Methods of Interpretation of International Investment Law

doi:10.1017/9781009599122.016

10 - Methods of Interpretation of International Investment Law

The Use of the Object and Purpose of Investment Treaties in Interpreting Territoriality

from Part III - Unity, Diversity, and Evolution of Interpretation across Subject Matters of International Law

Published online by Cambridge University Press: aN Invalid Date NaN

Thomas Nektarios Papanastasiou

Edited by

Sotirios Ioannis Lekkas ,

Nina Mileva and

Panos Merkouris

Edited in association with

Ivo Tarik de Vries-Zou

Show author details

Sotirios Ioannis Lekkas: Affiliation:
University of Sheffield
Nina Mileva: Affiliation:
University of Groningen
Panos Merkouris: Affiliation:
University of Groningen
Ivo Tarik de Vries-Zou: Affiliation:
University of Goningen

Book contents

Summary

This chapter examines the interpretation practice of international investment tribunals, using the territoriality requirement in international investment arbitration as a case study. International investment tribunals employ various interpretative methods when interpreting the scopes ratione loci and ratione materiae of investment treaties. However, on many occasions arbitral tribunals use methods of interpretation that favor the object and purpose of treaties over other elements of interpretation envisaged in Articles 31–33 of the VCLT. When applied to the interpretation of the territoriality requirement, arbitral tribunals interpret the requirement based on the intention of the contracting parties to create favourable conditions for the promotion of investments and economic cooperation. Such an interpretive approach creates an expansive tendency of the territorial application of investment treaties.

Keywords

investment arbitration international investment tribunals territoriality teleological interpretation expansive interpretation

Information

Type: Chapter
Information: The Practice of Interpretation in International Law
Unity, Diversity, and Evolution
, pp. 248 - 271

DOI: https://doi.org/10.1017/9781009599122.016 [Opens in a new window]

Publisher: Cambridge University Press

Print publication year: 2026
Creative Commons: This content is Open Access and distributed under the terms of the Creative Commons Attribution licence CC-BY-NC-ND 4.0 https://creativecommons.org/cclicenses/

10 Methods of Interpretation of International Investment Law The Use of the Object and Purpose of Investment Treaties in Interpreting Territoriality

10.1 Introduction

This chapter aims to analyze the interpretation of the territoriality requirement under international investment treaties and explore the application of customary international law and the Vienna Convention on the Law of Treaties (VCLT), in particular Article 31, in international investment arbitration. It focuses on whether and to what extent special rules and methods pertaining to the process of interpretation have emerged in the field of international investment law.Footnote ¹ International investment treaties, as a rule, extend protection only to assets that qualify as ‘investments’. Similarly, the foreign private party’s right to initiate dispute resolution against the host State under a treaty or investment law extends only to disputes arising out of that party’s investments.Footnote ²

The reason for this limitation is the perception among both less-developed and industrialized States that private investment is a catalyst for development and prosperity.Footnote ³ International investment treaties, including the Washington Convention and bilateral investment treaties (BITs),Footnote ⁴ constitute a conscious, and potentially politically costly, derogation of State sovereignty.Footnote ⁵ The State’s sacrifice of freedom of action is done for a particular purpose, and that purpose closely defines the scope of operation of international investment treaties. The primary motivation for both developing and developed States to enter into these agreements is, in the words of the Washington Convention preamble, ‘the need for international cooperation for economic development, and the role of private international investment therein’, along with the need to create an international dispute resolution mechanism that can effectively protect foreign investments.Footnote ⁶ Thus, there is a recognition that a certain category of cross-border economic action, called ‘foreign investment’, helps expand welfare around the globe.Footnote ⁷ In addition, the majority of BITs indicate in the preamble their purpose to protect investments. The corollary is that other kinds of activities are not considered to have the same effect: short-term capital flows, particularly those involving speculation in debt or currency, are widely seen by host States as sources of monetary or economic instability, rather than stability and prosperity.Footnote ⁸ The derogation of State sovereignty necessary for a direct investor-State dispute resolution system is therefore generally viewed to be worth undertaking to the extent that it helps a developing country compete to attract ‘good’ asset flows, designated as ‘investments’.Footnote ⁹

