there is no doubt that such an

58
59

Majority Award, para. 300.
Majority Award, para. 307.

23

 agreement would have benefited Sri Lanka and furthered its national interest. Such an
agreement would nevertheless have been an ordinary sale of goods with an offer of a
discount and not an investment. 60 It is, therefore, difficult to see why a Hedging
Agreement, which potentially and at best would have the same effect (and at worst would
lead to CPC paying millions of dollars to the Claimant), should be considered a substantial
contribution or commitment for the purposes of economic development in Sri Lanka.

63.

The manner in which the majority treats the Hedging Agreement as a substantial
contribution and commitment would mean that almost all transactions would be
considered as having this characteristic. Any ordinary commercial contract including the
sale of goods would involve:

(i)

The delivery of goods or services in the host State;

(ii)

Potentially lengthy pre-contract negotiations;

(iii)

Some risk; and

(iv)

Some direct or indirect benefit to the host State (otherwise the host State would
not execute such an agreement).

That would not, however, result in these pure trading contracts being transformed into
investments for the purposes of a BIT or the Convention.

64.

In Global Trading Resource Corporation it was argued by the claimants that:

the conclusion of the contracts was solicited by Ukraine at the highest
level, for important reasons of social and economic development policy,
and with performance guaranteed by the State … the claims arise from
“(a) the Ukrainian Prime Minister’s entreaties that U.S exporters assist
the Prime Minister’s efforts to break a domestic-producer monopoly,
reduce prices, and curb inflation, and (b) the Prime Minister’s explicit
assurances that Ukraine would fulfill its obligations to those exporters
60

See Global Trading Resource Corp. and Globex International Inc. v. Ukraine (ICSID Case No. ARB/9/11),
Award, 1 December 2010, para 56. The specific contracts at issue in that case involved the import of poultry into
Ukraine for the purpose of easing prices in the domestic market. The Tribunal held that
“[t]he fact that the trade in these particular goods was seen to further the policy priorities of the purchasing
State does not bring about a qualitative change in the economic benefit that all legitimate trade brings in its
train. Nor can an undertaking by officials of the State to honour the contractual commitments to be concluded
transform a sale and purchase agreement into an investment.”

24

 willing to support the Prime Minister’s economic-development efforts.”
The substantial resources devoted by the Claimants to procuring, shipping
and delivering the goods and the purposes for which they were being
purchased thus constituted on a proper interpretation, in the Claimants’
submission, ‘investments’ under the BIT and the ICSID Convention. 61

The Global Trading Tribunal rejected this submission in the following words:

The fact that the trade in these particular goods was seen to further the
policy priorities of the purchasing State does not bring about a qualitative
change in the economic benefits that all legitimate trade brings in its
train. Nor can an undertaking by officials of the State to honour the
contractual commitments to be concluded transform a sale and purchase
agreement into an investment.
It concluded 62 that neither such contracts “nor the moneys expended by the supplier in
financing its part in their performance, can by any reasonable process of interpretation be
construed to be ‘investments’ for the purposes of the ICSID Convention.” 63

65.

The Majority Award relies on Pantechniki S.A. Contractors & Engineers v. Republic of
Albania 64 in support of its conclusion that “where a sales agreement includes special
features such as a bespoke product, it will usually be considered an investment” 65. My
reading of the Pantechniki award is different from that of the majority.

66.

Pantechniki arose out of a claim made by a contractor engaged in road works in Albania.
The claimant’s site had been destroyed and his equipment looted during civil disturbances.
The respondent sought to minimize the nature of the claimant’s work by referring to it as
“mere repairs”. It contended that it lacked the characteristics of an “investment”. The
Tribunal found the objection unsustainable.

61

Global Trading Resource Corp. and Globex International Inc. v. Ukraine (ICSID Case No. ARB/9/11), Award, 1
December 2010, para. 42.
62
Ibid. para. 56.
63
Ibid.
64
Pantechniki S.A. Contractors & Engineers v. Republic of Albania (ICSID Case No. ARB/07/21), Award, 30 July
2009.
65
Majority Award, para. 310.

25

 67.

The State parties to the BIT, at issue in Pantechniki, had defined “investment” broadly.
The Tribunal was of the view that the claim was clearly within the definition of investment
in the BIT. The question before that Tribunal was whether the concept of “investment”,
under Article 25 of the Convention, had an objective meaning which could not be enlarged
by the parties to a BIT. It was in this context that the Pantechniki Tribunal noted that even
a “pure” sales contract which was protected under the BIT may in certain cases fall within
the scope of Article 25:

It may be objected that some types of economic transactions simply cannot
be called “investments” no matter what a BIT may say … The typical
example given is that of a “pure” sales contract. There is force in the
argument. It is admittedly hard to accept that the free on board sale of a
single tractor in country A could be considered an “investment” in
country “B”. But what if there are many tractors and payments are
substantially deferred to allow cash poor buyers time to generate income?
Or what if the first tractor is a prototype developed at great expense for
the specificities of country B on the evident premise of amortization?” 66

68.

The context of these remarks is made evident by the very next sentence:

Why should States not be allowed to consider such transactions as
investments to be encouraged by the promise of access to ICSID. 67

The Tribunal, thus, questioned the wisdom of denying ICSID access to transactions which
enjoyed BIT protection on the basis of a one size fits all description of the “objective
features” of an ICSID investment. It did not make a one size fits all ruling that a sales
agreement which “includes special features such as a bespoke product…will usually be
considered an investment.” 68

66

Pantechniki S.A. Contractors & Engineers v. Republic of Albania (ICSID Case No. ARB/07/21), Award, 30 July
2009, para. 44.
67
Ibid.
68
Majority Award, para. 310.

26

 69.

There are several reason why the ratio of the Pantechiki award is not applicable to this
case. First, the agreement there was found to be clearly a protected investment under the
BIT. The Hedging Agreement is not so protected. Second, the Hedging Agreement is not a
bespoke product or a “prototype developed at great expense for the specificities of [Sri
Lanka] on the evident premise of amortization”. There is in fact very little difference
between this Hedging Agreement and those executed between CPC and Citibank and
Standard Chartered Bank respectively. Third, CPC and the Claimant did not execute many
Hedging Agreements. They executed only one Hedging Agreement. It had no special
features which offered any benefits to either the Respondent or its “cash poor” citizens.

70.

