‘TRUST ISSUES’ IN INVESTMENT TREATY ARBITRATION

– Godwin Tan & Pranay Lekhi

Keywords: standing, trusts, investor, investment arbitration

Introduction

Trusts are often used as investment vehicles in many jurisdictions either due to their tax-efficient nature or as a way for individuals to transfer assets while retaining control over them. More recently, there has been an increase in the number of investment treaty cases involving trusts, which points towards their growing popularity in foreign investments structured by private investors and sovereign wealth funds. As ownership of the investment plays an essential role in the extension of investment treaty protection, a recurring question in contemporary jurisprudence is whether the trustee or the beneficiary (or both) has the standing to bring a claim under international investment agreements and treaties.

There is no universally accepted and comprehensive definition of ‘trust’. However, the nature of a trust may be understood by reference to its dramatis personae. Put simply, an express trust is created when a settlor places assets under the control of a trustee for the benefit of a beneficiary or a specified purpose. A trust has no separate legal personality, and, across jurisdictions, it may include complicated structures with varying levels of participation by the settlor, beneficiary, and trustee. A key objective of the trust structure is to separate the legal title to the trust assets from its equitable title. This implies that, while the trustee has the power and duty to manage trust assets, the trustee is typically unable to enjoy the benefit of such assets personally.

The ‘uncontroversial’ controversy of standing

A high-level survey of investment treaty jurisprudence reveals at least two schools of thought on this issue. The first was highlighted by Professor Brigitte Stern in her dissenting opinion in Occidental v Ecuador: “where the legal title and the beneficial ownership are split … it is quite uncontroversial, after a thorough review of the existing doctrine and case-law, that international law grants relief to the owner of the economic interest. In that case, she opined that only the beneficial owner could claim for interference with its interests.

A similar approach is seen in Blue Bank International v Venezuela. The claimant, Blue Bank, was a Barbadian company appointed as the sole trustee of a trust under Barbadian law. The trust assets included indirect shareholdings in two Venezuelan companies that were parties to concession agreements in the hospitality sector. Following Venezuela’s termination of the agreements, Blue Bank initiated proceedings at the International Centre for Settlement of Investment Disputes (ICSID) alleging the violation of its rights under the Barbados-Venezuela Bilateral Investment Treaty (BIT). The key question that arose for determination was whether Blue Bank, as a trustee, could bring the claim as an “investor” under the BIT.

The tribunal analysed the Barbados International Trusts Act (which mirrors Article 2 of the Hague Convention on the Law Applicable to Trusts and on their Recognition) and the relevant trust deed in detail and noted that, based on the provisions in the Act, Blue Bank did not own the trust assets but simply managed and administered them. On the facts, given that Blue Bank did not commit any assets in its own right and had neither incurred any risk nor shared the loss or profit resulting from the investment. The tribunal ruled that it did not make an ‘investment’ in Venezuela as understood under the Barbados-Venezuela BIT. For the tribunal, Blue Bank was not “an owner in any relevant sense of the word”; instead, it was the beneficiaries of the trust that came “closest to satisfying the requirements of ‘ownerships’” as they enjoyed “ultimate control over the trust assets and [they] will enjoy or suffer, as the case may be, the fortunes of the trust assets.” Thus, the tribunal concluded that Blue Bank did not qualify as an “investor” and, accordingly, did not have standing to bring the claim.

On the other hand, there have been cases where tribunals have found that a trustee, holding only the legal title to the relevant trust assets, may have standing to bring an investment treaty claim. Among these is the decision in Saba Fakes v Turkey, which involved the Netherlands-Turkey BIT. In this case, the claimant was a Dutch national who held the legal title to certain shares (by way of temporary share certificates). Beneficial ownership of those shares was vested with a Turkish national. The tribunal in Saba Fakes noted that neither the ICSID Convention nor the Netherlands-Turkey BIT made “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.” It opined that, in theory, both trustees and beneficiaries might, in appropriate circumstances, have the standing to bring a claim under the relevant treaty and the ICSID Convention.