However, one of the most challenging issues in international investment treaties is defining what qualifies as an ‘investment’. This definition is crucial because it determines whether a foreign investor can initiate dispute resolution under a treaty or contract and whether the arbitral tribunal has jurisdiction ratione materiae.Footnote ¹⁰ Treaties signed before the 1990s often provided a relatively restricted definition of ‘investment’, sometimes expressly linking the concept to ‘capital’ or requiring that a local business enterprise be established to qualify for protection.Footnote ¹¹ Other BITs based on developed countries modelsFootnote ¹² provided a broader and a more descriptive definition of investments including new forms of investments based on a non-exhaustive list of assets.Footnote ¹³

The vast majority of international investment treaties include a specific wording in defining the term ‘investment’ or ‘covered investment’, requiring the investment to be made ‘in the territory’ of the host State. A typical example of a Treaty defining ‘investment’ is Article 1(2)(a) of the Colombia-UK BIT (2010) according to which ‘Investments means every kind of economic asset, owned or controlled directly or indirectly, by investors of a Contracting Party in the territory of the other Contracting Party, in accordance with the law of the later.’Footnote ¹⁴ According to this condition, that the investment shall be made ‘in the territory of the host State’, it is evident that ratione materiae jurisdiction relies upon a territorial requirement. Arbitral tribunals follow specific rules and methods of interpretation in determining the territoriality requirement of investments in international investment arbitration.

On many occasions, arbitral investment tribunals have adopted interpretative approaches that prioritize the object and purpose of investment treaties – typically the promotion and protection of foreign investment – over other interpretative elements outlined in Articles 31 to 33 of VCLT.Footnote ¹⁵ The object and purpose of an international investment treaty is usually referred to in the preamble of the treaty, which has a different wording and style than the main text of the treaty. This chapter explores how arbitral tribunals use the object and purpose of international investment treaties in interpreting territoriality, according to the rule of interpretation set forth in Article 31 of the VCLT. However, as it will be shown, the use of the object and purpose of a treaty shall not be used in a way to extend the obligations of the respondent State by overriding the text of the treaty.Footnote ¹⁶

Arbitral tribunals tend to interpret the treaty’s scope ratione loci and ratione materiae more broadly, requiring the territorial application of international investment treaties as compatible with the object and purpose of the treaties. Arbitral tribunals, in these instances, seem to lean towards pro investore interpretative constructions by prioritizing teleological interpretation and the principle of effectiveness, sometimes over other interpretative elements, including that of the principle of systemic integration. They do so, by resorting to specific objectives such as the protection and promotion of foreign investments, and the economic development of the States, considering them as the main purpose of international investment treaties.

As will be analyzed in Section 10.2, such methods may apply to economic services performed outside the national jurisdiction of host States. In more detail, the economic dimension of the territorial requirement may differ according to the interpretative approach taken by investment tribunals. Section 10.2.1 will focus on the ‘economic benefit’’ approach. Section 10.2.2 will supplement this analysis by examining the ‘economic unity of the investment’ approach.

Section 10.3 will then argue that the interpretative methods employed by investment tribunals that give preference to teleological and effectiveness interpretative constructions, and which prioritize the protection of the investor (pro investore interpretation), may also apply to foreign investments established in the territory of another state where the host State exercises effective control but does not have sovereign rights. In more detail, this chapter will delve into the extraterritorial application of BITs in situations where these investments are located in occupied areas, such as recent arbitration cases that are related to Russia’s illegal annexation of Crimea (Section 10.3.1). While the primary focus remains on the investment law implications, it is important to acknowledge that the scenarios under discussion also engage broader and complex questions of sovereignty, territorial status and the legality of competing claims. Although these issues fall outside the core scope of the present analysis, their relevance cannot be overlooked, and they are therefore briefly addressed at appropriate points in the chapter to provide necessary context.

