Stockholm

Arbitration Report
2004:2
Contents:
Articles
The Neutrality of Arbitrators in International Commercial
Arbitration • Estelle Dougier
The New York Convention:The Practice of Swedish Courts • Hans Danelius
Recent Practice from the Arbitration Institute of the Stockholm Chamber
of Commerce. Prima Facie Decisions on Jurisdiction and
Challenges of Arbitrators • Annette Magnusson & Hanna Larsson
When Has a Party Received an Arbitral Award? - A Presentation of
Three Swedish Supreme Court Decisions • Emilia Skog

Arbitral Awards
Court Decisions on Arbitration
Notes & Information

ARBITRATION INSTITUTE
OF THE STOCKHOLM CHAMBER OF COMMERCE

JP JURIS PUBLISHING, INC.

 FINAL ARBITRAL AWARD RENDERED IN 2000
IN UNCITRAL AD HOC ARBITRATION*
SWEMBALT AB V. REPUBLIC OF LATVIA
Subject-Matters:

(1) Jurisdiction under a Bilateral Investment Treaty.

(2) Definition of investment.
(3) Definition of expropriation and the duty to compensate for
expropriation.
(4) Failure of Respondent to appear (procedural default).
(5) State responsibility for actions of municipal authorities
(agencies/subdivisions).
(6) Determining the rate of interest on amounts awarded.
(7) Whether the losing party shall be ordered to pay the costs of the
arbitration.

Findings:

(1) The Tribunal found that it had jurisdiction under the Sweden-
Latvia Bilateral Investment Treaty, because:
(a) a dispute exists between the Swedish claimant and Latvia;
(b) SwemBalt is an investor in the sense of Article 1 (3) (b) of the
BIT, as a legal person having its seat in Sweden.
(2) There is no basis for doubt about SwemBalt’s ownership of the
ship that is the subject of the dispute, which constitutes an
investment under the treaty, and SwemBalt showed that, in all
likelihood, it complied with Latvian law. Latvia failed to
demonstrate that the investment was not made in accordance with
Latvian law; and, in any event, Latvia’s actions were out of
proportion with any non-compliance that may have existed.
(3) By taking SwemBalt’s ship, preventing SwemBalt from using it, and
by auctioning it without any compensation to SwemBalt, Latvia
breached its obligations under the BIT and general international
law.
While the BIT contains no provision directly requiring Latvia to
compensate SwemBalt for its expropriated investment, such right
can be found in the condition of “prompt, adequate and effective
compensation” required for expropriation to be legal under the
BIT. In addition, the right to compensation for breaches of

*
For an account of the challenge and enforcement proceedings of the award, cf. Stockholm
Arb. Rep. 2003:2, p. 261 ff.

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Copyright © 2004 by the Arbitration Institute of the Stockholm Chamber of Commerce & JurisNet, LLC
 SWEMBALT AB v. REPUBLIC OF LATVIA

Decision

“1. The Respondent, the Republic of Latvia, shall pay SwemBalt

compensation for loss of the ship in the amount of USD 2,506,258,
with interest of 10% per year starting from 9 April 1999 up until
the day payment is made.
“2. The Respondent shall pay SwemBalt compensation for duties and
payments to solicitors, including duties and costs of the Arbitration
Tribunal, totalling USD...”

Observations by Farouk Yala

Swembalt v. Latvia

Part Two: The Notion of Investment and

Attribution of State Responsibility Under a BIT

The following observations focus on two preliminary issues examined by

the Swembalt Tribunal. The first issue, which concerned the scope of the
arbitrators’ jurisdiction, relates to the notion of investment. The second
relates to the conditions upon which the international responsibility of a host
State can be established for wrongful acts committed by its organs. On both
questions, the Swembalt decision is in line with the general trends and
solutions of BIT-based investment arbitration case law. Unfortunately,
though the Tribunal applied well-established rules and principles of
international law to the matter at hand, the award still displays a certain
paucity of detail in several aspects. The vagueness of some of the tribunal’s
reasoning may leave the reader somewhat frustrated with an award, which
could have been more exhaustive in its analysis of the facts and application
of the law.

