The use of trusts in investment arbitration

The use of trusts in investment arbitration Abstract This article is the first to address the use of trusts in investment arbitration, and particularly all those instances in which trust structures may have a direct bearing on investment treaty claims. As a matter of fact, the increasing use of trusts in transnational business has created a whole new set of considerations that call for the attention of users and practitioners alike. Owing to the intricacies of trusts, and in the light of a series of recent cases, this article sets out to explore such questions as standing to sue, authorization to bring claims on behalf of the trust or the assets held in trust, whether the trustee, the beneficiary or other trust parties should be considered covered investors, whether the trust itself may have standing, whether any resulting damages award should form part of the trust assets and be distributed in accordance with the trust deed, as well as other admissibility and quantum-related questions that may arise when dealing with trusts. All in all, this article maps the multitude of issues that trust structures raise in investment arbitration. And while it may be too early to draw any conclusive remarks based on the cases discussed in this article, it would appear that trusts test the somewhat laggard abilities of investment treaties to entertain the complexity of modern-day investment practices. 1. INTRODUCTION The growth of investment treaty arbitration and the widespread use of trusts in transnational business have created a whole new set of considerations that call for the attention of users and practitioners alike. While corporate practice suggests that trusts are mainly used for tax reasons, and less so in (investment treaty) nationality planning, the spike in recent investment treaty cases involving trusts indicates that trusts, for one reason or another, may be at the forefront of investment treaty litigation. Be that as it may, the intricate legal issues associated with the use of trusts along with the idiosyncrasies of investment treaty arbitration may frequently lead to fierce legal battles that neither the structuring attorney nor the arbitration practitioner had anticipated. For their part, states and state entities are increasingly becoming aware of the importance of trusts and apart from latching on their intricacies to mount jurisdictional and other defences; they themselves have become heavy users of trust structures. As a matter of fact, sophisticated sovereign funds operate through the use of various trust structures and most importantly, States make use of trust instruments in order to protect their assets from disgruntled investors and other creditors.1 1 Such practices fall outside the scope of this article but are nevertheless an important and currently evolving issue of the law of state immunity. See eg AIG Capital Partners, Inc v The Republic of Kazakhstan [2005] EWHC 2239 (Comm) (involving the enforcement of an ICSID award). Setting out from the above, this article attempts to map all those instances in which trust structures may have a direct bearing on investment treaty claims. This article therefore discusses the main characteristics of trusts and the relevance of trust taxonomies to investment treaty arbitration (Section 2), the main jurisdiction (Sections 3–5) and admissibility (Section 6) issues that could arise in respect of trusts, and certain quantum considerations that may hinge on the intricacies of trusts (Section 7). 2. CLASSIFICATION OF TRUSTS AND ITS RELEVANCE TO INVESTMENT TREATY ARBITRATION The protagonists of the trust structure are typically three: the settlor, the trustee, and the beneficiary.2 2 See Lynton Tucker and others, Lewin on Trusts (Sweet & Maxwell, 19th edn 2017) 1-001-035 (citing David J Hayton, Underhill and Hayton, Law Relating to Trusts and Trustees (Lexis Nexis, 15th edn) 3; LA Sheridan, Keeton and Sheridan, Law of Trusts (Barry Rose Law Publishers, 12th edn) 3; Re Marshall’s Will Trusts [1945] Ch 217, 219; Green v Russell [1959] 2 QB 226, 241. See also Robert Pearce and John Stevens, The Law of Trusts and Equitable Obligations (2006) 157–59. The term ‘trust’ describes the legal relationship created by ‘the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose’.3 3 See Hague Convention on the Law Applicable to Trusts and on their Recognition (signed on 1 July 1985) art 2. See also Empresa Eléctrica del Ecuador, Inc v Republic of Ecuador, ICSID Case No ARB/05/9, Award, 2 June 2009, para 86 (‘for the purposes of the present case, a trust is a contract by which a natural or juridical person transfers ownership of a given portion of its assets to a trustee, so that the trustee can use these assets to carry out a lawful purpose, which must be expressly set forth in the contract by the person setting up the trust. The beneficiary of the trust is the person who receives the benefit from the trust’). Typically, a trust has the following characteristics: (a) the assets constitute a separate fund [also known as the trust fund] and are not a part of the trustee’s own estate; (b) title to the trust assets stands in the name of the trustee or in the name of another person on behalf of the trustee; (c) the trustee has the power and the duty, in respect of which he is accountable, to manage, employ or dispose of the assets in accordance with the terms of the trust and the special duties imposed upon him by law.4 4 ibid. The settlor may himself be a beneficiary or the trustee, and the trustee may also be a beneficiary, but these roles cannot be held simultaneously, unless there are multiple trustees or beneficiaries.5 5 Under a trust structure, there may also be multiple categories of beneficiaries with some having primary and others secondary or defeasible interests. This stems from the very underpinnings of the trust structure, whose objective is to separate legal from equitable title.6 6 Tucker and others (n 2) 1-009. Thus, control and management of trust assets ‘is separated from its enjoyment’ and is vested in the trustee.7 7 ibid 1-027. The trustee then generally manages and administers the trust assets (i) to the benefit of a third party (in the case of the customary ‘beneficiary trust’) or (ii) in furtherance of a particular purpose (in the case of ‘purpose-trusts’). In practice, trusts are an effective way to confer on a beneficiary the equitable ownership or a partial equitable interest8 8 ibid 1-006. in real or personal property, such as an estate, shares, a contract, or even debt securities.9 9 ibid 1-010, 2-029, 2-034. Traditionally, a distinction is also drawn between bare or simple trusts and special trusts, which include discretionary trusts.10 10 ibid 1-028. See also Pearce and Stevens (n 2) 157–59. A bare trustee holds the trust assets as a ‘passive repository for the beneficial owner, having no duties other than a duty to transfer the property to the beneficial owner’.11 11 ibid 1-028. On the other hand, a discretionary trust,12 12 ibid 1-029. is typically a trust, in which the trustee is vested with the power to withhold payments, income or principal to a beneficiary. In such trust structures, the trustee enjoys and exercises more powers. Another distinction is between revocable and irrevocable trusts. Where the trust assets are to revert to the settlor or someone appointed by the settlor (subsequent to the creation of the trust), the trust is a revocable trust. Where the property of the trust is divested of unconditionally by the settlor the trust is an irrevocable trust. However, in any trust structure, the beneficiaries can enforce the trust against the trustee(s). If ‘the beneficiaries have no rights enforceable against the trustees there are no trusts’.13 13 ibid 1-005. The need for beneficiaries with enforceable rights does not, however, apply to charitable trusts. Moreover, a trust has no legal personality,14 14 ibid 3-071. and at common law, it also does not have a domicile.15 15 ibid 11-027. Furthermore, the ability to sue for interferences with the trust assets is generally vested in the trustee, but the beneficiaries can sometimes sue directly, when for instance, the trustee refuses to exercise such right.16 16 ibid 4-013 and 30-088. Another party to trust structures may be the protector. In certain offshore territories, the office of a protector is required in order to enforce a purpose trust.17 17 See eg BVI Trustee Act, 1961 (as amended in 2003), ch 303, s 84(2)(d). In non-purpose trusts, the appointment of a protector is optional. When appointed, the main role of a protector is to safeguard the interests of the settlor by supervising the trustee.18 18 ibid s 86 (‘(1) An instrument creating a trust may contain provisions by virtue of which the exercise by the trustees of any of their powers and discretions shall be subject to the previous consent of the settlor or some other person, whether named as protector, nominator, committee or any other name; and if so provided in the instrument creating the trust the trustees shall not be liable for any loss caused by their actions if the previous consent was given. (2) There may be conferred on the settlor or some other person, whether named as protector, nominator, committee or by any other name, by the instrument creating the trust, any powers, and without limitation to the foregoing power may be conferred on that person to do any one or more of the following: (a) determine the law of which jurisdiction shall be the proper law of the trust; (b) change the forum of administration of the trust; (c) remove trustees; (d) appoint new or additional trustees; (e) exclude any beneficiary as a beneficiary of the trust; (f) include any person as a beneficiary of the trust in substitution for or in addition to any existing beneficiary of the trust; and (g) withhold consent from specified actions of the trustees either conditionally or unconditionally. (3) A person exercising any of the powers set forth in paragraphs (a) to (d) and (g) of subsection (2) shall not by virtue only of the exercise of the power be deemed to be a trustee; and unless otherwise provided in the instrument creating the trust, is not liable to the beneficiaries for the bona fide exercise of the power’). However, the protector, unlike the trustee, is not the legal owner of the trust assets.19 19 See Dickenson v Teasdale (1862) 1 De G J & S 52 (‘If all that a person holds is a power over property, not an … interest, he cannot be a trustee’). Sometimes, the settlor may wish to retain control over certain trust assets or the main asset held in trust. For example, the settlor may wish to retain control of a trading company while still putting a significant shareholding into trust and then it may be possible to issue shares with different rights which secure control to the settlor while leaving the economic benefit of the shareholding with the trustees.20 20 Tucker and others (n 2) 34-061 (referring to the Virgin Islands Special Trusts Act (VISTA) trust in the British Virgin Islands and the STAR trust in the Cayman Islands). See VISTA, 2003; Cayman Islands Trusts Law (2011 revision), Pt VIII, replacing Special Trusts (Alternative Regime) Law, 1997. Regardless, under most trust laws, if so much of the powers over the day-to-day administration are retained by the settlor, the trust would be considered a ‘sham’ and would therefore not be enforceable.21 21 See Rahman v Chase Bank (C I) Trust Company Limited [1991] JLR 103. When powers are delegated to a protector, disbanding a trust may be more difficult.22 22 See Jan Dash and Herman W Liburd, The Role of Protectors in Offshore Trusts (2003) 6 (‘Although … the “sham trust doctrine” has been somewhat restricted, it is still wise to utilize a Protector when establishing an offshore Trust. While a Settlor may reserve powers over the Trustee for himself, a Court that has personal jurisdiction over the Settlor may force him to use such powers in favor of a creditor or a litigious tax authority. However, if such powers are held by the Protector, the Settlor has removed himself from any interest in the Trust and cannot be forced to do anything with regard to its corpus’). However, this does not mean that a protector may act above and beyond his demarcated powers. Rather, recent case law suggests that depending on the circumstances, a protector may be found to be a fiduciary (just like a trustee) who can be removed by an action brought by a beneficiary.23 23 See Jasmine Trustees Limited [2015] JRC 16; In the matters of the A and B Trusts (Jersey) [2012] JRC 169A. The intricacies of the trust may lead to complicated debates when considering the multitude of questions that trust structures raise in investment arbitration. Some of these questions are dealt with in the next section and include the following: Who has standing to sue? The trust, the trustee or the beneficiary? If the trust has standing, how is the nationality of a trust established? If the trust is considered to be a ‘sham’ would that mean that the settlor or the protector has standing to sue? Does it make any difference if the trust is irrevocable? Who has made an investment? The settlor, the trustee, the trust or the beneficiary? Is the answer different when dealing with purpose trusts? Who controls the investment? The trustee, the beneficiary or the settlor? How do multiple classes of beneficiaries, protectors and the type of the trust (simple or special; beneficiary or purpose trust) affect issues of control? Who is authorized to file a claim on behalf of a trust or the trust assets? In the event damages are awarded, do they form part of the trust assets and should thus be distributed accordingly? Should trusts be pierced when determining nationality issues? Is the answer different when the relevant question is control under investment treaties or the ICSID Convention? Should trusts be pierced when dealing with denial of benefits objections? 3. CLAIMS BY TRUSTS In cases involving trusts, a preliminary but crucial issue is the identification of the proper claimant. Specifically, relevant questions involve whether the covered investor is the trust itself, the trustee, the beneficiary(ies) or even other persons such as the settlor and the protector. This may not always be easy to answer, especially when the trust and the various trust parties have different nationalities. In most cases, trusts are used as the first layer of the investment structuring process mainly in order to preserve the confidentiality and anonymity of the ultimate holder. In those cases, the investment vehicles (typically limited companies) will form part of the trust assets and the investment at issue will be held by those investment vehicles directly or indirectly.24 24 See Yukos Universal Limited (Isle of Man) v The Russian Federation, PCA Case No AA 227; Hulley Enterprises Limited (Cyprus) v The Russian Federation, PCA Case No AA 226; Veteran Petroleum Limited (Cyprus) v The Russian Federation, PCA Case No AA 228, UNCITRAL, Interim Award on Jurisdiction and Admissibility, 30 November 2009, Appendix (hereinafter Yukos v Russia). However, arbitral practice shows that the investment at issue may sometimes form part of the trust assets. In those cases, it is most relevant to determine whether the entity that has standing is the trust itself, the trustee or the beneficiary, among others. This Section explores the issues that arise when the trust itself is the named claimant. 3.1 Jurisdiction ratione personae 3.1.1 Under investment treaties Very few investment treaties deal with trusts in the definition of covered ‘investors’. Likewise, very few cases appear to have been filed directly by trusts. First, some treaties that expressly include trusts in the definition of covered ‘investors’ include Canadian, Japanese and Austrian bilateral investment treaties (BITs). For instance, the Canada–Costa Rica BIT covers as qualified ‘investors’, ‘any entity constituted or organized under applicable law, whether or not for profit, whether privately-owned or governmentally-owned, including any corporation, trust, partnership, sole proprietorship, joint venture or other association’.25 25 Canada–Costa Rica BIT, art 1(b)(i) (emphasis added) (signed on 18 March 1998, entered into force on 29 September 1999). See also Japan–Cambodia BIT, art 1(4) (signed on 14 June 2007, entered into force on 31 July 2008); Japan–Colombia BIT, art 1(d)(i) (signed 12 September 2011, entered into force 11 September 2015); Austria–Armenia BIT, art 1(3) (signed on 17 October 2001, entered into force 1 February 2003). NAFTA Chapter 11, also covers trusts,26 26 The North American Free Trade Agreement, US-Can-Mex, 17 December 1992, 32 ILM 289 (1993) Ch 11, art 1139 and Ch 2, art 201 (hereinafter NAFTA). and it appears that at least one claim has been filed by a trust claimant.27 27 See Melvin J Howard, Centurion Health Corp. & Howard Family Trust v The Government of Canada, UNCITRAL, PCA Case No 2009-21, Notice of Arbitration, 5 January 2009 (terminated). Further, the Protocol on Finance and Investment of the Southern African Development Community (SADC) also includes trusts in the definition of covered ‘investors’.28 28 SADC Protocol on Finance and Investment, Annex 1, art 1(2) (signed on 18 Aug 2006, entered into force on 16 April 2010). See also Josias Van Zyl, The Josias Van Zyl Family Trust & The Burmilla Trust v The Kingdom of Lesotho, PCA Case No 2016-21, Procedural Order No 1, 3 December 2016. Claims filed by incorporated entities, which may include the term ‘trust’ in their corporate name, should be distinguished for obvious reasons. See eg Blue Bank International & Trust (Barbados) Ltd v Bolivarian Republic of Venezuela, ICSID Case No ARB 12/20, Request for Arbitration, 22 June 2012; Guardian Fiduciary Trust, Ltd, f/k/a Capital Conservator Savings & Loan, Ltd v Macedonia, former Yugoslav Republic of, ICSID Case No ARB/12/31, Award, 22 September 2015. In light of the foregoing, a question that may be posed is whether trusts will generally qualify as investors absent an express reference to trusts in the definition of covered ‘investors’. For instance, would a trust qualify as an investor under a treaty that uses the tests of incorporation and seat?29 29 For a general overview of nationality requirements in connection to legal entities, see Christoph Schreuer and others (eds), The ICSID Convention: A Commentary, A Commentary on the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (2nd edn, CUP 2009) 296–337; Jeswald W Salacuse, The Law of Investment Treaties (OUP 2009) 186–90; Nigel Blackaby and others, Redfern and Hunter on International Arbitration (Kluwer Law International 2009) 471–74; R Doak Bishop, James Crawford and W Michael Reisman, Foreign Investment Disputes: Cases, Materials and Commentary (2nd edn, Kluwer Law International 2014) 281–380; Kenneth J Vandevelde, Bilateral Investment Treaties: History, Policy, and Interpretation (OUP 2010) 168–72; UNCTAD, Scope and Definition (United Nations 2011) 85–92. Would the case be different when dealing with a treaty that adopts a control test? Specifically, investment treaties commonly define the nationality of legal entities by reference to the criteria of incorporation, siège statutaire (registered office), siège social (the main seat of business) and effective control, or a combination of these criteria.30 30 Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (OUP 2012) 45–47; Jeswald W Salacuse, The Three Laws of International Investment (OUP 2013) 376–77; Engela C Schlemmer, ‘Investment, Investor, Nationality, and Shareholders’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (OUP 2008) 76–78; Campbell Mclachlan, Laurence Shore and Matthew Weiniger, International Investment Arbitration: Substantive Principles (OUP 2007) 143; Katia Yannaca-Small, ‘Who is Entitled to Claim? Nationality Challenges’ in Katia Yannaca-Small (ed), Arbitration under International Investment Agreements: A Guide to the Key Issues (OUP 2010) 227–41. For example, the Cyprus-Serbia and Montenegro BIT defines the term ‘investor’ as a legal entity incorporated, constituted or otherwise duly organized in accordance with the laws and regulations of one Contracting Party, having its seat in the territory of that Contracting Party and making investments in the territory of the other Contracting Party.31 31 Cyprus-Serbia and Montenegro BIT, art 1(3)(b) (emphasis added) (signed on 21 July 2005, entered into force on 23 December 2005). [Definition A] The Switzerland-United Arab Emirates BIT as companies including corporations, partnerships, associations and other organizations, which are constituted or otherwise duly organised under Swiss law, as well as companies not established under Swiss law but effectively controlled by Swiss nationals