Investment arbitration and financial products



Over the past few years, it has been common knowledge that banks and other financial institutions do not afford arbitration much interest, believing that this mechanism of dispute resolution is at odds with their industry. We do not demonstrate here that these views are based on misconceptions, but it should be pointed out that when a dispute against a host state escalates, arbitration (in the context of the available investor-state dispute settlement setting) seems to be the only effective means to obtain redress. In fact, a few examples in the investment arbitration arena show that banks and financial institutions should be more open to arbitration and particularly investment arbitration when it comes to protecting their investments.

However, when dealing with financial products, more specifically sovereign debt products, two major obstacles can be (and indeed have been) raised against the protection accorded to foreign investors.

On one hand, some claims arise out of financial instruments where the funds are not channelled directly into the territory of the host state, but are merely made available to it elsewhere, which may give rise to the question of fulfilment of the requisite territory. On the other hand, it may also be debated whether a particular financial product falls within the ordinary meaning of ‘investment’ provided for in the provision of the relevant international instrument for protection of investments, and more particularly, whether provision contains an exhaustive list of ‘investments’, thus according, or not, protection to such financial products.

Indeed, during the first cases in which investment tribunals had to deal with sovereign debt products, the respondent states objected to the claim by contending that the ‘investment’ at stake had not been made within its ‘territory’.

In 1997, an International Centre for Settlement of Investment Disputes (ICSID) tribunal decided a dispute brought by FEDAX against Venezuela, in relation to negotiable instruments acquired in the secondary market, in the form of promissory notes. However, Venezuela contended that the funds involved in that transaction had not made their way into Venezuelan territory.

However, the tribunal was not impressed by this argument and considered that a loan qualifies as an investment within ICSID’s jurisdiction. It went on to further state that, “[i]t is a standard feature of many international financial transactions that the funds involved are not physically transferred to the territory of the beneficiary, but put at its disposal elsewhere. In fact, many loans and credits do not leave the country of origin at all, but are made available to suppliers or other entities. The same is true of many important offshore financial operations relating to exports and other kinds of business”.

In 2011, in Abaclat v Argentina, an ICSID tribunal decided upon its jurisdiction to hear a case dealing with dematerialised government bonds. The tribunal held that, “with regard to an investment of a purely financial nature, the relevant criteria cannot be the same as those applying to an investment consisting of business operations and/or involving manpower and property. [They] should be where and/or for the benefit of whom the funds are ultimately used, and not the place where the funds were paid out or transferred. Thus, the relevant question is where the invested funds ultimately made available to the Host State and did they support the latter’s economic development”.

In a similar vein, in 2012, the investment tribunal in Deutsche Bank AG v Sri Lanka dealt with commodity hedging agreements (a derivative financial product), and in 2013, a panel in Ambiente Ufficio v Argentina considered whether dematerialised government bonds could be protected under the relevant bilateral investment treaty (BIT).

In these cases, investment tribunals showed deference to these financial products and considered them to be included in the scope of protection of the relevant BIT, thus deserving redress in face of states’ measures that constituted a violation of the standards of protection (mainly, fair and equitable treatment, and prohibition of expropriation without due compensation). This seemed to show a trend towards broadening the scope of protection accorded by international instruments.

However, a fourth case, decided in 2015 (Poštová Banka v Greece), has muddied the waters, and considered that government bond issuances acquired in the secondary market (via Clearstream) did not deserve protection under the relevant BIT. In so doing, the tribunal relied specifically on the second kind of obstacle: the definition of ‘investment’ according to the specific treaty provision.

Indeed, and turning now to the second type of issue, it should be stressed that virtually every international instrument for the protection of foreign investments contains a generic provision to the effect of considering that an investment is ‘every kind of asset’. This general clause will in principle be followed by an illustrative list of ‘assets’ considered as ‘investment’, such as “movable and immovable property” and “loans, claims to money or to any performance under contract having a financial value”. This would in principle be sufficient to consider that a government bond issuance, even if acquired in the secondary market, should be included in the ordinary meaning of the treaty provision.

