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Mihaly v. Sri Lanka
41 International Legal Materials 862 (2002)
Case No. ARB/00/2 (March 15, 2002)
www.worldbank.org/icsid
Do business development expenditures for establishing a power plant BOT contract constitute an "investment" protected under a bilateral investment treaty?
An ICSID tribunal considered that such business development expenditures (though constituting 2-4 % of the total envisaged investment) did not constitute, in this particular case, "investment" protected under the applicable US-Sri Lanka BIT. There were several letters of intent, but no final contract. It relied on the fact that there was no legally binding agreement and that Sri Lanka had never expressly consented to the envisaged investment.
The case is of interest as modern investment treaties (bilateral and multilateral ones - such as the NAFTA or Energy Charter Treaty) - include now very extensive definitions of "investment", including contractual rights, loans, permits etc. Arguably, this extensive notion moves the threshold from which a pre-investment expenditures is protected quite far into the pre-investment sequence. The question, though, is to distinguish a business development expenditure which has not matured into an "investment" (in the extensive sense of those treaties) from such expenditures which constitute "investment".
Presumably, a certain lasting nature, but also some definitive act of the government encouraging, inducing or accepting such expenditures as the first stage of an investment followed by subsequent stages of more intensive investment, is required. Mihaly v. Sri Lanka can therefore seen as covering a very early stage where a business development expenditure has not matured into a protected "investment" in the absence of some trust-inspiring and confidence-building identifiable act of the government. One needs also to appreciate that these treaties generally distinguish between "pre-investment" ("making of investment") where more loose best-efforts obligation (e.g. Energy Charter Treaty) apply or where the main obligations relate to non-discriminatory access, often with sectoral limitations (e.g. US BIT model).
This difference between lower-protection pre-investment rules and higher-protection post-investment rules suggests that not every pre-investment activity merits the full protection of the treaties. Nevertheless, as investment typically matures in stages of increasing assumption of risk and expenditures, one should not set the threshold too high.
Unlike most BIT's, the NAFTA investment chapter goes even further than merely providing a very broad definition of investment - because it also provides a definition of "an investor of a Party" as including one who "seeks to make an investment." Given the fact that few investors will go through an expensive arbitration merely to recoup losses suffered in "seeking to make an investment," there has not yet been a NAFTA case on point, but the difference would likely have been determinative if the Mihaly claim would have been a NAFTA case. Under the Energy charter Treaty (Art. 10), there is a "soft-law" obligation not to discriminate for investors "making an investment".
The formulation used is "shall endeavour to accord" (i.e. national treatment). A supplementary treaty is supposed to flesh out this obligation. A draft is available, but there seems to be currently no interest to complete it for signature. A superficial view holds that this soft-law obligations means nothing. But that is not certain. Using a literal interpretation according to the Vienna Convention on Treaty interpretation rules, "endeavour to accord" means just that: A country that does not try hard enough would breach the obligation - and be responsible for damages. Reportedly, another ICSID panel is dealing with a similar issue as Mihaly. A decision is expected around December 2002.
Comments by T. Weiler, Canada and M. Kantor, Washington DC are acknowledged.
Further Reference: T. Wälde, International Investment under the 1994 Energy Charter Treaty, in: 29 JWT 5-72 (1995)