It is also notable that, more recently, in August 2020, the UNCITRAL tribunal in Mehta et al v Uruguay reportedly declined jurisdiction over the claims brought by discretionary beneficiaries of a trust, noting that the claimants did not have ownership rights. In arriving at its conclusion, the tribunal appeared to note that the claimants did not have control over the assets, and their rights to the assets were merely conditional (being dependent on the trustee’s decision).

Conclusion: commonalities in diverse decisions?

Based on the cases above, the question of whether a holder of a bare legal title to an investment has standing to bring an investment treaty claim remains debatable. However, this does not mean that existing cases provide little guidance. Despite their diverging pronouncements and conclusions, the tribunals in these cases appear to share certain common features in their analyses.

First, to determine whether a title holder qualifies for investment protection, tribunals generally refer closely to the relevant language in the relevant BIT. Certain treaties define investments as assets “invested by” the nationals or companies, while other treaties define investments as assets “owned or controlled by” investors. While such linguistic differences are not necessarily material or conclusive in all cases and ought to be read in context, they may provide a steer to the tribunal and the parties on a case-by-case basis and serve as a starting point for further analysis.

Secondly, the tribunals generally undertake a factual analysis to examine the claimant’s involvement in the investment to determine if it is an investor capable of bringing the relevant claim. The cases above suggest that tribunals are not typically swayed by nomenclature: they are concerned with who actually controls the investment rather than their purported roles in the transaction on paper.

Therefore, with trusts gaining greater traction as investment vehicles, it is evident that the issue concerning the standing of trustees is likely to be debated further. However, much like the inability to comprehensively define a trust due to the unique features its structure may adopt, a universal approach towards a trustee’s standing may well be elusive. Nevertheless, as the relevant jurisprudence continues to develop, parties will be able to observe how tribunals approach this issue and, in turn, shape the trajectory of their investment planning or dispute strategy.

Godwin Tan holds a Bachelor of Laws from University College London and a Master of Law from the University of Cambridge. Pranay Lekhi holds a Bachelor of Laws from WBNUJS, Kolkata, and a Master of Law from the University of Cambridge.

Preferred Form of Citation: Godwin Tan & Pranay Lekhi, “‘Trust Issues’ in Investment Treaty Arbitration”, (ICAR, 2 July 2022) .

The views and opinions expressed in the article are those of the authors solely and do not reflect the official position of the institutions, firms and clients with which the authors are affiliated. Further, the statements of the authors produced herein should not be construed as legal advice.

ENDNOTES

1. Occidental Petroleum Corporation and Occidental Exploration and Production Company v. Republic of Ecuador (II), ICSID Case No. ARB/06/11, Dissenting Opinion of Professor Brigitte Stern, 5 October 2012, para. 148.
2. Blue Bank International & Trust Ltd. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/12/20, Award, 26 April 2017.
3. Agreement between the Government of Barbados and the Republic of Venezuela for the Promotion and Protection of Investments, 15 July 1994.
4. Blue Bank International & Trust Ltd. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/12/20, Award, 26 April 2017, paras. 168 and 170.
5. Saba Fakes v. Republic of Turkey, ICSID Case No. ARB/07/20, Award, 14 July 2010.
6. Agreement on Reciprocal Encouragement and Protection of Investments between the Kingdom of the Netherlands and the Republic of Turkey, 27 March 1986.
7. Saba Fakes v. Republic of Turkey, ICSID Case No. ARB/07/20, Award, 14 July 2010, para. 134.
8. Prenay Agarwal, Vinita Agarwal and Ritika Mehta v. Oriental Republic of Uruguay, PCA Case No. 2018-04, Award, 6 August 2020; Lisa Bohmer, Breaking: UNCITRAL Tribunal Declines Jurisdiction Over Discretionary Beneficiaries of a Trust, 7 August 2020, available at https://www.iareporter.com/articles/breaking-uncitral-tribunal-declines-jurisdiction-over-discretionary-beneficiaries-of-a-trust/ (accessed 7 April 2022).