In an award in MAKAE Europe SARL v Kingdom of Saudi Arabia rendered under the ICSID Convention, and the agreement between the Government of the Kingdom of Saudi Arabia (KSA) and the Government of the French Republic concerning the encouragement and reciprocal protection of investments, which entered into force with effect from 18 March 2004 (KSA-France BIT), a three-member tribunal constituted by ICSID found that it did not have jurisdiction on the basis that the claimant failed to demonstrate the requirements of a protected investment under article 1(1) of the KSA-France BIT. This award shows that the gateways for a tribunal’s jurisdiction under bilateral investment treaties (BITs) tend to be strict and require presentation of sufficient evidence for a foreign investor to pass successfully.
The claimant, MAKAE Europe SARL, a French-incorporated limited liability company, brought claims in excess of $500 million against the KSA for having taken a suite of measures, commencing in 2001, that ultimately, so the claimant alleged, resulted in the indirect expropriation of its investment in KSA in violation of the KSA-France BIT. In its defense, KSA raised a number of jurisdictional objections, including an argument that, contrary to the terms of article 1(1) of the KSA-France BIT, the underlying investment was not controlled by the claimant. In essence, the core of the respondent’s jurisdictional objections bore on the qualification of the claimant as a protected investor and of the claimant’s investment as a protected investment under the terms of the KSA-France BIT. For context, the claimant’s purported investment in KSA was the establishment and operation of an extensive retail and restaurant business that sought to introduce popular international brands to consumers in KSA. That business, in turn, was carried out by MAKAE Trading Establishment, the claimant’s local Saudi affiliate.
The tribunal’s reasoning
Adopting a sensible approach of procedural economy, the tribunal’s reasoning started from the premise that, given the cumulative nature of the gateway requirements under bilateral investment treaties, to find against its jurisdiction on one jurisdictional ground that is required under the KSA-France BIT would be sufficient to dismiss the case. As a result, the tribunal decided to deal with the question of whether the claimant did or did not control the underlying investment first. In the tribunal’s own words:
[…]. There can only be jurisdiction if the claims fall within the limits of the Respondent’s consent to jurisdiction reflected in Article 1 of the Treaty. Inter alia, there must be a qualifying investor. There must be a covered investment. The investment must be owned or controlled by the investor. Such ownership or control must be in conformity with the Respondent’s legislation. If any of these requirements is not met, the claim is not within the scope of the Respondent’s consent to jurisdiction, and the Tribunal cannot proceed.
Should the Respondent prevail on any one of them, the Tribunal can go no further and the case must be dismissed for lack of jurisdiction.
A decision by the Tribunal accepting any one of the Respondent’s several objections to jurisdiction means that the case cannot go forward. Such a decision also makes it unnecessary for the Tribunal to decide other disputed jurisdictional issues. In the interests of judicial economy, the Tribunal has chosen to address first the Respondent’s objection that the Claimant did not control the investment.
The question of control more specifically arises from article 1(1) of the KSA-France BIT, according to which “the term ‘investment’ shall refer to all assets of any nature, such as property, rights and returns, owned or controlled by an investor of one of the contracting parties in the territory of the other contracting party” (my emphasis), it being an established fact between the parties that the claimant did not have any ownership interest in the underlying investment in KSA. As such, the claimant was left to contend for its de facto control of the underlying investment, which, the parties equally agreed, could satisfy the control requirement within the meaning of article 1(1) of the BIT, as had been found by other investment tribunals in their construction of corresponding BIT language (see for example, International Thunderbird Gaming Corporation v The United Mexican States (“[i]nterpreted in accordance with its ordinary meaning, control can be exercised in various manners […] a showing of effective or ‘de facto’ control is, in the Tribunal’s view, sufficient”); Bernard Friedrich Arnd Rüdiger von Pezold et al v Republic of Zimbabwe, at paragraph 324: ‘Control of a company may be factual or effective (de facto) as well as legal; Italba Corporation v Oriental Republic of Uruguay, at paragraph 254 (“determinations as to whether an investor controls an enterprise will involve factual situations that must be evaluated on a case-by-case basis”). As regards the definition of “control” more specifically, the parties were agreed and the tribunal concurred that its meaning derived from customary international law rules of treaty interpretation in accordance with article 31 of the Vienna Convention on the Law of Treaties (VCLT), which requires that terms of a treaty to be given their ordinary meaning within the context in which they appear.
Against this background, the tribunal noted that although the parties were in agreement that control could be de facto and that as such, its determination was fact-based, they disagreed on two points, these were “(a) the character or weight of the evidence required to prove de facto control, and (b) whether a claimant must demonstrate that it has decision-making authority over the allegedly controlled investment, combined with some form of ownership or other economic interest involving an expectation of financial return”. On the former point, the tribunal held that in keeping with the established position in international investment arbitration, the standard of proof is that of “the balance of probabilities” (at paragraph 122) whilst recalling that “under Rule 34 of the ICSID Arbitration Rules applicable in this case, [the tribunal] is the judge of the probative value of any evidence adduced.” On the latter point, the tribunal did not hesitate to find against the respondent: “The [KSA-France BIT] clearly establishes ownership or control as alternative bases of jurisdiction. The contention that control requires ownership or other form of economic interest disregards this distinction, and conflicts with the ordinary meaning of the Treaty’s words”. The tribunal also took care to confirm that “there can be de facto control where the evidence establishes that a small and specialized component of a corporate family performs a role or roles that determine the overall character and direction of an enterprise”.
Applied to the facts at hand, the tribunal essentially conceded that, if proven on the basis of the evidence before it, it was possible for the claimant to exert the required de facto control over the underlying investment in KSA by establishing and managing the implementation of the MAKAE brand strategy in the GCC countries, and more specifically KSA. However, the claimant had not been able to do this. To the contrary, on closer examination, the tribunal found that the evidence presented on the subject was entirely inconsistent and as such, the claimant’s proposition of the claimant’s exercise of de facto control over the underlying investment within the meaning of Article 1(1) of the KSA-France BIT did not hold.
On that basis, the tribunal came full circle, concluding as follows:
[…] the Tribunal’s decision that the Claimant has not proved that it controlled the claimed investment means that the Tribunal lacks jurisdiction and that its claim must be dismissed. Accordingly, it is not necessary or an efficient use of resources for the Tribunal to consider how it might rule upon the many other disputed jurisdictional issues. As the Tribunal lacks jurisdiction, no further decisions are required as to these.
Conclusion
This award sounds a warning to investors that seek to bring claims under international investment treaties too light-heartedly, in complete oblivion to their burden to prove that they meet the jurisdictional threshold requirements under the investment treaty upon which they intend to rely. This will even be the case where the applicable jurisdictional gateways under the relevant investment treaty are comparatively wide. Even if tribunals are favourably disposed to give concepts such as de facto control a wide meaning in order to broaden the scope of protected investments under the relevant investment treaty, in doing so, tribunals will adhere to a strict application of the evidential burden of proof. A failure to meet the evidential burden of proof can come at a significant costs if, as in the present case, the unsuccesful claiming party is ordered. to bear the lion share of the counterparty’s costs of the phase on jurisdiction (here around $10 million).