The Pantechiki Tribunal did suggest that depending on the facts and circumstances of a
case, the same product may be considered an ordinary sale of goods or an investment. This
does not mean that every commercial transaction or sale agreement, having any special
feature, will be considered an investment. As stated by the ad hoc Committee in
Malayasian Historical Salvors v. Malayasia 69:

It appears to have been assumed by the Convention’s drafters that the use
of the term “investment” excluded a simple sale and like transient
commercial transaction from the jurisdiction of the Centre.

71.

Almost all ordinary commercial transactions contain some special features designed to
fulfill the specific requirements of the parties. For instance, an agreement for the purchase
of oil may contain special terms relating to the method and time of payment and delivery
of the oil. This does not, however, mean that such an agreement will usually be an
investment. Such a proposition would, in effect, turn the ICSID jurisprudence on its head.
Almost every agreement would then be presumed to be an investment and the onus would
be on the respondent to show that a particular agreement did not in fact contain any special
features.

72.

It is worth remembering that the Convention is supposed to strike a delicate balance
between the rights of foreign investors and those of host States. According to the Report of
the Executive Directors on the Convention:

69

Malaysian Historical Salvors Sdn, BHD v. Government of Malaysia (ICSID Case No. ARB/05/10), Decision on
the Application for Annulment, 16 April 2009, para 80.

27

 While the broad objective of the Convention is to encourage a larger flow
of private international investment, the provisions of the Convention
maintain a careful balance between the interests of investors and those of
host States. 70

73.

In measuring any asset against these characteristics, the purpose of the Convention has to
be kept in sight, which is to encourage the flow of private foreign investment into host
States by providing certain procedural and substantive protections and guarantees to
foreign investors whose investments would otherwise be at the mercy of the host States.
The rational underpinning the entire system of investment treaty arbitration is a quid pro
quo between private foreign investors and host countries. The former seek profitable
avenues for investing their resources and the latter seek investment for their economic
development.

74.

The expansion of ICSID jurisdiction to include every commercial agreement, which
contains any special features, will alter this carefully crafted balance. It is one thing to say
that arbitral tribunals should respect the agreement of the parties to a BIT and where a
financial transaction is clearly protected by the BIT arbitrators should hesitate before
dismissing a claim on an arbitrator-crafted notion of an ICSID investment. It is quite
another to hold that transactions which may not ordinarily be regarded as an “investment”
should be protected on the basis of a “special features” doctrine.

75.

I, therefore, find that the Hedging Agreement did not constitute an investment for the
purposes of the Treaty or the Convention.

III. Expropriation
76.

In other parts of this opinion, I have relied on the facts as stated in the Majority Award. To
consider whether the Supreme Court’s Interim Order of 28 November 2008 and the
Central Bank’s letter of 16 December 2008 amounted to an expropriation of the

70

Report of the Executive Directors on the Convention on the Settlement of Investment Disputes between States
and Nationals of Other States, 18 March 1965, 1 ICSID Rep 25, para. 13.

28

 Claimant’s debt under the Hedging Agreement, it is necessary, in my opinion, to restate
the relevant facts:

(i)

In November 2008, two fundamental rights applications were filed in the
Supreme Court of Sri Lanka relating to the hedging agreements entered into by
the CPC with various banks. In one of these applications, the petitioner sought to
challenge the authority of the CPC to enter into these agreements.

(ii)

On 28 November 2008, the Supreme Court issued an Interim Order in which it
ordered that all payments by the CPC to the Claimant and other banks be
suspended and directed the Monetary Board of the Central Bank to carry out an
investigation into the hedging agreements.

(iii)

On 3 December 2008, the Claimant terminated the Hedging Agreement on the
ground that CPC had failed to execute the ISDA Master Agreement within 90
days of the Trade Date as defined in the Confirmation.

(iv)

On 5 December 2008, following a meeting between the officers of the Claimant
and members of the Central Bank, the Claimant received a report containing an
Assessment of Compliance with the Provisions of the Directions Issued by the
Central Bank of Sri Lanka on Financial Derivative Products, which identified five
non-compliances in connection with the execution of the Hedging Agreement.

(v)

On 10 December 2008, the Claimant calculated a close-out amount payable by
CPC to the Claimant of USD 60,368,993.

(vi)

On 16 December 2008, the Monetary Board of the Central Bank requested banks
not to proceed with or give effect to the hedging agreements.

(vii)

On 6 January 2009, the Central Bank sent a report titled “Initial Investigation
Report on Oil Derivative Transactions entered into by Deutsche Bank AG with
the Ceylon Petroleum Corporation” to the Claimant. The report concluded that
the Hedging Agreement was materially affected, which seriously undermined the
propriety of the transaction.
29

 (viii)

On 27 January 2009, the Supreme Court issued a final order terminating the
fundamental rights proceedings and vacating all previous interim orders.

(ix)

The Central Bank issued a press release stating that its directions to the banks, of
16 December 2008, would remain in force.

77.

CPC made a payment of USD 4,597,857.14 to the Claimant on 14 November 2008. Two
weeks later, on 28 November 2008, while the Hedging Agreement was in force the
Supreme Court issued its first Interim Order. At that time no claim for payment by the
Claimant was pending with CPC. In the absence of such a claim there was no debt and,
therefore, none which could have been expropriated.

78.

A few days later, on 3 December 2008, the Claimant terminated the Hedging Agreement.
The letter of termination neither mentioned the Interim Order of the Supreme Court nor
referred to any action by the Central Bank. The stated reason was CPC’s failure to execute
the ISDA Master Agreement. It was only on the termination of the Hedging Agreement
that a close-out amount was calculated and a debt identified. The question, therefore, is
whether this debt was expropriated by the failure of the Supreme Court to immediately
vacate its Interim Order or by a continuation by the Central Bank of its direction of 16
December 2008.

79.