I. The Requirement that Investment be Made “In Accordance”

with Host State’s Laws

To contest the jurisdiction of the arbitral tribunal, Latvia put forward

several arguments relating both to the existence of an investment made by
the claimant in its territory and to the conformity of this investment with its
own legislation.2

2 For a presentation of the facts of the case, see Noah Rubins’ observations above.

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 STOCKHOLM ARBITRATION REPORT 2004:2

a) On the Existence of an Investment

First, the respondent asserted that the Swedish company was not the
owner of the ship in dispute. As the arbitrators noted, “the Respondent has
expressed doubts on Swembalt’s ownership of the ship,”3 and “the
Respondent contends that Swembalt does not own the ship.”4 At first blush,
such questioning is astonishing. Indeed, in any arbitral (or even judicial)
proceedings, when a claimant asserts interference with its assets or goods,
the first exhibit he produces before the tribunal is a document that
establishes legal title to the asset or good in question.5 In the case at hand, all
Swembalt would have had to do to successfully defeat the Latvian objection
was to produce a document establishing the prima facie existence of a right of
ownership (title of property, registering certificate, extract from the Swedish
ship register, etc.). From a procedural standpoint, inasmuch as for arbitrators
the determination of a right claimed by one party is a mere question of fact,
such an attitude would have been in full compliance with Article 24.1 of the
UNCITRAL Arbitration Rules, which governed the proceedings. Article
24.1 provides that: “Each party shall have the burden of proving the facts
relied on to support his claim.” Furthermore, in order to eliminate any
doubts that might have remained with regard to the ownership of the boat,
the arbitral tribunal could also have asked Swembalt to produce additional
documents or evidence in support of its claim (Article 24.3 of the
UNCITRAL Rules). Had the Tribunal chosen to do so, it could have easily
checked the regularity of the documents produced in sight of Swedish
and/or Latvian laws, and then decided whether the right claimed by
Swembalt was opposable to the respondent State at the international level.

However, the Swembalt Tribunal did not adopt this approach. It preferred
to emphasize the behavior of host State authorities. In particular, it
underlined the fact that the Riga port authorities had used the former name
of the ship—Feeder Chief, as listed on the Swedish ship register when it was
Swembalt’s property, to conclude that, in the eyes of the Latvian State, the
ship had remained Swembalt’s property. A few days before, Swembalt’s
subsidiary—Swedebalt SIA—had asked that the ship’s name be changed and
obtained a new certificate of nationality from the Swedish authorities. This
was not considered sufficient to raise doubts as to the existence and
regularity of Swembalt’s title of ownership. Thus, the arbitrators held:
“[W]ith regard to Claimant’s ownership of the ship, there is no basis for
doubt about Swembalt’s ownership of it. It is correct that its earlier name

3 Swembalt at ¶ 22.
4 Id. at ¶ 29.
5 The question of the existence of the ownership right is to be distinguished from that of the

proof of the said ownership right.

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 SWEMBALT AB v. REPUBLIC OF LATVIA

was Feeder Chief, and that, on application by SwedeBalt, on 15 November

1993, the Swedish Ship Register registered a name change to SwedeBalt
and issued a new certificate of nationality. Two days later the Port of Riga
still used the old name of the ship when issuing the pilot's bill relating to
the towing of the ship from the shipyard to the berth at Kipsala. This, in
the opinion of the Arbitrators, does not give rise to doubt about the
ownership of the ship.”6

At first reading, this holding is puzzling as it appears to reverse the burden

of proof. However, the Swembalt Tribunal’s solution is not isolated in
international case law. Other arbitral tribunals have also taken into account
the host State’s behavior to determine the validity of a claimant’s property
right, without regard to legal qualifications contemplated by national laws.
For example, in Middle East Shipping v. Egypt,7 the question arose whether a
boat (the “Poseidon”) that had been subject to forced auction sale by the
Egyptian authorities belonged to the claimant or to its parent company,
incorporated in Greece. In that case, rather than applying the national laws
of the States concerned (Egypt and Greece) to determine the legal status of
the ship, the arbitrators relied on several letters and documents emanating
from the Egyptian authorities designating the claimant as the official owner
of the boat. The Tribunal held that “if an authority and the courts of the
Respondent treat Claimant as the owner of the Poseidon when collecting the
auction price, they are barred from disputing its ownership under the BIT.”8
In the present case, the Swembalt Tribunal adopted similar reasoning. It
decided that the Swedish claimant should be considered the real owner of
the ship simply because it was considered as such by the Latvian State.
However, while in the Middle East Shipping case the arbitrators relied on
several official documents emanating from high-ranking host State’s
authorities, notably documents produced in judicial proceedings, in Swembalt
the Tribunal contented itself with a simple “pilot’s bill’ used for the transfer
of the ship from the Riga Ship Repair Yard to Kipsala. The question remains
whether such a technical and isolated document is sufficient to illustrate the
“will” or “opinion” of the Latvian State with regard to the legal status of the
investment in question or its real owner. As for the question of private
international law rules applicable to the ownership of the ship, the arbitrators
simply elided the issue.

