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This article deals with the matter of jurisdiction in the third ICSID (International Centre for Settlement of Investment Disputes) case with the participation of Ukraine¹, which is Tokios Tokeles v. Ukraine, ICSID Case No.ARB/02/18². This arbitration case was initiated in August 2002 by Tokios Tokeles (Claimant), a company owned 99% by Ukrainian citizens³ and incorporated in the Republic of Lithuania with actual top management by Ukrainian owners. The Claimant’s request for arbitration was registered by the Centre in December 2002. The Claimant alleges that the governing authorities of Ukraine (most of all, the tax authorities), beginning from February 2002, “engaged in a series of unreasonable and unjustified actions” against Taki Spravy, a wholly owned Ukrainian subsidiary of the Claimant (managed by the same Ukrainian citizens who own and manage the Claimant), “that adversely affected the Claimant’s investment”⁴. The Tribunal was constituted of three members: Mr.Daniel Price, a national of the United States, appointed by the Claimant; Professor Piero Bernardini, a national of Italy, appointed by the Respondent and Professor Prosper Weil, a national of France, appointed by the ICSID after consultation with the parties to serve as the President of the Tribunal.

At the very beginning of the proceedings, the Respondent raised a number of jurisdictional objections and requested the Tribunal to consider these objections as a preliminary matter, i.e. prior to consideration of the merits of the case. Despite the Claimant’s objections to such an approach, the Tribunal agreed to the so-called “bifurcation”, i.e. dealing with the Ukraine’s objections on jurisdiction as a preliminary matter. The parties presented four written submissions on the matter, two from each party. On 10 December 2003 the Tribunal held an oral hearing on jurisdiction in Paris, France. On 29 April 2004 two documents were produced: the Decision on Jurisdiction in favour of the Claimant (“Decision” — 47 pages), signed by the members of the Tribunal Mr. Price and Professor Bernardini, and the Dissenting Opinion (“Dissenting Opinion” — 19pages) by the President of the Tribunal Professor Weil⁵ who decided to resign from the Tribunal due to a disagreement with the majority of the Tribunal on a matter of principle. The arbitration proceedings were suspended and the parties were invited by the ICSID to agree on the new President of the Tribunal within 45 days.

An untypical split between the members of the Tribunal, when the President of the Tribunal takes a dissenting position compared to the parties’ appointed arbitrators, occurred “on the issue of principle raised in this case for the first time in the ICSID’s history” (Dissenting Opinion, p. 1). The major jurisdictional argument raised by the Respondent was that the Claimant, although formally incorporated in the Republic of Lithuania as required by Article 1(2)(b) of the BIT between Ukraine and Lithuania⁶, in fact, is just a nominal Lithuanian legal entity (without substantial business activity comparable with its more than USD 6 million investments in Ukraine), which is legally and factually controlled by Ukrainian nationals (such control was properly proved in the course of the proceedings) and all the investments of which in Ukraine are actually Ukrainian by origin of capital (this was supported by a careful Respondent’s analysis of each of the numerous Claimant’s investments). Therefore, in the Respondent’s opinion, the Claimant’s investments do not possess an essential quality of “international investment” under the Preamble of the ICSID Convention⁷. In other words, the Respondent argued that “to find jurisdiction in this case would be tantamount to allowing Ukrainian nationals to pursue international arbitration against their own government, which … would be inconsistent with the object and purpose of the ICSID Convention” (Decision, p. 8). In the Respondent’s view, this situation is untypical for ICSID practice and requires a realistic rather than formalistic approach.

The majority of the Tribunal took a legally formal position based largely on the language of the BIT⁸ and not on the purpose and object of the ICSID Convention as a special procedural treaty. “The Tribunal concludes that the Claimant is an “investor” of the Lithuania under Article 1(2)(b) of the BIT and “a national of another Contracting State”, under Article 25 of the Convention” (Decision, paragraph 71, p. 30). Further, “Even assuming, arguendo, that all of the capital used by the Claimant to invest in Ukraine had its ultimate origin in Ukraine, the resulting investment would not be outside the scope of the Convention. The Claimant made an investment for the purpose of the Convention when it decided to deploy capital under its control in the territory of Ukraine instead of investing it elsewhere. The origin of the capital is not relevant to the existence of an investment” (Decision, paragraph 80, p. 36, original emphasis preserved). And finally, “in our view, the ICSID Convention contains no inchoate requirement that the investment at issue in a dispute have an international character in which the origin of the capital is decisive” (Decision, para­ graph82, p. 36).

The approach of the majority of the Tribunal on the matter of principle is, in the view of the President of the Tribunal, “at odds with the object and purpose of the ICSID Convention and might jeopardize the future of the institution. In other words, my dissent does not relate to any particular aspect of this brilliantly drafted Decision, or to any particular assessment of the facts, but rather to what I would call the philosophy of the Decision” (Dissenting Opinion, paragraph 1, p.1).

The President of the Tribunal stresses: “the ICSID arbitration mechanism is meant for international investment disputes, that is to say, for disputes between States and foreign investors. It is because of their international character, and with a view to stimulating private international investment, that these disputes may be settled, if the parties so desire, by an international judicial body. The ICSID mechanism is not meant for investment disputes between States and their own nationals” (Dissenting Opinion, paragraph 5, pp.2-3, original emphasis preserved). Further, the President asserts that “the Decision rests on the assumption that the origin of the capital is not relevant and even less decisive. This assumption is flying in the face of the object and purpose of the ICSID Convention and system as explicitly defined in the Preamble of the Convention and in the Report of the Executive Directors” (Dissenting Opinion, paragraph 6, p. 3, original emphasis preserved).

