Investment arbitration: territory of a state
On 6 December 2024, the Supreme Court ruled on a number of cases involving investment arbitration. These cases involve investments made by natural persons or companies from one sovereign state in the territory of another sovereign state. In order to stimulate such investments on both sides, states regularly conclude bilateral investment treaties (so-called BITs). In these treaties, member states generally agree that foreign investors from the other state will be treated in (at least) the same way as 'their own’ domestic investors and that these foreign investments will be protected against expropriation.
A BIT often contains the requirement that an investment must have been obtained or made legally, according to the regulations of the host country, in order to fall within the scope of the BIT. Sometimes a BIT also contains a temporal limitation with regard to the scope of the treaty. In order to prevent investors from having to litigate before the courts of the host state in the event of expropriation, a BIT generally provides for arbitration. This guarantees the administration of justice independently of the host state, which is a reassuring thought for foreign investors. This is also the case with the BIT that was concluded between Russia and Ukraine in 1998.
In the cases on which the Supreme Court ruled on 6 December 2024, the issue at hand was how to deal with investments by Ukrainian investors in Crimea. These were investments made in the period prior to the events there in 2014. Russia incorporated Crimea in the spring of 2014. This incorporation is not recognised by the international community. The investments were made by Ukrainian individuals and entities at a time when Crimea was still indisputably part of Ukraine. At the time the investments were made, they were therefore Ukrainian domestic investments that were not protected by the BIT. However, when the investments were expropriated in the period after 2014, the investors believed that their investments did fall under the scope of the BIT.
One of the questions that arose in the annulment proceedings related to the legality requirement and thus to the validity of the arbitration agreement: who bears the burden of proof that the investments were made or obtained legally. You can read more about this in this article on our website.
Another question that arose was whether or not Crimea is part of the territory of Russia as referred to in the applicable BIT. The Court of Appeal ruled that for the purposes of the treaty, Crimea is considered to be part of the territory of Russia. To this end, the Court considered, among other things, that the text of the BIT does not show that Russia and Ukraine intended to limit the operation of the treaty to sovereign territory, so that territory that is de facto controlled by the other treaty state also falls under the concept of territory in the BIT. According to the Court, such an interpretation would also not be in line with the intention of the treaty parties to encourage and protect reciprocal investments in their territories.
According to the Supreme Court, the Court of Appeal thus correctly applied article 31 of the Vienna Convention (which regulates the interpretation of treaties) and the Court of Appeal's interpretation of the BIT was not incomprehensible. The Supreme Court could only review the court of appeal's interpretation of the relevant provision in the BIT for comprehensibility to a limited extent. This is because the BIT is foreign law (the Netherlands is not a party to it) and the Supreme Court may not rule on the correctness of the interpretation of foreign law by a lower court.
Although the Court of Appeals's judgement on the interpretation of the concept of territory in the BIT is in line with the decisions of arbitration courts and public courts in other jurisdictions, it is a shame that the correctness of that decision could not be substantively reviewed by the Supreme Court. The reasoning followed by the Court of Appeal is in conflict with international customary law, from which it follows that the term territory usually refers to the sovereign territory of a state. From the perspective of the international community, Crimea does not belong to the sovereign territory of Russia. The reasoning that territory effectively controlled by another state would also fall under the territory of that state, is derived from human rights treaties and is not comparable to an investment treaty.