Expropriation, in international law, takes place when a claimant suffers a substantial
deprivation of property rights for a meaningful period of time. Several tribunals have
expressed the view that unless these twin requirements are met there can be no
expropriation. In S.D. Myers Inc. v. Canada 71, the Tribunal found that a ban on exports for
a period of eighteen months did not amount to a lasting removal of the ability of the owner
to make use of its economic rights. 72 Similarly, in the case of Tecnicas Medioambientales
Tecmed S.A. v. Mexico 73, the Tribunal noted that:

71

S.D. Myers Inc. v. Canada (UNCITRAL), Partial Award, 13 November 2000.
Ibid. paras. 283-288.
73
Técnicas Medioambientales Tecmed, S.A. v. United Mexican States (ICSID Case No. ARB(AF)/00/2), Award, 29
May 2003.
72

30

 it must be first determined if the Claimant, due to the Resolution, was
radically deprived of the economical use and enjoyment of its
investments, as if the rights related thereto —such as the income or
benefits related to the Landfill or to its exploitation— had ceased to exist.
In other words, if due to the actions of the Respondent, the assets involved
have lost their value or economic use for their holder and the extent of the
loss. This determination is important because it is one of the main
elements to distinguish, from the point of view of an international tribunal,
between a regulatory measure, which is an ordinary expression of the
exercise of the state’s police power that entails a decrease in assets or
rights, and a de facto expropriation that deprives those assets and rights
of any real substance. (emphasis supplied)

…Therefore, it is understood that the measures adopted by a State,
whether regulatory or not, are an indirect de facto expropriation if they
are irreversible and permanent and if the assets or rights subject to such
measure have been affected in such a way that “...any form of exploitation
thereof...” has disappeared; i.e. the economic value of the use, enjoyment
or disposition of the assets or rights affected by the administrative action
or decision have been neutralized or destroyed. 74

80.

The majority accepts this standard as correct 75. It does not, however, apply it to the facts of
this case. The majority finds that “the entire value of Deutsche Bank’s investment was
expropriated for the benefit of Sri Lanka itself” 76. This finding is not supported with any
independent reasoning. Instead, the Majority Award refers to its earlier analysis with
regard to the denial of fair and equitable treatment (“FET”).

74

Ibid. paras. 115 and 116. See also Mohammad Ammar Al-Bahloul v Republic of Tajikistan (SCC Case No.
064/2008), Partial Award on Jurisdiction and Liability, 2 September 2009, para. 281:
As the standard set out in the Tecmed case … suggests, for an indirect expropriation to have occurred in
respect of Claimant’s contract rights … the conduct of the State must result in an irreversible and
permanent taking or destruction of Claimant’s rights. In case of contractual rights, a temporary nonfulfilment of the State’s contractual obligations is not sufficient to constitute an expropriation.
75
Majority Award, para. 503: “In general terms a substantial deprivation of rights, for at least a meaningful period
of time is required”.
76
Ibid. para. 523.

31

 81.

The denial of FET, if any, to the investment of the Claimant by the orders of the Supreme
Court and the actions of the Central Bank would not ipso facto result in an expropriation.
A denial of one – FET – does not automatically lead to a finding of the other –
expropriation. In several cases tribunals held that there was a breach of FET but no
expropriation. 77

82.

For an action to constitute expropriation under international law, it must have completely
or at least substantially destroyed the investor’s right to the enjoyment or use of his
investment. The rights related thereto must have effectively ceased to exist. In this case,
therefore, the relevant question is whether the Claimant’s debt was so completely or
substantially destroyed that it will no longer be able to recover the same.

83.

The parties agree that the Hedging Agreement is governed by English law and is subject to
the jurisdiction of English courts. In similar facts and circumstances involving CPC, an
English court, in the case of Standard Chartered Bank v. Ceylon Petroleum Company 78,
held that the bank could recover a debt owed by CPC under a hedging agreement despite
those very actions of the Supreme Court and the Central Bank which are under scrutiny
here. This decision has been upheld by the English Court of Appeals 79.

84.

One of the defences taken by CPC in this action before the High Court was that as a result
of the directions of the Central Bank, any payment made by it to Standard Chartered Bank
would be illegal under the law of Sri Lanka and therefore, it could not be required to make
such a payment. The defence failed. While rejecting this argument the judge held as
follows:

77

Pope and Talbot Inc. v. Canada, Award on the Merits, 10 April 2001, 7 ICSID Rep 102; and Award on Damages,
31 May 2002, 7 ICSID Rep 148, CMS Gas Transmission Company v. Argentine Republic (ICSID Case No.
ARB/01/8), Award, 12 May 2005, 44 ILM 1205, Enron Creditors Recovery Corporation (formerly Enron
Corporation) and Ponderosa Assets, L.P. v. Argentine Republic (ICSID Case No. ARB/01/3), Award, 22 May
2007, Sempra Energy International v. Argentina (ICSID Case No. ARB/02/16), Award, 28 September 2007, El
Paso Energy International Co. v. Argentine Republic (ICSID Case No. ARB/03/15), Award, 31 October 2007, EDF
International S.A., Saur International S.A. and Leon Participaciones Argentinas S.A. v. Argentine Republic (ICSID
Case No. ARB/03/23) Award, 11 June 2012, Antoine Goetz and others v. Republic of Burundi (ICSID Case No.
ARB/01/2), Award, 21 June 2012; and Railroad Development Corporation v. Republic of Guatemala (ICSID Case
No. ARB/07/23), Award, 29 June 2012.
78
Standard Chartered Bank v. Ceylon Petroleum Company, Neutral Citation No. 1785, Case No. 2009 FOLIO 375,
Queen’s Bench Division Commercial Court, 11 July 2011.
79
Standard Chartered Bank v. Ceylon Petroleum Corporation, 2012 EWCA Civ 1049, 27 July 2012.

32

 467. However, I do not accept that these provisions required payment to
be made from Sri Lanka. Payment was required to be made in New
York. How that payment was to be made was a matter for CPC but it
was not contractually obliged to do so from Sri Lanka.

468. In any event, the statutory power [of the Central Bank] is directed at
SCB not CPC. It could not be directed at CPC, which was not a
bank, and therefore could not render CPC’s payment obligation
illegal in Sri Lanka.

469. Further, the import of CPC’s case is that CBSL had power, after a
contract had been entered into, effectively to deprive a bank, by
letter, of its accrued right to payment, for no compensation. Even
assuming that such an extraordinary power could be granted
consistently with the Sri Lankan constitution I agree with SCB that
for it to exist, it would need to be clearly spelt out in the relevant
statute, and clearly exercised. Neither condition is satisfied here.
The statutory provision relied upon (s 46 of the Banking Act, a
regulatory statute) does not disclose such a power. Nor does the
letter of 16 December 2008 letter [sic] purport to exercise any such
power. Rather, it appears to be ancillary to the Supreme Court’s
interim order dated 26 November 2006 [sic], which fell away on 27
January 2009.

470. For the reasons set out above CPC’s illegality defence fails.

85.

