On 9 April 2015, an International Centre for Settlement of Investment Disputes (“ICSID”) arbitral tribunal dismissed a case arising out of Greece’s sovereign debt exchange for lack of jurisdiction. The landmark decision is the first time that an ICSID tribunal has declined jurisdiction over interests in sovereign bonds. The award was made in Poštová banka, a.s. and ISTROKAPITAL SE v. Hellenic Republic, a bilateral investment treaty (“BIT”) arbitration initiated in 2013 by a Slovak bank and its former Cypriot shareholder under the Slovak Republic-Hellenic Republic BIT (“Slovakia-Greece BIT”) and the Cyprus-Hellenic Republic BIT. The claimants had sought compensation for illegal expropriation, failure to accord fair and equitable treatment, and violation of umbrella clauses in respect of the bank’s interests in Greek government bonds (“GGBs”) that were exchanged in 2012. Beyond the headline, the decision is an important reminder that not every kind of asset qualifies as a protected investment under a potentially applicable investment treaty or the ICSID Convention, and of the basic yet fundamental rule of treaty interpretation that a BIT’s terms must be interpreted in good faith within their context and in light of the treaty’s object and purpose. More generally, the conclusion by a majority of the Tribunal that the bank’s interests in GGBs did not meet the objective requirements of contribution and risk for the purposes of Article 25 of the ICSID Convention may have broader implications for treaty-based claims asserted by other holders of interests in restructured sovereign debt. No Investment Under The BIT In deciding whether it had jurisdiction ratione materiae (subject-matter jurisdiction) over the dispute, the Tribunal had to determine as a matter of treaty interpretation whether the interests in the GGBs held by the Slovak claimant, Poštová banka, qualified as a protected investment under the definition of investment in Article 1(1) of the Slovakia-Greece BIT, specifically its chapeau and the categories of assets listed thereunder. As we discuss below, the Tribunal found that the bank’s interests in GGBs did not fall within the definition and therefore dismissed the claim. The chapeau of Article 1 of the Slovakia-Greece BIT provides that “[i]nvestment means every kind of asset and in particular, though not exclusively includes: (…).” Article 1(1)(b) refers to “shares in and stock and debentures of a company and any other form of participation in a company.” Article 1(1)(c) refers to “loans, claims to money or to any performance under contract having a financial value.” (para 278) Although the Tribunal agreed with Claimants that Article 1 of the BIT contains a broad asset-based definition rather than a closed list or exhaustive description (para 286), the Tribunal noted that the careful drafting of categories of protected investments in the subsections demonstrated that there were limits to the definition. (para 294) In this regard, the Tribunal considered Greece’s treaty practice, observing that some Greek BITs refer to the term “loans,” others to “long term loans,” others to loans “connected to an investment”, whilst others exclude the term “loan” altogether. (para 292) Accordingly, the Tribunal underlined the importance of the principle of effective treaty interpretation as follows:
The list of examples provided by the Slovakia-Greece BIT must, thus, be considered in the context of the treaty and be given some meaning together. Otherwise, if the interpretation stops by simply indicating that any asset is an investment, the examples will be unnecessary, redundant or useless. […]
The Tribunal was further persuaded by the fact that Article 1(1)(b) of the BIT refers to “shares in and stock and debentures of a company and any other form of participation in a company” but not to sovereign debt or bonds issued by the State parties. The Tribunal found that this language in the Slovakia-Greece BIT differed significantly from the Argentina-Italy BIT at issue in Abaclat and Ambiente Ufficio, in which ICSID tribunals upheld jurisdiction over sovereign bonds. (para 304) For example, whereas Article 1(c) of the Argentina-Italy BIT includes “obligations, private or public titles or any other right to performances or services having economic value, including capitalized revenues,” Article 1(1) of the Slovakia-Greece BIT does not refer to a general concept such as “obligations,” or to “public titles”. (paras 306-308) In the absence of similar language to the Argentina-Italy BIT, the Tribunal could not reach the same conclusions as in Abaclat and Ambiente (or for that matter the more recent Alemanni case), holding that: an interpretation of the text and context of Article 1(1) leads the Tribunal to consider that the State parties to the treaty wanted an ample definition of what could constitute an investment, but within certain categories that are also broad, but not unlimited. Otherwise, the examples could be expanded to include any asset whatsoever, and would become useless or meaningless. (para 314) As part of the interpretative exercise, the Tribunal paid particular attention to the special features and characteristics of sovereign debt that distinguish it from private debt, (318-323) including that creditors’ security and legal recourse against a sovereign debtor is much more limited, and there is a high degree of political influence and risk, because: [a] sovereign State engages in much more complex decisions, both in negotiating and structuring the debt and in payment thereof, and repayment is subject not only to the normal credit risk of any credit operation, but also to political decisions that are extremely sensitive for the inhabitants of the given State, such as a tax increase or a reduction in public expenditure or investment to repay the sovereign debt. (para 320) The Tribunal thus concluded: In sum, sovereign debt is an instrument of government monetary and economic policy and its impact at the local and international levels makes it an important tool for the handling of social and economic policies of a State. It cannot, thus, be equated to private indebtedness or corporate debt (para 324) The Tribunal also noted the practical realities of sovereign debt, including that its issuance is subject to specific and strict regulations and that secondary market trading and holding of sovereign debt is also heavily regulated. (paras 325-326, 329) The Tribunal noted that sovereign debt financial instruments are “easily tradable” on the secondary market, independent of the issuing State, and that creditors therefore change many times during the life of the financial instrument. (para 327) The Tribunal agreed with Greece that sovereign bonds are “different from forms of participation in corporations, and therefore their exclusion from the definition of investment in a given treaty indicates that the contracting parties did not intend to cover these types of assets.” (para 333) Having performed its analysis of the treaty language and practicalities of sovereign debt issuance and trading, the Tribunal reasoned that:
Neither Article 1(1) of the Slovakia-Greece BIT nor other provisions of the treaty refer, in any way, to sovereign debt, public titles, public securities, public obligations or the like. The Slovakia-Greece BIT does not contain language that may suggest that the State parties considered, in the wide category of investments of the list of Article 1(1) of the BIT, public debt or public obligations, much less sovereign debt, as an investment under the treaty.