In addition to questioning the ownership of the boat, the respondent

claimed that “Swembalt has not provided evidence that the ship was intended as an
investment in Swedebalt SIA”9 and that “no investment took place.”10 Since the

6 Swembalt at ¶ 30.
7 Middle East Cement Shipping & Handling Co. SA v. Arab Republic of Egypt, ARB/99/6,
ICSID Award of 12 April 2002, published at 18 ICSID Rev.–FILJ 602 (2003).
8 Middle East Shipping at ¶135.
9 Swembalt at ¶ 23.

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parties had entered into no contract for the exploitation of the ship, the
question could indeed be raised whether the said ship was an “investment”
or a mere “good,” owned by a foreigner and brought to Latvian territory for
only a limited period of time. In fact, it was this very question of the
distinction between an “investment” and a “good” that was raised. In
rejecting the respondent’s argument, the Arbitral Tribunal first
acknowledged that “it is correct that no written agreement about the lease has been
submitted.” Indeed, the claimant produced no contract for the lease of the
boat signed with its local subsidiary, Swedebalt SIA, or any other companies.
However, this fact was not considered decisive by the Tribunal, which
underlined that:
“[I]t is clear from the evidence that the ship was bought by Swembalt for
the purpose of a floating trade center in Riga, that it was renovated and
converted for this purpose, that land was leased in Riga in the name of the
Latvian subsidiary to create a basis for the center and a quay for the ship,
and that space aboard the ship was rented or was about to be rented to
various traders”…“in these circumstances we find that there is an
investment that is covered by Article 1(1) and/or Article 1(2).”11

By doing so, the Swembalt Tribunal insisted on the commercial purpose of

the good allegedly owned by the Swedish company, and on its application to
profit-making ends. One might object that, once the arbitrators had
established that the ship was indeed the claimant’s property it qualified as
“movable property” covered by Article 1.1.a of the Sweden/Latvia BIT.12 It
could be submitted that this was sufficient to qualify the ship as an
investment and, hence, ground the ratione materiae jurisdiction of the Arbitral
Tribunal. Nowhere does the BIT require any particular usage or
“commercial assignment” for movable assets to qualify as protected
“investments.” In view of the arbitrators’ reasoning, it is arguable that the
Swembalt Tribunal implicitly endeavored to characterize the existence of an
investment by relying on an objective-qualifying criterion, independent from
the definitions contained in the BIT. This criterion would be that the asset
or good is used for profit-making purposes. In the ICSID arbitration
context, some tribunals have identified several criteria that economic
operations or contracts must satisfy in order to fall within the ambit of the
Washington Convention’s scope of protection.13 These criteria are: a

10 Id. at ¶ 31.
11 Id. at ¶ 31.
12 Agreement Between the Government of the Kingdom of Sweden and the Government of

the Republic of Latvia on the Promotion and Reciprocal Protection of Investments, signed on
10 March 1992, came into force on 6 November 1992, U.N.T.S., vol. 1823, I-31209.
12 Swembalt at ¶ 22.
13 Fedax NN v. The Republic of Venezuela, ARB/96/3, ICSID Decision of the Tribunal on

Objections to Jurisdiction of 11 July 1997, published at 37 I.L.M. 1378 (1998); Salini Costruttori

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contribution from the foreign investor (in money or in kind); a sufficient

duration; a positive impact on the host State’s economic development; and
some sort of risk in connection with the profit that the investor hopes to
derive from the exploitation of the good.14 This last criterion is decisive in
distinguishing investments from mere contracts for the sale of goods or
services.15 In the ad hoc BIT arbitration context, one recent Arbitral Tribunal
examined the distinction between an investment and a good. After stating that
“the term ‘investment’ should be given a broad definition” and that the BIT in
question (Germany/Russia) provided such a broad definition, the tribunal
constituted in the Sedelmayer v. Russia case16 held that “it must be presupposed,
however, that investments are made within the framework of a commercial
activity and that investments are, in principle, aiming at creating a further
economic value.”17 For this reason, the Sedelmayer tribunal refused to grant
compensation for the claimant’s loss of “personal belongings” (clothes,
kitchen equipment, other house appliances), which were not “affected” by the
activity of its local subsidiary in Russia.18 In the case at hand, the Swembalt
Tribunal relied on a similar criterion. However, it decided that the ship was
used “for commercial purposes” simply because the claimant had the “intent”
to create a shopping mall on the boat, and because it hoped to use it for profit-
making reasons. The Tribunal did not consider relevant the fact that the
claimant’s commercial project never came to pass, and that no contracts for
the commercial operation of the boat were ever signed.

