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  • Somdatta Ghosh

How far does the ICSID tribunal rely upon the Salini test when it comes to defining ‘investment’?

This article is authored by Somdatta Ghosh, a 4th Year student at the Xavier Law School, St. Xavier's University, Kolkata.

There is no definition of investment under International Investment Law. Even Article 25 (1) of the International Centre for Settlement of Investment Disputes (Hereinafter referred to as “ICSID”) convention says that jurisdiction shall be granted to matters arising directly out of an investment, but nowhere is the term ‘investment’ defined in the convention or anywhere for that matter. The primary reason is that the parties must have the flexibility and the autonomy to decide what they want to define as an investment whenever they are entering into a Bilateral Investment Treaty (Hereinafter referred to as ‘BIT’).


ICSID grants jurisdiction to every dispute arising out of an investment where both parties have mutually agreed to a definition of investment in the BIT. Eventually, the ICSID tribunals realized that consent alone was not enough, and there was a dire need for an objective definition as well; otherwise, any and every matter can come within the purview of investment[1]. The recommendation for an objective definition of investment was made first in Fedax v. Venezuela when Venezuela refused to honour the promissory notes that Fedax was entitled to.

Later, in the case of Salini v. Morocco, a well-formulated objective definition was laid down for investment. The five criteria for investment laid down in the Salini test are:

● Duration: The investment should have taken place for a certain duration.

● An assumption of risk: Just as every investment has an element of risk, the investor’s contribution to the host state must have an element of risk.

● Contribution of money or assets: The investor’s contribution should either be monetary in nature or a transfer or assets (e.g. property, concession rights, intellectual property rights etc.) to amount to an investment.

● Profits and Returns: The profits and returns directly arising out from the investment.

● Contribution to the economic development of the Host State: The investment must play an important role in fostering the economic development of the host state

In the case of Joy Minings Machinery v. The Arab Republic of Egypt, Joy Mining, a British Company, was hired to replace the existing mining system and supply a new mining system as well. During the due course, a dispute arose between the parties where one party blamed the other for the problem of equipment. The contention of Egypt was that Egypt had a mere contract for sale with Joy Mining, and hence, it was outside the jurisdiction of ICSID. However, the ICSID tribunal agreed with Joy Mining, who contended that Joy Mining had met all the criteria of the Salini test, and the tribunal granted jurisdiction to Joy Mining.

In Jan de Nul N.V. v. Arab Republic of Egypt, the claimant was hired by the Egyptian Government to deepen and widen the Suez Canal. Disputes arose in the due course of time and the matter went up to the arbitral tribunal. The tribunal applied the Salini test again and concluded that as the claimant had met all the five criteria of the Salini test, it had made an investment and shall be granted jurisdiction. Here, the Salini test was applied purely respecting the value of the precedent that was well-settled.


Over time, the objective definition laid down in the Salini test has met a lot of criticism. The last criterion, which talks about the contribution to the economic development of the host state, has been the most controversial of all. This is mainly because, in practical aspects, an investment might not have any relation with the economic development of the host state, and secondly, economic development depends on a lot of factors like market conditions, political stability, and so on, and not just investment. Here are several arguments and opinions put forward by the ICSID tribunal while criticizing the criterion:

· In the case of Saba Flakes v. The Republic of Turkey, the claimant was a Dutch investor and owned a particular number of shares in the Turkish company. The government, while investigating the company, froze his shares and sold them, thereby constituting a gross BIT violation. Here, while applying the Salini Test, the tribunal opined that it was immaterial to look at whether Mr. Flakes’ contribution boosted the economic development of the host state. The reason being there are many investments that do not have any relation with the economic development of the host state, and Mr. Flakes’ investment is of such nature. As the other conditions of the Salini test were satisfied, the ICSID tribunal granted jurisdiction to Mr. Flakes.

· In the case of Victor Pey Passado v. Republic of Chile, the tribunal held that if the other criteria of the Salini test were met, then there is no need to look at whether there has been any economic development or not. The prime reason being that economic development is an outcome of investment and not a characteristic.

· Even In LESI v. the People’s Democratic Republic of Algeria and Quiborax v. Bolivia, the arbitral tribunal upheld that economic development was implicitly established once the other criteria in the Salini test were made. When the other criteria of the Salini test are established, the criterion of economic development is automatically met and there is no need for establishing that criterion separately.

However, in the Phoenix case, the arbitral tribunal felt that it was also necessary to establish the bonafide intention of the investor along with fulfilling all the criteria laid down in the Salini test.