Another “key feature of the ICSID mechanism” that, in the President’s view, the Decision ignores, is the exclusivity of the ICSID arbitration under Articles 26 and 27 of the ICSID Convention. Such exclusivity means that consent of the parties to arbitration under the Convention excludes diplomatic protection and jurisdiction of domestic courts as to such dispute. “It follows that ICSID arbitral tribunals have to be particularly cautious when they determine their jurisdiction. An unwarranted extension of the ICSID arbitral jurisdiction would entail an unwarranted encroachment on both the availability of diplomatic protection and the jurisdiction of domestic courts” (Dissenting Opinion, paragraph 8, p. 4).

The President of the Tribunal also suggests that “while the Contracting Parties to the BIT are free to confer to the ICSID tribunal a jurisdiction narrower than that provided for by the Convention, it is not for them to extend the jurisdiction of the ICSID tribunal beyond its determination in the Convention” (Dissenting Opinion, paragraph 13, p. 7)⁹. The President also observes: “Chapter II of the Convention (‘Jurisdiction of the Centre’), which, in the words of the Report of the Executive Directors, defines ‘the limits within which the provisions of the Convention will apply and that the facilities of the Centre will be available’ is the cornerstone of the system. Even assuming that the definition of these ‘limits’ — in particular, the definition of the key term ‘national of another Contracting Party’ — is left to the discretion of the Parties, this, as the Decision recognizes, holds true only insofar as this discretion is ‘reasonable’. There can be no question of leaving unconditionally to the parties the task of determining the scope of application of the Convention along with the rights and duties it places on both parties. This would frustrate the system by putting its extent in the hands of the parties and at their discretion, thus making the provisions of its Chapter II, and more particularly of its central and crucial Article 25, a purely optional clause. This, in my view, is unacceptable. This, however, is what the Decision does” (Dissenting opinion, paragraph 28, pp.18-19, footnotes omitted, original emphasis preserved).

The final conclusion of the President demonstrates his concern about the future of the ICSID system. “The ICSID mechanism and remedy are not meant for, and are not to be construed as, allowing — and even less enco­ ura­ ging— nationals of a State party to the ICSID Convention to use a foreign corporation, whether preexistent or created for that purpose, as a means of evading the jurisdiction of their domestic courts and the application of their national law. It is meant to protect— and thus encourage — international investment. It is regrettable, so it seems to me, to put the extraordinary success met by ICSID at risk by extending its scope and application beyond the limits so carefully assigned to it by the Convention. This might dissuade Governments either from adhering to the Convention or, if they have already adhered, from providing for ICSID arbitration in their future BITs or investment contracts” (Dissenting Opinion, paragraph 30, p. 19, original emphasis preserved).

The authors of the present article, as the counsels to the Respondent in the pending case (the next stage is the merits of the case), attempted to refrain from presenting their own characteristics of the above discussion between the members of the Tribunal, which, however, can be easily assumed. We did not focus on the other arguments of the parties and the conclusions of the Tribunal, which are beyond the scope of the key debate on jurisdiction in this arbitration case. The question of principle, which was raised in this case for the first time in the ICSID’s history, deserves to be carefully considered and evaluated by the future ICSID tribunals, as well as the Contracting States to the ICSID Convention.

1 The first case under the ICSID Additional Facility was Joseph C. Lemire v. Ukraine (ARB(AF)/98/1; lasted 1998-2000, concluded by the Settlement Agreement on the Claimant’s initiative). The Tribunal’s Award in the second ICSID case Generation Ukraine Inc. v. Ukraine (ARB/00/9; lasted 2000-2004) was unanimously taken in favour of Ukraine. 2 The views and characteristics, if expressed in this article, are the personal views of its authors only. 3 “There is no dispute that nationals of Ukraine own ninety-nine percent of the outstanding shares of Tokios Tokeles and comprise two-thirds of its management” (p. 8 of the Decision). 4 Quotation made from the Tribunal’s Decision on Jurisdiction, p. 1. 5 Under the parties’ agreement, both documents have been published by the Centre on its website (http://www.worldbank.org/icsid/cases/awards.htm). 6 BIT (bilateral investment treaty) is the Agreement between the Government of Ukraine and the Government of the Republic of Lithuania for the Promotion and Reciprocal Protection of Investments signed on 8 February 1994 and in force since 27 February 1995. The respective authentic English text is: “2. ‘Investor’ means: … (b) in respect of Republic of Lithuania: … any entity established in the territory of the Republic of Lithuania in conformity with its laws and regulations;”. 7 The Convention on the Settlement of Investment Disputes between States and Nationals of Other States of 1965. The relevant authentic English text is: “The Contracting States Considering the need for international cooperation for economic development, and the role of private international investment therein;” (emphasis supplied). 8 “The jurisdiction of the Centre depends first and foremost on the consent of the Contracting Parties, who enjoy broad discretion to choose the disputes that they will submit to ICSID” (Decision, paragraph 19, p. 7) with reference in footnote 4 to the language of the Report of the Executive Directors “[c]onsent of the parties is the cornerstone of the jurisdiction of the Centre”). In this case the Ukraine’s consent is objectively implied in the BIT, and in the well recognised absence of precise detailed definition of “national of another Contracting State” (and “investment”), “[t]hus, we begin our analysis of this jurisdictional requirement by underscoring the deference this Tribunal owes to the definition of corporate nationality contained in the agreement between the Contracting Parties, in this case, the Ukraine-Lithuania BIT” (Decision, paragraph 25, p. 10). The analogous method of reasoning with respect to “investment” is exercised in paragraph 73 of the Decision (pp. 31-32) with reference to ICSID cases and publicists. 9 Cf.: “The BIT cannot bestow jurisdiction on an ICSID tribunal beyond the jurisdiction bestowed on it by the ICSID Convention” (Dissenting opinion, paragraph 29, p. 19).