THE AUTHOR<\/strong>: The question of jurisdiction under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (1965)<\/a> (\u201cICSID Convention<\/strong>\u201d) remains one of the most debated and structurally significant issues in international investment arbitration. At the heart of this debate lies the interpretation of Article 25 of the Convention<\/a>, which establishes the jurisdiction of the ICSID along two fundamental axes: jurisdiction ratione personae<\/em><\/a> <\/em>and jurisdiction ratione materiae<\/a><\/em>.<\/p>\n\n\n\n Among these, the determination of jurisdiction ratione personae <\/em>\u2014 particularly the definition of a \u201cnational of another Contracting State\u201d \u2014 has generated considerable jurisprudential divergence. This divergence becomes especiallypronounced in cases where a juridical person is formally incorporated in a foreign State, while being effectively controlled by nationals of the host State.<\/p>\n\n\n\n Article 25 provides that:<\/p>\n\n\n\n In this respect, two approaches must be considered. One of which adopts the economic test<\/strong>, focusing on the criterion of effective control, whereas the other favors the legal test<\/strong>, relying on the formal nationality of the company as determined by its place of incorporation.<\/p>\n\n\n\n Proponents of the economic test submit that the decisive criterion lies in effective control over the capital<\/strong>, rather than the formal nationality of the corporate vehicle.<\/p>\n\n\n\n They base this position on the nature of the ICSID system, which was established under the ICSID Convention on the Settlement of Investment Disputes between States and Nationals of Other States. In their view, both the object and purposeof the Convention are clearly articulated in the Report of the Executive Directors, which explains that the Centre was\u201cdesigned to facilitate the settlement of disputes between States and foreign investors, with a view to stimulating a larger flow of private international capital into countries which wish to attract it.\u201d<\/p>\n\n\n\n The Preamble to the Convention further recognizes that \u201cdisputes may arise from time to time in connection with investment between Contracting States and nationals of other Contracting States,\u201d and that, although such disputes areordinarily subject to national legal processes, they may, in certain circumstances, require recourse to an international method of settlement. It is for this purpose that an \u201cinternational facility for conciliation and arbitration\u201d was established, to which Contracting States and nationals of other Contracting States may submit such disputes, should they so agree.<\/p>\n\n\n\n Accordingly, Article 25(1) of the Convention provides that the jurisdiction of the Centre extends to legal disputes \u201cbetween a Contracting State and a national of another Contracting State\u201d. Beyond such disputes, the Centre has no jurisdiction.<\/p>\n\n\n\n It follows that the arbitral mechanism established under the ICSID was conceived, in principle, for cross-border investment disputes<\/strong>, namely those arising between a State and a foreign investor. In light of the international character of such relationships, and with a view to promoting the flow of international investment, the Convention permits, subjectto the parties\u2019 consent, recourse to an international adjudicatory forum.<\/p>\n\n\n\n By contrast, disputes between a State and its own nationals do not, as a general rule, fall within the scope of theConvention, save for the exceptional circumstance contemplated in the second limb of Article 25(2)(b).<\/p>\n\n\n\n On this basis, any interpretation to the contrary would be inconsistent with the object and purpose of the ICSID Convention and would disregard the substantive limits it establishes on the Centre\u2019s jurisdiction. Though, regarding thespecific object of the Convention \u2014 namely, the protection and promotion of international investment \u2014 the Convention imposes a strict framework of rights and obligations upon both Contracting States and investors qualifying as nationals of other Contracting States.<\/p>\n\n\n\n In particular, the Convention excludes recourse to diplomatic protection and removes the jurisdiction of domestic courts, substituting instead a self-contained international arbitral mechanism of a distinct character. Accordingly, tribunals constituted under the ICSID must exercise caution when determining their jurisdiction, as any unwarranted expansion thereof may, in effect, result in the adjudication of purely domestic disputes channeled through a formally foreign corporate vehicle.<\/p>\n\n\n\n In this context, the well-known statement of Aron Broches<\/a>, General Counsel of the World Bank during the drafting of the Convention, assumes particular significance. He affirmed that the ICSID Convention defines the outer limits of theCentre\u2019s jurisdiction, and that bilateral treaties cannot extend that jurisdiction beyond what is permitted under the Convention itself.