or by companies established under Swiss law.32 32 Switzerland–UAE BIT (signed on 3 November 1998, entered into force on 16 August 1999), art 1(1)(a)(ii) (emphasis added) (signed on 3 Nov 1998, entered into force on 16 Aug 1999). [Definition B] And the Energy Charter Treaty (ECT) as a company or other organization organized in accordance with the law applicable in that Contracting Party.33 33 Energy Charter Treaty (annex I of the Final Act of the European Energy Charter Conference) 17 December 1994, 34 ILM 373 (1995) (entered into force on 16 April 1998) art 1(7)(a)(ii) (hereinafter ECT). [Definition C] It therefore is relevant to determine whether under any of these definitions, trusts would be regarded as covered ‘investors’. At the outset, a definition that adopts the tests of incorporation and seat (such as Definition A), would be problematic for at least two reasons: first, trusts do not have a legal personality, and also do not have a domicile or seat. As further explained below in Section 3.2, the term ‘seat’ is alien to common law jurisdictions, which nevertheless recognize the concept of ‘domicile’. However, at common law, a trust did not have a domicile, let alone a seat. In England and Wales, a trust, by operation of European Union law, may have a domicile, but this does not mean that an express provision of a treaty making reference to the term ‘seat’ can be equated to the concept of domicile.34 34 See Tucker and others (n 2)11-026, 11-027. As further explained in Section 3.2, this would require a renvoi to municipal law. Definition C would be less stringent compared to Definition A, inasmuch as it would require proof of establishment of a trust in accordance with the law applicable in an ECT Contracting Party. Therefore, a trust established lawfully in England and Wales, the Isle of Man, Jersey or Guernsey, would arguably qualify as an investor under the ECT.35 35 The ECT extends to the Crown dependencies: the Bailiwicks of Guernsey and Jersey and the Isle of Man, but it is disputed if it continues to apply to the overseas territory of Gibraltar on a provisional basis. See Odysseas G Repousis, ‘The Application of Investment Treaties to Overseas Territories and the Uncertain Provisional Application of the Energy Charter Treaty to Gibraltar’ (2017) 32(1) ICSID Review-FILJ 170, 180–92. Under Definition B, a trust controlled by Swiss nationals or companies established under Swiss law, would qualify as an investor if the term ‘companies’ in conjunction with the terms ‘and other organizations’ are found to also include such entities as trusts. Moreover, it would also be necessary to show that the trust in question is effectively controlled by a Swiss national. In that respect, the relevant question would be whether control is vested in the trustee, the beneficiary or another person. For example, if the trustee of the trust is a Swiss national but the beneficiary is a South African national; will a trust be a covered investor under Definition B? This issue is further discussed below in Section 4. Another consideration is trust nationality. From a domestic law perspective, the nationality of a trust depends on the type of the trust or the type of issue in question. In the United States, for example, federal district courts have ruled that in diversity suits, when a trust retains the sole membership interest in a limited liability company, the court only takes into account the nationality of the trustee, not the nationality of the beneficiaries.36 36 See eg France v Thermo Funding Company, No 13 Civ 712(SAS), [2013] WL 5996148, SDNY, 12 November 2013, 1. However relevant under domestic law, such considerations do not appear controlling in investment arbitration. This is all the more so when considering that those investment treaties that grant standing to trusts require that the trust be constituted or otherwise organized under the laws of a contracting party. Therefore, emphasis is placed on the creation of the trust or the trust agreement and not on the nationality of such persons as the trustee or the beneficiary. Regardless, in Strategic Infrasol v India, a claim that is currently pending, the named claimants are an Emirati limited liability company (Strategic Infrasol Foodstuff LLC), and a joint venture established between the Thakur Family Trust and Ace Hospitality Management (UAE). Claimants appear to be arguing that the Thakur Family Trust, a trust allegedly established in India, is a national of the UAE because the managing trustee is resident in the UAE ‘and hence the Trust is a resident of UAE’.37 37 Strategic Infrasol Foodstuff LLC, The Joint Venture of Thakur Family Trust, UAE with Ace Hospitality Management DMCC, UAE v The Republic of India, Notice of Arbitration, 8 October 2015, paras 8 and 9; Reply to Second Notice of Arbitration, 21 February 2017, 3 (‘This is a case of treaty shopping by establishing a corporate vehicle in the United Arab Emirates to gain access to the India-UAE BIPA, as both Mr. Nitesh J Thakur and Thakur Family Trust are India entities, and there can be no nexus established between the Indian and the UAE entity at the time of entering into the oral agreement’). See also, India–UAE BIT, art 1(7) (‘the term “Company” means: … b) in respect of United Arab Emirates: any juridical person or other entity legally constituted under the laws and regulations of UAE and its local governments such as institutions, development funds, authorities, foundations , establishments, agencies, enterprises, cooperatives, partnerships, corporations, companies, firms, organizations and business associations or similar entities irrespective of whether their liabilities are limited or otherwise’). While the crucial issue in that case is likely to be whether the joint venture itself has standing, the ultimate answer to this question depends to a certain extent to the issue of renvoi discussed in Section 3.2 below. Overall, depending on the wording of the investment treaty at hand, trusts can qualify as covered investors under investment treaties. 3.1.2 Under the ICSID convention Article 25(2)(b), first sentence, defines nationals of another Contracting State as ‘any juridical person which had the nationality of a Contracting State other than the State party to the dispute’.38 38 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, 575 UNTS 159 (signed on 18 March 1965, entered into force on 14 October 1966) art 25(2)(b) limb b. Schreuer and others suggest that ‘legal personality is a requirement for the application of Art. 25(2)(b) and that a mere association of individuals or of juridical persons would not qualify’.39 39 Schreuer and others, art 25, para 690. In fact, in LESI v Algeria, the tribunal found that it did not have jurisdiction to hear a claim brought by a consortium of companies, which unlike the companies it was comprised of, did not have separate legal personality.40 40 LESI-DIPENTA v Algeria, Award, 10 January 2005, paras 37–41. See also Impregilo v Pakistan, Decision on Jurisdiction, 22 April 2005, paras 133–134 (‘It follows that the consent to arbitration contained in the BIT here does not cover claims by GBC, since GBC is not a “juridical person” for the purposes of the ICSID Convention’). ICSID’s travaux suggest that some opposition was directed towards extending the term ‘company’, which was included in the Preliminary Draft of the ICSID Convention, ‘to a mere association of natural persons or to an unincorporated partnership’.41 41 Schreuer and others art 25, para 689 (citing History, vol I, 122, vol II, 170, 284, 359, 360, 661). While the issue of trusts is not expressly addressed in the travaux and it also does not appear that an ICSID tribunal has previously dealt with this matter, the reference of Article 25(2)(b) to ‘juridical’ persons seems to dispose of the matter. This may directly clash with certain investment treaties, which as discussed above grant standing to trusts. In that case, it would appear that if the investors were minded to name the trust as a claimant, they will have to pursue non-ICSID arbitration. Similarly, under Article 25(2)(b), second sentence, the term used is ‘juridical person’. Therefore, trusts which have the nationality of the host State, but are controlled by investors of the other Contracting State, would also not have standing under the ICSID Convention. 3.2 Renvoi to municipal law: Is it admissible? The various objections that can be raised against trusts in investment treaty arbitration, call into question the extent, reach and applicability of domestic law in determining such matters. This is particularly so with respect to the interpretation of the trust instrument (known also as trust deed or trust agreement), and such treaty requirements as incorporation, domicile or seat, and issues of control. The permissibility of renvoi to municipal law has recently been examined in CEAC v Montenegro, a case dealing with a company incorporated in a common law jurisdiction (Cyprus) but investing in a civil law jurisdiction (Montenegro).42 42 CEAC Holdings Limited v Montenegro, ICSID Case No ARB/14/8, Award, 26 July 2016. The relevant treaty provision, which has already been discussed as Definition A in Section 3.1 above, adopts both incorporation and a seat requirement.43 43 Cyprus-Serbia and Montenegro BIT (2005), art 1(3)(b) (emphasis added). However, under Cypriot law, the concept of ‘seat’ is alien. Rather, similar to most common law jurisdictions, Cypriot law recognizes the concept of registered office. The tribunal thus had to determine whether CEAC qualified as an investor under the Cyprus-Serbia and Montenegro BIT despite the fact that the concept of ‘seat’ is non-existent under Cypriot law. In this respect, the majority determined that it was not necessary ‘to determine the precise meaning’ of the term ‘seat’ because ‘the evidence in the record’ did not support a finding that the Claimant ‘had a registered office in Cyprus at the relevant time’ and that it was ‘managed and controlled from Cyprus’.44 44 CEAC v Montenegro (n 42) para 148. With respect to the existence of a registered office, the majority found that the certificates adduced by the Claimant would as a general matter ‘indicate that a company indeed has a registered office at the address specified therein’.45 45 ibid, para 152. However, the majority found ‘itself compelled to first consider the issue of the probative value of a certificate of registered office or, more precisely, the precise extent of the facts which it certifies’.46 46 ibid, para 153. Finding so, the majority determined that the registrar of companies, does not carry out any official and independent verification as to whether a declaration made by a company concerning its registered office corresponds to reality.47 47 ibid, para 166. Based on these findings, the majority went on to examine whether the evidence on record supported a finding that the Claimant had a registered office in Cyprus at the time he filed the request for arbitration,48 48 ibid, para 169. and concluded that no such office was maintained by the Claimant.49 49 ibid, paras 173–199. Professor Park criticised the findings of the majority arguing that while the award ‘declines to determine the meaning’ of the term ‘seat’, it ‘nevertheless finds that CEAC has no seat in Cyprus’.50 50 CEAC v Montenegro (n 42) Separate Opinion of William W Park, para 1. In his dissenting opinion, Park explained that the Claimant actually ‘argued that “seat” corresponds to “registered office” in Cypriot law, defined as an office that has been registered’51 51 ibid, para 3. and under that scenario, Claimant’s counsel stated that ‘all you need to be satisfied of is that we have … incorporation … and a certificate of registered office’.52 52 ibid, para 3. Park further found that although the notion of ‘seat’ is alien to the English legal tradition from which Cyprus derives its companies law, ‘analogues can be found in the [Brussels] Regulation, providing that for Cyprus a statutory seat means, alternatively, registered office, place of incorporation or the place under the law of which the company formation took place’.53 53 ibid, para 14 (citing Dicey, Morris and Collins, Conflicts of Law (15th edn 2012) para 11-079: ‘a company has a seat in the UK if either (i) incorporated under UK law with registered office or some other official UK address or (ii) possessing central management and control exercised in the UK’). According to Park, international law ‘as it currently stands provides no uniformly accepted “ordinary meaning” of corporate seat’, which remains ‘essentially a municipal law concept derived from Continental systems, whereas Claimant’s incorporation occurred in a common law country lacking such notions’.54 54 ibid, para 18. See also para 12 (citing International Law Commission, Draft Articles on Diplomatic Protection with Commentaries 2006, A/61/10, YILC, vol II, pt Two (2006) art 9, cmt 3: ‘international law has no rules of its own for the creation, management and dissolution of a corporation or for the rights of shareholders and their relationship with the corporation, and must consequently turn to municipal law for guidance on this subject’). Moreover, Park opined that if the term ‘seat’ is equated with management and control, then this test would import into the BIT ‘an obligation of substantial economic activity similar to “denial of benefits”’,55 55 ibid, para 20. and concluded that the test that ‘best matches the meaning of “seat” in Cyprus’56 56 ibid, para 22. is ‘an office that is registered’.57 57 ibid, para 19. Under this test, Park found that the Claimant possessed a ‘seat’ and its claims could therefore not be dismissed ‘on this ground alone’.58 58 ibid, para 22. A similar issue arose in Tenaris v Venezuela, where the tribunal determined that the meaning of the term ‘seat’ had to be interpreted by recourse to municipal law.59 59 Tenaris SA and Talta - Trading e Marketing Sociedade Unipessoal Lda v Bolivarian Republic of Venezuela, ICSID Case No ARB/11/26, Award, 29 January 2016, paras 167, 169. Finally, the issue was revisited in Orascom v Algeria where the tribunal determined that a renvoi to municipal law was impermissible60 60 Orascom TMT Investments Sàrl v People’s Democratic Republic of Algeria, ICSID Case No ARB/12/35, Final Award, 31 May 2017, paras 278, 314, 315. finding that ‘in application of Article 31 of the VCLT, the Tribunal cannot agree that the requirement of siège social in Article 1(1)(b) of the BIT refers to domestic nationality requirements’.61 61 ibid, para 278. Based on the above, it could be argued that whether a renvoi to municipal law is permissible may well impact on the standing of trusts under investment treaties. Given that very few investment treaties expressly include trusts in the definitions of covered ‘investors’, it could often be the case that the very standing of trusts will depend on the applicability of municipal law when interpreting such treaty requirements as incorporation, seat or control. If the views of the tribunal in Tenaris and Park’s dissent were endorsed this could potentially lead to more broad interpretations, which would grant trusts standing to sue, despite the fact that such entities do not have a domicile or seat. 4. CLAIMS BY TRUST PARTIES A number of recent cases has shed light on some of the difficult jurisdictional questions that trusts pose when it comes to the standing of trust parties (for example, trustees or beneficiaries). As a general note, when it comes to the standing of trust parties, the question at issue is not so much one of jurisdiction ratione personae. As a matter of fact, in most cases, the trust parties that are named claimants are covered under the nationality requirements of the treaty they seek to invoke. What is mostly at issue is whether such claimants actually hold a qualifying investment, through (direct or indirect) ownership or control. Therefore, most of the issues that arise with respect to trust parties are issues of jurisdiction ratione materiae. As a general caveat, the exposition of the cases discussed below is not chronological but to the best of this author’s knowledge is reflective of the complete record of cases publicly available to date. 4.1 Who controls the trust and its assets? 4.1.1 Under investment treaties 4.1.1.1 Saba Fakes v Turkey In Saba Fakes v Turkey, a case under The Netherlands–Turkey BIT, the claimant (a Dutch national) had allegedly acquired a 67% shareholding through temporary share certificates in a leading Turkish telecommunications company (Teslim).62 62 Saba Fakes v Republic of Turkey, ICSID Case No ARB/07/20, Award, 14 July 2010, paras 2, 125, 133. According to those certificates the claimant held legal title to Teslim’s shares and Mr Uzan (a Turkish national) had the beneficial ownership of such shares.63 63 ibid, para 133 (‘Furthermore, the Claimant “would vote [his] shares as instructed by Mr. Uzan, and Mr. Uzan would make any final decision as to when and to whom the shares in Telsim would be sold”’). On that basis, the tribunal observed that the division of property rights amongst several persons or the separation of legal and beneficial ownership is commonly accepted in a number of legal systems, be it through a trust, a fiducie or any other similar structure. Such structures are in no way indicative of a sham or a fraudulent conveyance, and no such presumption should be entertained without convincing evidence to the contrary.64 64 ibid, para 134. On that basis, the tribunal accepted that The separation of legal title and beneficial ownership rights does not deprive such ownership of the characteristics of an investment within the meaning of the ICSID Convention or the Netherlands-Turkey BIT. Neither the ICSID Convention, nor the BIT make any distinction which could be interpreted as an exclusion of a bare legal title from the scope of the ICSID Convention or from the protection of the BIT.65 65 ibid. The tribunal thus determined that in principle, both trustees and beneficiaries could have standing to sue under the treaty and the ICSID Convention. Eventually however, the tribunal denied jurisdiction finding that the temporary share certificates did not even intend to grant legal title to Mr Fakes over Mr Uzan’s shares in Teslim.66 66 ibid, para 147. 4.1.1.2 Guardian Fiduciary v Macedonia In Guardian Fiduciary v Macedonia, the tribunal had to address the issue of control in the context of The Netherlands–Macedonia BIT. That BIT defines investors by reference to the term ‘national’, which comprises legal persons controlled by natural or legal persons of a Contracting State.67 67 Guardian Fiduciary Trust, Ltd, f/k/a Capital Conservator Savings & Loan, Ltd v Macedonia, former Yugoslav Republic of, ICSID Case No ARB/12/31, Award, 22 September 2015. Therefore, the tribunal had to determine whether the claimant, a company organized under the laws of New Zealand, was controlled by a Dutch foundation, and thus qualified as an ‘investor’ under the treaty.68 68 ibid, paras 2–7. The Dutch foundation indirectly owned the claimant through several subsidiaries. Specifically, the claimant was wholly owned by Capital Conservator Trustees Limited (CCT) a trustee company incorporated under the laws of New Zealand. CCT in turn was a wholly-owned subsidiary of IN Asset Management Limited (IN Asset Management) also a company incorporated under the laws of New Zealand. Finally, IN Asset Management was wholly owned by the Dutch foundation.69 69 ibid, para 5. The respondent denied that the claimant was controlled by the Dutch foundation. Rather, the respondent argued that the beneficial owner of CCT was not IN Asset Management but Capital Conservator Group LLC (CCG), a company incorporated in the Marshall Islands. CCG’s shares in CCT were transferred to IN Asset Management based on a trust deed, which provided that CCG was the beneficiary of the shares in CCT and IN Asset Management the trustee.70 70 ibid, para 7. However, under the trust deed, IN Asset Management was not entitled to encumber, transfer, assign or deal with the shares of CCT in any way without the written consent of CCG, and CCG could ‘appoint a new trustee and remove IN Asset Management as a trustee of CCT’.71 71 ibid, para 134. The record was thus silent on the existence of direction and control or the exercise of voting rights vested in IN Asset Management. This led the Tribunal to the conclusion that there was a lack of evidence on record regarding ‘the actual exercise of control, direct or indirect, by’ the Dutch foundation ‘over the Claimant’.72 72 ibid, para 135. Therefore, the tribunal found that the claimant was not a covered ‘investor’ because it was not indirectly controlled by IN Asset Management and the Dutch foundation but by CCG, a Marshall Islands company. This case reveals that when a trust structure is involved, such factors as the trustees powers of direction and control and the exercise of voting rights are determinative. In that case, the trustee didn’t have any direct or indirect control or voting rights over the trust or the trust assets. Ultimately, the Guardian Fiduciary case stands for the proposition that when dealing with trust structures, labelling is not determinative and issues of control should be decided on case-by-case analysis. This approach is consistent with the position other investment tribunals have adopted with respect to minority shareholders,73 73 See eg Bernhard von Pezold and others v Republic of Zimbabwe, ICSID Case No ARB/10/15, Award, 28 July 2015, para 324; International Thunderbird Gaming Corp v Mexico, Award, 26 January 2006, para 106. and suggests that depending on the form that a trust takes (for example a bare or a discretionary trust) the answer to questions of standing may be different. 