10.2 The Territorial Nexus between the Investment and the Host State (ratione materiae): The Economic Dimension of the Territorial Requirement

The notion of investment and its definition has yet to become a serious barrier to jurisdiction in investor-State arbitration.Footnote ¹⁷ Nevertheless, respondent States have raised the issue as a jurisdictional objection in a large number of ICSID cases. Tribunals have tended to approach each such objection largely on its own merits and with regard to the circumstances of the case at hand.Footnote ¹⁸

According to the majority of international investment treaties, the territorial requirement of investment is considered as a jurisdictional condition. Only investments made ‘in the territory’ of the host State can be a ‘protected investment’. The territoriality requirement plays a central role in determining the scope of application ratione materiae of BITs, as it links the protection afforded by the treaty to investments made within the territory of the host State.Footnote ¹⁹ While the ICSID Convention does not explicitly define the territorial requirement, it implicitly incorporates this notion through its reference to a ‘dispute arising directly out of an investment’ under Article 25. In practice, ICSID tribunals often rely on the territorial scope defined in the underlying BIT or investment contract to assess whether the dispute falls within their jurisdiction.Footnote ²⁰ Thus, arbitral tribunals have jurisdiction ratione materiae to adjudicate a case only when the investment at stake is located in the territory of the host State.Footnote ²¹ However, unlike tangible assets that have physical presence and it is easy to identify the investment (e.g. immovable property), it is difficult to determine whether non tangible assets, such as contractual rights, financial transactions and economic activities performed outside of the host State, are ‘located’ in the territory of the host State. Those assets have an immaterial nature as they lack a physical location.

In general, as a jurisdictional condition for the arbitral system of dispute resolution, ‘the conception of an investment at the jurisdictional stage can only serve the object and purpose of the treaty if it is conducive to a relatively high degree of legal certainty’.Footnote ²² One of the necessary elements in determining the investment concept is the territorial connection with the host State. In addition, considering the notion of territory, international investment treaties often implicitly or explicitly tie the concept of territory to the sovereign power of the host State. Sovereign power refers to the State’s capacity to govern and exercise authority over its territory and people. This includes creating and enforcing laws, regulating economic activities and upholding public order. The exercise of enforcement jurisdiction is particularly significant as it denotes not only a State’s legal authority but also its actual ability to apply and enforce its laws within a given territory.Footnote ²³ Actually, the territorial link between an investment and the host State and the extent of sovereign power of contracting states to enforce their laws are at the heart of international investment law.Footnote ²⁴ Otherwise, arbitral tribunals cannot accept that the alleged violations fall within the jurisdiction of the host State. Therefore, no international responsibility can be attributed to the host State if it has no jurisdiction and sovereign power over the investment or the investor. Thus, the essential rule of international investment law that contracting States must avoid any arbitrary behaviour towards foreign investments in their territory (the so called ‘political’ or ‘sovereign’ risk)Footnote ²⁵ is combined with their obligation to enforce their national laws ‘consistently’ along with their responsibility to protect investments.Footnote ²⁶ In fact, the host State’s obligation to protect investments located in its territory is the primary objective of all international investment treaties, along with the economic development of the host State and the enhancement of economic cooperation between the contracting States. Host States are not required to protect investments located outside their territory, unless a territorial link is established.Footnote ²⁷

Where contractual rights or intangible ‘assets’ constitute an investment, there is still a need for that investment to qualify for a territorial link with the host State. Therefore, it is a requirement of international law that the territorial jurisdiction of the host State is necessary even for non-tangible investments, to enforce its laws in accordance with its general obligation to protect the investment.

For this reason, this section seeks to identify methods of interpreting territoriality applied by arbitral tribunals in determining their jurisdiction for cases involving financial transactions or other economic activities.Footnote ²⁸

To interpret territoriality according to customary law as enshrined in Article 31 VCLT, there are several criteria applied by arbitral tribunals in order to satisfy the condition of the BITs on the definition of protected investment. Taking into consideration these criteria, there are two approaches used in arbitral practice: (i) the subjective approach to the ‘economic utility of the investment for the host State’, the so called ‘economic benefit test’; and (ii) the integrated aspect of the investment, the so called ‘economic unity of the investment’ test.Footnote ²⁹

