The Nationality Test in Investment Arbitrations

ICSID Tribunal upholds jurisdiction where Claimant investors who changed nationality sue the State of their former nationality in BIT proceedings

In a recent Decision in Ioan Micula, Viorel Micula and others v. Romania (ICSID Case No. ARB/05/20) commenced under the bilateral investment treaty (BIT) between Romania and Sweden, the Tribunal rejected Romania’s jurisdictional objections on the grounds of the Claimants’ nationality.

ICSID, a division of the World Bank, is the best-known institution handling arbitrations of investment disputes between investors and States who have signed up to the 1965 Washington Convention on the settlement of investment disputes between States and nationals of other States. Under Article 25 of the Washington Convention, a Tribunal must determine whether the claimant investor was:

(1) a national of a Contracting State other than the respondent State to the dispute, at the date of (a) the Request for Arbitration and (b) the registration of the Request by ICSID (the so-called “positive nationality requirement”); and

(2) not a national of the host respondent State on either of these dates (the so-called “negative nationality requirement”).

The general principle, reflected in most BITs, is that it is for each State to decide its own nationality requirements. Such determination is conclusive unless it is inconsistent with international law (e.g. it is the result of fraudulent actions or material error).

The Micula ruling is noteworthy for affirming that an individual investor’s strong links with the host State (i.e. the State where the relevant investment was made) do not bar a BIT claim against that State if the investor lawfully holds the other State’s nationality.

The decision

The claimants obtained Swedish nationality in the 1990s having previously held Romanian nationality (Romanian law allows citizens to renounce their Romanian nationality). They established businesses in Romania that benefited from certain investment incentives under Romanian law until those incentives were partially withdrawn or altered in the context of Romania’s EU accession. The two investors (and three of their controlled Romanian corporate entities) commenced a BIT arbitration before ICSID seeking restitution of the investment incentives or adequate compensation.

Romania objected to the Tribunal’s jurisdiction on grounds of the individual investors’ strong links with Romania and the lack of genuine and effective links with Sweden (their newly acquired nationality).

In overruling the objections, the Tribunal noted that the individual investors’ nationality was not a matter of convenience; they held assets in Sweden, had family ties in Sweden and were paying pension contributions in Sweden. In any event, under the laws of Sweden, the investors were Swedish. The maintenance of effective links to the State of their former nationality (Romania) through permanent residence and the operation of business interests in that country were not decisive factors that would bar the investors from bringing an investment claim.

This decision reaffirms conclusions of previous tribunals that the Washington Convention does not leave room for arguments based on “dominant” or “effective” nationality and the search for a genuine link is inapposite when there is no issue of dual nationality.

Comment

The Tribunal’s decision follows a series of recent rulings (Champion Trading Company v. Egypt, The Rompetrol Group N.V. v. Romania, Siag v. Egypt) revolving around the nationality requirements of individual and corporate investors bringing a BIT claim before ICSID.

In respect of corporate claimants it has been established that nationals of a given state may sue that same state before an international tribunal, provided that the investments at issue were made via a corporate vehicle incorporated in a state that concluded a BIT with the host State. This is in keeping with the doctrine of separate corporate identity. However, some BITs exclude offshore entities or so-called “mailbox” companies (i.e. shell entities which conduct no real business activity, but which are owned or controlled directly by the investor or through another corporate holding incorporated elsewhere) from the scope of application of the BIT by way of a denial of benefits clause so as to avoid “BIT shopping”.

The position of individual claimants can be more complex. In the Champion Trading case it was established that Article 25 of the Washington Convention was clear and there was no room left for a discussion of “dominant” or “effective” nationality for the purpose of establishing jurisdiction. However, while Article 25(2)(a) does not require that a Claimant should hold only one nationality, persons holding dual or multiple nationalities cannot invoke the Washington Convention against a host country of which they are also nationals.

The Tribunal discussed the issue of “convenience” nationality in Siag v. Egypt. In Micula v. Romania the Tribunal followed the Siag ruling that the specific regime established by the BIT in relation to the threshold of nationality should prevail, since the Contracting Parties are free to agree on any requirements for the determination of nationality for treaty purposes. It is worth noting that only a few BITs impose more restrictive nationality requirements on an individual investor, such as an express requirement that the investor has been resident for some period of time in the putative home State, in order to satisfy the eligibility requirements as an investor under the BIT. On the contrary, some BITs extend their protections beyond nationals to include permanent residents.

Although clear deference is given to the nationality threshold of the BIT at issue, the Siag and Micula decisions demonstrate that the requirement of a genuine link is not completely overlooked by Tribunals and treaty shopping based on nationality criteria remains a potential bar to jurisdiction in investment arbitrations. The Micula decision indicates that strong and continuous factual links with the host State such as former nationality, personal, professional or business ties, do not alone bar an individual claimant from asserting jurisdiction before ICSID. However, the outcome would have been different if the individual claimants had maintained their Romanian nationality. In such scenario, the Romanian nationality would have operated as a jurisdictional bar, regardless of the strength of the investors’ links with Sweden.