4.1.1.3 Blue Bank v Venezuela In Blue Bank v Venezuela the claimant, Blue Bank, was a Barbados company which was appointed trustee of the Qatar Trust—a trust under the laws of Barbados—for the purpose of administering and managing the assets of that trust. Among the assets of the Qatar Trust figured shareholdings in two BVI Companies, which, in turn, were indirect shareholders in two Venezuelan companies, ITC and Hemesa.74 74 Blue Bank International & Trust (Barbados) Ltd. v Bolivarian Republic of Venezuela, ICSID Case No ARB 12/20, Award, 26 Apr 2017, para 46. Moreover, while it was disputed whether the Qatar Trust was a purpose or beneficiary trust, the tribunal determined that it was a beneficiary trust, since provision was made for the office of an ‘eligible person’, which term the tribunal considered to be equivalent to the office of a beneficiary.75 75 ibid, para 170. That eligible person was Hampton Latin American Holdings, Ltd, which was also the protector of the trust.76 76 ibid, para 179. The question that arose in those proceedings was whether Blue Bank had standing to bring a claim as trustee for the Qatar Trust.77 77 ibid, paras 136–37. The Tribunal underwent a detailed analysis of the Barbados International Trusts Act and the trust deed in question, and determined that Blue Bank did not have standing for the reasons discussed below. At the outset, the tribunal found that because the acquisition of the shares took place before the appointment of Blue Bank as trustee, Blue Bank had not made an investment but was merely providing trustee services for a fee.78 78 ibid, paras 159–73. This restrictive approach was motivated by the wording of the Barbados–Venezuela BIT, which defines covered investments as ‘every kind of asset invested by nationals or companies of one Contracting Party in the territory of the other Contracting Party’.79 79 Barbados–Venezuela BIT (1994) art I(a). This approach finds a parallel in the findings of the tribunal in Standard Chartered v Tanzania.80 80 Standard Chartered Bank v United Republic of Tanzania, ICSID Case No ARB/10/12, Award, 2 November 2012. That case was brought under the UK–Tanzania BIT, which requires that [e]ach Contracting State shall encourage and create favourable conditions for nationals or companies of the other Contracting State to invest capital in its territory and, subject to its right to exercise powers conferred by its laws, shall admit such capital.81 81 UK–Tanzania BIT (1994) art 2(1). In light of this provision, the tribunal found that the active verb ‘to invest’ suggests ‘an active relationship between the investor and the investment’82 82 Standard Chartered Bank v Tanzania (n 80) paras 229, 230. and to benefit from the BIT’s investor–state arbitration clause a claimant must demonstrate that the investment was made at the claimant’s direction, that the claimant funded the investment or that the claimant controlled the investment in an active and direct manner. Passive ownership of shares in a company not controlled by the claimant where that company in turn owns the investment is not sufficient.83 83 ibid, para 230. This approach appears overly formalistic84 84 See also ibid, paras 231 and 232 (‘The Tribunal is not persuaded that an “investment of” a company or an individual implies only the abstract possession of shares in a company that holds title to some piece of property … Rather, for an investment to be “of” an investor in the present context, some activity of investing is needed, which implicates the claimant’s control over the investment or an action of transferring something of value (money, know-how, contacts, or expertise) from one treaty-country to the other’). See also ibid, para 255. and it is not entirely certain that the Blue Bank tribunal had Standard Chartered in mind when it opined on this matter. Still, situations of passive ownership or control are likely to be present in most trust cases. It is therefore foreseeable that this new line of argument may become prevalent in future cases involving trusts. In any case, the tribunal in Blue Bank went on to consider other factors and thus did not confine its analysis to the issue of passive ownership or control. Specifically, the tribunal found that Blue Bank’s legal title over the trust assets did not mean that it was ‘an owner in any relevant sense of the word’.85 85 Blue Bank v Venezuela (n 74) para 168. Rather, the tribunal opined that the party that would come closest to satisfying the requirements of ‘ownership’ with regard to the assets of the Qatar Trust is what the trust deeds refer to as the ‘Eligible Person’ (which is not a term of art but one that the Tribunal … considers to be a beneficiary). It is the ‘Eligible Person’, in this case Hampton, that enjoys ultimate control over the trust assets and that will ultimately enjoy or suffer, as the case may be, the fortunes of the trust assets.86 86 ibid, para 170. Finding that the Qatar Trust was created for the benefit of Hampton,87 87 ibid, paras 170, 179. the tribunal went on to examine whether the trustee (Blue Bank) was in a position to act with some independence in administering the trust (as it should).88 88 ibid, para 196. By examining the trust terms, the tribunal came to the conclusion that Blue Bank could not ‘perform many essential trustee functions independently, but, with respect to them’ was ‘under the control of Hampton, as both the Eligible Person and the Protector of the Qatar Trust’.89 89 ibid. Therefore, Hampton was essentially in ‘full control over Blue Bank’s management of the Qatar Trust’ as it decides the way in which earnings are distributed …, it has the power to remove the trustee and, in its capacity as Eligible Person (not a term of art), it is the beneficiary of the earnings distributed at its own discretion, without being accountable to anyone. It is, for all intents and purposes, the “real” owner of the purported investment in the BVI Companies.90 90 ibid, para 197. The findings of the tribunal in Blue Bank are therefore illustrative inasmuch as they show that tribunals will not dwell on a labelling exercise, but will endeavour to look at the substance, not the form that a trust structure may take. This is consistent with domestic courts, which as explained above tend to look closely at trust instruments and a trust’s mode of operation before determining whether the trust is a ‘sham’, and should thus not be enforceable. 4.1.1.4 Mercer v Canada An interesting factual matrix was also present in Mercer v Canada, a case which is currently pending.91 91 Mercer International Inc. v Government of Canada, ICSID Case No ARB(AF)/12/3. In that case, the claimant, Mercer LLC, a public company organized under the laws of the State of Washington, owned and operated an industrial plant in Canada, which consisted of a pulp mill and a biomass-energy generation facility.92 92 ibid, Request for Arbitration, 30 Apr 2012, para 1. Mercer had structured its investments through Celgar, a Canadian wholly-owned subsidiary. Specifically, Celgar owned all of the assets of the plant, in trust for the benefit of the unit holders in the Celgar Partnership. In turn, the Celgar Partnership, was formed by Celgar and Mercer as a Canadian limited partnership. According to the partnership agreement, Celgar was the general partner and owned a residual 0.1% economic interest in the partnership, while Mercer was the limited partner and owned the remaining 99.9% economic interest.93 93 ibid, para 13. In other words, Celgar was the trustee and the Celgar Partnership the beneficiary. However, Mercer chose to bring a claim under its own name and Celgar or the Celgar Partnership was not included as claimants (as it could have been the case on the basis that they were effectively controlled by Mercer). This case shows that when all economic interests ultimately accrue to the claimant, focusing on who is the named beneficiary is not likely to be controlling. Indeed, under the trust structure discussed above, it was the Celgar Parnership that was the beneficiary of the trust assets, and Celgar the trustee. Mercer was entitled to 99.9% of the economic interests arising from the partnerships operations, and was strictly speaking not the owner of the trust assets (the pulp mill and the energy generation facility). 4.1.1.5 Howard v Canada In Howard, a claim that was eventually discontinued, the investments were held through a trust, the Howard Family Trust (HFT), which was a Canadian irrevocable family trust. Specifically, the main investments were two Canadian corporations, Centurion Health Corporation and Regent Hills Health Centre Inc. Those investments were owned by the HFT and were managed by Howard Capital Management LP, a US limited partnership which had been appointed as trustee of the HFT.94 94 Melvin J Howard, Centurion Health Corp. & Howard Family Trust v The Government of Canada, UNCITRAL, PCA Case No 2009-21, Notice of Arbitration, 5 January 2009, 4; Statement of Claim, 2 February 2009, 3. That case was brought under the NAFTA, which as discussed above expressly includes trusts in the definition of covered investors. On that basis, the named claimants in that case were Melvin Howard (a US citizen), HFT and the Canadian corporations. Furthermore, while the trust (HFT) was named as a claimant, the trustee (Howard Capital Management LP) was not. While it is not clear whether Melvin Howard was the beneficiary under the trust, the nature of HFT, being an irrevocable trust, denotes that Melvin Howard was most likely the settlor. If that was indeed the case, it could have been argued that Melvin Howard did not hold an investment under the NAFTA as a settlor would normally not be in control of the trust or the trust assets. Moreover, HFT being a Canadian trust, as well as the two Canadian corporations could only have been considered US investors if they were effectively controlled by a US national, in that case Melvin Howard.95 95 ibid, Notice of Arbitration, 5 January 2009 (terminated). If Melvin Howard did not have control over the trust and its assets, the afore-mentioned entities would not have qualified ratione personae under the NAFTA. As Blue Bank suggests, in such cases, tribunals are more likely to look into the overall economic transactions focusing on the entity that is in fact in control of the trust’s fortunes. Thus, even if Melvin Howard was merely a settlor, this would not have been dispositive of his claim. 4.1.1.6 EMELEC v Ecuador In EMELEC, the claim was initiated under the US-Ecuador BIT96 96 US–Ecuador BIT (signed 27 August 1993, entered into force on 11 May 1997). by Empresa Eléctrica del Ecuador, Inc. (EMELEC), a company incorporated in the US, whose shares were fully owned by NEPEC, a company incorporated in the Bahamas.97 97 Empresa Eléctrica del Ecuador, Inc. v Republic of Ecuador, ICSID Case No ARB/05/9, Award, 2 June 2009, para 2. In 1925, EMELEC had opened a branch in Ecuador and had entered into a 60-year concession contract for the production, transmission, and distribution of electricity.98 98 ibid, para 81. After the termination of the initial term in 1985, EMELEC continued to operate on the basis of provisional permits.99 99 ibid. In 1993, NEPEC was acquired by Mr Fernando Aspiazu Seminario, an Ecuadorian national who was also the owner of an Ecuadorian bank, Banco del Progreso S.A. (BdP).100 100 ibid, para 82. However, in 1999, BdP was taken over and entered into a restructuring process under the control of the Deposit Guarantee Agency (AGD), a State agency which was required by law to refund 100% of the deposits made by the bank’s customers.101 101 ibid. To cover the debt owed to the depositors of BdP, Mr Aspiazu created a revocable trust in the Bahamas, named Progreso Repatriation Trust (PRT I), to which he transferred all his interests in NEPEC and EMELEC.102 102 ibid, para 85. As fully explained below, PRT I was the first in a series of three trusts to which Mr Aspiazu’s aforementioned interests were transferred with the view to create a fund that would indemnify the depositors of BdP. Before explaining the details of this scheme, it is also important to focus on the claim that EMELEC brought against Ecuador. Specifically, after BdP was taken over and entered into restructuring, EMELEC claimed that in 2000, Ecuador expropriated its premises, bank accounts and other property located in Ecuador.103 103 ibid, para 41. It was therefore on that basis that EMELEC brought the treaty claim. In order to determine whether it had jurisdiction to hear EMELEC’s claim, the tribunal found that it had to determine whether the person that had filed EMELEC’s claim had the legal capacity required.104 104 ibid, paras 75 and 76. That issue was crucial but nevertheless difficult to easily ascertain in light of the trust structures in place. In more detail, the first trust, PRT I was created in 1999 by Mr Aspiazu and his wife.105 105 ibid, para 87. While the latter were the settlors (‘grantors’), ‘by precise stipulation, retained the right … to direct the trustee with respect to the transactions into which he was authorized to enter’, in addition to retaining the right to revoke the trust (in which case the property forming part of the trust would be conveyed to the grantors).106 106 ibid, para 88. By express provision of the trust deed, the trustee of PRT I also had the right to ‘submit to arbitration obligations or claims, including claims in respect of taxes, in favor of or against the Trust’.107 107 ibid, para 89. PRT I was eventually terminated pursuant to a deed of termination and a letter containing the instructions of Mr and Mrs Aspiazu,108 108 ibid, paras 90–93. whereby Mr Heberling was appointed successor trustee.109 109 ibid, para 92. In February 2000, and in accordance with the deed of termination, Mr Heberling created a new trust (the second trust), the Progreso Depositors Trust (PDT), in which he appointed himself as trustee.110 110 ibid, para 97. The beneficiaries of PDT were BdP’s creditors and neither Mr Aspiazu nor Mrs Aspiazu were designated as beneficiaries.111 111 ibid, para 99. Moreover, PDT, unlike PRT I, was an irrevocable trust.112 112 ibid. Pursuant to PDT’s trust deed, PDT’s trustee could be removed by action of the Board of Protectors.113 113 This in fact did occur. See ibid, para 108. Moreover, under the trust deed, the trustee was obliged to sell the shares and other assets of NEPEC and EMELEC with the view to best serve the interests of the beneficiaries (here the depositors of BdP).114 114 ibid, para 100. In 2003, Mr and Mrs Aspiazu created a revocable trust (the third trust), Progreso Repatriation Trust (PRT II), whereby they purported to transfer all their interests in NEPEC and EMELEC.115 115 ibid, para 111. The trustee of PRT II was Mr Lluco, and the trustees of PDT, ‘who are vested with the trust fund’, were directed to transfer the property to Mr Lluco.116 116 ibid, para 118. Finally, the beneficiaries of PRT II were the depositors of BdP and the Aspiazus.117 117 ibid, para 116. The validity of PRT II was questioned throughout the proceedings118 118 ibid, paras 116–25. with the tribunal eventually finding that Mr and Mrs Aspiazu ‘did not have in their power the share certificates of NEPEC establishing ownership of EMELEC, among other assets held by the trust’ since these ‘share certificates had been conveyed to the trustees of PDT’.119 119 ibid, para 119. On that basis, the tribunal found that it did not have jurisdiction to hear EMELEC’s claim because the ‘persons who acted on behalf of EMELEC do not have the required legal capacity’.120 120 ibid, paras 130, 136. In the words of the tribunal: Even assuming that it could be argued (i) that the provisions of the PRT II include the granting of authority to file and pursue this arbitration; (ii) that EMELEC is a United States company; and (iii) that EMELEC has substantial business activities in the United States, the Tribunal concludes that the attorneys of Mr. Lluco, the putative trustee of PRT II in this arbitration, have not met the burden of proving to the Tribunal’s satisfaction that the control and power to represent EMELEC were transferred to PRT II. Mr. Lluco’s attorneys have not demonstrated that the terms and conditions stipulated in the PDT are ‘of no effect and substance,’ to quote the words of the preamble to PRT II. If it is acknowledged that Mr. and Mrs. Aspiazu were legally competent to terminate PRT I then simple logic would dictate, on the basis of this same legal competency set forth in the Deed of Termination, that Mr. and Mrs. Aspiazu (or Mrs. Aspiazu) would have the legal capacity to authorize the establishment of the PDT, a trust which, according to its own provisions, is irrevocable.121 121 ibid, para 125. It follows, that the tribunal in EMELEC did not eventually opine on the standing of trust parties under investment treaties, since the crux of the matter at issue was whether the arbitration claim had been properly authorized. This issue is further discussed below in Section 4.2. However, suffice it to say that the findings of the tribunal in EMELEC are based on a close reading and adherence to the mechanics of trusts and their operation under domestic law. Thus, while not expressly stated, the syllogism of the tribunal appears to revolve around the principle that the ability to sue for interferences with the trust assets is generally vested in the trustee.122 122 See Section 2. While one may not prognosticate how the tribunal would have ruled in the event that it had accepted jurisdiction, it bears noting that its findings imply that it would have accepted jurisdiction over EMELEC if the claim was filed by the trustee of PDT. Regardless, the tribunal was open to entertaining a test focusing on actual control, but the claimant did not meet its burden of proving that ‘the control and power to represent EMELEC were transferred to PRT II’.123 123 EMELEC v Ecuador (n 97) para 125. Overall, it appears that there is no easy answer when dealing with trust parties and their standing to sue under investment treaties. What stems nevertheless from the above cases is that tribunals are reluctant to entertain claims filed by trustees who do not appear to be in control of the trust’s fortunes. The findings of the tribunals in Fakes, Guardian Fiduciary and Blue Bank are illustrative in this respect. In fact, the tribunal in Blue Bank stands out for effectively piercing the trust’s legal veil and finding that it was the beneficiary (who also happened to be the protector) that had retained control over the trust and its assets—not the trustee. While that tribunal did not find that the trust was a sham and was thus unenforceable, it effectively reached the same conclusion. Moreover, as explained above in Section 2, apart from those cases where a trust may be considered to be a sham, the settlor may retain control over certain trust assets, especially when this is done through voting shares. While investment tribunals have not dealt with this situation, it would appear that voting control is important when determining ownership over an asset, but this will not necessarily be determinative of the issue.124 124 See eg Aguas del Tunari, SA v Republic of Bolivia, ICSID Case No ARB/02/3, Decision on Respondent’s Objections to Jurisdiction, 21 Oct 2005, para 264 (finding that the reference of the BIT to investments ‘directly or indirectly controlled’ means ‘that one entity may be said to control another entity (either directly … or indirectly) if that entity possesses the legal capacity to control the other entity. Subject to evidence of particular restrictions on the exercise of voting rights, such legal capacity is to be ascertained with reference to the percentage of shares held’). See also Vacuum Salt Products Ltd v Republic of Ghana, ICSID Case No ARB/92/1, Award, 16 Feb 1994, para 43 (which nevertheless dealt with foreign control under the ICSID Convention). On the other hand, while the tribunals in Fakes and EMELEC did not opine on the standing of trust parties per se, their findings nevertheless imply that trustees may, under certain circumstances, have standing to sue. Furthermore, a distinction between EMELEC and Blue Bank is that in the former case, the named claimant was actually one of the assets held in trust, while in the latter case the claimant was the trustee. 