CPC did not appeal this aspect of the judgment. For the purposes of English law, therefore,
it stands concluded that the debt owed by CPC, under the Hedging Agreement, can be
recovered by the Claimant. The debt as well as the remedy for its recovery has survived
both the order of the Supreme Court and the action of the Central Bank. As observed by
the Tribunal in SGS Société Générale de Surveillance S.A. v. Republic of the Philippines:

…on the material presented by the Claimant no case of expropriation has
been raised. Whatever debt the Philippines may owe SGS still exists;
33

 whatever right to interest for late payment SGS had it still has. There has
been no law or decree enacted by the Philippines attempting to
expropriate or annul the debt, nor any action tantamount to expropriation.
The Tribunal is assured that the limitation period for proceedings to
recover the debt before the Philippine courts under Article 12 has not
expired. A mere refusal to pay a debt is not an expropriation of property,
at least where remedies exist in respect of such refusal. 80

86.

The Majority Award holds that “the coordinated actions of the Supreme Court and the
Central Bank prevented Deutsche Bank from receiving payment under the Hedging
Agreement”. 81 This is an extra-ordinary finding without any credible evidence to support
it. It is correct that the Central Bank passed its first stop payment order immediately after
the first Interim Order of the Supreme Court. It is also correct that the Central Bank
decided to continue with this order after the Supreme Court had discharged its interim
order. These facts on their own or taken together do not lead to the conclusion that the two
institutions were working in tandem to prevent payment to the Claimant.

87.

Even if it is assumed that the Interim Order of the Supreme Court and the actions of the
Central Bank caused a breach of the contract between the Claimant and CPC that cannot
be equated with an expropriation of the debt. A mere breach of contract or denial of
liability is not expropriation. As observed by the Tribunal in Waste Management Inc. v.
United Mexican States 82:

The mere non-performance of a contractual obligation is not to be
equated with a taking of property, nor (unless accompanied by other
elements) is it tantamount to expropriation… [T]he normal response by an
investor faced with a breach of contract by its governmental counter-party
(the breach not taking the form of an exercise of governmental
prerogative, such as a legislative decree) is to sue in the appropriate court
to remedy the breach. It is only where such access is practically or legally

80

SGS Société Générale de Surveillance S.A. v. Republic of the Philippines (ICSID Case No. ARB/02/6), Decision
of the Tribunal on Objections to Jurisdiction, 29 January 2004, para. 161.
81
Majority Award, para. 521.
82
Waste Management, Inc. v. United Mexican States (ICSID Case No. ARB(AF)/00/3), Award, 30 April 2004,
para. 174.

34

 foreclosed that the breach could amount to an outright denial of the right,
and the protection of Article 1110 [of NAFTA] would be called into play.

88.

The Waste Management Tribunal did not lay down a rule that an investor alleging
expropriation of contractual rights must exhaust the contractual remedies before initiating
a BIT claim. The investor must, however, establish to the satisfaction of the tribunal that
its efforts to obtain correction of the action have been frustrated by conduct which is
tantamount to expropriation or that such avenues are not available to it. As noted by the
Tribunal in Generation Ukraine Inc. v. Ukraine 83:

The fact that an investment has become worthless obviously does not mean
that there was an act of expropriation; investment always entails risk. Nor
is it sufficient for the disappointed investor to point to some governmental
initiative, or inaction, which might have contributed to his ill fortune. Yet
again, it is not enough for an investor to seize upon an act of
maladministration, no matter how low the level of governmental authority;
to abandon his investment without any effort at overturning the
administrative fault; and thus to claim an international delict on the
theory that there had been an uncompensated virtual expropriation. In
such instances, an international tribunal may deem that the failure to seek
redress from national authorities disqualifies the international claim, not
because there is a requirement of exhaustion of local remedies but
because the very reality of conduct tantamount to expropriation is
doubtful in the absence of reasonable – not necessarily exhaustive – effort
by the investor to obtain correction. 84

89.

The Tribunal in Parkerings-Compagniet AS v. Republic of Lithuania 85 identified “three
cumulative conditions” 86 which must be met to qualify a State’s conduct as an indirect
expropriation for which compensation is due:

83

Generation Ukraine Inc. v. Ukraine (ICSID Case No. ARB/00/9), Award, 16 September 2003.
Ibid. para. 20.30.
85
Parkerings-Compagniet AS v Republic of Lithuania (ICSID Case No. ARB/05/8), Award, 11 September 2007.
86
Ibid. para. 440.
84

35

 (i)

the State must have acted not only in its capacity of party to the
agreement but also pursuant to its sovereign authority and power;

(ii)

as a general rule, the foreign investor must have sought to remedy
the breach of contract by suing in the appropriate forum; and

(iii)

the breach must give rise to a substantial decrease of the value of
the investment. 87

90.

The Tribunal cited several NAFTA and ICSID decisions to support the conclusion that it
was a prerequisite that the foreign investor should seek relief from the contractual forum
before initiating a BIT claim for expropriation. It observed as follows:

An investor faced with a breach of an agreement by the State counterparty should, as a general rule sue that party in the appropriate forum to
remedy the breach. Therefore, … a preliminary determination of the
existence of a contractual breach under domestic law is, in most cases a
prerequisite. 88

If the investor is deprived, legally or practically, of the possibility to seek
a remedy before the appropriate domestic court, the Arbitral Tribunal
might decide on the basis of the BIT if international rights have been
violated… That would be the case, for instance, if a party is denied the
possibility to complain about the wrongful termination of the agreement
before the forum contractually chosen. 89

In the absence of any objective reason not to bring the case before
national tribunals, it cannot be concluded, on the basis of facts at hand,
that the Claimant’s investment has been indirectly expropriated. 90
87

Ibid. paras.443 448 and 455 and Polasek, Martina and Puig, Sergio, Case Summary: Parkerings-Companiet AS v.
Republic of Lithuania (ICSID Case No.ARB/05/8), ICSID Review–FILJ, Vol. 22, No. 2 (2007), p. 415, at p. 420.
88
Parkerings-Compagniet AS v. Republic of Lithuania (ICSID Case No. ARB/05/8, Award 11 September, 2007,
para. 448. See also, Polasek, Martina and Puig, Sergio, Case Summary: Parkerings-Companiet AS v. Republic of
Lithuania (ICSID Case No.ARB/05/8), ICSID Review–FILJ, Vol. 22, No. 2 (2007), p. 415, at p. 419:
In any event the Tribunal stressed that the contractually identified forum would need to issue a preliminary
ruling on a breach of contract claim under the applicable municipal law before an ICSID tribunal could
consider whether international law had been violated.
89
Parkerings-Compagniet AS v Republic of Lithuania (ICSID Case No. ARB/05/8), Award, 11 September, 2007,
para.449.
90
Ibid. para. 454.