10.2.1 The ‘Economic Benefit’ Test

The ‘economic benefit’ test or approach was taken by arbitral tribunals in cases related to various financial instruments issued by the host State, such as promissory notes,Footnote ³⁰ bonds,Footnote ³¹ hedging agreements,Footnote ³² loansFootnote ³³ and others. According to these cases, arbitral tribunals interpreted the territorial requirement by using economic characteristics of the investment, such as whether there is any economic contribution to the host State, which is an assertion made simply favouring an interpretation that gives full effect to the rights of investors. For example, the arbitral tribunal in Abaclat adopted a functional (economic) interpretation of the investment’s territorial-link requirement for the financial assets at stake to be considered as ‘covered investments’ under the Italy-Argentina BIT:

With regard to investments of a purely financial nature, the relevant criteria should be where and/or for the benefit of whom the funds are ultimately used, and not the place where the funds were paid out or transferred. Thus, the relevant question is where the invested funds ultimately made available to the Host State [sic] and did they support the latter‘s economic development … it was used by Argentina to manage its finances, and as such must be considered to have contributed to Argentina’s economic development and thus to have been made in Argentina.Footnote ³⁴

For some types of investment like financial instruments and transactions taken outside the host State, arbitral tribunals considered that physical presence of an investment should not be a decisive factor, because the relevant criteria cannot be the same as those applying to an investment with a tangible nature. An important factor for the territorial requirement of investments with a purely financial nature should be whether such financial transactions were made available and utilized for the economic benefit of the host State.Footnote ³⁵

Such an interpretative approach of the territorial requirement based on the economic benefit condition is problematic. In fact, by replacing the required territorial link between the investment and the host State with the condition of the host State’s economic benefit, it creates different results than the textual meaning of the investment treaties’ provisions.Footnote ³⁶ According to arbitral tribunals, the ‘economic benefit’ test replaces the requirement that an investment be ‘made in the territory of the host State’ by a subjective criterion, that an investment be made for the ‘benefit of the host State’. In this vein, there is neither a need to localize financial instruments nor to demonstrate whether financial entitlements are associated with a specific investment project located in the host State, therefore invalidating territoriality as a jurisdictional requirement in international investment arbitration. Finally, concerning the application of the benefit test to sovereign debt instruments like the bond cases in Argentina, apart from the difficulty to prove that the host State is the ultimate beneficiary of financial entitlements on the secondary market,Footnote ³⁷ it is quite unclear how to establish the required connection of the funds generated by the purchase of such instruments for the benefit or economic development of the host State.Footnote ³⁸ Otherwise, if arbitral tribunals assume that any financial instrument that can benefit the host State can satisfy the concept of ‘investment’ or ‘protected investment’ through such a ‘functional’ interpretation of the territoriality requirement, then there is no substantial difference between foreign direct investments and portfolio investments or simple cross-border payments.Footnote ³⁹ Therefore, such a broad and loose interpretation of territoriality leads to a subjective and absurd result that is contrary to the textual interpretation of the territorial clause contained in most international investment treaties.

10.2.2 The ‘Economic Unity of the Investment’ Test

In order to fulfil the territorial requirement of investment and establish the ratione materiae jurisdiction of arbitral tribunals, it is important to justify a connection between the financial operation and the territory of the host State. Such territorial nexus cannot be circumvented by a loose and exaggerated interpretation of the territorial requirement contained in most international investment treaties, transforming the territorial into an economic or functional element.Footnote ⁴⁰ Judge Abi-Saab in his Dissenting Opinion in Abaclat criticized the opinion of the majority in defining investment and emphasized that the ordinary meaning of the investment made in the territory of the other Party could not be clearer, ‘except by tracing it to a specific project, enterprise or activity in that territory that corresponds to the economic meaning of investment in article 25 of the ICSID Convention’.Footnote ⁴¹ As the tribunal held in SGS v Philippines, ‘[i]n accordance with normal principles of treaty interpretation, investments made outside the territory of the Respondent State, however beneficial to it, would not be covered by the BIT’.Footnote ⁴²