Nonetheless, the tribunal considered that, while the definition of ‘investment’ contained in the BIT would be broad enough to include a sovereign bond, meaning was to be given to the list contained in the provision.

The tribunal considered that if the broad definition would suffice to include investments not expressly provided for in that list, then the examples of that list would be redundant. This rationale would mean that to classify an investment as protected, the treaty would have to set forth an express provision to that effect or at least contain a provision similar to this kind of ‘investment’, which was not the case.

Subsequently, the tribunal relied on that list to determine whether the Greek government bonds fit into any of the categories contained therein, and concluded that those sovereign bonds could not equate to any ‘company debenture’ (for the purposes of Art. 1(1)(b) of the relevant BIT) nor to ‘claims of money’ (Art. 1(1)(c)). The underlying consideration was that there existed no privity, as Poštová banka was in no way party to any agreement entered into with Greece because it had acquired the bonds in question via an intermediary in the secondary market.

In the words of the tribunal, “[T]he creditor in a loan is generally a bank or group of banks, normally identified in the pertinent agreement. Bonds are generally held by a large group of creditors, generally anonymous. Moreover, unlike creditors in a loan, the creditors of bonds may change several times in a matter of days or even hours, as bonds are traded. The tradability of loans or syndicated loans is generally limited, and precisely because loans are generally not tradable, they are not subject to the restrictions or regulations that apply to securities”.

The tribunal continued: “(...) loans involve contractual privity between the lender and the debtor, while bonds do not involve contractual privity. The lender has a direct relationship with the debtor – in the case of public debt, the state – as party to the same contract – the loan agreement – while in the issuance of bonds the contractual relationship of the State is with the intermediaries – in the case at hand with the participants and the primary dealers. The holders of the bonds – the ultimate creditors, holders of the bonds – have a contractual relationship with the intermediary or the clearing house where the bonds are acquired or both”.

Considering these aspects, the tribunal decided it did not have jurisdiction to hear the case.

Although the decision of the tribunal in Poštová Banka rested almost exclusively on the analysis of the definition of investment provided for in the treaty at hand, it nevertheless contained interesting elements: the tribunal found that the investment could not fit into any of the categories listed in the treaty because Greece had not entered into a contract with the ‘investor’; further, the tribunal seem to have afforded a great deal of relevance to the fact that the bonds at stake were ‘tradable’, that is, freely negotiable. The privity element was missing and there was a tradable asset, which was in clear contrast with other financial products that had been the subject-matter of previous cases.

Therefore, can we draw the conclusion that, at least for financial products, we need to look at investments that are ‘non-tradable’ and that are a result of the bargain between the host state and the investor? Arguably, the privity character would be of considerable relevance.

However, to consider that the investment must have been entered into with the host state would be a step too far that would leave numerous investments outside of the scope of protection provided for in virtually every treaty for the protection of investments.

In any event, it seems that the decision in Poštová Banka is not receptive to the understanding of the current financial market, especially as financial products are currently negotiated in the secondary market and through brokers and intermediaries that play a fundamental role in raising funds to the issuer of the various available financial products.

Nevertheless, Poštová Banka should not serve as a further deterrent to banks and financial institutions when considering arbitration as a method of dispute resolution. Emerging trends evidence that at least one obstacle, namely the fulfilment of the requisite territory, provides less cause for concern as tribunals tend to afford greater importance to who or where benefits from the funds as opposed to the physical territorial location. With regard to the second obstacle (definition of ‘investment’ according to the specific treaty provision), it remains to be seen whether future tribunals will follow the reasoning of Poštová Banka, therefore alienating many investments contained in most investment protection treaties.


Duarte G. Henriques is the founding partner and Victoria Crozier is a legal assistant at BCH Lawyers. Mr Henriques can be contacted on +351 917 895 543 or by email at: Ms Crozier can be contacted on +44 7772 453221 or by email:

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Duarte G. Henriques and Victoria Crozier

BCH Lawyers

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