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Redefining Micro-Investment Disputes Before the ICSID During COVID-19

Article by Parth Tyagi and Achyutam Bhatnagar,

Since the start of the novel coronavirus (COVID-19) pandemic, global investment levels have seen a significant decline. Estimates from late March by the International Monetary Fund (IMF) revealed that investors had removed $83 billion from developing countries since the beginning of the COVID-19 crisis—the largest capital outflow ever recorded. Similarly, the UN Conference on Trade and Development (UNCTAD) noted that the global Foreign Direct Investment (FDI) flows are likely to contract between 30 percent to 40 percent during 2020-21. The projected decrease in foreign investment will be coupled with an increase in skepticism by investors across the globe, who might want special assurance that their investments will be protected from arbitrary state actions (under the ruse of emergency), in case they seek to carry forward with an investment plan. Also, a number of investors will likely resort to micro-investments, which are investments worth less than $5 million.

These shifts call for a better investment protection mechanism, particularly for micro-investors, from tribunals operating under different institutional rules, so as to regain investors’ trust. The scope of this blog is confined only to possible improvements in the protection mechanism for micro-investors under the International Centre for Settlement of Investment Disputes (ICSID/Centre).

What Constitutes an Investment Under the ICSID?

ICSID was developed as an instrument of international policy for the promotion of investments and economic development. The jurisdiction of the ICSID depends upon the meaning of the word ‘investment’ according to Article 25 of the ICSID Convention. The ICSID itself has not defined what constitutes ‘investment’ under Article 25, as it does not mention the minimum threshold at which cash flow is considered an investment.

To understand what constitutes an investment, ICSID Tribunals have employed the Salini test, which provides a four-factor approach to identifying an investment: (1) the contribution of an investment in the host state; (2) the duration of the investment; (3) an assumption of risk following the investment; and (4) the “contribution of the investment to the economic development of the host state.” Although the fourth factor promotes the ideological foundation of the ICSID, which includes the promotion of a cooperative state approach to economic development, it bars micro-investment disputes from coming under the ICISD’s jurisdiction.

Since 2001, with only a few exceptions, most ICSID Tribunals applied the Salini test blindly and strictly when determining whether a dispute arose out of an investment, irrespective of the Vienna Convention. The ICSID Tribunal offered a helpful solution to this potential inconsistency in Ceskoslovenska v. Slovak that should be taken seriously today.

How has the ICSID dealt with Micro-Investment Disputes?

Since the adoption of the Salini test, micro-investment cases have been bereaved of ICSID’s jurisdiction, due to their inability to satisfy the ‘Contribution of the Investment to the economic development of the host state’ criterion of the Salini test. The following are examples of relevant micro-investment cases before the ICSID:

Mitchell was one of the first ICSID cases in which the Tribunal applied a strict form of the Salini test to determine whether a flow of money constituted an investment or not. Mitchell, a U.S. citizen, started a small law firm in the Congo. The law firm was later taken over by the government authorities and closed for eight months. To recover the losses he suffered, Mitchell filed a case before the ICSID under the appropriate Bilateral Investment Treaty (BIT). The Tribunal’s initial award favored Mitchell. However, the decision was later annulled by the Ad Hoc Committee.

Because Mitchell’s economic contribution could not satisfy the fourth factor of the Salini test, the Ad Hoc Committee determined that Mitchell had made an insignificant investment in the Congo. It held that the law firm was not readily recognizable as an ‘investment’ but instead as a somewhat uncommon operation from an investment standpoint. 

This case was among the few in which the ICSID rejected the strict application of the Salini test by emphasising the importance of doing away with its fourth factor. In this case, the Malaysian Government entered into an agreement with Salvors, a marine salvage company, to search a shipload that sank in 1817. In 1995, the Claimant brought forward the dispute concerning remuneration for the services offered.

The matter was taken up to the ICSID, wherein the initial award was granted in favor of Malaysia. The Tribunal concluded that the size of the contribution made by Salvors was not significant and did not lead to any contribution to the economic development of the state. However, the Ad Hoc Committee, understanding micro-investors’ need for recognition by the ICSID, annulled the Tribunal’s award. The Committee noted that the Tribunal’s decision wrongly excluded small contributions from the ICSID’s jurisdiction. It further observed that the Tribunal’s approach ran counter to the decision of the drafters of the ICSID Convention to reject a monetary floor for the amount of an investment.

Changing the Contours of the Salini Test During COVID-19

Assuming that the changing times call for changing norms, the ICSID must do away with the fourth prong of the Salini test, at least during the pandemic. Since its inception, the Salini test has been accepted as a valid means of identifying investment across the globe, with the ICSID applying the test strictly in a majority of the cases before it. Not only will micro-investments dominate the foreign investment landscape during the pandemic, but also, the ICSID has historically found micro-investors to make only insignificant contributions to the economic development of their respective host states. If the fourth factor of the Salini test is upheld, then micro-investors will have no redressal mechanism, which in turn will reduce the inflow of money into a state.

Furthermore, inaction in this regard might lead to a conscious abuse of the investors at the hand of the host state under the guise of emergency. According to Hogan Lovells’ April 2020 report, COVID-19: will State measures give rise to a new set of investment claims?, such instances have already been reported in Europe and China. States have expropriated private supplies of protective equipment for use in state-run hospitals or permitted the government seizure of private hotels and hospitals to house patients. As stated in the report, “the amount of compensation provided for such seizures, if any, has varied significantly between countries.”

The ICSID should be flexible as it considers what defines an investment. According to a UNCTAD study, the drafters of the ICSID Convention chose not to include a precise definition, in part “to enable the Convention to accommodate both traditional types of investment, in the form of capital contributions, and new types of investment, including service contracts and transfers of technology, which might change with time. This legislative history explicitly shows the drafters’ intent to leave the meaning of ‘investment’ to change over time. The exclusion of contemporary micro-investors from the ICSID’s jurisdiction would undermine the ICSID’s foundational principles, which call for the “availability of facilities for international arbitration to Contracting States and nationals of other Contracting States.”

Again, the ICSID was developed as an instrument of international policy for the promotion of investments and of economic development. At least while the pandemic lasts, the ICSID Tribunal needs to adopt a more inclusive formula for classifying a transaction as an investment. The decision of the Tribunal in Ceskoslovenska v. Slovak might be the most appropriate one to adopt for investment disputes arising during the period of the COVID-19 pandemic.

The Tribunal noted that a non-investment transaction may be treated as an investment for the purposes of the ICSID Convention if it contributes to the economic development of a ‘contracting state’. This criterion directly contradicts the fourth factor of the Salini test in that it expands the category of transactions that ‘contribute to the economic development of the host state in order to be considered as an investment’ to include “international transaction[s] which contribute[] to cooperation designed to promote the economic development of a Contracting State.” Given the increased likelihood of less and smaller investment outflows dominating the global landscape, the Tribunal’s approach in Ceskoslovenska v. Slovak seems more plausible. The Ceskoslovenska approach would not only simplify jurisdictional requirements under the ICSID, but it would also encourage individual or small investors to carry out international investment transactions.


Parth Tyagi and Achyutam Bhatnagar are fourth year students at National Law Institute University, Bhopal and National Law University, Orissa, respectively.

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Feb 04, 2022

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