Alternatively, arbitral tribunals have developed through their case-law a method of interpreting territoriality based on the ‘economic unity of the investment’.Footnote ⁴³ Such an approach is different to the ‘economic benefit’ concept as it does not circumvent the textual interpretation of territorial clauses but can still be adopted in investments with a non-physical nature or operations performed outside the host State. The ‘economic unity of the investment’ test examines whether each activity is a ‘substantial and non-severable aspect of the overall service’ that is provided in the territory of the host State.Footnote ⁴⁴ According to this approach, if an activity or a financial transaction is carried outside the host State, and is verified as an integral part of the overall operation (the investment), or can be traced to a specific project that is localized in the territory of the host State, then this activity can qualify as a protected investment in the territory of that State.Footnote ⁴⁵

This approach, known as the ‘economic unity of the investment’ doctrine, assesses whether or not separate activities can be regarded as part of an overall operation that needs to be performed in the territory of the host State.Footnote ⁴⁶ For example, in SGS v Philippines, the activity at stake performed outside the Philippines was related to the provision of pre-shipment inspection services for exports directed to the host State with the objective of improving the import trade of the Philippines. Such activities were carried out in accordance with the main goal of the investment contract, the improvement of a reliable inspection certificate system, and were not subdivided with the overall services provided within the Philippines, therefore they were classified as investments made in the territory of the host State.Footnote ⁴⁷ In this case, as well as in other cases such as Deutsche telecom AG v IndiaFootnote ⁴⁸ and in Deutsche Bank v Sri LankaFootnote ⁴⁹ concerning financial instruments, the Tribunal examined the overall purpose of the investor’s activities in order to assess whether the territoriality requirement is fulfilled. It concluded that even if the activities at issue are performed outside the host State or consist of financial instruments, contracts, licences and other agreements or arrangements, which alone do not qualify as an investment, they can still constitute protected investment when they are a substantial and interrelated part of the wider activity that is performed in the territory of the host State.Footnote ⁵⁰ In conclusion, financial instruments, notwithstanding their remoteness from the economic activity or project in the territory of the host State, have to be interconnected with that activity or project in order to qualify as a ‘protected investment’.Footnote ⁵¹ Otherwise, they would probably be identified as mere cross-border trade transactions.Footnote ⁵²

In this regard, for non-tangible investments to be considered covered investments, arbitral tribunals tend to interpret territoriality by applying two different approaches. The ‘economic benefit’ approach represents a subjective and investor-centric method, which tends to decouple the investment from the territory of the host State by focusing primarily on the investor’s economic gain, rather than on where the core investment activities take place. In contrast, the ‘economic unity of the investment’ approach applies a more textually and contextually consistent interpretative method, aligning more closely with the object and purpose of territorial clauses in investment treaties – namely, to ensure that treaty protections apply only to investments genuinely linked to the host State’s territory and regulatory control. This latter approach supports the tribunal’s ratione materiae jurisdiction by reinforcing the territorial scope contemplated in both treaties and contracts.

However, this interpretive trend illustrates the increasing prominence of teleological and effectiveness-based reasoning in investment arbitration. Rather than adhering strictly to the ordinary meaning or textual constraints of territorial clauses, some tribunals appear to prioritize the effective realization of the treaty’s overarching purpose – such as the promotion and protection of foreign investment – even if this requires stretching the geographic or legal boundaries of what qualifies as a territorial link. In this respect, the investment arbitration jurisprudence may signal a divergence from a holistic approach under Article 31(1) VCLT, which requires that treaty terms be interpreted in good faith according to their ordinary meaning, in context, and in light of their object and purpose. Here, the teleological element seems to assume a driver’s seat in the interpretative exercise, sometimes at the expense of textual and contextual fidelity.

In the next section, we examine how arbitral tribunals use a teleological interpretation of the territoriality requirement, not as a condition of BITs to determine a protected investment pursuant to ratione materiae jurisdiction but to determine territory when the investment is located in occupied areas over which a State exercises de facto control.

10.3 The Extraterritorial Application of BITs

The term extraterritorial jurisdiction traditionally refers to a State’s exercise of legal authority over conduct or persons outside its sovereign territory, subject to the limits set by international law. However, in the context of investment arbitration, this term may be misleading. Rather than exercising jurisdiction in a strictly extraterritorial sense, some arbitral tribunals have interpreted BITs as applying to investments located beyond the internationally recognized borders of the host State – such as in occupied territories – so long as the host State exercises effective control over the area. This practice blurs the line between territorial and extraterritorial application, raising important questions about how territorial clauses in BITs are interpreted in light of sovereignty disputes.