Nor did the sovereign bonds at issue fall within Article 1(1)(c) of the BIT (“loans, claims to money or to any performance under contract having a financial value”), because there was inter alia no claim to money, no contractual privity or contractual relationship between Poštová and Greece that could arise out of the bond issuance or trading process. (paras 338-349) By adopting a rigorous approach to treaty interpretation that focuses on the terms in their context and in light of the BIT’s object and purpose in order to give an effective meaning, the award therefore has wider significance in demonstrating that not every kind of asset qualifies as a protected investment, including where the treaty contains a broadly drafted asset-based definition, which is common in BITs. No Investment Under The ICSID Convention For an ICSID arbitral tribunal to have jurisdiction ratione materiae, it must find that the dispute concerns an investment protected under both the underlying BIT and the ICSID Convention. Because the Poštová Tribunal found no jurisdiction under the Slovakia-Greece BIT, it was not necessary to consider the position under the ICSID Convention in order to dispose of the case. Nevertheless, a majority of the Tribunal made important observations on the treatment of sovereign debt under the ICSID Convention. As noted by the Tribunal, a number of ICSID tribunals have held that there are “objective” characteristics of an “investment” under Article 25 of the ICSID Convention irrespective of any “subjective” definition of an investment agreed in the BIT, namely (i) a contribution of money or assets, (ii) duration and (iii) risk. (paras 351-359) Having concluded that the “subjective” test pursuant to Article 1 of the BIT was not met – and therefore the Tribunal lacked jurisdiction over the dispute – a majority of the Tribunal nevertheless stated that the claimants would also have failed to satisfy the “objective” requirements for an investment to be protected under the ICSID Convention. (paras 360, 371) Specifically, “the element of contribution to an economic venture and the existence of the specific operational risk that characterizes an investment under the objective approach” were not present. (para 371) Accordingly, the Tribunal could not have asserted jurisdiction even if the BIT had been drafted broadly enough to cover sovereign debt. Whereas the majority considered an investment “in an economic sense, is linked with a process of creation of value”, the arbitrators found that Poštová’s purchase of interests in GGBs made no contribution to an economic venture. (paras 361, 371) In this regard, the majority noted:
The Claimants have not argued that the money Poštová banka paid for the GGB interests, even if considered as ultimately benefitting Greece, was used in economically productive activities. Rather, it appears that the funds were used for Greece’s budgetary needs, and particularly for repaying its debts…
Citing to Michael Waibel’s scholarship, the Tribunal noted the importance of the distinction between sovereign bonds that are used for general funding purposes and those used for specific public works or services. (para 364) The Tribunal observed that the ICSID tribunals in Fedax v. Venezuela, CSOB v. Slovakia, Joy Mining v. Egypt and Alps Finance v. Slovak Republic have adopted the same approach in distinguishing between protected investments connected with a particular economic operation, on the one hand, and instruments or contracts that are not linked with an economic venture and are therefore do not satisfy the objective test, on the other. (para 365) Regarding the risk element, the majority held that investment risk requires the presence of operational risk, explaining:
Under the objective approach, commercial and sovereign risks are distinct from operational risk. The distinction here would be between a risk inherent in the investment operation in its surrounding – meaning that the profits are not ascertained but depend on the success or failure of the economic venture concerned – and all the other commercial and sovereign risks.
The majority’s view was that acquisition of interests in sovereign bonds would not amount to taking any operational risk. (para 371) In sum, had the objective requirements of contribution and risk been applied, the Tribunal would not therefore have had jurisdiction over the dispute under the ICSID Convention, regardless of the language in the Slovakia-Greece BIT. This conclusion will undoubtedly give pause to other holders of interests in sovereign debt before initiating arbitration proceedings under other investment treaties.