Once the Arbitral Tribunal had held that Swembalt’s ship qualified as an
investment within the meaning of Article 1.1 of the Sweden/Latvia BIT
(which refers to “movable property”), it seems unusual that the arbitrators
took the additional precaution to find jurisdiction also on Article 1.2 of the
BIT. This article lays down the principle of equality of treatment between
investments and goods put at the disposal of host State nationals under
leasing contracts by citizens of other contracting States.19 It seems that the

SpA & Italstrade SpA v. Kingdom of Morocco, ARB/00/4, ICSID Decision on Jurisdiction
of 23 July 2001, published at 42 I.L.M. 609 (2003); Joy Mining Machinery Ltd v. The Arab
Republic of Egypt, ARB/03/11, ICSID Award on Jurisdiction of 6 August 2004, published at
http://www.asil.org/ilib/JoyMining_Egypt.pdf.
14 Noah Rubins, “The Notion of ‘Investment’ in International Investment Arbitration,” in N.

Horn (ed.), ARBITRATING FOREIGN INVESTMENT DISPUTES, 283 (Kluwer, 2004).

15 Farouk Yala, “The Notion of Investment in ICSID Case Law: a Drifting Jurisdictional

Requirement? Some ‘Un-Conventional’ Thoughts on Salini, SGS & Mihaly,” T.D.M, Oct.
2004, http://www.transnational-dispute-management.com.
16 Franz Sedelmayer v. The Russian Federation, Award of 7 July 1998, published at

http://www.iisd.org/pdf/2004/investment_sedelmayer_v_ru.pdf.
17 Sedelmayer at ¶ 2.2.4.
18 Id. at ¶ 3.4.3.
19 Article 1(2) of the Latvia/Sweden BIT provides that: “Goods that under a leasing agreement are

placed at the disposal of a lessee in the territory of one Contracting Party by a lessor being a national of the

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Tribunal determined that this provision qualifies rented or hired ships as

investments protected by the BIT: “we find that there is an investment that is
covered by […] and/or Article 1(2).” In the Middle East Shipping case, arbitrators
similarly relied on a provision contained in the Greece/Egypt BIT, which
relates to rented goods, to conclude that “even if the Poseidon was owned
by the Claimant’s mother company […] and the Claimant had only leased (or
chartered) the ship, it can still qualify as the Claimant’s investment.”20
However, in that case, the BIT in question expressly mentions goods under
lease in the category of “investments” (Article 1.1.e of the Greece/Egypt
BIT). In Swembalt, Article 1(2) of the Sweden/Latvia BIT simply lays down a
principle of “no less favorable treatment” as between foreign investments
and goods under lease. This appears to be a significant difference.
Furthermore, since the Tribunal itself recognized that no leasing contract
was ever concluded between the claimant and its Latvian subsidiary, it is
difficult to conclude that the ship was actually “hired” or “rented” by a
national of Latvia as required by the BIT.

b) On the Conformity of the Investment with Host State’s Laws

Next, the respondent contested the regularity of the Swedish company’s

investment with regard to its domestic laws. The Republic of Latvia objected
that the Sweden/Latvia BIT only protects investments made “in accordance
with the laws and regulations of the Host State.”21 It claimed that Swembalt’s
investment did not meet this condition. In particular, it argued that the
Swedish company “invested at a time when it had not registered a company in
Latvia.” It added that “it had not made valid agreements about the lease of land, the
towage of the ship to its berth and about placing it there.”22 The arbitrators rejected
both objections.

On the first objection, the Arbitral Tribunal noted that “the activity of the
Claimant in Latvia only began after the ship had been towed to its berth in
Kipsala. Until then, the ship was under renovation at a Latvian shipyard in
Riga, which according to Article 2 of the Foreign Investment Law cannot be
regarded as activity undertaken by Swembalt.”23 In the eyes of the
arbitrators, Swembalt could not have violated the host State’s investment
legislation, since when the ship entered Latvian territory it was not yet being
used for commercial purposes.

other Contracting Party or a legal person having its seat in the territory of that Contracting Party, shall be
treated not less favourably than an investment,” U.N.T.S., vol. 1823, I-31209.
20 Middle East Shipping at ¶ 136.
21 Article 1(1) provides that: “The term ‘investment’ shall mean every kind of asset, invested by an investor

of one Contracting Party in the territory of the other Contracting Party, provided that the investment has been
made in accordance with the laws and regulations of the other Contracting Party […].”
22 Swembalt at ¶ 29.
23 Id. at ¶ 32.