<\/p>\n\n\n\n It follows that, while Contracting States may, through bilateral arrangements, restrict the scope of ICSID jurisdiction ascompared to that provided under the Convention, they may not expand it beyond the limits established therein.Accordingly, recourse to the provisions of a bilateral investment treaty arises only once the jurisdiction of the Centre has been established under the Convention.<\/p>\n\n\n\n On this basis, a fundamental question arises: whether a foreign company -despite being subject to complete and undisputed domestic control – may properly be regarded as possessing a foreign nationality within the meaning of the Convention, or whether such effective domestic control requires that it be treated, in substance, as a domestic company, thereby defeating the jurisdictional requirement.<\/p>\n\n\n\n While the Convention leaves the determination of corporate nationality, to a certain extent, to the appreciation of the Contracting States, such discretion is not without limits. It may not be exercised in a manner that expands the jurisdiction of the ICSID beyond what is expressly provided for in the Convention. The Centre\u2019s jurisdiction is confined to the boundaries set by the Convention, and the parties may not, through a bilateral treaty, introduce additional categories of disputes or persons falling within its scope.<\/p>\n\n\n\n These provisions must be interpreted in accordance with Article 31 of the Vienna Convention on the Law of Treaties (1969)<\/a>, which reflects customary international law and requires that a treaty be interpreted in good faith in accordance withthe ordinary meaning of its terms, in their context, and in light of its object and purpose.<\/p>\n\n\n\n There can be no dispute that the object and purpose of the ICSID Convention is not to provide a forum for the resolution of purely domestic disputes between a State and its own nationals, but rather to address disputes arising out of cross-border investments involving the flow of international capital. As noted by Christoph Schreuer<\/a>, \u201cthe basic idea of the Convention, as indicated by its title, is to provide for the settlement of disputes between States and foreign investors; disputes between a State and its own nationals are to be settled before its domestic courts.\u201d<\/p>\n\n\n\n Accordingly, the ICSID mechanism is not intended to cover domestic investments channeled through a formally foreign entity, whether established for that purpose or pre-existing. It follows that the proposition that the origin of capital is irrelevant, and that the sole criterion is incorporation under the law of another Contracting State, is manifestly inconsistent with the object and purpose underlying the ICSID system as a whole.<\/p>\n\n\n\n This position is further supported by the approach adopted by Prosper Weil<\/a>, President of the Tribunal, in his dissentingopinion in Tokios Tokel\u00e9s v. Ukraine<\/em><\/a>, where he took issue with the majority\u2019s decision, considering that its \u201cunderlying philosophy\u201d was inconsistent with the object and purpose of the ICSID Convention.<\/p>\n\n\n\n In his view, the ICSID system was not established to resolve disputes between a State and its own nationals, but rather to address disputes of an international character. He therefore considered that the majority\u2019s conclusion -that the origin ofcapital is irrelevant- was \u201centirely inconsistent\u201d with the object and purpose of the Convention.<\/p>\n\n\n\n According to Professor Weil, the core issue was whether the claimant could genuinely be regarded as a national of Lithuania within the meaning of the Convention. Contrary to the majority\u2019s findings, he considered that the origin of theclaimant\u2019s capital was a decisive factor.<\/p>\n\n\n\n Given that the claimant was wholly controlled by Ukrainian nationals, he concluded that the dispute was not international in nature, but rather a dispute between Ukraine and its own nationals.<\/p>\n\n\n\n Professor Weil further acknowledged that it may not always be appropriate for arbitral tribunals to look beyond the corporate structure to ascertain the origin of capital. However, he emphasized the need for a degree of flexibility, cautioning that allowing an overly facile circumvention of domestic judicial mechanisms -through the use of formally foreign entities- could ultimately undermine the integrity of the ICSID system.<\/p>\n\n\n\n
Judge Dr Sameh Salem<\/strong>, Senior Judge at the Egyptian Courts of Appeal <\/strong>& <\/strong>Manager of the General Department for Arbitration and International Disputes at the Egyptian Ministry of Justice<\/strong><\/p>\n\n\n\n
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