ICSID may choose not to rely upon the Salini test at all. For instance, in Biwater Gauff v. Tanzania, Tanzania contended that what Biwater Gauff had made did not amount to an investment at all since it did not fulfil the criteria laid down in the Salini test. However, the tribunal rejected Tanzania’s argument by saying that the ICSID tribunal is not bound by the Salini test, and there is no mention in the convention for the same. Hence, it will interpret the wordings of the BIT as per Article 31 of the Vienna Convention of Law of Treaties (Hereinafter referred to as ‘VCLT’) which states that the wordings of a treaty should be interpreted as it is in good faith. As per the definition of investment in the BIT, Biwater Gauff had made an investment, and hence, ICSID granted jurisdiction to Biwater Gauff.

In the case of MSH v. Malaysia, the arbitral tribunal had held that the historical excavation, as it was in the case of the claimant, cannot amount to an investment as it did not fulfil the criteria laid down in the Salini test. This award, however, was annulled on two major grounds. Firstly, the arbitrator had completely negated the definition in the BIT, which was mutually agreed upon by both the parties and secondly, the sole arbitrator had paid a heavy reliance on the contribution of the economic development of the host state. Although the economic development of the host state is an important criterion, it cannot be the major factor based on which jurisdiction is given or refused.


To understand the importance of determining whether an arbitral award can constitute an investment, we need to refer to the landmark case, Saipem v. People’s Republic of Bangladesh. In this case, Saipem, an Italian company, had entered into an agreement on the construction of pipelines with Petrobangla. The dispute arose in due course of time and the matter went up to ICC, the arbitral tribunal, where the tribunal passed the award in favor of the claimant and held Petrobangla liable for paying compensation. However, the High Court Division of the Supreme Court of Bangladesh stated that they did not have the authority to either enforce or annul an arbitral award. That is when the question of whether an arbitral award can constitute an investment in case such award is not being enforced, arose before the tribunal.

The ICSID tribunal held that non-enforcement of an arbitral award amounted to expropriation and led to a BIT violation. At the same time, considering the Salini test, the ICC arbitral award, and other elements, the tribunal held that Saipem had made an investment and thus granted jurisdiction. However, the ICSID tribunal never commented on whether an arbitral award can in itself constitute an investment. There is no rule on the matter of an arbitral award constituting an investment since there was no opinion of the tribunal on the same. The tribunal will look into the facts and circumstances of each case and then determine how far an arbitral award is relevant in considering something as ‘investment’.


Hence, to what extent shall ICSID rely upon the Salini test? The ICSID tribunals will carefully observe the facts and circumstances of each case and the pleadings of both parties. It may then either go completely by the Salini test, go partly by the Salini test, go by the Salini test without considering the criterion of economic development, or not go by the Salini test at all and instead go by the interpretation of the wordings of the BIT as per Article 31 of the Vienna Convention of Law of Treaties. Precisely, the extent to which ICSID relies on the Salini test is case-specific and entirely depends upon the facts and circumstances of each case.

The Salini test has been given due importance primarily because of two reasons. Firstly, the preamble of the ICSID convention says that the goal of investment is to foster economic development and the last criterion of the Salini test, that is, contribution to the host state’s economy, completely aligns with the goal of ICSID. Secondly, it is a well-settled precedence that has been followed for decades, and ICSID is reluctant to deviate from such a well-settled law.

Capital exporting countries are generally the developed countries who invest in the developing nations. In case there is a dispute, the investor would always prefer going to an arbitral tribunal to establish that there has been an ‘investment’ dispute amounting to a BIT violation. In this case, as the claims are against the state, the compensation amount is higher than that received in case of a contractual violation. A broad asset-based definition enables capital exporting countries to constitute any transfer of assets as investments. On the contrary, the capital importing countries are generally developing nations and the host state. A narrow enterprise-based definition gives a protection to capital importing countries when the investor tries to include any and every transfer of asset as within the ambit of investment to establish a treaty violation thereby claiming large amount of compensation. That is the reason why Capital-exporting countries always prefer a broad asset-based definition of investment, whereas capital-importing countries prefer a narrow enterprise-based definition[2].

[1] Alex Grabowski, The Definition of Investment under the ICSID Convention: A Defense for Salini, 15 Chicago Journal of International Law, 287,289 (2014) [2] Mahnaz Malik, Definition of Investment in International Investment Agreements, 1 IISD, 1,1 (2009)

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