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On the second objection, in relation to the validity of the lease agreement

for a berth in the port, the arbitrators adopted another approach. Rather
than applying Latvian law to decide the question, they emphasized that they
“have not been provided with the text of the legal instruments”24 upon which Latvian
authorities relied to contest the validity of the lease contract. Once again,
pursuant to Article 24 of the UNCITRAL Arbitration Rules, the arbitrators
certainly could have asked the respondent to provide them with such
instruments and documents within a certain period of time (see Noah Rubins’
commentary, above). The award remains silent on this issue. Rather than
requiring the respondent state to submit additional evidence or exhibits in
support of its claim, the Arbitral Tribunal relied upon the Latvian State’s
behavior towards Swembalt’s investment. The arbitrators stressed that they
found “surprising” that “Swembalt has not been informed at an earlier stage
about the alleged illegality of the project of towing the ship in Kipsala.”25 They
then observed that it was equally surprising that, upon instructions from the
port of Riga, official boats would take part in the transfer of Swembalt’s ship
to its final destination if “the mooring of the ship there was illegal.” Next, they
underlined that “it is surprising that the authorities waited for more than four
months before taking any measures in that regard, if really, the whole
enterprise was illegal.”26 The Arbitral Tribunal concluded that:
“[I]n these circumstances, we find that Swembalt has shown, that in all
likelihood it has complied with Latvian law, that the Respondent has not
shown that the investment was not made in accordance with the law and
regulations of Latvia and that in any event the actions of the Respondent
were out of proportion with any non-compliance that may have existed.
We conclude, therefore, that Swembalt has made an investment in Latvia,
which fulfills the requirements made by the Investment Agreement for
being protected by that agreement.”27

The requirement of regularity or conformity of foreign investment with

host State laws and regulations can be found in numerous BITs.28 This
requirement should not be confused with the condition that investment be
approved by host State’s authorities, a clause found more rarely in BITs,
which reflects the will of some countries to maintain strict control over the
entry of foreign investment into their territory and to approve only projects
in line with their economic policy objectives.29 In case law, the issue of prior
24 Id. at ¶ 34.
25 Id. at ¶ 32.
26 Id. at ¶ 32.
27 Id. at ¶ 35.
28 For example, on Argentine BITs, see: Rubén E. Tempone, PROTECCIΌN DE INVERSIONES

EXTRANJERAS, at 45 (Ciuada pub., 2003); Esteban Mr Ymaz Videla, PROTECCION DE

INVERSIONES EXTRANJERAS – TRATADOS BILATERALES – SUS EFFECTOS EN LAS
CONTRATACIONES ADMINISTRATIVAS, at 19 ( La Ley pub. ,1999).
29 SCOPE AND DEFINITION, UNCATD IIA Paper Series, at 24 (United Nations pub., 2001).

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approval of investments by local authorities was at the heart of the Gruslin v.

Malaysia matter. 30 In that case, the tribunal rejected the claim of a Belgian
investor who had invested on the Kuala Lumpur stock exchange, because
the Malaysian authorities had not specifically approved this portfolio
investment, nor classified it as an “approved project” as required by the
applicable BIT (Belgium-Luxemburg/Malaysia). With respect to the “legal
regularity” requirement at issue in Swembalt, this clause was discussed by the
ICSID tribunal in Salini v. Morocco, where the arbitrators held that this
requirement “seeks to prevent the Bilateral Treaty from protecting
investments that should not be protected, particularly because they would be
illegal.”31 In that case, the tribunal underlined that both Italian claimants
“took part in the tender process in conformity with the legal rules applicable
to invitations and tender,” and that they had concluded the corresponding
contract “in conformity with the laws in force at that time.” As a result, the
Salini tribunal concluded that “it has never been shown that the Italian
companies infringed the laws and regulations of the Kingdom of Morocco.”32
In the ad hoc arbitration context, the question of legality was also raised. For
example, in the above-mentioned Sedelmayer case, the Russian Federation
contested the legality of the investor’s incorporation of its local subsidiary, and
relied on several judicial decisions in support of the claim that the investment
was made in violation of Russian legislation. Russia also objected that the
claimant had not complied with customs regulations. The arbitrators examined
these objections both as a matter of jurisdiction and on the merits. They
rejected part of the Russian Federation’s objections, emphasizing its
permissive behavior towards the investment, at least at the outset.33 However,
the arbitrators accepted the objection relating to non-compliance with customs
regulations, relying on the fact that an action was pending before the Russian
courts in this regard, and that they could not reach a decision as to whether the
host State’s confiscation of the claimant’s property was well-founded or not.34
In Swembalt, the Latvian authorities had not brought any legal action against

