Claims against states: investment treaties and the financial sector



When Croatia legislated to convert loans by Austrian banks denominated in Swiss francs into euros in 2015, after the Swiss franc surged in value, several affected banks made claims for compensation against the Croatian government. The banks brought their claims in arbitrations under the investment protection treaty between Croatia and Austria, arguing that the conversion of the loans breached obligations Croatia owed them under the treaty, and demanded compensation from Croatia for losses they sustained as a result of the conversion. While the outcome of these claims is still pending, the fact that a foreign private investor can bring claims in an arbitration against a state under a treaty is striking.

Investment protection treaties are international agreements between two or more states, under which, each state party grants protection rights to nationals and companies – termed ‘investors’ – of the other state party (the home state) when they make a qualifying investment in the territory of the first, or ‘host’ state. More than 2300 bilateral investment treaties are currently in effect worldwide, as well as several multilateral investment treaties, such as the Energy Charter Treaty. It is, of course, possible to structure an investment to secure protection under an available investment treaty, particularly with professional advice, although this must be done before a dispute emerges.

Two particular features of investment treaties make them a powerful tool for foreign investors – the far-reaching protections most treaties grant against conduct by the host state, or for which the state is responsible, and the right of foreign investors to bring claims directly against the host state for violations of the treaty, through international arbitration. This note briefly considers two principal protection standards that are available under most investment treaties, and reviews types of investments made by financial institutions that may qualify for protection.

Most investment treaties provide broadly similar types of protections to investors. These normally include Fair and Equitable Treatment (FET), treatment no less favourable than that afforded to nationals of the host state – which is known as national treatment, and nationals of any third state – known as ‘most favoured nation treatment’, full protection and security, a requirement to observe any undertakings the state has given in relation to an investment and, finally, compensation for unlawful expropriations or takings. The types of protections afforded tend to follow a common pattern, although relatively subtle differences in their wording can sometimes lead to markedly different outcomes.

While formal expropriations are relatively uncommon, investment protection treaties also cover ‘indirect’ expropriation, where a host state’s regulatory measures have the effect of destroying the value of an investment in the absence of any formal transfer of title. In Deutsche Bank v. Sri Lanka, for example, the state central bank’s and the Supreme Court’s prevention of payments under a commodity hedging agreement were found to amount to an indirect expropriation of Deutsche’s Bank’s entitlement to payment, as they involved excess powers and improper motivation, lacked a public purpose and were discriminatory.

In many cases, state conduct, which did not amount to expropriation, nonetheless constituted a violation of FET, which is a more flexible standard and potentially requires a lesser degree of interference. There is no fixed definition of FET, and its assessment depends heavily on the facts of each case. State conduct that is arbitrary or discriminatory, or violates legitimate expectations, as well as instability and unpredictability of the legal or business environment, and a lack of transparency or due process, can all be relevant to determining a breach of FET. In Saluka Investments v. Czech Republic, the tribunal found that the state’s actions with respect to Saluka’s investment violated FET as they were discriminatory compared to similarly situated banks, and because the state had failed to ensure a predictable and transparent framework for the investment and refused to negotiate with the investor in good faith concerning the treatment of the investment.

To benefit from investment treaty protections, the putative claimant must qualify as an ‘investor’ and must hold a covered ‘investment’ in the host state. Depending on the treaty, incorporation in the home state is often sufficient to qualify as an ‘investor’.

A key issue for financial institutions is whether their activities qualify as protected ‘investments’. For this, it is necessary to consider both the terms of the applicable investment treaty and, often, also the requirements of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention), which provides additional criteria to qualify as an investment in arbitrations brought under the auspices of ICSID.

Unlike investment protection treaties, the ICSID Convention does not define ‘investment’. An ICSID tribunal in Salini v. Morocco considered that inherent properties of a protected investment include a substantial commitment of resources or capital, a sufficient duration, the assumption of risk and a contribution to the development of the host state. The ‘Salini test’, as this became known, is rarely followed strictly, but investment tribunals often consider factors it identifies when determining whether an investment qualifies for protection, including in some non-ICSID cases. Modern tribunals often consider the commitment of resources, a certain duration and risk. This type of assessment is particularly relevant in determining what types of financial products qualify as an investment attracting protection under a treaty.