36

 91.

As the first two conditions were not met the Tribunal did not see the need to examine
whether the third condition was satisfied. 91

92.

In this case the contract was not terminated by CPC in the exercise of its authority under
the Hedging Agreement. The grievance of the Claimant is that the sovereign power of Sri
Lanka was used through the Supreme Court and the Central Bank to direct that no
payments be made to it. The Claimant can, therefore, claim that ostensibly the first of the
three conditions, mentioned above, is satisfied.

93.

English law governs the Hedging Agreement. Claims arising out of it can be adjudicated
by the English courts. The contractual remedy for the recovery of the debt is legal action in
England. The parties may have selected English Law and English jurisdiction because, as
stated in the Majority Award, “[i]t is a reality of modern banking that London is the
world’s premier financial location. Its courts have great experience in financial
transactions and its law in that area offers great security to bankers and investors.” 92 The
choice may, however, equally plausibly have been dictated by the desire of the Claimant to
curb any temptation that Sri Lanka may have to obstruct a legal action for the recovery of
the debt. Whatever may have been the intention of the parties the result is that an action for
the recovery of the debt can be commenced in England. The Supreme Court and the
Central Bank have not interfered with nor could they have interfered with this remedy.

94.

The object of expropriation, i.e., the debt, has not been destroyed. It is enforceable under
English law. It cannot, therefore, be said to have been expropriated. To deal with this the
majority draws an analogy with Abaclat and others v. Argentine Republic 93. The majority
reasons that the situation in the present case is the same as in Abaclat where the claimants
also had a contractual remedy against Argentina’s failure to make payments under the
bonds, but invoked ICSID jurisdiction because Argentina “had intervened as a sovereign
by virtue of its State power to modify its payment obligations towards its creditor in
general” 94.

91

Ibid. para. 456.
Majority Award, para. 291.
93
Abaclat and others v. Argentine Republic (ICSID Case No. ARB/07/5), Decision on Jurisdiction and
Admissibility, 4 August 2011.
94
Majority Award, para. 557 to 559.
92

37

 95.

This analogy conflates two issues. The Tribunal’s discussion and decision in the Abaclat
case related to the admissibility of the claim and not to the merits of the dispute. The
Abaclat Tribunal admitted the claim on the ground that Argentina had not merely breached
a contract but had used its sovereign power, through the enactment of various laws, to
interfere with and change the terms of the contract. Whether such interference with or
modification of the terms of the contract amounted to an expropriation was neither the
issue before nor the issue decided by the Abaclat Tribunal, at the time.

96.

In this case, the Respondent has not taken the position that the Claimant could not have
invoked ICSID jurisdiction because it had a contractual remedy available to it. 95 The case
of the Respondent is that the orders of the Supreme Court and the conduct of the Central
Bank have not resulted in the expropriation of the money claim of the Claimant. The
governing law of the contract is English law. The courts in England have the jurisdiction to
adjudicate the money claim. Nothing that has happened in Sri Lanka has either destroyed
the debt or barred the contractual remedy available to the Claimant for its recovery.
Abaclat, therefore, does not support the majority’s finding of expropriation in this case.

97.

By drawing this analogy with Abaclat, the majority treats the issue of jurisdiction and the
issue of expropriation as one. In relation to a claim for the recovery of a debt, which has
allegedly been expropriated, the analysis of the availability of an alternate forum in the
context of determining ICSID jurisdiction is different from the analysis of the availability
of an alternative forum to seek damages for expropriation. In the former, a tribunal
analyses whether a claimant can successfully establish ICSID jurisdiction based on an
alleged violation of an international agreement. In the latter, a tribunal analyses whether a
claimant can successfully establish expropriation where the money claim is alive and
enforceable.

98.

The Majority Award also states that

In any case, it is evident that even if Deutsche Bank were to obtain a
judgment from the English courts, CPC would likely be prevented from

95

The Respondent takes the position that because the Claimant’s contractual remedy to recover the debt under the
Hedging Agreement remains available to it, there was no expropriation of the debt. See Respondent’s CounterMemorial, Vol. 1, paras 511 to 515.

38

 complying with that judgment as a result of the prohibition on paying its
debt to Deutsche Bank. 96.

The majority’s reasoning runs contrary to the judgment of the English court in the
Standard Chartered Bank case, where the judge found that the Central Bank’s direction
did not prevent CPC from making a payment to the bank. As observed by the judge, as
CPC is not a bank, the Central Bank had no authority to issue any directions to it.97 As a
matter of English law, which governs the debt, there is no prohibition on CPC paying its
debt to the Claimant.

99.

The Majority Award presumes that the judgment of the English court will be in favour of
the Claimant, that CPC will be “prevented from complying” with any such judgment and
that the Claimant will not be able to enforce it as CPC may have no assets outside Sri
Lanka. Whether CPC has any assets outside Sri Lanka is a matter of speculation. The
majority postulates that it would be impossible for CPC to make such a payment since its
operations are based in Sri Lanka and it receives all its income there. A finding of
expropriation and an award of damages cannot, however, be based on such assumptions. If
a direction of the Central Bank prevents the Claimant from enforcing a judgment against
CPC and recovering the debt this may lead to a breach of the Treaty and a valid ICSID
claim. Even the Respondent admits this. 98 The situation as it stands, is different. The debt
has not been destroyed. It continues to exist. It can be enforced and recovered under its
governing law. It, therefore, has not been expropriated.

100. In view of the foregoing, I find that there has been no expropriation of the Claimant’s
claim to money. No damages can, therefore, be awarded to the Claimant on the basis of a
violation of Article 3 of the Treaty.

96

Majority Award, para. 563.
The Interim Order of the Supreme Court was vacated on 27 January 2009 and therefore is irrelevant.
98
Respondent’s Post-Hearing Brief, para. 119.
97

39

 IV. Fair and Equitable Treatment
A. Interim Order of the Supreme Court

101. The majority finds that:
(i)

The Supreme Court issued its Interim Order on 28 November 2008.“In a five page
judgment rendered less than 48 hours after the filing of the petition, it granted all
the claims formulated by petitioners based on what appears to have been extremely
limited evidence and without hearing from the various banks whose contractual
rights were directly affected by the Order.” 99.