30 Philippe Gruslin v. Malaysia, ARB/99/3, ICSID Award of 27 November 2000, published at

5 ICSID Rep. 483 (1994).

31 Salini at ¶ 46.
32 Id. at ¶ 46.
33 Sedelmayer at ¶ 2.2.4, where the tribunal stated notably that “the transfer [of the premises]

does not seem, at the outset, to have caused any objections from the Russian authorities […]
it is worth noting that, as far as has been shown, [local vehicle] operated quite openly. The
evidence submitted by the Claimant gives room for the assumption that the activities of [local
vehicle] were accepted by several authorities […].”
34 Compare with Generation Ukraine Inc. v. Ukraine, ARB/00/9, ICSID Award of 16

September 2003, published at http://www.asil.org/ilm/Ukraine.pdf, at ¶ 9.3, where the tribunal

rejected a similar argument raised by the respondent, declaring that “the Respondent has not
produced any decision of a competent Ukrainian court on the validity of the state registration
of [local vehicle] In these circumstances, the Tribunal must accept the status quo of [local
vehicle]’s effective existence as a Ukrainian legal entity because this Tribunal has no
jurisdiction to investigate and rule upon the alleged formal defect raised by the Respondent”.

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Swembalt or its local subsidiary to contest the validity of the lease contract or
the regularity of the ship’s berth in the port. Had it done so, the Tribunal’s
ultimate ruling might have been different.

In an incidental observation relating to this question of regularity of the

investment, the Tribunal stated that:
“in any event the actions of the Respondent were out of proportion with
any non-compliance that may have existed.”35

This observation deserves attention. Indeed, it is difficult to understand

how the nature or gravity of the host State’s measures against foreign
investment (seizure, forced sale, direct or creeping expropriation, etc.) could
have any influence on the legality of the investment under local law. It could
be that the arbitrators meant to say that, from their point of view, Swembalt
had not committed such a significant infraction as to justify exclusion from the
BIT’s protection. If it is really the sense of their observation, this would mean
that when a foreign investment complies grosso modo or simply prima facie with
the host State’s legislation, it deserves the protection of any applicable BIT.

Such a conclusion would be hardly justified for at least two reasons. First,
it is worth recalling that, in the case at hand, the respondent State did not
develop any detailed argumentation on this issue of investment legality, since
it was absent from most of the proceedings. It may well be the case that
Swembalt’s ship represented a menace to the security of the Latvian port. If
the arbitrators “had been provided with the text of the legal instrument,” they might
also have decided that the contract, if one existed, was illegal. We will
probably never know. However, the peculiarity of the facts of the case
deserves notice, to avoid any general conclusions. Secondly, under cover of
flexibility, a liberal interpretation of the requirement of investment legality
under host State law could simply lead to the neglect of another requirement
contained in a majority of BITs, related to the admission of foreign
investments. Article 2 of the Sweden/Latvia BIT contains the following rule:
“Each Contracting Party shall, subject to its general policy in the field of
foreign investment, promote in its territory investments […] and shall
admit such investments in accordance with its legislation.”

As professor Muchlinski has observed, “under general international law

states have the unlimited right to exclude foreign nationals and companies
from entering their territory. There is no international standard requiring
states to adopt an ‘open door’ to inward direct investment. Most BITs
reserve the right of the host state to regulate the entry of foreign investments
into its territory. Therefore, the application of the treaty to an investment is
35 Swembalt at ¶ 35.

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made conditional on its being approved in accordance with the laws and
regulations of the host state.”36 In certain cases, too flexible an interpretation
of the condition of legality of the investment, generally contained in the
“definitions” section of the BIT, could amount to a violation of the legality
requirement in the “admission” section of the same BIT. Furthermore, from
an economic policy standpoint, such a flexible interpretation could force host
States to install a free access regime for foreign investments. Any foreign
investment would be susceptible of being protected by a BIT, even if it had
not entirely or strictly complied with the host State’s laws and regulations. This
is not what BITs are generally designed to do. Finally, this would introduce a
form of discrimination against national investments, which remain subject to
the host States’ laws, in favor of foreign investment, which would be free to
develop at will, provided that local authorities tolerate them for a certain
period of time (the Swembalt Tribunal was satisfied with a period of four
months), whether by ignorance, negligence, or corruption of local agents. All
this seems contrary to the legitimate objectives of free competition and market
transparency. In the Sweden/Latvia BIT, the contracting parties granted
protection to investments made in accordance with their laws and regulations
(Article 1.1), and also only to investments admitted into their territory
according to their laws and regulations and in compliance with their economic
policy objectives (Article 2.1). If Latvia had objected also in the area of
admission of the investment, the decision might have been different, or at least
its reasons might have been more detailed.