Crucially, the question is whether shifts in effective control over a territory may also affect the tribunal’s jurisdiction ratione loci, as jurisdiction under a BIT often hinges on whether the host State had sufficient authority to extend treaty protections to the investment at the relevant time.Footnote ⁵³

Extraterritorial jurisdiction has been jurisprudentially validated by international courts and tribunals, such as the European Court of Human Rights (ECtHR).Footnote ⁵⁴ Actually, international investment law and international human rights law share foundational principles – such as the protection of individual rights against State interference and access to international adjudicationFootnote ⁵⁵ – which allows for meaningful interaction between the two fields.Footnote ⁵⁶ Moreover, observing a growing reference to human rights in investment arbitration case law, it is interesting to explore whether investment tribunals should take into consideration ECHR and other human rights treaties as relevant rules for the interpretation of their respective investment agreements, according to the customary principle of systemic integration as enshrined in Article 31(3)(c) VCLT.Footnote ⁵⁷

This section examines the notion of extraterritoriality and the methods of interpretation that arbitral tribunals have used under article 31 VCLT in order to assess the territoriality requirement, and their jurisdiction ratione loci to adjudicate a case.Footnote ⁵⁸ For the purpose of this chapter, the extraterritoriality of a BIT refers to its territorial extension applying to investments made in the territory of a State,Footnote ⁵⁹ which is partially occupied by the State that is a contracting party to that BIT. In particular, this chapter explores whether the changes of ‘effective control’ over the territoryFootnote ⁶⁰ affects an arbitral tribunal’s jurisdiction under that BIT.Footnote ⁶¹

Following the recent developments of international arbitration related to the illegal annexation of the Crimean Peninsula by Russia, this chapter uses the Crimean conflict as a case study in exploring whether investments that existed prior to the armed conflict and were damaged, not necessarily by the host State, but rather by another State that occupies part of the host State’s territory, can be protected through the BIT framework. On the occasion of the Crimean investment-arbitration cases, this section examines whether international investment treaties apply to occupied territories in view of the effective (or de facto) control of the aggressor State party over that territory.Footnote ⁶²

Notably, it analyzes the Russia-Ukraine BIT applicability in the territory of Crimea as an investment protection mechanism (in the context of disputed borders), by determining the scope of ‘investment’ and ‘territory’, terms that determine the arbitral tribunal’s jurisdiction.

10.3.1 The Protection of Foreign Investments in Occupied Territories: The Crimea Investor-State Arbitrations

Following the 2014 annexation, Ukrainian investors that lost their properties or suffered severe damages initiated several ad hoc arbitral proceedings against the Russian Federation under the UNCITRAL Arbitration Rules, pursuant to the Russia-Ukraine BIT, considering themselves as foreign investors and Crimea as a territory over which Russia exercises de facto control. These proceedings, administered by the Permanent Court of Arbitration (PCA), were seated in Switzerland.

Even though the respondent State (Russia) contested the tribunals’ jurisdiction by selecting not to participate in the process,Footnote ⁶³ several arbitral awards were rendered affirming the tribunals’ jurisdiction and the admissibility of the investors’ claims.Footnote ⁶⁴ While many of the investor-State arbitrations are at the moment of writing of this chapter still pending, some of the arbitral tribunals proceeded to the adjudication of the dispute on the merits and awarded damages to the claimant, as they found Russia to be in breach of its obligations under the applicable BIT due to unlawful expropriation. Interestingly, the Swiss Federal Supreme Court held public deliberations in two separate appeal proceedings, rejecting Russia’s appeal to set aside the interim awards on jurisdiction rendered by the respected arbitral tribunals.Footnote ⁶⁵

