Global Development

* The author acted on behalf of Clorox Spain in the proceedings before the Swiss Federal Supreme Court.

Introduction

The Swiss Federal Supreme Court (the ‘Court’) has had to address setting-aside requests against decisions rendered in investment treaty arbitrations in around 15 cases over the last 20 years.¹ In accordance with the generally low success rate of setting-aside applications before the Court,² all of these requests had been dismissed so far. With its decision 4A_306/2019 dated 25 March 2020 in proceedings between Clorox Spain (‘Clorox’) and the Bolivarian Republic of Venezuela (‘Venezuela’)³ the Court for the first time set aside an investment treaty award, finding that the arbitral tribunal in the underlying arbitration (the ‘Tribunal’) had wrongly declined its jurisdiction over the dispute based on an erroneous application of the Spain-Venezuela BIT (the ‘BIT’).

The Tribunal’s award on jurisdiction

The setting-aside application before the Court concerned an award rendered on 20 May 2019 (the ‘Award’) by a Geneva-seated Tribunal in a PCA-administered UNCITRAL arbitration between Clorox, a Spanish subsidiary of The Clorox International Company (‘Clorox International’), and Venezuela. Clorox International had created Clorox through a restructuring in 2011, in which it contributed the shares in its Venezuelan subsidiary to the newly created company, thus making Clorox the owner of the shares in the Venezuelan subsidiary and Clorox International the owner of the shares in Clorox. Venezuela argued in the arbitration that, under the circumstances, Clorox’s shareholding in the Venezuelan subsidiary did not qualify as an ‘investment’ under the BIT.

In its Award, the Tribunal agreed with this argument, finding that for there to be an ‘investment’ under the BIT, the investor not only had to be the owner of the relevant assets, but also needed to have been ‘the active subject in the act of investing.’⁴ The Tribunal based its view in particular on the wording of Art. 1(2) of the BIT, defining as ‘investments’ any assets ‘invested by investors of one Contracting Party in the territory of the other Contracting Party.’⁵ The Tribunal further associated this requirement with the need for the investor to obtain the investment in exchange for consideration and took the view that the circumstances in which Clorox had acquired the shares in the Venezuelan subsidiary did not fulfil this requirement.⁶ In particular, the Tribunal held that the fact that Clorox International had become the owner of the shares in Clorox when contributing the shares in the Venezuelan subsidiary to Clorox in the context of the restructuring could not be seen as consideration by Clorox.⁷ As a consequence, the Tribunal held that Clorox had not made an ‘investment’ under the BIT and that it did not have jurisdiction over the dispute.⁸

The investor’s challenge of the Award before the Federal Supreme Court

All awards rendered in Swiss-seated international arbitrations can be challenged directly before the Swiss Federal Supreme Court based on the five grounds listed in Section 190(2) of the Swiss Federal Private International Law Act (PILA), including a situation where ‘the arbitral tribunal wrongly accepted or declined jurisdiction.’ The Court decides on any setting-aside applications in first and last instance, thus avoiding an extended legal battle after an arbitral tribunal has rendered its final award.

Clorox applied to the Court to set aside the award on the sole ground that the Tribunal had wrongly declined jurisdiction. Specifically, it argued that the Tribunal had interpreted the BIT in a manner that was incompatible with the interpretation principles listed in Art. 31 of the Vienna Convention on the Law of Treaties and had effectively introduced new requirements for the existence of an ‘investment’ that were not envisaged by the BIT.⁹

Clorox pointed out in particular that the wording of Art. 1(2) of the BIT did not require an active act of investing and that there was nothing in the treaty to exclude purely passive investments from its scope of protection. Similarly, Clorox highlighted that the ordinary meaning of the words used in Art. 1(2) in no way implied a requirement of consideration. In any event, Clorox argued that, even assuming an element of consideration was necessary, the provision’s wording did not imply that this consideration would have to be provided by the investor himself rather than by its parent company, in this case Clorox International. In addition, Clorox stressed that nothing in the treaty suggested that the type of restructuring creating Clorox could not be seen as involving an element of consideration by the newly created company in exchange for the shares in the Venezuelan subsidiary.

Clorox added that the Tribunal’s interpretation of Art. 1(2) of the BIT was also incompatible with several other provisions in the BIT, as well as with the object and purpose of the treaty. Specifically, Clorox emphasised that Art. 1(1)(b) of the BIT, which extends the definition of ‘investor’ under the treaty to ‘juridical persons constituted in one Contracting Party but effectively controlled by investors of the other Contracting Party’, clearly showed the intention of the signatories to protect local companies with assets in the host State once they came under the control of an investor of the other party. Since these local companies did not carry out any ‘active’ act of investing and did not themselves provide any consideration at the moment of being acquired by a foreign investor, the requirements established by the Tribunal effectively meant that they could never be protected, thus depriving Art. 1(1)(b) of the BIT of any effet utile.

In addition, Clorox highlighted the provision in Art. 2(3) of the BIT, according to which the ‘Agreement shall also apply to investments made before its entry into force by investors of one Contracting Party in accordance with the legislation of the other Contracting Party in the territory of the latter Party.’ Clorox argued that, by specifically including pre-existing investments within the protective scope of the treaty, the signatories had rejected attributing any importance to the act of investing, seeing the relevant criterion for protection rather in the investor’s holding of assets in the host State’s territory after the treaty’s entry into force.