A final question remains, to which, unfortunately, the Arbitral Tribunal

gave no answer, perhaps because it was raised only indirectly. According to
the Swedish claimant, the problem of the conformity of its investment with
Latvian legislation only arose to the extent that “a new law had been adopted,
which had been applied retrospectively, thereby invalidating the land lease agreement.”37
Arguably, the question could have been raised whether a subsequent
modification of the host State’s laws and regulations could affect the legality
of Swembalt’s investment, and consequently, its qualification as a protected
investment within the meaning of the BIT. In relation to the legality
requirement within the definition of investment contained in the Peru/UK
BIT, one author has submitted that in the context of ICSID arbitration “the
reference that article 1(a) of the BIT makes to the ‘laws and regulations of
the contracting party in whose territory that investment is made’ allows for
the possibility of altering and modifying the notion of investment, which in
turn may reduce the jurisdiction of the Centre.”38 Referring to the power of

36 P.T. Muchlinski, MULTINATIONAL ENTERPRISES AND THE LAW, at 620 (Blackwell, 1999).
37 Id. at ¶ 7
38 Enrique M. Ch. Bardales, “The Settlement of Disputes Under the United Kingdom-Peru

Bilateral Investment Treaty,” Revista Iberoamericana de Arbitraje, 2001, published at

http://www.servilex.com.pe.

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the host State to unilaterally modify its legislation and to the authority
granted in Article 25.4 of the Washington Convention to restrict the class of
disputes subject to ICSID jurisdiction, the commentator further opined that
“one possible effect of the above argument is that any unilateral decision
would amount to giving unlimited power to the state to modify the matters
expressly included in article 1(a) of the BIT. This argument would render
useless any attempt of giving certainty and predictability to the investors: the
strength of the bilateral international treaty would be seriously compromised
if no alternative interpretation was given.”39 In conclusion, he proposed that
“to shed some light on the problem, it may be pointed out that the matters
expressly listed in article 1(a) represent a de minimis guarantee, which cannot
be unilaterally modified as far as the BIT is concerned. Secondly, it could be
stated that the only possibility for modifying the subject matter of
investment is reduced to the matters not referred to expressly on that list but
contained in the national legislation.”40 In the case at hand, the Swembalt
Tribunal could have examined the effect of a change in Latvian laws on the
legality of the claimant’s investment, both at the time of its admission and
over the course of its development. At least two solutions could have been
adopted. First, it might have been held that if the investment was legal when
it was admitted into the territory of Latvia and used there, any subsequent
modification of Latvian law could not affect the “international legality” of
the investment (Latvian law being, in a sense, “stabilized”). Alternatively, the
Tribunal could have decided that any change in Latvian laws is entirely and
immediately opposable to Swembalt’s investment, which must always
conform to local law, or at least to its public policy rules.

II. Acts of State’s Organs and State Responsibility

Under BITs

The second preliminary issue examined by the Arbitral Tribunal relates to

the imputability to the Latvian State of the actions its local agents took in
relation to Swembalt’s investment. The Tribunal noted that “the Respondent
contends that the arbitrators have no jurisdiction in this case, as the Latvian government is
not the real Respondent.”41 In fact, the objection did not relate to the scope of
the Tribunal’s jurisdiction, but rather to the merits of the case. In rejecting
the respondent’s argument and confirming the attribution of responsibility
to Latvia of actions taken by the port of Riga, the city council and the
maritime administration, the arbitrators noted that:

39 Op. cit.
40 Op. cit.
41 Swembalt at ¶ 22.

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“[I]n the present case, we are faced with a dispute in which it is alleged that
the duties and obligations of the Respondent under general international
law and under the Investment Agreement itself have been breached.”42

The arbitrators went on to indicate that:

“[I]n such a case, the subdivisions of the state and the way in which each
state chooses to divide the work between such subdivisions is without
relevance. If the state delegates certain work to lower levels of government,
be they federal, regional or municipal, it must be an obligation of the state
under international law to ensure that its obligations under international
law, whether general or treaty law, are fulfilled by such subdivisions.”43

Finally, the Tribunal concluded that:

“We, therefore, conclude that the question, which public authority in fact
acted to deprive SwemBalt of its rights, is not relevant in this case,
regardless of the status of the authority directly involved.”