(ii)

“Founding itself on the allegations of the petitioners with respect to the structure of
the different hedging agreements…the Supreme Court decided that the petitioners
had established a strong prima facie case”. 100

(iii)

“[R]eaching such a conclusion and issuing the Order as detailed above with its far
reaching consequences without a proper examination and without giving the banks
involved, constitutes a breach of the fair and equitable treatment”. 101

(iv)

“[P]ublic statements made subsequently by Chief Justice Silva who presided over
the hearing. In those public statements the Chief Justice confirmed that the
decision was issued for political reasons.” 102

(v)

“[T]he fact that the Order of the Supreme Court was interim and was discharged
two months later, is irrelevant, particularly given that the Tribunal considers that
it involved a serious due process violation.” 103

(vi)

“Indeed looking at the situation as a whole, at the time that the Order of the
Supreme Court was discharged, the Monetary Board of the Central Bank had put

99

Majority Award, para. 476.
Ibid. para. 477.
101
Ibid. para. 478.
102
Ibid. para. 479.
103
Ibid. para. 479.
100

40

 its own stop-payment Order in place, preventing performance of the Hedging
Agreement.” 104

102. In practice, the grant of interim injunctions or orders is neither unusual nor extraordinary
for a common law court. The court may grant an interim remedy on an application made
without notice if satisfied that there are good reasons for not giving notice. “Such
applications may be made whether or not the claim form has been issued and in cases of
extreme urgency may be dealt with by telephone.” 105 As is well known from publicly
available media reports, such orders are even more readily and frequently granted by the
courts in South Asia. In recent years, the Supreme Courts of South Asian States have
increasingly intervened to protect the public interest. Interim ex parte injunctions in public
interest petitions without notice to the other side are granted often. Such orders are passed
after a prima facie examination of facts and in the absence of the respondents. Neither
lengthy submissions are made nor a detailed investigation conducted. The orders are,
therefore, usually quite brief. If, after hearing the parties, a court comes to the conclusion
that the order was improperly obtained or incorrectly granted it discharges the order and at
times even burdens the applicant with costs. Viewed in this context, the Interim Order
passed by the Supreme Court of Sri Lanka should raise few eyebrows.

103. In this case, on 28 November 2008, when the matter came up for hearing before the
Supreme Court, CPC had to make a payment of USD 46 million to Standard Chartered
Bank, under another hedging agreement, in a few days time. 106 Given the substantial
amount involved, in order to protect the public interest, the Supreme Court may have
deemed it necessary to stop such payments pending a more detailed enquiry into the
transaction.

104. There is no evidence to suggest that the conduct of proceedings before the Supreme Court
violated any established rules and principles. While the Claimant was not present on the
day the Interim Order was passed, an ex parte Interim Order does not ipso facto deny due
process. Nothing prevented the Claimant from approaching the Court and seeking a
modification or discharge of the order. It could also have sought costs and damages if it
104

Ibid. para. 480.
Halsbury’s Laws of England, vol. 37, 4th ed., Reissue, para. 467. See also Halsbury’s Laws of England, Vol. 11,
th
5 ed, para. 334; Kerr on Injunctions, 6th ed, p.634.
106
Interim Order of the Supreme Court of Sri Lanka in S.C.(FR)535/2008 and S.C.(FR) 536/2008 dated 28
November 2008, p. 5.
105

41

 believed that the order had been wrongly obtained. The case was then taken up on 15
December 2008, 17 December 2008 and 13 January 2009 by the Supreme Court. No such
application was made on any of these dates. The Supreme Court on its own on 27 January
2009 vacated the interim orders and terminated the proceedings. The Interim Order in
question barely lasted two months. This is a very relevant fact both with regard to the
finding on expropriation and FET particularly as the order did not deny due process.
105. The Majority Award determines the propriety of the Interim Order in a legal and
contextual vacuum. By holding that the Interim Order constitutes a breach of the FET
standard on the basis that, in the majority’s view, the evidence before the Supreme Court
was not sufficient to draw the conclusions it did, the majority has adopted the role of an
appellate court sitting in judgment on the Supreme Court’s order. With utmost respect this
is not the role that an international tribunal should arrogate to itself.

106. There is no doubt that certain actions by domestic courts can constitute a breach of the
FET standard, but an international tribunal should not be quick to reach such a conclusion
without clear evidence to that effect. The judiciary of a host State is entitled to a “high
measure of deference” 107 and there should be a presumption that it has acted in a proper
manner. To hold that an interim order passed by the Supreme Court of a host State on the
first day of hearing breaches the international FET standard is a finding which needs to be
supported by more than the subjective view of the majority that the evidence before the
Supreme Court did not warrant the making of such an order.

107. The Majority Award seeks to draw support from certain statements allegedly made by the
former Chief Justice of the Supreme Court in a newspaper interview. The majority fails to
mention that the Respondent had not only vehemently denied these allegations but had
also pointed out that these statements only appeared in an internet newspaper run by a
person wanted in Sri Lanka for fraud and for whom a red warrant had been issued by
Interpol. 108

108. The Respondent had also submitted that the former Chief Justice himself had, after his
retirement, taken on a political role and had become a vehement critic of the current
government. In the interview on which the Majority Award relies the Chief Justice made
107
108

S. D. Myers v. Canada, First Partial Award on Liability, 13 November 2000, para. 236.
Core Bundle 7, Exhibit 320.

42

 no bones about his disagreement with the executive. The majority nevertheless reproduces
and relies on these alleged statements as if they had been proved through cogent and
credible evidence and on that basis imputes bad faith to the Supreme Court. This is in spite
of the fact that in the very first line of the interview the Chief Justice is described as “a
controversial figure who locked horns with the executive in the last stages of his term.” 109.

