The assignment of arbitration agreements has been the subject of multiple rulings by domestic courts of various countries. This body of case law, with its own principles, is not directly applicable to assignment in investment arbitration.
Assignment is the transfer of rights, property or other benefits from an assignor to an assignee. In investment arbitration, an investor transfers its claims to a third party, which subsequently may have the right to pursue this claim.
In investment arbitration, the assignment will concern claims, as opposed to arbitration agreements often contained in a bilateral investment treaty or State legislation.
The assignment of investment arbitration claims has multiple objectives. It can be a way of increasing liquidity before an investor divests from a country. In such a configuration, an investor with a potential arbitration claim sells it before divesting from the country. Assignment can also be used by liquidators, who can increase the assets available to creditors by selling and assigning viable claims.[1] On the other hand, in the presence of multiple claims, those deemed less meritorious can potentially be sold and assigned to fund claims that are more likely to succeed, which can be an alternative to third-party funding.
Claimants undergoing mergers or other corporate restructurings can also have their claim pursued by the succeeding entity. In such cases, the successor is in principle under treaty protection if the original claimant satisfied jurisdictional requirements.[2]
Jurisdictional Challenges
Although assignment in investment arbitration is admitted and practised, it presents unique challenges, not all of which are encountered in commercial arbitration. These challenges primarily centre on nationality (ratione personae) and temporal (ratione temporis) prerequisites to an arbitral tribunal’s jurisdiction.
Ratione Personae
Before an investment arbitration has been initiated, applicable investment treaties may determine whether an investor is a protected investor by defining nationality. While in some investment treaties, mere incorporation suffices, other treaties have more stringent rules on nationality.
In some investment treaties, an investor can only be protected if it is controlled by nationals of a State party to the investment treaty. In other investment treaties, the seat of the investor must be in a State party to the applicable investment treaty. If the applicable investment treaties narrowly define nationality, assignment may not be viable.
Yet, if this assignment occurs after an investment arbitration has been initiated, it does not in principle affect jurisdiction. Once jurisdictional requirements related to nationality are satisfied, they are in principle not affected by subsequent assignments. In CSOB v. Slovakia, the tribunal held that:
[I]t is generally recognized that the determination whether a party has standing in an international judicial forum for purposes of jurisdiction to institute proceedings is made by reference to the date on which such proceedings are deemed to have been instituted. Since the Claimant instituted these proceedings prior to the time when the two assignments were concluded, it follows that the Tribunal has jurisdiction to hear this case regardless of the legal effect, if any, the assignments might have had on Claimant’s standing had they preceded the filing of the case.[3]
Ratione Temporis
Assigned claims can fail if the concerned investments were not protected by any applicable legal instrument when the dispute arose. This was partially the case in Société Générale v. Dominican Republic. Société Générale had purchased a minority share of a Dominican power company, DR Energy Holdings Limited and Empresa Distribuidora de Electricidad del Este S.A. (“EDE Este”). Société Générale subsequently brought an investment arbitration claim, partially on behalf of EDE Este.[4]
Société Générale had purchased its share after the facts composing the dispute. In addition, the applicable France-Dominican Republic bilateral investment treaty entered into force after the facts of the dispute occurred. Given these two elements, Société Générale could not fully exercise a claim for EDE Este.[5]
Conversely, investment arbitration case law has been divided on whether assignments occurring before an investment arbitration has been initiated are admissible.
The Viability of Assignment in Investment Arbitration
Case law on the viability of assignment in investment arbitration is limited and divided. Two landmark cases best demonstrate the uncertain viability of assignment in investment arbitration.
The first case is Daimler v. Argentina, in which the claimant sold all its shares to its parent company before it filed an arbitration request.[6]
Argentina challenged the admissibility of Daimler’s case by pointing out that the claimant did not own its Argentine subsidiaries at the time it filed its request for arbitration.[7] The applicable investment treaty in this case was the Germany-Argentina bilateral investment treaty, while both Daimler and its parent company were German, thereby eschewing the issue of nationality.