With regard to the treaty’s object and purpose, Clorox pointed out that the preamble of the BIT referred to the creation of ‘favourable conditions for investments made by investors’, thus indicating that the signatories wished to encourage not only the making of future investments but also maintaining existing ones, as also confirmed by Art. 2(3) of the BIT. Clorox argued that the interpretation given by the Tribunal to Art. 1(2) of the BIT was incompatible with this purpose for leaving numerous investments without protection. It also highlighted that the Tribunal’s interpretation arbitrarily led to different outcomes in economically identical situations in a way that could not have been intended by the signatories. Specifically, the Tribunal’s interpretation implied that an investor who had obtained the shares in a local company at the moment of being created through a restructuring was not protected, whereas an investor who in the context of its creation had received a capital contribution from its parent company and then used that capital to purchase the shares in the local company from its parent came under the protective scope of the treaty. According to Clorox, this differentiation was absurd and would force investors to resort to artificial transactions to fulfil the requirements for protection under the BIT.

Finally, Clorox argued that the requirements of an active act of investing and an element of consideration established by the Tribunal were also in conflict with the decisions of several other arbitral tribunals in previous investment treaty arbitrations.

The Federal Supreme Court’s reasoning

Without discussing all of these arguments in detail, the Court agreed with Clorox that the Tribunal had wrongly declined jurisdiction over the dispute.

The Court started by recalling its findings in previous decisions to the effect that there was no generally accepted definition of the term ‘investment’ and that this term had to be interpreted in good faith based on the ordinary meaning of the words used in the relevant treaty when considered in their context and in the light of the treaty’s object and purpose.¹⁰ It further pointed out that, while the Tribunal had based its assumption of an active act of investing as a requirement for the existence of an investment specifically on the formulation ‘invested by investors’ in Art. 1(2) of the BIT, ‘what really seems to have led the Tribunal to deny the applicant a right to protection with regard to the investments in dispute is the fact that the act of investing – as defined by the Tribunal – was not carried out by a Spanish company but by one or several American companies of the same group.’¹¹ The ‘formal’ requirement of an ‘active act of investing’ thus really appeared as a cover for an analysis of the origin of the invested funds through the requirement of an element of consideration that had to be provided by the investor himself.¹² According to the Court, it was

‘the fact that the shareholding in the Venezuelan subsidiary of the group, initially held by a US company, has been transferred to a Spanish company newly created in the context of a restructuring, the purpose of which was precisely to obtain the protection of the BIT, that seems to have been the decisive element leading the Tribunal to deny the applicant the protection under the BIT.’¹³

The Court pointed out that the definition of investment in Art. 1(2) of the BIT corresponded to the classic broad definition found in many BITs and that the BIT, unlike other treaties, did not contain any provisions seeking to prevent the practice of ‘treaty shopping’, such as a denial of benefits or origin of capital clause.¹⁴ The Court referred to several examples in other investment treaties to show that such clauses must have been known to the signatories when concluding the BIT in 1995, and that the absence of any express provisions in this regard suggested that ‘the origin of an element of consideration potentially to be provided at the moment of making the investment must be irrelevant.’¹⁵ It further highlighted that the formulation ‘invested by investors’ in Art. 1(2) of the BIT did not imply a ‘requirement of an active investment that would necessarily have to be carried out by the investor himself in exchange of consideration’, and that the BIT rather did not contain ‘any requirements going beyond the holding of assets by an investor of a contacting party in the territory of the other contracting party.’¹⁶

The Court went on to state that, in the absence of any restrictions in a treaty, the limit to legitimate nationality planning was to be seen in the prohibition of abuse of rights, an internationally recognized legal principle that also formed part of Swiss substantive public policy.¹⁷ It pointed out that the question of timing was decisive in this regard and that, if the relevant nationality was acquired only after the beginning of a specific dispute, an arbitral tribunal would already lack jurisdiction ratione temporis. By contrast, the prohibition of abuse of rights could become relevant where a restructuring was carried out so as to obtain protection with regard to a specific future dispute:

‘One indeed has to admit that the protection under an investment treaty must be refused to an investor carrying out an operation to acquire the nationality [of the home State] at a time when the dispute giving rise to the arbitration proceedings was already foreseeable and this operation must be considered, based on the rules of good faith, to have been carried out with this dispute in mind.’¹⁸

The Court added that it would not seek to define general criteria to determine when a dispute was foreseeable, but that it would be up to the relevant arbitral tribunal to consider that aspect. Since Venezuela had raised the objection of an abuse of right in the arbitral proceedings, and this objection had not yet been decided upon, the Court referred the matter back to the arbitral tribunal for further examination of this issue.¹⁹

Significance of the decision

The Court’s decision seems significant for at least two reasons.

First, when it comes to drawing a line between legitimate treaty planning and abusive conduct, the Court indicated that it would follow the approach taken by a number of arbitral tribunals over the last decade or so, by looking at the question of whether a specific dispute was already foreseeable when the investor acquired the relevant nationality.²⁰

Second, and more fundamentally, the Court showed its willingness to interpret international investment treaties independently and correct an erroneous interpretation by arbitral tribunals where necessary. While the Court had in an earlier decision indicated a certain degree of deference to the views of ‘specialist’ arbitrators in treaty-based proceedings,²¹ in this case it took a considerably more assertive approach.

The Court’s rejection of the imposition of additional protection requirements without any basis in the relevant treaty should give parties in Swiss-seated investment arbitrations comfort that there is a remedy against erroneous decisions on jurisdiction in treaty cases. As a consequence, the decision is likely to further strengthen Switzerland as a preferred seat in non-ICSID investment treaty arbitrations.

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