109. The Chief Justice had stated that neither the government nor the banks were willing to
listen to and abide by the orders of the Supreme Court, which is why, the petitioners, once
they realized the position the Supreme Court was in, withdrew the applications. 110 Also
omitted from the Majority Award is the fact that the Chief Justice believed that the case
raised issues of public interest which the Court had to take up:

It was a public interest suit. People were affected by the high taxes that
were imposed, about 150 per cent at that time. The petitioners came to
court on the basis that these high taxes were imposed to make payments
on the illegal hedging agreements whereas market prices were tumbling.
We had every right to see whether the hedging agreements were lawfully
entered into. That was executive action. It was well within jurisdiction.111

110. The Majority Award holds that the public statements by the Chief Justice “confirmed that
the decision was issued for political reasons. He indeed declared that” 112:

the Government was forced to comply with the hedging agreements. We
will stop that on a judicial order, just pass on to the benefit to the people.
The Government said you stop the hedging agreements we won’t pass on
the benefits. 113

109

Core Bundle 7, Exhibit 313, p.1.
Core Bundle 7, Exhibit 313, p. 2 where the Chief Justice is quoted as stating that
“…because when the Supreme Court’s orders are not complied by the government, the bank will say they, too,
won’t comply. There are two parties to this, the government and the banks. That was the dilemma and
fortunately we didn’t have to go into that crisis because the petitioners knew we were in a bad position and
withdrew”.
111
Core Bundle 7, Exhibit 313, p.2.
112
Majority Award, para. 479.
113
Core Bundle 7, Exhibit 320.
110

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 111. This statement is to be examined in its context. In the preceding sentences of this
paragraph, the Chief Justice refers to the high tax structure worked out by the Treasury
officials to meet the claims arising out of the Hedging Agreement. This had caused public
concern. In the previous paragraph, the Chief Justice stated the legal basis for his order and
his belief that had the executive obeyed his orders the problem was capable of being
judicially resolved:

All we said was that the hedging agreements entered into by the chairman
of the petroleum corporation – who is under the jurisdiction of the court –
are prima facie not valid and the benefit of this should pass on to the
people … The Supreme Court would have dealt with this matter. We would
probably have brought about the solution with the banks. It was stymied
by this very hard headed decision not to comply with the court decision. 114

This interview, when read in its entirety, suggests that the Court intervened because high
taxes were a matter of public concern and it believed that the matter was capable of
judicial resolution. This cannot form the basis of a conclusion that the intervention was
motivated by any behind the scenes dialogue or by political considerations.

112. The Majority Award does not mention that the interview clearly brings out that the Chief
Justice wanted to decide the issues relating to the hedging agreements. He was unhappy
with the executive for not obeying his orders. The Majority Award relies on the opinion of
the Chief Justice that in an international arbitration Sri Lanka has no defence to present
and that it would be a difficult fight. 115 But it is clear from the interview that the Chief
Justice wanted the case to be decided locally because he was of the view that it had
elements of fraud and corruption and that the Court could have brought about a solution
with the banks. He believed that by refusing to obey his orders the executive triggered
international arbitration which would produce unfavourable results. In this the Chief
Justice is not alone. Many judges of domestic courts believe that they are much better
placed than arbitrators to decide complex contentious issues. They also regard
international arbitration as alien and unfriendly. One may not agree with such views but

114

Core Bundle 7, Exhibit 313, p.2.
Majority Award, para. 479.

115

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 one cannot on that basis conclude that the proceedings before the Supreme Court violated
due process.

113. In any event, relying solely on such contested evidence to impute bad faith to the highest
court of a country does not meet the standard for rigorous analysis and reasoning that
should be the sine qua non for any international tribunal recording such a damaging
finding about the Supreme Court of a Sovereign State.

114. A finding of denial of FET to a foreign investor should not be readily made against the
highest court of a country. Mondev v. USA lays down, in my opinion, the correct test in
this regard:

[W]hether, at an international level and having regard to the generally
accepted standards of the administration of justice, a tribunal can
conclude in the light of all the available facts that the impugned decision
was clearly improper and discreditable, with the result that the investment
has been subjected to unfair and inequitable treatment. 116 [Emphasis
supplied].

115. In Waste Management v. Mexico where the failure of the Mexican courts and tribunals to
provide relief was in issue, the Tribunal observed that

“fair and equitable treatment is infringed by conduct attributable to the
State and harmful to the claimant if the conduct is arbitrary, grossly
unfair, unjust, idiosyncratic or discriminatory and exposes claimant to
sectional or racial prejudice.” 117 [Emphasis supplied].

116. The term “arbitrary” was defined by the ICJ in the ELSI case as “a willful disregard of due
process of law, an act which shocks, or at least surprises, a sense of judicial propriety.” 118

116

Mondev International Limited v United States of America (ICSID Case No. ARB(AF)99/2), Award, 25 May
2004, para. 127.
117
Waste Management Inc v. United Mexican States (ICSID Case No. ARB(AF)/00/3), Award, 30 April 2004, para.
98.
118
Case Concerning Elettronica SpA (ELSI) (United States v Italy), ICJ reports, 1989, para. 128.

45

 117. In the light of the facts of this case, it is not possible for me to conclude that the Supreme
Court acted in an improper or discreditable manner. I do not find the conduct of the judges
or the content of their orders to be arbitrary, grossly unfair, unjust, idiosyncratic or
discriminatory. They did not act in a manner or pass such orders which shock or surprise a
sense of judicial propriety. I, therefore, find that the Interim Order of the Supreme Court
did not result in a denial of fair and equitable treatment to the Claimant and that the
Claimant is not entitled to any damages on this basis.

118. The Majority Award states that at the time when the order of the Supreme Court was
discharged, the Central Bank had issued a Stop-Payment Order. 119 The conduct of the
Central Bank has been separately examined in the Majority Award. It holds that the
actions of the Central Bank denied FET to the Claimant. The Stop-Payment Order of the
Central Bank cannot, therefore, be made a basis for a finding that the orders of the
Supreme Court resulted in a denial of FET. I now proceed to examine whether the actions
of the Central Bank caused any damage to the Claimants.

B. Actions of the Central Bank
119. Insofar as the investigations conducted by the Central Bank are concerned, even if these
can be said to have been arbitrary or unfair, these cannot without more lead to an award of
the damages accorded by the majority. There being no causality between the investigation
and the damages claimed by and awarded to the Claimant, it is not clear how these
investigations could lead to an award of damages of USD 60,368,993 plus interest.

120. With regard to the stop-payment direction issued by the Central Bank, it is essential for the
Claimant to establish that this direction affected the existence or the recovery of the debt.
The debt, however, remains unaffected. The stop-payment direction of the Central Bank,
as held by the English court, could not have been aimed at CPC and did not prevent it from
making payment to the Claimant. Despite the actions of the Central Bank, the Claimant’s
debt and its recovery remains unaffected. A direct causal link between the act of the
Respondent and the damage suffered by the Claimant is missing. In the absence of this link
no damages can be awarded to the Claimant on this basis.