The issue at the heart of Daimler v. Argentina lay in Daimler’s Argentine subsidiary selling its shares to its German parent company while reserving the right to initiate arbitration against Argentina.[8]
While assignment operated in reverse here (the claim was kept, while the investment was sold, although at a loss) the issue remains that of assigning, or reserving, the right to initiate investment arbitration without owning the protected investment.
The tribunal found that claims can be reserved or transferred:
As the large and thriving global market for distressed debt attests, most jurisdictions allow for legal claims to be either sold along with or reserved separately from the underlying assets from which they are derived. The reason is that such severability greatly facilitates and speeds the productive re-employment of assets in other ventures.[9]
The tribunal’s finding was drafted in a manner that suggested its general applicability.
Yet, the tribunal in Mihaly v. Sri Lanka, the second landmark case, ruled in the opposite direction.[10]
In Mihaly, the claimant was a US investor invoking the US-Sri Lanka bilateral investment treaty over a failed power project. Mihaly International Corporation (Canada) assigned its claim to Mihaly International Corporation (USA).[11]
The tribunal found it lacked jurisdiction.[12] Since Canada was not a party to the ICSID convention at the time, Mihaly Canada never had a viable claim to assign to Mihaly USA.[13] For Mihaly Canada to viably assign its claim, it would need to have an existing, viable claim.
In summary, assignments following the initiation of a viable investment arbitration claim are generally admitted. Likewise, a claim devoid of procedural flaws can be assigned or reserved in some cases. Yet, procedurally faulty claims, as they are flawed at the root, cannot be reliably assigned in investment arbitrations.
[1] Eugene Kazmin v. Republic of Latvia, ICSID Case No. ARB/17/5, Award, 24 March 2021; WNC Factoring Ltd (WNC) v. The Czech Republic, PCA Case No. 2014-34, Award, 22 February 2017; CEAC Holdings Limited v. Montenegro, ICSID Case No. ARB/14/8, Award, 26 July 2016.
[2] Noble Energy Inc. and Machala Power Cía. Ltd. v. Republic of Ecuador and Consejo Nacional de Electricidad, ICSID Case No. ARB/05/12, Decision on Jurisdiction, 5 March 2008; Daimler Financial Services AG v. Argentine Republic, ICSID Case No. ARB/05/1, Award, 21 August 2012.
[3] Ceskoslovenska Obchodni Banka, a.s. v. The Slovak Republic, ICSID Case No. ARB/97/4, Decision of the Tribunal on Objections to Jurisdiction, 24 May 1999, para. 31.
[4] Société Générale in respect of DR Energy Holdings Limited and Empresa Distribuidora de Electricidad del Este, S.A. v. The Dominican Republic, LCIA Case No. UN 7927, Award on Preliminary Objections to Jurisdiction, 19 September 2008.
[5] Société Générale in respect of DR Energy Holdings Limited and Empresa Distribuidora de Electricidad del Este, S.A. v. The Dominican Republic, LCIA Case No. UN 7927, Award on Preliminary Objections to Jurisdiction, 19 September 2008, para. 107.
[6] Daimler Financial Services AG v. Argentine Republic, ICSID Case No. ARB/05/1, Award, 21 August 2012.
[7] Daimler Financial Services AG v. Argentine Republic, ICSID Case No. ARB/05/1, Award, 21 August 2012, para. 72.
[8] Daimler Financial Services AG v. Argentine Republic, ICSID Case No. ARB/05/1, Award, 21 August 2012, para. 105.
[9] Daimler Financial Services AG v. Argentine Republic, ICSID Case No. ARB/05/1, Award, 21 August 2012, para. 144.
[10] Mihaly International Corporation v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/00/2, Award, 15 March 2002.
[11] Mihaly International Corporation v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/00/2, Award, 15 March 2002, para. 15.
[12] Mihaly International Corporation v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/00/2, Award, 15 March 2002, para. 62.
[13] Mihaly International Corporation v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/00/2, Award, 15 March 2002, para. 24.