The disputes focused on the territorial scope of the Russia-Ukraine BIT, on whether the BIT extended to Crimea, over which Russia exercised de facto control. Arbitral tribunals in this case confirmed that the concept of ‘territory’ encompasses regions over which a contracting State exercises de facto control.Footnote ⁶⁶ Even if BITs do not have any specific explanation for the term ‘territory’ or any reference to ‘effectively controlled’ areas, arbitral tribunals interpret ‘territory’ in accordance with Article 31 VCLT. Regarding the term ‘territory’, the Russia-Ukraine BIT contains wording similar to the majority of BITs,Footnote ⁶⁷ which must be interpreted according to the ordinary meaning under international law and enhance the twofold object and purpose of the BIT as defined in the Treaty’s Preamble.Footnote ⁶⁸ Such an interpretative approach was taken in the Ukrnafta & Stabil cases taking into consideration the ‘useful result’ requirement of the BIT’s object and purpose, stating that:

The Appellant rightly does not question that the principles of interpretation of Art. 31 et seq. VCLT are to be observed in interpreting the 1998 Investment Protection Agreement. In particular, according to Art. 31(1) VCLT a treaty is to be interpreted in good faith in accordance with the ordinary meaning to be given to its terms in their context and in light of its object and purpose. Together with interpretation in good faith, a teleological interpretation guarantees the treaty’s ‘effet utile.’ If there are multiple possible interpretations, the term to be interpreted is to be assigned the meaning that guarantees its effective application and does not lead to a result that conflicts with the treaty’s object and purpose.Footnote ⁶⁹

Therefore, a teleological (and grammatical) interpretation (according to Article 31(1) VCLT) supported the fact that the Ukraine-Russia BIT served in its preamble two purposes, the promotion and protection of investments.Footnote ⁷⁰ A broad protection of investments, including investments located in the territory of the Russian Federation only because of subsequent border changes (even if this border change is unlawful), does not contradict the object and purpose of the Ukraine-Russia BIT.Footnote ⁷¹ The object and purpose of the BIT cannot be restricted just because there is a change in the effective control of the territory in question. Conversely, a narrow interpretation of the term ‘territory’ due to the de facto control of the aggressor State would not only leave investments in the territory at stake unprotected (which would go against the object and purpose of the Treaty) but also allow the aggressor State to benefit from its unlawful action without any responsibility or consequence.Footnote ⁷² Otherwise, a stricto sensu interpretation would leave investors in a legal vacuum. A strict interpretation of territorial scope would deprive arbitral tribunals of jurisdiction over such claims, creating a legal vacuum, as harmful acts taken place in occupied territories would be attributable to no State. Therefore, as it is already referred, the Swiss Supreme Court emphasized the principle of effectiveness method of interpretation.Footnote ⁷³ The tribunal also concluded that it was unnecessary, for the purpose of applying the Ukraine-Russia BIT, to determine whether the annexation of Crimea was lawful under public international law. From the point of view of the object and purpose of an investment treaty, the important fact is to ascertain whether the Contracting Party has effective control (authority) over the territory at stake and not whether that control was acquired legally or illegally. While this reasoning might appear to sideline the international law on occupation, it does not necessarily conflict with it. Rather, it reflects a functional approach according to which investment tribunals assess de facto control to establish jurisdiction, without making a determination on the legality of that control under the law of armed conflict or occupation.Footnote ⁷⁴

Even in case of subsequent territorial changes, a treaty remains applicable to the entire territory of each contracting State, without the need for a supplementary agreement (Article 29 VCLT) and therefore the illegality of the annexation of Crimea is irrelevant for the purpose of the application of the Ukraine-Russia BIT. Nevertheless, this does not mean that arbitral tribunals recognize any illegal acquisition of territory as legitimate.Footnote ⁷⁵ On the contrary, the arbitral tribunals emphasized that ‘for the assessment of its jurisdiction under Art. 9 IPA 1998, it was not required to address the question of the permissibility of the accession of Crimea into the Russian Federation or the lawfulness of the associated territorial claims’.Footnote ⁷⁶ Therefore, the arbitral tribunals adopted the position of the Ukrainian observations (third party submission) according to which Crimea remained Ukrainian territory, but was temporarily under Russian effective control due to the occupation, exclusively for the purposes of the application of the Russia-Ukraine BIT.Footnote ⁷⁷ Otherwise, such recognition would violate public international law, notably the UN Charter (Article 2 (4)) and would be subject to challenge or annulment.