4.1.2 Under ICSID As pointed out by the tribunal in Fakes v Turkey, the ICSID Convention does not make ‘any distinction which could be interpreted as an exclusion of a bare legal title from the scope of the ICSID Convention’.125 125 Fakes v Turkey (n 62) para 134. In principle therefore, any trust party could potentially have standing to sue under the ICSID Convention. What may be less clear is the application of the foreign control clause under Article 25(2)(b), second sentence. As discussed above in Section 3.1, a trust which has the nationality of the host State, but is controlled by investors of the other Contracting State, would not have standing under the ICSID Convention because the ICSID Convention requires that a covered ‘investor’ be a juridical person and a trust does not have legal personality. The case is nevertheless different when dealing with trust parties, which will typically have legal personality. In that case, if certain trust assets are local entities, such as in the example of the two Venezuelan companies, ITC and Hemesa, in Blue Bank, it may be relevant to determine whether such local entities, may also have standing (here ratione personae) under the treaty and the ICSID Convention. In general, the local entities may have standing only if the trust party that is in control of the trust and its assets is covered under the nationality requirements of the treaty in question and the requirements of the ICSID Convention are satisfied. Take for example the case in Blue Bank. The claimant in that case was covered under the Barbados–Venezuela BIT, since it was a company incorporated in Barbados. Moreover, in accordance with Article I(d) of that BIT, the term ‘company’ in the definition of covered investors also includes ‘any company incorporated or constituted under the law in force in one Contracting Party which is owned or effectively controlled by nationals or companies of the other Contracting Party’. As explained above, the Qatar Trust owned ITC and Hemesa through BVI entities. Depending therefore on who was in control of ITC and Hemesa they could also be named as claimants. In this respect, suffice to say that ICSID tribunals have consistently held that the requirement of ‘foreign control’ under Article 25(2)(b) should be appraised against the backdrop of several factors, including ownership, voting rights and effective or de facto control. Thus, shareholding, managerial responsibility, voting rights, nationality of board members and other similar criteria become relevant when defining the notion of ‘foreign control’ but as is often stated, there is no ‘formula’.126 126 See Vacuum Salt v Ghana (n 124) para 43. See also Caratube International Oil Company LLP v The Republic of Kazakhstan, ICSID Case No ARB/08/12, Award, 5 June 2012, para 407. If nevertheless the trust is ultimately controlled by nationals of the host state, seeking to establish a tribunal’s jurisdiction over local entities under Article 25(2)(b) will not be effective. Moreover, in such cases, the tribunal will also be allowed to lift the pierce the corporate veil and look behind any corporate and trust structures to determine who the ultimate owner of the local entities is. This approach may sound draconian but has been affirmed in at least three ICSID cases.127 127 See TSA Spectrum de Argentina SA v Argentine Republic, ICSID Case No ARB/05/5, 19 Deemberc 2008, Award, paras 1–14, 133–62; Burimi SRL and Eagle Games SHA v Republic of Albania, ICSID Case No ARB/11/18, 29 May 2013, paras 1–3, 109–22; National Gas SAE v Arab Republic of Egypt, ICSID Case No ARB/11/7, 3 April 2014, Award, paras 73–149. 4.2 Who is authorized to bring a claim on behalf of the trust or the trust assets? As explained above in Section 4.1(vi), the tribunal in EMELEC found itself bereft of jurisdiction due to the fact that the claim at issue had not been authorized by the trustee. On the other hand, in Blue Bank, although the claim was filed by the trustee, the tribunal determined that it also did not have jurisdiction finding that the entity which was in fact in control of the trust assets was Hampton, the named beneficiary and protector. These findings bring to mind the requirement of corporate authorization, which is a conditio sine qua non an arbitration claim, may not be filed. In those cases, the rules governing corporate authorization are those provided for under the laws under which a company has been established. This has been established in Scimitar v Bangladesh, a claim under a concession contract, in which the respondents objected to jurisdiction on the ground that proceedings had been instituted by persons not competent to act for Scimitar, a company incorporated in the British Virgin Islands (BVI).128 128 Scimitar Exploration Limited v Bangladesh and Bangladesh Oil, Gas and Mineral Corporation, ICSID Case No ARB/92/2, Award, 4 May 1994. The tribunal found that: It is the joint position of the Parties that the law applicable to the question of corporate transactions and governance is the law of the British Virgin Islands. Upon its own review of applicable law, the Tribunal sees no reason to depart from this position, which is consonant with Article 42 [of the ICSID Convention]. … The Tribunal has also examined the question of corporate authorization under the law of the British Virgin islands, which is that proceedings initiated by a corporation without proper corporate authority or authorization are invalid.129 129 ibid, paras 26, 28 (cited in Schreuer and others, art 42, para 159). On that basis, the tribunal found that the claim had not been initiated pursuant to those procedures required under BVI law to effectuate a valid corporate authorization, and determined that it did not have jurisdiction over the dispute.130 130 Scimitar Exploration Limited v Bangladesh and Bangladesh Oil, Gas and Mineral Corporation, ICSID Case No ARB/92/2, Award, 4 May 1994, para 29. By analogy, when it comes to trusts, the rules governing authorization should be the rules governing the creation of the trust, without prejudice to potentially applicable conflict of laws rules or the Hague Convention.131 131 See Hague Convention on the Law Applicable to Trusts and on their Recognition (n 3). As explained above in Section 2, under most trust laws, the power to assert claims will generally be vested in the trustee, but there may be a number of situations where beneficiaries and potentially other persons, such as the protectors, will be able to authorize claims and exercise rights. A question that may thus arise in investment arbitration is whether this requirement should be considered mandatory where a trust is found to be a sham or it is otherwise determined that certain trust parties—other than the trustee—are in fact in control of the trust’s fortunes. 5. TRUST ASSETS AND DISTRIBUTION Another issue that arises from the investment treaty cases discussed in Section 4 has to do with the distribution of any resulting damages award. As a matter of fact, what those issues discussed in Section 4 does not answer is what actually happens to any resulting award. A finding that an investment at issue was an investment owned or controlled by a beneficiary who may have standing under an investment treaty (whether the claim was authorized by the trustee or not) does not necessarily mean that any resulting damages awarded for the harm inflicted on that investment should be payable to the beneficiary. Rather, unless the trust is found to be a sham and is dissolved through municipal court proceedings, it would appear that any such damages should form part of the trust’s assets and any benefits arising from a damages award should be distributed in accordance with the trust deed. If this assumption is correct, it somewhat casts doubt on those approaches barring trustees from bringing investment treaty claims. Analogous considerations underpin the rationale behind the ability to bring claims on behalf of local entities, or the ability of local entities to be claimants. The former is provided for under such treaties as the NAFTA,132 132 See NAFTA (n 26), art 1117; US Model BIT 2012, art 24(1)(b); Meg N Kinnear and other (eds) Investment Disputes under NAFTA: An Annotated Guide to NAFTA Chapter 11 (Kluwer Law International 2006 & 2008 Suppl) art 1116, 1–41 and art 1117, 1–6; Andrea K Bjorklund, ‘NAFTA Chapter 11’ in Chester Brown (ed), Commentaries on Selected Model Investment Treaties (OUP 2013), 500–04. and the latter is precisely the case, inter alia, under ICSID Article 25(2)(b), second sentence, discussed above. First, ‘[i]t is quite usual for host States to require that foreign investors carry on their business within their territories through a company organized under the laws of the host country’ and ‘[i]f no exception were made for foreign-owned but locally incorporated companies, a large and important sector of foreign investment would be outside the scope of the Convention’.133 133 Aaron Broches, ‘The Convention on the Settlement of Investment Disputes between States and Nationals of Other States’ (1972)136 Rec Des Cours 355, 358–59, also in Aron Broches, Selected Essays, World Bank, ICSID, and Other Subjects of Public and Private International Law (Martinus Nijhoff 1995) 201, 202. Second and most importantly, allowing a locally incorporated entity to directly file a claim against the host state ensures that damages are paid to the locally incorporated entity itself, rather than to the investor. Indeed, enabling claims by and on behalf of local entities (i) ‘ensures that all investors in the enterprise receive some share in, or benefit from, any damages paid’, (ii) ‘ensures that creditors of the enterprise are not circumvented in claiming whatever share might be owed them’, and (iii) determines whether ‘the tax treatment of the award might change depending on which entity received the award’.134 134 Bjorklund (n 132) 503 (referring to art 1117 NAFTA, that enables claims by investors of one Contracting Party, on behalf of an enterprise of the host state). See also Lee M Caplan and Jeremy K Sharpe, ‘United States’ in Commentaries on Selected Model Investment Treaties (OUP 2013) 766–70. These considerations may equally apply when the trust itself is not a claimant but rather a trust party brings a claim for the harm inflicted on the trust assets. In those cases, if any resulting damages award would have to form part of the trust assets and would have to be distributed in accordance with the trust deed, granting trustees standing to sue (ratione materiae) may not be too sweeping an argument to make. Equally this can be a consideration that tribunals could factor in before determining that a beneficiary is a covered investor (ratione materiae). These findings may not always be possible as much will depend on nationality requirements, the trust deed and the factual matrix at issue. However, one can easily anticipate situations where there are multiple beneficiaries but only one of them is covered under an investment treaty. In those cases, any resulting damages award would most likely form part of the trust assets and will have to be distributed to the beneficiary that had standing under the treaty as well as those other beneficiaries that happened not to be covered under an investment treaty. This dilemma is somewhat echoed in the debate about minority shareholder claims, but those cases are distinct inasmuch as those minority shareholders would normally only be allowed to claim for the value of their shareholdings.135 135 See generally Zachary Douglas, The International Law of Investment Claims (CUP 2009) 284–327. In the case of trusts, the beneficiaries are most likely to have a ‘floating’ equitable interest over the entirety of the trust assets. This means that enabling such beneficiaries to file claims in respect of the entirety of the trust assets may do violence to the rights of other beneficiaries. These issues are not easy to answer in the abstract but arguably capture the difficult issues and the legal debates that may be generated depending on who is recognized as the claimant in investment treaty proceedings, and how trust assets should be distributed pursuant to the trust deed in question. 6. TRUSTS AND ADMISSIBILITY ISSUES Trust structures may also be relevant when considering various admissibility issues. Therefore, changes in the nationality of trustees and beneficiaries with the view to gain access to a treaty’s protective veil could potentially be caught by the admissibility defence against abusive forum shopping.136 136 See Phoenix Action, Ltd. v The Czech Republic, ICSID Case No ARB/06/5, 15 April 2009, Award; Philip Morris Asia Limited v The Commonwealth of Australia, UNCITRAL, PCA Case No 2012-12, 15 December 2015, Award on Jurisdiction and Admissibility. Similarly, parallel claims brought by various trust parties and the trust itself may also be rejected as an abuse of the arbitral process.137 137 See Ampal-American Israel Corporation and others v Arab Republic of Egypt, ICSID Case No ARB/12/11, 1 February 2016, Decision on Jurisdiction; Orascom v Algeria (n 60). A good illustration of how trusts may trigger admissibility defences is the denial of benefits clause as applied in Yukos. In these cases, the first claimant, Yukos Universal Ltd (YUL), was a company organized under the laws of the Isle of Man and was wholly-owned by GML a company incorporated in Gibraltar. GML was in turn owned by seven Guernsey trusts.138 138 Yukos v Russia (n 24) paras 1 and 536. The second claimant, Hulley Enterprises Ltd, was a Cypriot company whose sole shareholder was YUL.139 139 ibid, para 535. Finally, the third claimant, Veteran Petroleum Ltd, was also a Cypriot company whose ownership and control was vested with Chiltern, the trustee of a trust settled in Jersey, whose settlor as well as beneficiary was YUL.140 140 ibid, para 521. The question that therefore arose was whether Russia’s invocation of the denial of benefits provision satisfied the first limb of Article 17 of the ECT,141 141 ibid, paras 443–555. which provides that a Contracting Party ‘reserves the right to deny the advantages of’ the ECT to ‘a legal entity if citizens or nationals of a third state own or control such entity’.142 142 ECT (n 33) art 17(1) (emphasis added). Given that the United Kingdom had extended the application of the ECT to the Isle of Man, Jersey and Guernsey, and applied the ECT provisionally to Gibraltar, the tribunal eventually concluded that the first limb of Article 17 was not satisfied as claimants were owned or controlled by nationals of the United Kingdom.143 143 Yukos v Russia (n 24) paras 536, 537. This case is illustrative for two main reasons. First, it shows how trust structures may be scrutinized through the reach of admissibility defences. Secondly, it shows that when trust structures are interwoven, in the sense that the offices of the settlor, the trustee and the beneficiary are assumed by multiple claimants, all of whom qualify under one or multiple investment treaties, issues of ownership or control may be less complex despite the sophisticated legal structures put in place.144 144 ibid. 7. TRUSTS AND QUANTUM In Occidental v Ecuador, Occidental brought a claim under the US–Ecuador BIT for claims arising out of the termination of a 1999 Participation Contract between Occidental and PetroEcuador for the exploration and exploitation of hydrocarbons in Block 15 of the Ecuadorian Amazon region. In 2000, Occidental had entered into two agreements with AEC, a Bermudan subsidiary of EnCana, a Canadian oil and gas company (the ‘AEC Farmout Agreement’ and the ‘AEC Operating Agreement’, together the ‘AEC Agreements’).145 145 Occidental Petroleum Corporation and Occidental Exploration and Production Company v Republic of Ecuador, ICSID Case No ARB/06/11, Decision on Jurisdiction, 9 September 2008, para 12. AEC was subsequently acquired by Andes, a Chinese company. Pursuant to the AEC Agreements, Occidental granted AEC a 40% economic interest in the share of the production from Block 15, and AEC agreed to pay to Occidental certain annual amounts over a four-year period and 40% of the operating costs.146 146 ibid, para 13. At the end of the four-year period, and on the condition that Occidental would obtain necessary government approvals, it was agreed that Occidental would assign legal title to AEC over the 40% share of the production.147 147 ibid, para 14. However, in 2004, when Occidental requested approval from Ecuador to proceed with the transfer of legal title, the approval was not granted.148 148 ibid, para 16. During the course of the arbitration proceedings, Ecuador argued that any calculation of damages to be awarded must be limited to the 60% interest in Block 15 retained by Occidental and should not include the 40% economic interest of AEC.149 149 Occidental v Ecuador (n 145) Award, 5 October 2012, para 571. Contrarily, Occidental argued that since it was the sole owner of the 1999 Participation Contract, it had the necessary standing to claim 100% of any damages arising therefrom.150 150 ibid, para 575. The tribunal looked at this issue from various angles, and determined that the assignment of the 40% economic interest to AEC in 2000 was not valid since it was never authorized by Ecuador, and was thus null and void.151 151 ibid, paras 649–50. On that basis, the tribunal disregarded the AEC Agreements for purposes of determining compensation and eventually found that Ecuador was obliged to compensate Occidental for 100% of their interest in Block 15,152 152 ibid, paras 650–51. ordering payment of USD 1.76 billion in damages.153 153 ibid, para 825. Arbitrator Stern disagreed with the majority finding that for the Occidental-AEC arrangement to be found null and void, a court-ordered declaration of nullity was necessary and neither Occidental nor PetroEcuador had requested or obtained one.154 154 Occidental v Ecuador (n 145) Dissenting Opinion of Prof. Stern, 20 September 2012, paras 114, 115. Therefore, Stern expressed the view that Occidental could only recover 60% of the damages under the Participation Contract.155 155 ibid, para 165. Ecuador subsequently initiated annulment proceedings and was successful in partially annulling the award on the basis that the majority should not have assumed jurisdiction over an investment beneficially owned by parties not covered under the BIT, ie Chinese investor Andes. On that basis, the Annulment Committee reduced the damages awarded by an unprecedented USD 700 million.156 156 Occidental v Ecuador (n 145) Decision on Annulment, 2 November 2015, paras 136ff. This case illustrates the difficult issues that trust structures raise when it comes to the quantification of damages. Overlooking the trust structures in place is therefore not advisable as this may render any resulting award amenable to annulment or set aside proceedings. 8. CONCLUSION While trusts are at the forefront of international investment structuring and are often implicated in investment treaty disputes, their inherent complexity raises a host of issues that may prove cumbersome and at times difficult to resolve without putting at risk the prospects of an award’s enforceability. This is all the more evident when considering the Occidental saga. Moreover, while it may be too early to draw any conclusive remarks based on the cases discussed in this article, it would appear that trusts test the somewhat laggard abilities of investment treaties to entertain the complexity of modern day investment practices. At the same time, the findings of the tribunals in such cases as Fakes, EMELEC, Guardian Fiduciary and Blue Bank reveal that the relevant inquiry is one of substance not form. This guiding principle, in all its simplicity, appears to be the most appropriate synopsis of the current state of the law in investment treaty cases involving trusts. © The Author(s) 2018. Published by Oxford University Press on behalf of the London Court of International Arbitration. All rights reserved. For permissions, please email: journals.permissions@oup.com This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/about_us/legal/notices) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Arbitration International Oxford University Press

The use of trusts in investment arbitration

