David Scott discusses jurisdictional issues in international arbitration with particular focus on the case of Zhinvali Development Ltd v Republic of Georgia.
IN domestic arbitrations, the jurisdiction of a person to hear a case is governed by the terms of the particular contract, supported by local laws. Together, these usually provide an efficient process for dealing with challenges to jurisdiction. Internationally, however, the process can be more difficult. The January 2003 arbitration award in the case of Zhinvali Development Limited v Republic of Georgia provides a good example and also serves to introduce to the reader a basis of international arbitration which has, only over the last few years, come to the fore.
Traditionally, any company investing in a ‘foreign’ State will be wary of submitting any disputes with its contracting party in the host State to the jurisdiction of the courts of that State.
This is particularly so in developing States where the legal system may not be as advanced as in more developed countries. In such situations, the usual compromise has been to agree that disputes be resolved through international arbitration, under some defined set of rules, with the jurisdictional seat of the arbitration being in a third party State.
Such arrangements, however, have not always helped the investing party in circumstances in which the host State (or its Government) may have expropriated or confiscated the investment. In this case, any claim for losses will inevitably be met by the defence of ‘Act of State’, or that the parties are in any event subject to the mandatory laws of the host State. The investor would usually be confined to seeking to persuade its own Government to lodge proceedings against the host State, usually in the International Court of Justice in The Hague. Such remedy would not always be of great use to the investing party, in particular given that its own Government is more likely to want to attempt to deal with the host State on a pragmatic and diplomatic basis.
A new breed of bilateral and multilateral investment treaties (“BITs” and “MITs” respectively) is, however, providing investors with new hope.
Their purpose, essentially, is to promote foreign investment into the host State, usually by guaranteeing fair and non-discriminatory treatment to investors, ‘due process’, and unrestricted return of capital.
Most importantly for present purposes, the more recent BITs and MITs entitle an investor, in the face of unwarranted expropriation of its investment by the host State, to commence arbitration pro-ceedings directly against the host State. In addition, that investor is not obliged to seek any remedy arising out of or in connection with the underlying contract with the other contracting party in the host State. The case of Zhinvali Development Limited v Republic of Georgia arose out of the attempted negotiation, by Zhinvali, of a contract in Georgia for the rehabilitation of a hydro-electric power plant and its tailrace tunnel. Negotiations between Zhinvali and Georgia, to conclude agreements to finance and implement the rehabilitation, failed, Zhinvali blaming the failure upon, variously, Georgia’s breach of contract, promissory estoppel and unjust enrichment.
Zhinvali, a company incorporated in the Republic of Ireland, filed a request for arbitration with the International Centre for the Settlement of Investment disputes (“ICSID”) in Washington, pursuant to the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of other States (“the ICSID Convention”). The Republic of Ireland and the Republic of Georgia are both contracting States to the ICSID Convention. ICSID arbitration only applies where the legal dispute is between a Contracting State and a national of another Contracting State (as was the position in the Zhinvali case).
The jurisdiction issue in the Zhinvali case was based on Article 25 of the ICSID Convention which provides that the “… jurisdiction of [ICSID] shall extend to any legal dispute arising directly out of an investment, between a Contracting State… and a national of another Contracting State which the parties to the dispute consent in writing to submit to [ICSID]…”.
Georgia challenged the jurisdiction of the tribunal on two principal grounds; namely (i) that Georgia had not “consented” to the jurisdiction of ICSID for the purposes of Article 25 (there was, for example, no BIT providing for ICSID arbitration in force between Ireland and Georgia at the time Zhinvali filed its Request for Arbitration), and (ii) there was no qualifying ICSID “investment” for the purposes of that Article.
With regard to the former, the tribunal decided that domestic Georgian legislation providing that “… disputes between a foreign investor and a government body, if the order of resolution is not agreed between them, shall be settled at the Court of Georgia or at the International Centre for the Resolution (sic) of Investment Disputes…” amounted to the necessary consent. The tribunal, therefore, then had to hear the Respondent’s supplementary case that the costs of the “development phase” of an aborted transaction were not, in the words of the tribunal in the earlier ICSID case of Mihaly International Corporation v Democratic Socialist Republic of Sri Lanka, ‘swept up’ under the ‘umbrella’ of an integrated, three phase investment project because the ‘project cycle’ was never completed; i.e. the development phase costs did not constitute an ‘investment’. In short, the tribunal agreed, and decided that ICSID did not have jurisdiction and that the tribunal was not empowered to hear the merits of Zhinvali’s claim.
The stakes in what was clearly going to be a high value claim, were, indeed, themselves high. The reasoning includes a dissenting opinion which notes that “a narrow interpretation of ‘investment’ would not only tend to discourage the free flow of capital into developing countries; it would also discourage future litigants from resorting to ICSID”. Despite winning the jurisdictional debate, costs were awarded by the tribunal against Georgia in light of the very late stage at which the jurisdictional challenge had been made, this award amounting to around US $600,000.
In conclusion, the door is by no means closed on the interpretation of the term ‘investment’ as it applies in many BITs and MITs. It may well be that the Zhinvali decision encourages more States to sign up to BITs and MITs. This itself may present investors the opportunity of making claims directly against the host State for all variety of investments jeopardised by the host State, and having the scope of the term ‘investment’, as it might apply to the particular BIT or MIT in question, tested further.
David Scott is a partner with McGrigors in Edinburgh (tel: +44 131 777 7023, email:
david.scott@mcgrigors.com