119

Majority Award, para. 480.

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 121. Alexandra Diehl states that there are four elements that have to be present if a claim for
FET is to succeed. These are:

(i)

an act or omission attributable to the host State;

(ii)

that constitutes a violation of the applicable FET clause;

(iii)

which has caused damage to the investor; and

(iv)

the existence of a direct and causal link between the act of the State and
the damage to the investor. 120

122. Iona Tudor is also of the view that there are “[f]our elements” required of a FET based
claim. These are “the action of the host State, the damage to the Investor, the causality
between these two, and solid factual proof of those to be brought by the investor.” 121
Elaborating upon the third element i.e., causality she states as follows:

The third requirement for a FET claim is to establish a direct causal link
between the act or omission attributable to the State and the damage
suffered by the Investor. There are not many cases discussing or
specifically requiring this third condition independently from the other
two. However, it appears that the arbitrators do verify, on a regular basis,
the existence of this direct causal link. In GAMI, the impossibility for the
Investor of bringing sufficient proof of establishing such a link was one of
the reasons why the tribunal decided to dismiss his claim on the basis of
FET. Establishing this direct connection between the action and the
damage is a natural feature in a legal procedure verified spontaneously by
tribunals and this may be the reason behind the absence of lengthy
analysis of this point, in the arbitral awards. However, if the damage
suffered is not a direct consequence of the State’s act or omission, the FET
claim is dismissed. 122

120

Diehl, Alexandra, The Core Standard of International Investment Protection: Fair and Equitable Treatment,
Kluwer, The Netherlands, 2012, p.324-327.
121
Tudor, Iona, The Fair and Equitable Treatment Standard in the International Law of Foreign Investment, OUP,
New York, 2008, pp. 134.
122
Ibid. pp.137-138.

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 123. The Tribunal in Joseph Charles Lemire v. Ukraine also summarized the FET standard as
requiring “an action or omission by the State which violates a certain threshold of
propriety, causing harm to the investor, and with a causal link between action or
omission and harm.”123 (Emphasis supplied).

124. As the existence of the debt has not been affected and the remedy to recover it has not
been impaired by either the investigations conducted or the Stop-Payment Order issued by
the Central Bank, the causal link between the actions of the Respondent and the damages
claimed by Claimant is missing. The Claimant has, therefore, failed to establish one of the
elements without which a FET claim cannot succeed.

125. In view of the above, I am of the opinion that no damages can be awarded to the Claimant
on the ground that it was denied FET by the actions of the Central Bank.

V.

Capacity of CPC to enter into the Hedging Agreement

126. The majority analyses this issue by considering whether the Hedging Agreement was a
hedge or a speculation. This analysis is based on the assumption that CPC does not have
the capacity to enter into speculative transactions. The majority fashions a bright-line test
for differentiating between hedging and speculation and finds that the Hedging Agreement
did not constitute speculation.

127. Transactions such as the Hedging Agreement contain elements of both hedging (due to
CPC’s underlying exposure to oil) and speculation (due to the unpredictable outcome of
the transaction) and it is difficult to place them firmly in either camp. Rather than fashion a
test, which may not be workable in all circumstances and which creates artificial
distinctions, the majority could have arrived at the same conclusion on the narrower and
alternative grounds it describes in paragraph 345 of the Majority Award. I agree with the
majority’s conclusion but only for the reasons set out in paragraph 345 of the Majority
Award.

123

Joseph C. Lemire v. Ukraine (ICSID Case No. ARB/06/18), Decision on Jurisdiction and Liability, 14 January
2010, para. 284.

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 VI. Attribution
128. In paragraph 404 of the Award, the majority finds that since it

“is satisfied that the actions of the Supreme Court and the Central Bank of
Sri Lanka establish violations of the Treaty under Articles 2 (fair and
equitable treatment) and 4(2) (expropriation) of the Treaty, it is
unnecessary for this Tribunal to further decide whether Article 8 was also
breached. As such, the primary rationale for deciding whether CPC’s
actions are attributable to Sri Lanka under Articles 4, 5 or 8 of the ILC
Articles also slips away.”

129. It reaffirms this conclusion in paragraph 406 by observing that “it is unnecessary for the
Tribunal to come to any firm conclusions on this matter, as it does not affect the
Tribunal’s findings on the violations of Articles 2 and 4 of the Treaty, nor does it have any
effect on the quantum of the damages claimed by Deutsche Bank.” In paragraph 407 it
notes that,”[f]inally, the Arbitral Tribunal has decided above that Sri Lanka’s actions
were within its powers and were not ultra vires. There is therefore no issue in this
respect.”

130. Despite stating that it is unnecessary to decide whether the CPC’s actions are attributable
to the Respondent, in paragraph 407 the majority makes a number of observations as to
why the actions of CPC are, in fact, attributable to the Respondent.

131. This international Tribunal has a limited mandate and should as matter of both principle
and propriety decide the dispute before it on the narrowest possible grounds. Having stated
that it is not required to decide the question of attribution since it does not affect its final
conclusions, the majority should have shied away from making the observations in
paragraph 407. These are quite unnecessary. While agreeing with the majority’s discussion
of the issue of attribution, I, therefore, disassociate myself from the observations made in
paragraph 407.

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 VII. Conclusion
132. For the foregoing reasons, J conclude as follows :

1.  

The Hedging Agreement did not constitute an investment for the purposes of the
Germany-Sri Lanka BIT or the ICSID Convention and the Tribunal, therefore, has
no jurisdiction over this dispute.

II.  

The Claimant' s asset, in this case a claim under the Hedging Agreement, was not
expropriated by the Interim Order of the Supreme Court of Sri Lanka or the actions
of the Central Bank of Sri Lanka; there was no breach of Article 3 of the Germany­
Sri Lanka BIT and therefore, the Claimant is not entitled to any damages.

III.  

The Interim Order of the Supreme Court of Sri Lanka did not constitute a violation
of Article 2 of the Germany-Sri Lanka BIT, which requires Sri Lanka to accord
protected investments or companies fair and equitable treatment and therefore, the
Claimant is not entitled to any damages.

IV.  

There being no causal link between the damages claimed by the Claimant and the
actions of the Central Bank of Sri Lanka which allegedly violated Article 2 of the
Germany-Sri Lanka BIT, the Claimant is not entitled to any damages.

Makhdoom Ali Khan
23 October 2012

so