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Abstract

Abstract This article is the first to address the use of trusts in investment arbitration, and particularly all those instances in which trust structures may have a direct bearing on investment treaty claims. As a matter of fact, the increasing use of trusts in transnational business has created a whole new set of considerations that call for the attention of users and practitioners alike. Owing to the intricacies of trusts, and in the light of a series of recent cases, this article sets out to explore such questions as standing to sue, authorization to bring claims on behalf of the trust or the assets held in trust, whether the trustee, the beneficiary or other trust parties should be considered covered investors, whether the trust itself may have standing, whether any resulting damages award should form part of the trust assets and be distributed in accordance with the trust deed, as well as other admissibility and quantum-related questions that may arise when dealing with trusts. All in all, this article maps the multitude of issues that trust structures raise in investment arbitration. And while it may be too early to draw any conclusive remarks based on the cases discussed in this article, it would appear that trusts test the somewhat laggard abilities of investment treaties to entertain the complexity of modern-day investment practices. 1. INTRODUCTION The growth of investment treaty arbitration and the widespread use of trusts in transnational business have created a whole new set of considerations that call for the attention of users and practitioners alike. While corporate practice suggests that trusts are mainly used for tax reasons, and less so in (investment treaty) nationality planning, the spike in recent investment treaty cases involving trusts indicates that trusts, for one reason or another, may be at the forefront of investment treaty litigation. Be that as it may, the intricate legal issues associated with the use of trusts along with the idiosyncrasies of investment treaty arbitration may frequently lead to fierce legal battles that neither the structuring attorney nor the arbitration practitioner had anticipated. For their part, states and state entities are increasingly becoming aware of the importance of trusts and apart from latching on their intricacies to mount jurisdictional and other defences; they themselves have become heavy users of trust structures. As a matter of fact, sophisticated sovereign funds operate through the use of various trust structures and most importantly, States make use of trust instruments in order to protect their assets from disgruntled investors and other creditors.1 1 Such practices fall outside the scope of this article but are nevertheless an important and currently evolving issue of the law of state immunity. See eg AIG Capital Partners, Inc v The Republic of Kazakhstan [2005] EWHC 2239 (Comm) (involving the enforcement of an ICSID award). Setting out from the above, this article attempts to map all those instances in which trust structures may have a direct bearing on investment treaty claims. This article therefore discusses the main characteristics of trusts and the relevance of trust taxonomies to investment treaty arbitration (Section 2), the main jurisdiction (Sections 3–5) and admissibility (Section 6) issues that could arise in respect of trusts, and certain quantum considerations that may hinge on the intricacies of trusts (Section 7). 2. CLASSIFICATION OF TRUSTS AND ITS RELEVANCE TO INVESTMENT TREATY ARBITRATION The protagonists of the trust structure are typically three: the settlor, the trustee, and the beneficiary.2 2 See Lynton Tucker and others, Lewin on Trusts (Sweet & Maxwell, 19th edn 2017) 1-001-035 (citing David J Hayton, Underhill and Hayton, Law Relating to Trusts and Trustees (Lexis Nexis, 15th edn) 3; LA Sheridan, Keeton and Sheridan, Law of Trusts (Barry Rose Law Publishers, 12th edn) 3; Re Marshall’s Will Trusts [1945] Ch 217, 219; Green v Russell [1959] 2 QB 226, 241. See also Robert Pearce and John Stevens, The Law of Trusts and Equitable Obligations (2006) 157–59. The term ‘trust’ describes the legal relationship created by ‘the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose’.3 3 See Hague Convention on the Law Applicable to Trusts and on their Recognition (signed on 1 July 1985) art 2. See also Empresa Eléctrica del Ecuador, Inc v Republic of Ecuador, ICSID Case No ARB/05/9, Award, 2 June 2009, para 86 (‘for the purposes of the present case, a trust is a contract by which a natural or juridical person transfers ownership of a given portion of its assets to a trustee, so that the trustee can use these assets to carry out a lawful purpose, which must be expressly set forth in the contract by the person setting up the trust. The beneficiary of the trust is the person who receives the benefit from the trust’). Typically, a trust has the following characteristics: (a) the assets constitute a separate fund [also known as the trust fund] and are not a part of the trustee’s own estate; (b) title to the trust assets stands in the name of the trustee or in the name of another person on behalf of the trustee; (c) the trustee has the power and the duty, in respect of which he is accountable, to manage, employ or dispose of the assets in accordance with the terms of the trust and the special duties imposed upon him by law.4 4 ibid. The settlor may himself be a beneficiary or the trustee, and the trustee may also be a beneficiary, but these roles cannot be held simultaneously, unless there are multiple trustees or beneficiaries.5 5 Under a trust structure, there may also be multiple categories of beneficiaries with some having primary and others secondary or defeasible interests. This stems from the very underpinnings of the trust structure, whose objective is to separate legal from equitable title.6 6 Tucker and others (n 2) 1-009. Thus, control and management of trust assets ‘is separated from its enjoyment’ and is vested in the trustee.7 7 ibid 1-027. The trustee then generally manages and administers the trust assets (i) to the benefit of a third party (in the case of the customary ‘beneficiary trust’) or (ii) in furtherance of a particular purpose (in the case of ‘purpose-trusts’). In practice, trusts are an effective way to confer on a beneficiary the equitable ownership or a partial equitable interest8 8 ibid 1-006. in real or personal property, such as an estate, shares, a contract, or even debt securities.9 9 ibid 1-010, 2-029, 2-034. Traditionally, a distinction is also drawn between bare or simple trusts and special trusts, which include discretionary trusts.10 10 ibid 1-028. See also Pearce and Stevens (n 2) 157–59. A bare trustee holds the trust assets as a ‘passive repository for the beneficial owner, having no duties other than a duty to transfer the property to the beneficial owner’.11 11 ibid 1-028. On the other hand, a discretionary trust,12 12 ibid 1-029. is typically a trust, in which the trustee is vested with the power to withhold payments, income or principal to a beneficiary. In such trust structures, the trustee enjoys and exercises more powers. Another distinction is between revocable and irrevocable trusts. Where the trust assets are to revert to the settlor or someone appointed by the settlor (subsequent to the creation of the trust), the trust is a revocable trust. Where the property of the trust is divested of unconditionally by the settlor the trust is an irrevocable trust. However, in any trust structure, the beneficiaries can enforce the trust against the trustee(s). If ‘the beneficiaries have no rights enforceable against the trustees there are no trusts’.13 13 ibid 1-005. The need for beneficiaries with enforceable rights does not, however, apply to charitable trusts. Moreover, a trust has no legal personality,14 14 ibid 3-071. and at common law, it also does not have a domicile.15 15 ibid 11-027. Furthermore, the ability to sue for interferences with the trust assets is generally vested in the trustee, but the beneficiaries can sometimes sue directly, when for instance, the trustee refuses to exercise such right.16 16 ibid 4-013 and 30-088. Another party to trust structures may be the protector. In certain offshore territories, the office of a protector is required in order to enforce a purpose trust.17 17 See eg BVI Trustee Act, 1961 (as amended in 2003), ch 303, s 84(2)(d). In non-purpose trusts, the appointment of a protector is optional. When appointed, the main role of a protector is to safeguard the interests of the settlor by supervising the trustee.18 18 ibid s 86 (‘(1) An instrument creating a trust may contain provisions by virtue of which the exercise by the trustees of any of their powers and discretions shall be subject to the previous consent of the settlor or some other person, whether named as protector, nominator, committee or any other name; and if so provided in the instrument creating the trust the trustees shall not be liable for any loss caused by their actions if the previous consent was given. (2) There may be conferred on the settlor or some other person, whether named as protector, nominator, committee or by any other name, by the instrument creating the trust, any powers, and without limitation to the foregoing power may be conferred on that person to do any one or more of the following: (a) determine the law of which jurisdiction shall be the proper law of the trust; (b) change the forum of administration of the trust; (c) remove trustees; (d) appoint new or additional trustees; (e) exclude any beneficiary as a beneficiary of the trust; (f) include any person as a beneficiary of the trust in substitution for or in addition to any existing beneficiary of the trust; and (g) withhold consent from specified actions of the trustees either conditionally or unconditionally. (3) A person exercising any of the powers set forth in paragraphs (a) to (d) and (g) of subsection (2) shall not by virtue only of the exercise of the power be deemed to be a trustee; and unless otherwise provided in the instrument creating the trust, is not liable to the beneficiaries for the bona fide exercise of the power’). However, the protector, unlike the trustee, is not the legal owner of the trust assets.19 19 See Dickenson v Teasdale (1862) 1 De G J & S 52 (‘If all that a person holds is a power over property, not an … interest, he cannot be a trustee’). Sometimes, the settlor may wish to retain control over certain trust assets or the main asset held in trust. For example, the settlor may wish to retain control of a trading company while still putting a significant shareholding into trust and then it may be possible to issue shares with different rights which secure control to the settlor while leaving the economic benefit of the shareholding with the trustees.20 20 Tucker and others (n 2) 34-061 (referring to the Virgin Islands Special Trusts Act (VISTA) trust in the British Virgin Islands and the STAR trust in the Cayman Islands). See VISTA, 2003; Cayman Islands Trusts Law (2011 revision), Pt VIII, replacing Special Trusts (Alternative Regime) Law, 1997. Regardless, under most trust laws, if so much of the powers over the day-to-day administration are retained by the settlor, the trust would be considered a ‘sham’ and would therefore not be enforceable.21 21 See Rahman v Chase Bank (C I) Trust Company Limited [1991] JLR 103. When powers are delegated to a protector, disbanding a trust may be more difficult.22 22 See Jan Dash and Herman W Liburd, The Role of Protectors in Offshore Trusts (2003) 6 (‘Although … the “sham trust doctrine” has been somewhat restricted, it is still wise to utilize a Protector when establishing an offshore Trust. While a Settlor may reserve powers over the Trustee for himself, a Court that has personal jurisdiction over the Settlor may force him to use such powers in favor of a creditor or a litigious tax authority. However, if such powers are held by the Protector, the Settlor has removed himself from any interest in the Trust and cannot be forced to do anything with regard to its corpus’). However, this does not mean that a protector may act above and beyond his demarcated powers. Rather, recent case law suggests that depending on the circumstances, a protector may be found to be a fiduciary (just like a trustee) who can be removed by an action brought by a beneficiary.23 23 See Jasmine Trustees Limited [2015] JRC 16; In the matters of the A and B Trusts (Jersey) [2012] JRC 169A. The intricacies of the trust may lead to complicated debates when considering the multitude of questions that trust structures raise in investment arbitration. Some of these questions are dealt with in the next section and include the following: Who has standing to sue? The trust, the trustee or the beneficiary? If the trust has standing, how is the nationality of a trust established? If the trust is considered to be a ‘sham’ would that mean that the settlor or the protector has standing to sue? Does it make any difference if the trust is irrevocable? Who has made an investment? The settlor, the trustee, the trust or the beneficiary? Is the answer different when dealing with purpose trusts? Who controls the investment? The trustee, the beneficiary or the settlor? How do multiple classes of beneficiaries, protectors and the type of the trust (simple or special; beneficiary or purpose trust) affect issues of control? Who is authorized to file a claim on behalf of a trust or the trust assets? In the event damages are awarded, do they form part of the trust assets and should thus be distributed accordingly? Should trusts be pierced when determining nationality issues? Is the answer different when the relevant question is control under investment treaties or the ICSID Convention? Should trusts be pierced when dealing with denial of benefits objections? 3. CLAIMS BY TRUSTS In cases involving trusts, a preliminary but crucial issue is the identification of the proper claimant. Specifically, relevant questions involve whether the covered investor is the trust itself, the trustee, the beneficiary(ies) or even other persons such as the settlor and the protector. This may not always be easy to answer, especially when the trust and the various trust parties have different nationalities. In most cases, trusts are used as the first layer of the investment structuring process mainly in order to preserve the confidentiality and anonymity of the ultimate holder. In those cases, the investment vehicles (typically limited companies) will form part of the trust assets and the investment at issue will be held by those investment vehicles directly or indirectly.24 24 See Yukos Universal Limited (Isle of Man) v The Russian Federation, PCA Case No AA 227; Hulley Enterprises Limited (Cyprus) v The Russian Federation, PCA Case No AA 226; Veteran Petroleum Limited (Cyprus) v The Russian Federation, PCA Case No AA 228, UNCITRAL, Interim Award on Jurisdiction and Admissibility, 30 November 2009, Appendix (hereinafter Yukos v Russia). However, arbitral practice shows that the investment at issue may sometimes form part of the trust assets. In those cases, it is most relevant to determine whether the entity that has standing is the trust itself, the trustee or the beneficiary, among others. This Section explores the issues that arise when the trust itself is the named claimant. 3.1 Jurisdiction ratione personae 3.1.1 Under investment treaties Very few investment treaties deal with trusts in the definition of covered ‘investors’. Likewise, very few cases appear to have been filed directly by trusts. First, some treaties that expressly include trusts in the definition of covered ‘investors’ include Canadian, Japanese and Austrian bilateral investment treaties (BITs). For instance, the Canada–Costa Rica BIT covers as qualified ‘investors’, ‘any entity constituted or organized under applicable law, whether or not for profit, whether privately-owned or governmentally-owned, including any corporation, trust, partnership, sole proprietorship, joint venture or other association’.25 25 Canada–Costa Rica BIT, art 1(b)(i) (emphasis added) (signed on 18 March 1998, entered into force on 29 September 1999). See also Japan–Cambodia BIT, art 1(4) (signed on 14 June 2007, entered into force on 31 July 2008); Japan–Colombia BIT, art 1(d)(i) (signed 12 September 2011, entered into force 11 September 2015); Austria–Armenia BIT, art 1(3) (signed on 17 October 2001, entered into force 1 February 2003). NAFTA Chapter 11, also covers trusts,26 26 The North American Free Trade Agreement, US-Can-Mex, 17 December 1992, 32 ILM 289 (1993) Ch 11, art 1139 and Ch 2, art 201 (hereinafter NAFTA). and it appears that at least one claim has been filed by a trust claimant.27 27 See Melvin J Howard, Centurion Health Corp. & Howard Family Trust v The Government of Canada, UNCITRAL, PCA Case No 2009-21, Notice of Arbitration, 5 January 2009 (terminated). Further, the Protocol on Finance and Investment of the Southern African Development Community (SADC) also includes trusts in the definition of covered ‘investors’.28 28 SADC Protocol on Finance and Investment, Annex 1, art 1(2) (signed on 18 Aug 2006, entered into force on 16 April 2010). See also Josias Van Zyl, The Josias Van Zyl Family Trust & The Burmilla Trust v The Kingdom of Lesotho, PCA Case No 2016-21, Procedural Order No 1, 3 December 2016. Claims filed by incorporated entities, which may include the term ‘trust’ in their corporate name, should be distinguished for obvious reasons. See eg Blue Bank International & Trust (Barbados) Ltd v Bolivarian Republic of Venezuela, ICSID Case No ARB 12/20, Request for Arbitration, 22 June 2012; Guardian Fiduciary Trust, Ltd, f/k/a Capital Conservator Savings & Loan, Ltd v Macedonia, former Yugoslav Republic of, ICSID Case No ARB/12/31, Award, 22 September 2015. In light of the foregoing, a question that may be posed is whether trusts will generally qualify as investors absent an express reference to trusts in the definition of covered ‘investors’. For instance, would a trust qualify as an investor under a treaty that uses the tests of incorporation and seat?29 29 For a general overview of nationality requirements in connection to legal entities, see Christoph Schreuer and others (eds), The ICSID Convention: A Commentary, A Commentary on the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (2nd edn, CUP 2009) 296–337; Jeswald W Salacuse, The Law of Investment Treaties (OUP 2009) 186–90; Nigel Blackaby and others, Redfern and Hunter on International Arbitration (Kluwer Law International 2009) 471–74; R Doak Bishop, James Crawford and W Michael Reisman, Foreign Investment Disputes: Cases, Materials and Commentary (2nd edn, Kluwer Law International 2014) 281–380; Kenneth J Vandevelde, Bilateral Investment Treaties: History, Policy, and Interpretation (OUP 2010) 168–72; UNCTAD, Scope and Definition (United Nations 2011) 85–92. Would the case be different when dealing with a treaty that adopts a control test? Specifically, investment treaties commonly define the nationality of legal entities by reference to the criteria of incorporation, siège statutaire (registered office), siège social (the main seat of business) and effective control, or a combination of these criteria.30 30 Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (OUP 2012) 45–47; Jeswald W Salacuse, The Three Laws of International Investment (OUP 2013) 376–77; Engela C Schlemmer, ‘Investment, Investor, Nationality, and Shareholders’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (OUP 2008) 76–78; Campbell Mclachlan, Laurence Shore and Matthew Weiniger, International Investment Arbitration: Substantive Principles (OUP 2007) 143; Katia Yannaca-Small, ‘Who is Entitled to Claim? Nationality Challenges’ in Katia Yannaca-Small (ed), Arbitration under International Investment Agreements: A Guide to the Key Issues (OUP 2010) 227–41. For example, the Cyprus-Serbia and Montenegro BIT defines the term ‘investor’ as a legal entity incorporated, constituted or otherwise duly organized in accordance with the laws and regulations of one Contracting Party, having its seat in the territory of that Contracting Party and making investments in the territory of the other Contracting Party.31 31 Cyprus-Serbia and Montenegro BIT, art 1(3)(b) (emphasis added) (signed on 21 July 2005, entered into force on 23 December 2005). [Definition A] The Switzerland-United Arab Emirates BIT as companies including corporations, partnerships, associations and other organizations, which are constituted or otherwise duly organised under Swiss law, as well as companies not established under Swiss law but effectively controlled by Swiss nationals or by companies established