Shareholdings, ordinarily, are considered protected ‘investments’ and frequently are expressly mentioned in investment treaties. Objections here are more likely to focus on whether the shareholder qualifies as an investor. In KT Asia Investment Group v. Kazakhstan, a shell corporation with no meaningful commercial activity or commitment of its own resources, but which simply moved shares from one entity to another, was found not to qualify as an investor. It is sometimes also argued that remotely held or indirect shareholdings are not protected investments.

Loans have been found to be protected under treaties which contain a broad definition of investments that includes ‘claim to money’ or ‘obligations’, as in British Caribbean Bank v. Belize, concerning a default under a loan. In Standard Chartered Bank v. Tanzania, however, a loan held by a subsidiary did not qualify as an investment by the parent bank where the parent had had no involvement or knowledge of the decision to purchase the loan.

Endorsed promissory notes issued by a government were found to constitute investments in Fedax v. Venezuela, as the treaty’s definition of investments included ‘titles to money’.

Depository receipts were held to fall within ‘all types of assets’ for purposes of the definition of investment in the Russia-Spain investment treaty at issue in Renta4 v. Russia. The tribunal considered that depository receipts represent a property interest covered by the treaty, despite the fact that the recorded owner is a third-party intermediary and not the beneficiary.

Convertible debentures were held to qualify as investments under the NAFTA in Fireman’s Fund v. Mexico. Although loans were excluded from protection under the treaty, Mexican law which governed the debentures treated them as capital, which was subject to regulation in Mexico by the financial authorities.

Dematerialised government bonds were found to qualify as investments in Abaclat v. Argentina and Ambiente Ufficio v. Argentina. In Abaclat, which was a mass claim on behalf of 60 thousand bondholders, the tribunal held that the inclusion of ‘obligations’ within the Argentina-Italy treaty’s definition of investment implicitly included sovereign debt and that this extended to the economic value incorporated in a credit title representing a loan, including bonds. The tribunal further noted that the sovereign debt could also constitute ‘securities’ – another example listed within the definition of investments in the treaty – and that bonds are covered investments in any event.

Similar government bonds were found not to qualify as investments in Poštová banka v. Greece, however. Poštová reflects a narrow reading of covered investments. It also illustrates the possibility that different tribunals may reach different outcomes on similar facts and considering the wording of different treaties. The tribunal differentiated Abaclat and Ambiente Ufficio by noting that, unlike the Argentina-Italy treaty, the Greece-Slovakia treaty did not mention ‘obligations’ or ‘public titles’ in its definition of investments. It also considered that covered investments should not be subject to expansive interpretation, and read the examples included in the treaty text restrictively. It further distinguished sovereign debt from private debt on the ground that it involves a contractual relationship between the creditor and an intermediary, rather than with the state, is held by large numbers of anonymous creditors and is frequently traded.

Investment treaty arbitration has experienced enormous growth in the past two decades and is continuing to develop rapidly. Investment treaty case law continues to evolve and coalesce, as does states’ treaty practice. It bears emphasising that the wording of the specific treaty at issue can have a decisive impact on the success, or otherwise, of any claim, as it did in many of the decisions discussed. States today are more focused on circumscribing the obligations they accept in modern investment treaties. Other changes are also afoot. The European Commission’s opposition to investment treaties between EU states is well known and the CJEU decided in 2018 that an ‘intra-EU’ investment treaty between The Netherlands and Slovakia was incompatible with EU law in Slovak Republic v. Achmea. The worldwide network of investment treaties, nonetheless, provides a powerful tool when facing adverse action by a state, for financial institutions as for other investors, and is likely to remain so.


Alexander Uff is a partner at Shearman & Sterling. He can be contacted on +44 (0)207 655 5961 or by email:

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Alexander Uff

Shearman & Sterling

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