This reasoning is in line with well-established rules and principles of

international law on State responsibility. For decades, international tribunals
have held that, at the international level, States are responsible for wrongful
or detrimental acts of agents and instrumentalities that are subordinate to
them or under their control (federal states, regions, local government,
municipality, etc.).44 The problem can be complex, however, notably when
the actions of a State-owned company are at issue. In such a case, arbitrators
tend to undertake a functional and structural analysis of the activity of the
entity in question and examine its degree of autonomy vis-à-vis State
authorities.45 In Swembalt, the question did not arise, since all the authorities
involved were directly linked to the Latvian State, either at the national or
local level. Recently one of the Swembalt arbitrators commented that “the
Swembalt case is—unfortunately—illustrative of the kind of problems that many investors
have experienced in recent years in the former republics of the Soviet Union. Investors have
not seldom ended up in the middle of a tug of wars between different governmental bodies
and/or between federal and regional, or local, bodies. Against this background it is
noteworthy that the arbitral tribunal had no problem in finding that, irrespective of how the
state decides to delegate work between different levels of government, the state remains

42 Id. at ¶ 37.
43 Id. at ¶ 37.
44 See, in general: Ian Brownlie, PRINCIPLES OF INTERNATIONAL LAW (Oxford, 5th ed.) &

James Crawford, THE INTERNATIONAL LAW COMMISSION’S ARTICLES ON STATE

RESPONSIBILITY (Cambridge, 2003).
45 See, e.g., Salini, op. cit., E.A. Maffezini v. Kingdom of Spain, ARB/97/7, ICSID Decision on

Jurisdiction of 25 January 2002 & Award of 13 November 2000, published at 16 ICSID Rev.–
FILJ 212 (2001).

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responsible under international law and under a BIT.”46 Without taking any position
on whether this assumption is well founded, it bears noting that the arbitrator
neglected to mention one important reservation contained in the Award.

In dicta the Swembalt Tribunal held that:

“[I]t cannot be excluded that the circumstances of a dispute may be such
that it is of importance whether the party to which the investor is opposed
is the government, or a part of it, or rather a municipal or other non-
governmental authority. That may depend, for example, on the character of
the dispute or the law applicable to it.”47

Unfortunately, the Tribunal gives no explanation or examples that would

allow the reader to identify with any certainty which circumstances the
arbitrators had in mind. Without lapsing into speculation, one might
nevertheless imagine a case where a State entity such as a federal state or a
municipality breaches a contract concluded with a foreign investor. There, to
borrow the Swembalt Tribunal’s words, the question relates to the “character of
the dispute,” and casts a shadow over the very nature of the claim (whether it
is a contract claim or a BIT claim). One interesting question that remains to be
explored is whether a breach of contract committed by a subdivision or organ
of the State can engage the State’s international responsibility under a BIT.48
The situation becomes still more sensitive when the contractual violations in
question are those of State enterprises, and the claimant seeks to engage the
responsibility of the host State by invoking an international treaty.49

On this issue, as with the previous one, the Swembalt award could certainly
have been more detailed in its analysis of the facts, and more exhaustive in
its reasoning. Nevertheless, it must be recognized that the respondent State
was largely absent from the proceedings, and it was not necessarily the task
of the eminent arbitrators on this Tribunal to develop arguments in lieu of
the defaulting Latvian State.
Farouk Yala
CAPA Paris, Université de Paris (Panthéon-Assas), Lecturer—French
Petroleum Institute.

46 Kaj Hobér, “Investment Arbitration in Eastern Europe: Recent Cases on Expropriation,”

OGEL, 2003, n° 5, http://www.gasandoil.com/ogel.

47 Swembalt at ¶ 37.
48 For example, see: Videndi & CAA v. The Argentine Republic, ARB/97/3, Award of 21

November 2000 & Decision on Annulment of 3 July 2002, published at

http://www.worldbank.org/icsid.
49 Nykomb Synergetics v. Republic of Latvia, ad hoc Award of 16 December 2003,

unpublished; RFCC v. Kingdom of Morocco, ARB/00/6, ICSID Award of 22 December

2003, published at http://www.worldbank.org/icisd.

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