under Swiss law.32 32 Switzerland–UAE BIT (signed on 3 November 1998, entered into force on 16 August 1999), art 1(1)(a)(ii) (emphasis added) (signed on 3 Nov 1998, entered into force on 16 Aug 1999). [Definition B] And the Energy Charter Treaty (ECT) as a company or other organization organized in accordance with the law applicable in that Contracting Party.33 33 Energy Charter Treaty (annex I of the Final Act of the European Energy Charter Conference) 17 December 1994, 34 ILM 373 (1995) (entered into force on 16 April 1998) art 1(7)(a)(ii) (hereinafter ECT). [Definition C] It therefore is relevant to determine whether under any of these definitions, trusts would be regarded as covered ‘investors’. At the outset, a definition that adopts the tests of incorporation and seat (such as Definition A), would be problematic for at least two reasons: first, trusts do not have a legal personality, and also do not have a domicile or seat. As further explained below in Section 3.2, the term ‘seat’ is alien to common law jurisdictions, which nevertheless recognize the concept of ‘domicile’. However, at common law, a trust did not have a domicile, let alone a seat. In England and Wales, a trust, by operation of European Union law, may have a domicile, but this does not mean that an express provision of a treaty making reference to the term ‘seat’ can be equated to the concept of domicile.34 34 See Tucker and others (n 2)11-026, 11-027. As further explained in Section 3.2, this would require a renvoi to municipal law. Definition C would be less stringent compared to Definition A, inasmuch as it would require proof of establishment of a trust in accordance with the law applicable in an ECT Contracting Party. Therefore, a trust established lawfully in England and Wales, the Isle of Man, Jersey or Guernsey, would arguably qualify as an investor under the ECT.35 35 The ECT extends to the Crown dependencies: the Bailiwicks of Guernsey and Jersey and the Isle of Man, but it is disputed if it continues to apply to the overseas territory of Gibraltar on a provisional basis. See Odysseas G Repousis, ‘The Application of Investment Treaties to Overseas Territories and the Uncertain Provisional Application of the Energy Charter Treaty to Gibraltar’ (2017) 32(1) ICSID Review-FILJ 170, 180–92. Under Definition B, a trust controlled by Swiss nationals or companies established under Swiss law, would qualify as an investor if the term ‘companies’ in conjunction with the terms ‘and other organizations’ are found to also include such entities as trusts. Moreover, it would also be necessary to show that the trust in question is effectively controlled by a Swiss national. In that respect, the relevant question would be whether control is vested in the trustee, the beneficiary or another person. For example, if the trustee of the trust is a Swiss national but the beneficiary is a South African national; will a trust be a covered investor under Definition B? This issue is further discussed below in Section 4. Another consideration is trust nationality. From a domestic law perspective, the nationality of a trust depends on the type of the trust or the type of issue in question. In the United States, for example, federal district courts have ruled that in diversity suits, when a trust retains the sole membership interest in a limited liability company, the court only takes into account the nationality of the trustee, not the nationality of the beneficiaries.36 36 See eg France v Thermo Funding Company, No 13 Civ 712(SAS), [2013] WL 5996148, SDNY, 12 November 2013, 1. However relevant under domestic law, such considerations do not appear controlling in investment arbitration. This is all the more so when considering that those investment treaties that grant standing to trusts require that the trust be constituted or otherwise organized under the laws of a contracting party. Therefore, emphasis is placed on the creation of the trust or the trust agreement and not on the nationality of such persons as the trustee or the beneficiary. Regardless, in Strategic Infrasol v India, a claim that is currently pending, the named claimants are an Emirati limited liability company (Strategic Infrasol Foodstuff LLC), and a joint venture established between the Thakur Family Trust and Ace Hospitality Management (UAE). Claimants appear to be arguing that the Thakur Family Trust, a trust allegedly established in India, is a national of the UAE because the managing trustee is resident in the UAE ‘and hence the Trust is a resident of UAE’.37 37 Strategic Infrasol Foodstuff LLC, The Joint Venture of Thakur Family Trust, UAE with Ace Hospitality Management DMCC, UAE v The Republic of India, Notice of Arbitration, 8 October 2015, paras 8 and 9; Reply to Second Notice of Arbitration, 21 February 2017, 3 (‘This is a case of treaty shopping by establishing a corporate vehicle in the United Arab Emirates to gain access to the India-UAE BIPA, as both Mr. Nitesh J Thakur and Thakur Family Trust are India entities, and there can be no nexus established between the Indian and the UAE entity at the time of entering into the oral agreement’). See also, India–UAE BIT, art 1(7) (‘the term “Company” means: … b) in respect of United Arab Emirates: any juridical person or other entity legally constituted under the laws and regulations of UAE and its local governments such as institutions, development funds, authorities, foundations , establishments, agencies, enterprises, cooperatives, partnerships, corporations, companies, firms, organizations and business associations or similar entities irrespective of whether their liabilities are limited or otherwise’). While the crucial issue in that case is likely to be whether the joint venture itself has standing, the ultimate answer to this question depends to a certain extent to the issue of renvoi discussed in Section 3.2 below. Overall, depending on the wording of the investment treaty at hand, trusts can qualify as covered investors under investment treaties. 3.1.2 Under the ICSID convention Article 25(2)(b), first sentence, defines nationals of another Contracting State as ‘any juridical person which had the nationality of a Contracting State other than the State party to the dispute’.38 38 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, 575 UNTS 159 (signed on 18 March 1965, entered into force on 14 October 1966) art 25(2)(b) limb b. Schreuer and others suggest that ‘legal personality is a requirement for the application of Art. 25(2)(b) and that a mere association of individuals or of juridical persons would not qualify’.39 39 Schreuer and others, art 25, para 690. In fact, in LESI v Algeria, the tribunal found that it did not have jurisdiction to hear a claim brought by a consortium of companies, which unlike the companies it was comprised of, did not have separate legal personality.40 40 LESI-DIPENTA v Algeria, Award, 10 January 2005, paras 37–41. See also Impregilo v Pakistan, Decision on Jurisdiction, 22 April 2005, paras 133–134 (‘It follows that the consent to arbitration contained in the BIT here does not cover claims by GBC, since GBC is not a “juridical person” for the purposes of the ICSID Convention’). ICSID’s travaux suggest that some opposition was directed towards extending the term ‘company’, which was included in the Preliminary Draft of the ICSID Convention, ‘to a mere association of natural persons or to an unincorporated partnership’.41 41 Schreuer and others art 25, para 689 (citing History, vol I, 122, vol II, 170, 284, 359, 360, 661). While the issue of trusts is not expressly addressed in the travaux and it also does not appear that an ICSID tribunal has previously dealt with this matter, the reference of Article 25(2)(b) to ‘juridical’ persons seems to dispose of the matter. This may directly clash with certain investment treaties, which as discussed above grant standing to trusts. In that case, it would appear that if the investors were minded to name the trust as a claimant, they will have to pursue non-ICSID arbitration. Similarly, under Article 25(2)(b), second sentence, the term used is ‘juridical person’. Therefore, trusts which have the nationality of the host State, but are controlled by investors of the other Contracting State, would also not have standing under the ICSID Convention. 3.2 Renvoi to municipal law: Is it admissible? The various objections that can be raised against trusts in investment treaty arbitration, call into question the extent, reach and applicability of domestic law in determining such matters. This is particularly so with respect to the interpretation of the trust instrument (known also as trust deed or trust agreement), and such treaty requirements as incorporation, domicile or seat, and issues of control. The permissibility of renvoi to municipal law has recently been examined in CEAC v Montenegro, a case dealing with a company incorporated in a common law jurisdiction (Cyprus) but investing in a civil law jurisdiction (Montenegro).42 42 CEAC Holdings Limited v Montenegro, ICSID Case No ARB/14/8, Award, 26 July 2016. The relevant treaty provision, which has already been discussed as Definition A in Section 3.1 above, adopts both incorporation and a seat requirement.43 43 Cyprus-Serbia and Montenegro BIT (2005), art 1(3)(b) (emphasis added). However, under Cypriot law, the concept of ‘seat’ is alien. Rather, similar to most common law jurisdictions, Cypriot law recognizes the concept of registered office. The tribunal thus had to determine whether CEAC qualified as an investor under the Cyprus-Serbia and Montenegro BIT despite the fact that the concept of ‘seat’ is non-existent under Cypriot law. In this respect, the majority determined that it was not necessary ‘to determine the precise meaning’ of the term ‘seat’ because ‘the evidence in the record’ did not support a finding that the Claimant ‘had a registered office in Cyprus at the relevant time’ and that it was ‘managed and controlled from Cyprus’.44 44 CEAC v Montenegro (n 42) para 148. With respect to the existence of a registered office, the majority found that the certificates adduced by the Claimant would as a general matter ‘indicate that a company indeed has a registered office at the address specified therein’.45 45 ibid, para 152. However, the majority found ‘itself compelled to first consider the issue of the probative value of a certificate of registered office or, more precisely, the precise extent of the facts which it certifies’.46 46 ibid, para 153. Finding so, the majority determined that the registrar of companies, does not carry out any official and independent verification as to whether a declaration made by a company concerning its registered office corresponds to reality.47 47 ibid, para 166. Based on these findings, the majority went on to examine whether the evidence on record supported a finding that the Claimant had a registered office in Cyprus at the time he filed the request for arbitration,48 48 ibid, para 169. and concluded that no such office was maintained by the Claimant.49 49 ibid, paras 173–199. Professor Park criticised the findings of the majority arguing that while the award ‘declines to determine the meaning’ of the term ‘seat’, it ‘nevertheless finds that CEAC has no seat in Cyprus’.50 50 CEAC v Montenegro (n 42) Separate Opinion of William W Park, para 1. In his dissenting opinion, Park explained that the Claimant actually ‘argued that “seat” corresponds to “registered office” in Cypriot law, defined as an office that has been registered’51 51 ibid, para 3. and under that scenario, Claimant’s counsel stated that ‘all you need to be satisfied of is that we have … incorporation … and a certificate of registered office’.52 52 ibid, para 3. Park further found that although the notion of ‘seat’ is alien to the English legal tradition from which Cyprus derives its companies law, ‘analogues can be found in the [Brussels] Regulation, providing that for Cyprus a statutory seat means, alternatively, registered office, place of incorporation or the place under the law of which the company formation took place’.53 53 ibid, para 14 (citing Dicey, Morris and Collins, Conflicts of Law (15th edn 2012) para 11-079: ‘a company has a seat in the UK if either (i) incorporated under UK law with registered office or some other official UK address or (ii) possessing central management and control exercised in the UK’). According to Park, international law ‘as it currently stands provides no uniformly accepted “ordinary meaning” of corporate seat’, which remains ‘essentially a municipal law concept derived from Continental systems, whereas Claimant’s incorporation occurred in a common law country lacking such notions’.54 54 ibid, para 18. See also para 12 (citing International Law Commission, Draft Articles on Diplomatic Protection with Commentaries 2006, A/61/10, YILC, vol II, pt Two (2006) art 9, cmt 3: ‘international law has no rules of its own for the creation, management and dissolution of a corporation or for the rights of shareholders and their relationship with the corporation, and must consequently turn to municipal law for guidance on this subject’). Moreover, Park opined that if the term ‘seat’ is equated with management and control, then this test would import into the BIT ‘an obligation of substantial economic activity similar to “denial of benefits”’,55 55 ibid, para 20. and concluded that the test that ‘best matches the meaning of “seat” in Cyprus’56 56 ibid, para 22. is ‘an office that is registered’.57 57 ibid, para 19. Under this test, Park found that the Claimant possessed a ‘seat’ and its claims could therefore not be dismissed ‘on this ground alone’.58 58 ibid, para 22. A similar issue arose in Tenaris v Venezuela, where the tribunal determined that the meaning of the term ‘seat’ had to be interpreted by recourse to municipal law.59 59 Tenaris SA and Talta - Trading e Marketing Sociedade Unipessoal Lda v Bolivarian Republic of Venezuela, ICSID Case No ARB/11/26, Award, 29 January 2016, paras 167, 169. Finally, the issue was revisited in Orascom v Algeria where the tribunal determined that a renvoi to municipal law was impermissible60 60 Orascom TMT Investments Sàrl v People’s Democratic Republic of Algeria, ICSID Case No ARB/12/35, Final Award, 31 May 2017, paras 278, 314, 315. finding that ‘in application of Article 31 of the VCLT, the Tribunal cannot agree that the requirement of siège social in Article 1(1)(b) of the BIT refers to domestic nationality requirements’.61 61 ibid, para 278. Based on the above, it could be argued that whether a renvoi to municipal law is permissible may well impact on the standing of trusts under investment treaties. Given that very few investment treaties expressly include trusts in the definitions of covered ‘investors’, it could often be the case that the very standing of trusts will depend on the applicability of municipal law when interpreting such treaty requirements as incorporation, seat or control. If the views of the tribunal in Tenaris and Park’s dissent were endorsed this could potentially lead to more broad interpretations, which would grant trusts standing to sue, despite the fact that such entities do not have a domicile or seat. 4. CLAIMS BY TRUST PARTIES A number of recent cases has shed light on some of the difficult jurisdictional questions that trusts pose when it comes to the standing of trust parties (for example, trustees or beneficiaries). As a general note, when it comes to the standing of trust parties, the question at issue is not so much one of jurisdiction ratione personae. As a matter of fact, in most cases, the trust parties that are named claimants are covered under the nationality requirements of the treaty they seek to invoke. What is mostly at issue is whether such claimants actually hold a qualifying investment, through (direct or indirect) ownership or control. Therefore, most of the issues that arise with respect to trust parties are issues of jurisdiction ratione materiae. As a general caveat, the exposition of the cases discussed below is not chronological but to the best of this author’s knowledge is reflective of the complete record of cases publicly available to date. 4.1 Who controls the trust and its assets? 4.1.1 Under investment treaties 4.1.1.1 Saba Fakes v Turkey In Saba Fakes v Turkey, a case under The Netherlands–Turkey BIT, the claimant (a Dutch national) had allegedly acquired a 67% shareholding through temporary share certificates in a leading Turkish telecommunications company (Teslim).62 62 Saba Fakes v Republic of Turkey, ICSID Case No ARB/07/20, Award, 14 July 2010, paras 2, 125, 133. According to those certificates the claimant held legal title to Teslim’s shares and Mr Uzan (a Turkish national) had the beneficial ownership of such shares.63 63 ibid, para 133 (‘Furthermore, the Claimant “would vote [his] shares as instructed by Mr. Uzan, and Mr. Uzan would make any final decision as to when and to whom the shares in Telsim would be sold”’). On that basis, the tribunal observed that the division of property rights amongst several persons or the separation of legal and beneficial ownership is commonly accepted in a number of legal systems, be it through a trust, a fiducie or any other similar structure. Such structures are in no way indicative of a sham or a fraudulent conveyance, and no such presumption should be entertained without convincing evidence to the contrary.64 64 ibid, para 134. On that basis, the tribunal accepted that The separation of legal title and beneficial ownership rights does not deprive such ownership of the characteristics of an investment within the meaning of the ICSID Convention or the Netherlands-Turkey BIT. Neither the ICSID Convention, nor the BIT make any distinction which could be interpreted as an exclusion of a bare legal title from the scope of the ICSID Convention or from the protection of the BIT.65 65 ibid. The tribunal thus determined that in principle, both trustees and beneficiaries could have standing to sue under the treaty and the ICSID Convention. Eventually however, the tribunal denied jurisdiction finding that the temporary share certificates did not even intend to grant legal title to Mr Fakes over Mr Uzan’s shares in Teslim.66 66 ibid, para 147. 4.1.1.2 Guardian Fiduciary v Macedonia In Guardian Fiduciary v Macedonia, the tribunal had to address the issue of control in the context of The Netherlands–Macedonia BIT. That BIT defines investors by reference to the term ‘national’, which comprises legal persons controlled by natural or legal persons of a Contracting State.67 67 Guardian Fiduciary Trust, Ltd, f/k/a Capital Conservator Savings & Loan, Ltd v Macedonia, former Yugoslav Republic of, ICSID Case No ARB/12/31, Award, 22 September 2015. Therefore, the tribunal had to determine whether the claimant, a company organized under the laws of New Zealand, was controlled by a Dutch foundation, and thus qualified as an ‘investor’ under the treaty.68 68 ibid, paras 2–7. The Dutch foundation indirectly owned the claimant through several subsidiaries. Specifically, the claimant was wholly owned by Capital Conservator Trustees Limited (CCT) a trustee company incorporated under the laws of New Zealand. CCT in turn was a wholly-owned subsidiary of IN Asset Management Limited (IN Asset Management) also a company incorporated under the laws of New Zealand. Finally, IN Asset Management was wholly owned by the Dutch foundation.69 69 ibid, para 5. The respondent denied that the claimant was controlled by the Dutch foundation. Rather, the respondent argued that the beneficial owner of CCT was not IN Asset Management but Capital Conservator Group LLC (CCG), a company incorporated in the Marshall Islands. CCG’s shares in CCT were transferred to IN Asset Management based on a trust deed, which provided that CCG was the beneficiary of the shares in CCT and IN Asset Management the trustee.70 70 ibid, para 7. However, under the trust deed, IN Asset Management was not entitled to encumber, transfer, assign or deal with the shares of CCT in any way without the written consent of CCG, and CCG could ‘appoint a new trustee and remove IN Asset Management as a trustee of CCT’.71 71 ibid, para 134. The record was thus silent on the existence of direction and control or the exercise of voting rights vested in IN Asset Management. This led the Tribunal to the conclusion that there was a lack of evidence on record regarding ‘the actual exercise of control, direct or indirect, by’ the Dutch foundation ‘over the Claimant’.72 72 ibid, para 135. Therefore, the tribunal found that the claimant was not a covered ‘investor’ because it was not indirectly controlled by IN Asset Management and the Dutch foundation but by CCG, a Marshall Islands company. This case reveals that when a trust structure is involved, such factors as the trustees powers of direction and control and the exercise of voting rights are determinative. In that case, the trustee didn’t have any direct or indirect control or voting rights over the trust or the trust assets. Ultimately, the Guardian Fiduciary case stands for the proposition that when dealing with trust structures, labelling is not determinative and issues of control should be decided on case-by-case analysis. This approach is consistent with the position other investment tribunals have adopted with respect to minority shareholders,73 73 See eg Bernhard von Pezold and others v Republic of Zimbabwe, ICSID Case No ARB/10/15, Award, 28 July 2015, para 324; International Thunderbird Gaming Corp v Mexico, Award, 26 January 2006, para 106. and suggests that depending on the form that a trust takes (for example a bare or a discretionary trust) the answer to questions of standing may be different. 4.1.1.3 Blue Bank v Venezuela In Blue Bank v Venezuela the claimant, Blue Bank, was a Barbados company which was appointed trustee of the Qatar Trust—a trust under the laws of Barbados—for the purpose of administering and managing the assets of that trust. Among the assets of the Qatar Trust figured shareholdings in two BVI Companies, which, in turn, were indirect shareholders in two Venezuelan companies, ITC and Hemesa.74 74 Blue Bank International & Trust (Barbados) Ltd. v Bolivarian Republic of Venezuela, ICSID Case No ARB 12/20, Award, 26 Apr 2017, para 46. Moreover, while it was disputed whether the Qatar Trust was a purpose or beneficiary trust, the tribunal determined that it was a beneficiary trust, since provision was made for the office of an ‘eligible person’, which term the tribunal considered to be equivalent to the office of a beneficiary.75 75 ibid, para 170. That eligible person was Hampton Latin American Holdings, Ltd, which was also the protector of the trust.76 76 ibid, para 179. The question that arose in those proceedings was whether Blue Bank had standing to bring a claim as trustee for the Qatar Trust.77 77 ibid, paras 136–37. The Tribunal underwent a detailed analysis of the Barbados International Trusts Act and the trust deed in question, and determined that Blue Bank did not have standing for the reasons discussed below. At the outset, the tribunal found that because the acquisition of the shares took place before the appointment of Blue Bank as trustee, Blue Bank had not made an investment but was merely providing trustee services for a fee.78 78 ibid, paras 159–73. This restrictive approach was motivated by the wording of the Barbados–Venezuela BIT, which defines covered investments as ‘every kind of asset invested by nationals or companies of one Contracting Party in the territory of the other Contracting Party’.79 79 Barbados–Venezuela BIT (1994) art I(a). This approach finds a parallel in the findings of the tribunal in Standard Chartered v Tanzania.80 80 Standard Chartered Bank v United Republic of Tanzania, ICSID Case No ARB/10/12, Award, 2 November 2012. That case was brought under the UK–Tanzania BIT, which requires that [e]ach Contracting State shall encourage and create favourable conditions for nationals or companies of the other Contracting State to invest capital in its territory and, subject to its right to exercise powers conferred by its laws, shall admit such capital.81 81 UK–Tanzania BIT (1994) art 2(1). In light of this provision, the tribunal found that the active verb ‘to invest’ suggests ‘an active relationship between the investor and the investment’82 82 Standard Chartered Bank v Tanzania (n 80) paras 229, 230. and to benefit from the BIT’s investor–state arbitration clause a claimant must demonstrate that the investment was made at the claimant’s direction, that the claimant funded the investment or that the claimant controlled the investment in an active and direct manner. Passive ownership of shares in a company not controlled by the claimant where that company in turn owns the investment is not sufficient.83 83 ibid, para 230. This approach appears overly formalistic84 84 See also ibid, paras 231 and 232 (‘The Tribunal is not persuaded that an “investment of” a company or an individual implies only the abstract possession of shares in a company that holds title to some piece of property … Rather, for an investment to be “of” an investor in the present context, some activity of investing is needed, which implicates the claimant’s control over the investment or an action of transferring something of value (money, know-how, contacts, or expertise) from one treaty-country to the other’). See also ibid, para 255. and it is not entirely certain that the Blue Bank tribunal had Standard Chartered in mind when it opined on this matter. Still, situations of passive ownership or control are likely to be present in most trust cases. It is therefore foreseeable that this new line of argument may become prevalent in future cases involving trusts. In any case, the tribunal in Blue Bank went on to consider other factors and thus did not confine its analysis to the issue of passive ownership or control. Specifically, the tribunal found that Blue Bank’s legal title over the trust assets did not mean that it was ‘an owner in any relevant sense of the word’.85 85 Blue Bank v Venezuela (n 74) para 168. Rather, the tribunal opined that the party that would come closest to satisfying the requirements of ‘ownership’ with regard to the assets of the Qatar Trust is what the trust deeds refer to as the ‘Eligible Person’ (which is not a term of art but one that the Tribunal … considers to be a beneficiary). It is the ‘Eligible Person’, in this case Hampton, that enjoys ultimate control over the trust assets and that will ultimately enjoy or suffer, as the case may be, the fortunes of the trust assets.86 86 ibid, para 170. Finding that the Qatar Trust was created for the benefit of Hampton,87 87 ibid, paras 170, 179. the tribunal went on to examine whether the trustee (Blue Bank) was in a position to act with some independence in administering the trust (as it should).88 88 ibid, para 196. By examining the trust terms, the tribunal came to the conclusion that Blue Bank could not ‘perform many essential trustee functions independently, but, with respect to them’ was ‘under the control of Hampton, as both the Eligible Person and the Protector of the Qatar Trust’.89 89 ibid. Therefore, Hampton was essentially in ‘full control over Blue Bank’s management of the Qatar Trust’ as it decides the way in which earnings are distributed …, it has the power to remove the trustee and, in its capacity as Eligible Person (not a term of art), it is the beneficiary of the earnings distributed at its own discretion, without being accountable to anyone. It is, for all intents and purposes, the “real” owner of the purported investment in the BVI Companies.90 90 ibid, para 197. The findings of the tribunal in Blue Bank are therefore illustrative inasmuch as they show that tribunals will not dwell on a labelling exercise, but will endeavour to look at the substance, not the form that a trust structure may take. This is consistent with domestic courts, which as explained above tend to look closely at trust instruments and a trust’s mode of operation before determining whether the trust is a ‘sham’, and should thus not be enforceable. 4.1.1.4 Mercer v Canada An interesting factual matrix was also present in Mercer v Canada, a case which is currently pending.91 91 Mercer International Inc. v Government of Canada, ICSID Case No ARB(AF)/12/3. In that case, the claimant, Mercer LLC, a public company organized under the laws of the State of Washington, owned and operated an industrial plant in Canada, which consisted of a pulp mill and a biomass-energy generation facility.92 92 ibid, Request for Arbitration, 30 Apr 2012, para 1. Mercer had structured its investments through Celgar, a Canadian wholly-owned subsidiary. Specifically, Celgar owned all of the assets of the plant, in trust for the benefit of the unit holders in the Celgar Partnership. In turn, the Celgar Partnership, was formed by Celgar and Mercer as a Canadian limited partnership. According to the partnership agreement, Celgar was the general partner and owned a residual 0.1% economic interest in the partnership, while Mercer was the limited partner and owned the remaining 99.9% economic interest.93 93 ibid, para 13. In other words, Celgar was the trustee and the Celgar Partnership the beneficiary. However, Mercer chose to bring a claim under its own name and Celgar or the Celgar Partnership was not included as claimants (as it could have been the case on the basis that they were effectively controlled by Mercer). This case shows that when all economic interests ultimately accrue to the claimant, focusing on who is the named beneficiary is not likely to be controlling. Indeed, under the trust structure discussed above, it was the Celgar Parnership that was the beneficiary of the trust assets, and Celgar the trustee. Mercer was entitled to 99.9% of the economic interests arising from the partnerships operations, and was strictly speaking not the owner of the trust assets (the pulp mill and the energy generation facility). 4.1.1.5 Howard v Canada In Howard, a claim that was eventually discontinued, the investments were held through a trust, the Howard Family Trust (HFT), which was a Canadian irrevocable family trust. Specifically, the main investments were two Canadian corporations, Centurion Health Corporation and Regent Hills Health Centre Inc. Those investments were owned by the HFT and were managed by Howard Capital Management LP, a US limited partnership which had been appointed as trustee of the HFT.94 94 Melvin J Howard, Centurion Health Corp. & Howard Family Trust v The Government of Canada, UNCITRAL, PCA Case No 2009-21, Notice of Arbitration, 5 January 2009, 4; Statement of Claim, 2 February 2009, 3. That case was brought under the NAFTA, which as discussed above expressly includes trusts in the definition of covered investors. On that basis, the named claimants in that case were Melvin Howard (a US citizen), HFT and the Canadian corporations. Furthermore, while the trust (HFT) was named as a claimant, the trustee (Howard Capital Management LP) was not. While it is not clear whether Melvin Howard was the beneficiary under the trust, the nature of HFT, being an irrevocable trust, denotes that Melvin Howard was most likely the settlor. If that was indeed the case, it could have been argued that Melvin Howard did not hold an investment under the NAFTA as a settlor would normally not be in control of the trust or the trust assets. Moreover, HFT being a Canadian trust, as well as the two Canadian corporations could only have been considered US investors if they were effectively controlled by a US national, in that case Melvin Howard.95 95 ibid, Notice of Arbitration, 5 January 2009 (terminated). If Melvin Howard did not have control over the trust and its assets, the afore-mentioned entities would not have qualified ratione personae under the NAFTA. As Blue Bank suggests, in such cases, tribunals are more likely to look into the overall economic transactions focusing on the entity that is in fact in control of the trust’s fortunes. Thus, even if Melvin Howard was merely a settlor, this would not have been dispositive of his claim. 4.1.1.6 EMELEC v Ecuador In EMELEC, the claim was initiated under the US-Ecuador BIT96 96 US–Ecuador BIT (signed 27 August 1993, entered into force on 11 May 1997). by Empresa Eléctrica del Ecuador, Inc. (EMELEC), a company incorporated in the US, whose shares were fully owned by NEPEC, a company incorporated in the Bahamas.97 97 Empresa Eléctrica del Ecuador, Inc. v Republic of Ecuador, ICSID Case No ARB/05/9, Award, 2 June 2009, para 2. In 1925, EMELEC had opened a branch in Ecuador and had entered into a 60-year concession contract for the production, transmission, and distribution of electricity.98 98 ibid, para 81. After the termination of the initial term in 1985, EMELEC continued to operate on the basis of provisional permits.99 99 ibid. In 1993, NEPEC was acquired by Mr Fernando Aspiazu Seminario, an Ecuadorian national who was also the owner of an Ecuadorian bank, Banco del Progreso S.A. (BdP).100 100 ibid, para 82. However, in 1999, BdP was taken over and entered into a restructuring process under the control of the Deposit Guarantee Agency (AGD), a State agency which was required by law to refund 100% of the deposits made by the bank’s customers.101 101 ibid. To cover the debt owed to the depositors of BdP, Mr Aspiazu created a revocable trust in the Bahamas, named Progreso Repatriation Trust (PRT I), to which he transferred all his interests in NEPEC and EMELEC.102 102 ibid, para 85. As fully explained below, PRT I was the first in a series of three trusts to which Mr Aspiazu’s aforementioned interests were transferred with the view to create a fund that would indemnify the depositors of BdP. Before explaining the details of this scheme, it is also important to focus on the claim that EMELEC brought against Ecuador. Specifically, after BdP was taken over and entered into restructuring, EMELEC claimed that in 2000, Ecuador expropriated its premises, bank accounts and other property located in Ecuador.103 103 ibid, para 41. It was therefore on that basis that EMELEC brought the treaty claim. In order to determine whether it had jurisdiction to hear EMELEC’s claim, the tribunal found that it had to determine whether the person that had filed EMELEC’s claim had the legal capacity required.104 104 ibid, paras 75 and 76. That issue was crucial but nevertheless difficult to easily ascertain in light of the trust structures in place. In more detail, the first trust, PRT I was created in 1999 by Mr Aspiazu and his wife.105 105 ibid, para 87. While the latter were the settlors (‘grantors’), ‘by precise stipulation, retained the right … to direct the trustee with respect to the transactions into which he was authorized to enter’, in addition to retaining the right to revoke the trust (in which case the property forming part of the trust would be conveyed to the grantors).106 106 ibid, para 88. By express provision of the trust deed, the trustee of PRT I also had the right to ‘submit to arbitration obligations or claims, including claims in respect of taxes, in favor of or against the Trust’.107 107 ibid, para 89. PRT I was eventually terminated pursuant to a deed of termination and a letter containing the instructions of Mr and Mrs Aspiazu,108 108 ibid, paras 90–93. whereby Mr Heberling was appointed successor trustee.109 109 ibid, para 92. In February 2000, and in accordance with the deed of termination, Mr Heberling created a new trust (the second trust), the Progreso Depositors Trust (PDT), in which he appointed himself as trustee.110 110 ibid, para 97. The beneficiaries of PDT were BdP’s creditors and neither Mr Aspiazu nor Mrs Aspiazu were designated as beneficiaries.111 111 ibid, para 99. Moreover, PDT, unlike PRT I, was an irrevocable trust.112 112 ibid. Pursuant to PDT’s trust deed, PDT’s trustee could be removed by action of the Board of Protectors.113 113 This in fact did occur. See ibid, para 108. Moreover, under the trust deed, the trustee was obliged to sell the shares and other assets of NEPEC and EMELEC with the view to best serve the interests of the beneficiaries (here the depositors of BdP).114 114 ibid, para 100. In 2003, Mr and Mrs Aspiazu created a revocable trust (the third trust), Progreso Repatriation Trust (PRT II), whereby they purported to transfer all their interests in NEPEC and EMELEC.115 115 ibid, para 111. The trustee of PRT II was Mr Lluco, and the trustees of PDT, ‘who are vested with the trust fund’, were directed to transfer the property to Mr Lluco.116 116 ibid, para 118. Finally, the beneficiaries of PRT II were the depositors of BdP and the Aspiazus.117 117 ibid, para 116. The validity of PRT II was questioned throughout the proceedings118 118 ibid, paras 116–25. with the tribunal eventually finding that Mr and Mrs Aspiazu ‘did not have in their power the share certificates of NEPEC establishing ownership of EMELEC, among other assets held by the trust’ since these ‘share certificates had been conveyed to the trustees of PDT’.119 119 ibid, para 119. On that basis, the tribunal found that it did not have jurisdiction to hear EMELEC’s claim because the ‘persons who acted on behalf of EMELEC do not have the required legal capacity’.120 120 ibid, paras 130, 136. In the words of the tribunal: Even assuming that it could be argued (i) that the provisions of the PRT II include the granting of authority to file and pursue this arbitration; (ii) that EMELEC is a United States company; and (iii) that EMELEC has substantial business activities in the United States, the Tribunal concludes that the attorneys of Mr. Lluco, the putative trustee of PRT II in this arbitration, have not met the burden of proving to the Tribunal’s satisfaction that the control and power to represent EMELEC were transferred to PRT II. Mr. Lluco’s attorneys have not demonstrated that the terms and conditions stipulated in the PDT are ‘of no effect and substance,’ to quote the words of the preamble to PRT II. If it is acknowledged that Mr. and Mrs. Aspiazu were legally competent to terminate PRT I then simple logic would dictate, on the basis of this same legal competency set forth in the Deed of Termination, that Mr. and Mrs. Aspiazu (or Mrs. Aspiazu) would have the legal capacity to authorize the establishment of the PDT, a trust which, according to its own provisions, is irrevocable.121 121 ibid, para 125. It follows, that the tribunal in EMELEC did not eventually opine on the standing of trust parties under investment treaties, since the crux of the matter at issue was whether the arbitration claim had been properly authorized. This issue is further discussed below in Section 4.2. However, suffice it to say that the findings of the tribunal in EMELEC are based on a close reading and adherence to the mechanics of trusts and their operation under domestic law. Thus, while not expressly stated, the syllogism of the tribunal appears to revolve around the principle that the ability to sue for interferences with the trust assets is generally vested in the trustee.122 122 See Section 2. While one may not prognosticate how the tribunal would have ruled in the event that it had accepted jurisdiction, it bears noting that its findings imply that it would have accepted jurisdiction over EMELEC if the claim was filed by the trustee of PDT. Regardless, the tribunal was open to entertaining a test focusing on actual control, but the claimant did not meet its burden of proving that ‘the control and power to represent EMELEC were transferred to PRT II’.123 123 EMELEC v Ecuador (n 97) para 125. Overall, it appears that there is no easy answer when dealing with trust parties and their standing to sue under investment treaties. What stems nevertheless from the above cases is that tribunals are reluctant to entertain claims filed by trustees who do not appear to be in control of the trust’s fortunes. The findings of the tribunals in Fakes, Guardian Fiduciary and Blue Bank are illustrative in this respect. In fact, the tribunal in Blue Bank stands out for effectively piercing the trust’s legal veil and finding that it was the beneficiary (who also happened to be the protector) that had retained control over the trust and its assets—not the trustee. While that tribunal did not find that the trust was a sham and was thus unenforceable, it effectively reached the same conclusion. Moreover, as explained above in Section 2, apart from those cases where a trust may be considered to be a sham, the settlor may retain control over certain trust assets, especially when this is done through voting shares. While investment tribunals have not dealt with this situation, it would appear that voting control is important when determining ownership over an asset, but this will not necessarily be determinative of the issue.124 124 See eg Aguas del Tunari, SA v Republic of Bolivia, ICSID Case No ARB/02/3, Decision on Respondent’s Objections to Jurisdiction, 21 Oct 2005, para 264 (finding that the reference of the BIT to investments ‘directly or indirectly controlled’ means ‘that one entity may be said to control another entity (either directly … or indirectly) if that entity possesses the legal capacity to control the other entity. Subject to evidence of particular restrictions on the exercise of voting rights, such legal capacity is to be ascertained with reference to the percentage of shares held’). See also Vacuum Salt Products Ltd v Republic of Ghana, ICSID Case No ARB/92/1, Award, 16 Feb 1994, para 43 (which nevertheless dealt with foreign control under the ICSID Convention). On the other hand, while the tribunals in Fakes and EMELEC did not opine on the standing of trust parties per se, their findings nevertheless imply that trustees may, under certain circumstances, have standing to sue. Furthermore, a distinction between EMELEC and Blue Bank is that in the former case, the named claimant was actually one of the assets held in trust, while in the latter case the claimant was the trustee. 4.1.2 Under ICSID As pointed out by the tribunal in Fakes v Turkey, the ICSID Convention does not make ‘any distinction which could be interpreted as an exclusion of a bare legal title from the scope of the ICSID Convention’.125 125 Fakes v Turkey (n 62) para 134. In principle therefore, any trust party could potentially have standing to sue under the ICSID Convention. What may be less clear is the application of the foreign control clause under Article 25(2)(b), second sentence. As discussed above in Section 3.1, a trust which has the nationality of the host State, but is controlled by investors of the other Contracting State, would not have standing under the ICSID Convention because the ICSID Convention requires that a covered ‘investor’ be a juridical person and a trust does not have legal personality. The case is nevertheless different when dealing with trust parties, which will typically have legal personality. In that case, if certain trust assets are local entities, such as in the example of the two Venezuelan companies, ITC and Hemesa, in Blue Bank, it may be relevant to determine whether such local entities, may also have standing (here ratione personae) under the treaty and the ICSID Convention. In general, the local entities may have standing only if the trust party that is in control of the trust and its assets is covered under the nationality requirements of the treaty in question and the requirements of the ICSID Convention are satisfied. Take for example the case in Blue Bank. The claimant in that case was covered under the Barbados–Venezuela BIT, since it was a company incorporated in Barbados. Moreover, in accordance with Article I(d) of that BIT, the term ‘company’ in the definition of covered investors also includes ‘any company incorporated or constituted under the law in force in one Contracting Party which is owned or effectively controlled by nationals or companies of the other Contracting Party’. As explained above, the Qatar Trust owned ITC and Hemesa through BVI entities. Depending therefore on who was in control of ITC and Hemesa they could also be named as claimants. In this respect, suffice to say that ICSID tribunals have consistently held that the requirement of ‘foreign control’ under Article 25(2)(b) should be appraised against the backdrop of several factors, including ownership, voting rights and effective or de facto control. Thus, shareholding, managerial responsibility, voting rights, nationality of board members and other similar criteria become relevant when defining the notion of ‘foreign control’ but as is often stated, there is no ‘formula’.126 126 See Vacuum Salt v Ghana (n 124) para 43. See also Caratube International Oil Company LLP v The Republic of Kazakhstan, ICSID Case No ARB/08/12, Award, 5 June 2012, para 407. If nevertheless the trust is ultimately controlled by nationals of the host state, seeking to establish a tribunal’s jurisdiction over local entities under Article 25(2)(b) will not be effective. Moreover, in such cases, the tribunal will also be allowed to lift the pierce the corporate veil and look behind any corporate and trust structures to determine who the ultimate owner of the local entities is. This approach may sound draconian but has been affirmed in at least three ICSID cases.127 127 See TSA Spectrum de Argentina SA v Argentine Republic, ICSID Case No ARB/05/5, 19 Deemberc 2008, Award, paras 1–14, 133–62; Burimi SRL and Eagle Games SHA v Republic of Albania, ICSID Case No ARB/11/18, 29 May 2013, paras 1–3, 109–22; National Gas SAE v Arab Republic of Egypt, ICSID Case No ARB/11/7, 3 April 2014, Award, paras 73–149. 4.2 Who is authorized to bring a claim on behalf of the trust or the trust assets? As explained above in Section 4.1(vi), the tribunal in EMELEC found itself bereft of jurisdiction due to the fact that the claim at issue had not been authorized by the trustee. On the other hand, in Blue Bank, although the claim was filed by the trustee, the tribunal determined that it also did not have jurisdiction finding that the entity which was in fact in control of the trust assets was Hampton, the named beneficiary and protector. These findings bring to mind the requirement of corporate authorization, which is a conditio sine qua non an arbitration claim, may not be filed. In those cases, the rules governing corporate authorization are those provided for under the laws under which a company has been established. This has been established in Scimitar v Bangladesh, a claim under a concession contract, in which the respondents objected to jurisdiction on the ground that proceedings had been instituted by persons not competent to act for Scimitar, a company incorporated in the British Virgin Islands (BVI).128 128 Scimitar Exploration Limited v Bangladesh and Bangladesh Oil, Gas and Mineral Corporation, ICSID Case No ARB/92/2, Award, 4 May 1994. The tribunal found that: It is the joint position of the Parties that the law applicable to the question of corporate transactions and governance is the law of the British Virgin Islands. Upon its own review of applicable law, the Tribunal sees no reason to depart from this position, which is consonant with Article 42 [of the ICSID Convention]. … The Tribunal has also examined the question of corporate authorization under the law of the British Virgin islands, which is that proceedings initiated by a corporation without proper corporate authority or authorization are invalid.129 129 ibid, paras 26, 28 (cited in Schreuer and others, art 42, para 159). On that basis, the tribunal found that the claim had not been initiated pursuant to those procedures required under BVI law to effectuate a valid corporate authorization, and determined that it did not have jurisdiction over the dispute.130 130 Scimitar Exploration Limited v Bangladesh and Bangladesh Oil, Gas and Mineral Corporation, ICSID Case No ARB/92/2, Award, 4 May 1994, para 29. By analogy, when it comes to trusts, the rules governing authorization should be the rules governing the creation of the trust, without prejudice to potentially applicable conflict of laws rules or the Hague Convention.131 131 See Hague Convention on the Law Applicable to Trusts and on their Recognition (n 3). As explained above in Section 2, under most trust laws, the power to assert claims will generally be vested in the trustee, but there may be a number of situations where beneficiaries and potentially other persons, such as the protectors, will be able to authorize claims and exercise rights. A question that may thus arise in investment arbitration is whether this requirement should be considered mandatory where a trust is found to be a sham or it is otherwise determined that certain trust parties—other than the trustee—are in fact in control of the trust’s fortunes. 5. TRUST ASSETS AND DISTRIBUTION Another issue that arises from the investment treaty cases discussed in Section 4 has to do with the distribution of any resulting damages award. As a matter of fact, what those issues discussed in Section 4 does not answer is what actually happens to any resulting award. A finding that an investment at issue was an investment owned or controlled by a beneficiary who may have standing under an investment treaty (whether the claim was authorized by the trustee or not) does not necessarily mean that any resulting damages awarded for the harm inflicted on that investment should be payable to the beneficiary. Rather, unless the trust is found to be a sham and is dissolved through municipal court proceedings, it would appear that any such damages should form part of the trust’s assets and any benefits arising from a damages award should be distributed in accordance with the trust deed. If this assumption is correct, it somewhat casts doubt on those approaches barring trustees from bringing investment treaty claims. Analogous considerations underpin the rationale behind the ability to bring claims on behalf of local entities, or the ability of local entities to be claimants. The former is provided for under such treaties as the NAFTA,132 132 See NAFTA (n 26), art 1117; US Model BIT 2012, art 24(1)(b); Meg N Kinnear and other (eds) Investment Disputes under NAFTA: An Annotated Guide to NAFTA Chapter 11 (Kluwer Law International 2006 & 2008 Suppl) art 1116, 1–41 and art 1117, 1–6; Andrea K Bjorklund, ‘NAFTA Chapter 11’ in Chester Brown (ed), Commentaries on Selected Model Investment Treaties (OUP 2013), 500–04. and the latter is precisely the case, inter alia, under ICSID Article 25(2)(b), second sentence, discussed above. First, ‘[i]t is quite usual for host States to require that foreign investors carry on their business within their territories through a company organized under the laws of the host country’ and ‘[i]f no exception were made for foreign-owned but locally incorporated companies, a large and important sector of foreign investment would be outside the scope of the Convention’.133 133 Aaron Broches, ‘The Convention on the Settlement of Investment Disputes between States and Nationals of Other States’ (1972)136 Rec Des Cours 355, 358–59, also in Aron Broches, Selected Essays, World Bank, ICSID, and Other Subjects of Public and Private International Law (Martinus Nijhoff 1995) 201, 202. Second and most importantly, allowing a locally incorporated entity to directly file a claim against the host state ensures that damages are paid to the locally incorporated entity itself, rather than to the investor. Indeed, enabling claims by and on behalf of local entities (i) ‘ensures that all investors in the enterprise receive some share in, or benefit from, any damages paid’, (ii) ‘ensures that creditors of the enterprise are not circumvented in claiming whatever share might be owed them’, and (iii) determines whether ‘the tax treatment of the award might change depending on which entity received the award’.134 134 Bjorklund (n 132) 503 (referring to art 1117 NAFTA, that enables claims by investors of one Contracting Party, on behalf of an enterprise of the host state). See also Lee M Caplan and Jeremy K Sharpe, ‘United States’ in Commentaries on Selected Model Investment Treaties (OUP 2013) 766–70. These considerations may equally apply when the trust itself is not a claimant but rather a trust party brings a claim for the harm inflicted on the trust assets. In those cases, if any resulting damages award would have to form part of the trust assets and would have to be distributed in accordance with the trust deed, granting trustees standing to sue (ratione materiae) may not be too sweeping an argument to make. Equally this can be a consideration that tribunals could factor in before determining that a beneficiary is a covered investor (ratione materiae). These findings may not always be possible as much will depend on nationality requirements, the trust deed and the factual matrix at issue. However, one can easily anticipate situations where there are multiple beneficiaries but only one of them is covered under an investment treaty. In those cases, any resulting damages award would most likely form part of the trust assets and will have to be distributed to the beneficiary that had standing under the treaty as well as those other beneficiaries that happened not to be covered under an investment treaty. This dilemma is somewhat echoed in the debate about minority shareholder claims, but those cases are distinct inasmuch as those minority shareholders would normally only be allowed to claim for the value of their shareholdings.135 135 See generally Zachary Douglas, The International Law of Investment Claims (CUP 2009) 284–327. In the case of trusts, the beneficiaries are most likely to have a ‘floating’ equitable interest over the entirety of the trust assets. This means that enabling such beneficiaries to file claims in respect of the entirety of the trust assets may do violence to the rights of other beneficiaries. These issues are not easy to answer in the abstract but arguably capture the difficult issues and the legal debates that may be generated depending on who is recognized as the claimant in investment treaty proceedings, and how trust assets should be distributed pursuant to the trust deed in question. 6. TRUSTS AND ADMISSIBILITY ISSUES Trust structures may also be relevant when considering various admissibility issues. Therefore, changes in the nationality of trustees and beneficiaries with the view to gain access to a treaty’s protective veil could potentially be caught by the admissibility defence against abusive forum shopping.136 136 See Phoenix Action, Ltd. v The Czech Republic, ICSID Case No ARB/06/5, 15 April 2009, Award; Philip Morris Asia Limited v The Commonwealth of Australia, UNCITRAL, PCA Case No 2012-12, 15 December 2015, Award on Jurisdiction and Admissibility. Similarly, parallel claims brought by various trust parties and the trust itself may also be rejected as an abuse of the arbitral process.137 137 See Ampal-American Israel Corporation and others v Arab Republic of Egypt, ICSID Case No ARB/12/11, 1 February 2016, Decision on Jurisdiction; Orascom v Algeria (n 60). A good illustration of how trusts may trigger admissibility defences is the denial of benefits clause as applied in Yukos. In these cases, the first claimant, Yukos Universal Ltd (YUL), was a company organized under the laws of the Isle of Man and was wholly-owned by GML a company incorporated in Gibraltar. GML was in turn owned by seven Guernsey trusts.138 138 Yukos v Russia (n 24) paras 1 and 536. The second claimant, Hulley Enterprises Ltd, was a Cypriot company whose sole shareholder was YUL.139 139 ibid, para 535. Finally, the third claimant, Veteran Petroleum Ltd, was also a Cypriot company whose ownership and control was vested with Chiltern, the trustee of a trust settled in Jersey, whose settlor as well as beneficiary was YUL.140 140 ibid, para 521. The question that therefore arose was whether Russia’s invocation of the denial of benefits provision satisfied the first limb of Article 17 of the ECT,141 141 ibid, paras 443–555. which provides that a Contracting Party ‘reserves the right to deny the advantages of’ the ECT to ‘a legal entity if citizens or nationals of a third state own or control such entity’.142 142 ECT (n 33) art 17(1) (emphasis added). Given that the United Kingdom had extended the application of the ECT to the Isle of Man, Jersey and Guernsey, and applied the ECT provisionally to Gibraltar, the tribunal eventually concluded that the first limb of Article 17 was not satisfied as claimants were owned or controlled by nationals of the United Kingdom.143 143 Yukos v Russia (n 24) paras 536, 537. This case is illustrative for two main reasons. First, it shows how trust structures may be scrutinized through the reach of admissibility defences. Secondly, it shows that when trust structures are interwoven, in the sense that the offices of the settlor, the trustee and the beneficiary are assumed by multiple claimants, all of whom qualify under one or multiple investment treaties, issues of ownership or control may be less complex despite the sophisticated legal structures put in place.144 144 ibid. 7. TRUSTS AND QUANTUM In Occidental v Ecuador, Occidental brought a claim under the US–Ecuador BIT for claims arising out of the termination of a 1999 Participation Contract between Occidental and PetroEcuador for the exploration and exploitation of hydrocarbons in Block 15 of the Ecuadorian Amazon region. In 2000, Occidental had entered into two agreements with AEC, a Bermudan subsidiary of EnCana, a Canadian oil and gas company (the ‘AEC Farmout Agreement’ and the ‘AEC Operating Agreement’, together the ‘AEC Agreements’).145 145 Occidental Petroleum Corporation and Occidental Exploration and Production Company v Republic of Ecuador, ICSID Case No ARB/06/11, Decision on Jurisdiction, 9 September 2008, para 12. AEC was subsequently acquired by Andes, a Chinese company. Pursuant to the AEC Agreements, Occidental granted AEC a 40% economic interest in the share of the production from Block 15, and AEC agreed to pay to Occidental certain annual amounts over a four-year period and 40% of the operating costs.146 146 ibid, para 13. At the end of the four-year period, and on the condition that Occidental would obtain necessary government approvals, it was agreed that Occidental would assign legal title to AEC over the 40% share of the production.147 147 ibid, para 14. However, in 2004, when Occidental requested approval from Ecuador to proceed with the transfer of legal title, the approval was not granted.148 148 ibid, para 16. During the course of the arbitration proceedings, Ecuador argued that any calculation of damages to be awarded must be limited to the 60% interest in Block 15 retained by Occidental and should not include the 40% economic interest of AEC.149 149 Occidental v Ecuador (n 145) Award, 5 October 2012, para 571. Contrarily, Occidental argued that since it was the sole owner of the 1999 Participation Contract, it had the necessary standing to claim 100% of any damages arising therefrom.150 150 ibid, para 575. The tribunal looked at this issue from various angles, and determined that the assignment of the 40% economic interest to AEC in 2000 was not valid since it was never authorized by Ecuador, and was thus null and void.151 151 ibid, paras 649–50. On that basis, the tribunal disregarded the AEC Agreements for purposes of determining compensation and eventually found that Ecuador was obliged to compensate Occidental for 100% of their interest in Block 15,152 152 ibid, paras 650–51. ordering payment of USD 1.76 billion in damages.153 153 ibid, para 825. Arbitrator Stern disagreed with the majority finding that for the Occidental-AEC arrangement to be found null and void, a court-ordered declaration of nullity was necessary and neither Occidental nor PetroEcuador had requested or obtained one.154 154 Occidental v Ecuador (n 145) Dissenting Opinion of Prof. Stern, 20 September 2012, paras 114, 115. Therefore, Stern expressed the view that Occidental could only recover 60% of the damages under the Participation Contract.155 155 ibid, para 165. Ecuador subsequently initiated annulment proceedings and was successful in partially annulling the award on the basis that the majority should not have assumed jurisdiction over an investment beneficially owned by parties not covered under the BIT, ie Chinese investor Andes. On that basis, the Annulment Committee reduced the damages awarded by an unprecedented USD 700 million.156 156 Occidental v Ecuador (n 145) Decision on Annulment, 2 November 2015, paras 136ff. This case illustrates the difficult issues that trust structures raise when it comes to the quantification of damages. Overlooking the trust structures in place is therefore not advisable as this may render any resulting award amenable to annulment or set aside proceedings. 8. CONCLUSION While trusts are at the forefront of international investment structuring and are often implicated in investment treaty disputes, their inherent complexity raises a host of issues that may prove cumbersome and at times difficult to resolve without putting at risk the prospects of an award’s enforceability. This is all the more evident when considering the Occidental saga. Moreover, while it may be too early to draw any conclusive remarks based on the cases discussed in this article, it would appear that trusts test the somewhat laggard abilities of investment treaties to entertain the complexity of modern day investment practices. At the same time, the findings of the tribunals in such cases as Fakes, EMELEC, Guardian Fiduciary and Blue Bank reveal that the relevant inquiry is one of substance not form. This guiding principle, in all its simplicity, appears to be the most appropriate synopsis of the current state of the law in investment treaty cases involving trusts. © The Author(s) 2018. Published by Oxford University Press on behalf of the London Court of International Arbitration. All rights reserved. For permissions, please email: journals.permissions@oup.com This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/about_us/legal/notices)

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Arbitration InternationalOxford University Press

Published: Jun 5, 2018

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