10.4 Conclusion

This chapter analyzed the interpretation of the territoriality requirement in international investment treaties and investment arbitration in light of customary international law and the Vienna Convention on the Law of Treaties (in particular Article 31). Investigating the extent to which special rules and methods have emerged regarding the interpretation process in the field of international investment law, it is found that the notion of territory is conceived in terms of extending investment protection. Arbitral tribunals interpret the territorial requirement based on the intention of the contracting parties to create favourable conditions for the promotion of investments and economic cooperation. Such an interpretive approach creates an expansive tendency of the territorial application of international investment treaties.

The ‘economic benefit’ approach to the interpretation of territoriality uses one of the BIT’s purposes (namely, the economic development of the host State) in contradiction to the wording of the treaty and, therefore, against the interpretation method of Article 31 of the VCLT. More specifically, the text of jurisdiction clauses contained in most BITs and international investment contracts requires a territorial nexus of the investment at stake with the host State and not one of economic benefit. Such method of interpreting the Treaty’s purpose over-expands the international investment law’s scope of protection, disconnecting the notion of protected investments from the territorial requirement.

On the contrary, the ‘economic unity of the investment’ approach to the interpretation of territoriality seems to follow the territorial requirement of most jurisdiction clauses, as it requires the connection between a financial transaction or an activity carried outside the host State and the specific investment or project that is localized in the territory of the host State. However, in order to satisfy the territoriality requirement, this approach requires that the activities at stake shall form a substantial and integral part of the overall operation carried out within the territory of the host State.

In addition, the significance of the Tribunals’ awards in the Crimea investor-State arbitrations cannot be underestimated, as it was the first time that an arbitral tribunal had found a BIT to be applicable in a territory regarded by the international community as illegally occupied. For the purpose of the application of the Ukraine-Russia BIT, arbitral tribunals found unnecessary to determine the lawfulness of Russia’s control over Crimea. Making a teleological interpretation that was supported by the object and purpose of the Ukraine-Russia BIT in its preamble to protect investments, arbitral tribunals confirmed that the concept of ‘territory’ encompasses regions over which a contracting State exercises de facto control. Otherwise, a strict interpretation of the territorial scope of BITs would deprive tribunals of jurisdiction over such claims, leaving foreign investors in a legal vacuum.

Finally, the conclusions of the Crimea investor-State arbitrations could also apply in the midst of complex and overwhelming situations in the international political arena. In light of the object and purpose of international investment treaties, arbitral tribunals could adopt a ‘pragmatic approach’ in the future by extending the application of the treaty to areas where the aggressor State exercises effective control.

Footnotes

¹ This chapter was presented in the conference ‘The Practice of Interpretation in International Law: Unity, Diversity, and Evolution’ that took place in the Hotel des Indes, The Hague, on 1–2 December 2022 organized under the TRICI-Law Project and the Department of Transboundary Legal Studies of the University of Groningen. The information and case-law referred to in this article were those available up until the time of organization of the conference.

² Investment is ‘every kind of asset owned or controlled, directly or indirectly, by an investor’. OECD, ‘The Multilateral Agreement on Investment: Draft Consolidated Text’ (22 April 1998) OECD Doc DAFFE/MAI(98)7/Rev1, art II (2). Economists and legal commentators, meanwhile, more often describe investment as a phenomenon, a process, or an action. According to Sornarajah, ‘[f]oreign investment involves the transfer of tangible or intangible assets from one country into another for the purpose of use in that country to generate wealth under the total or partial control of the owner of the assets’. M Sornarajah, The International Law on Foreign Investment (3rd edn, Cambridge University Press 2010) 8.

³ On the importance of foreign investment to industrialized countries, see W Sholz, ‘International Regulation of Foreign Direct Investment’ (1998) 31 Cornell IntlLJ 485, 486. On the role of investment in Third World development, see World Bank, ’Development Issues: Presentations to the 41st Meeting of the Development Committee, 1991’ (World Bank, 1991) 39 (Section on: The Role of Foreign Direct Investment in Development) <https://documents1.worldbank.org/curated/en/301731468765567295/pdf/multi-page.pdf> (last accessed 1 June 2025); I Shihata, Legal Treatment of Foreign Investment: The World Bank Guidelines (Brill 1993) 11; TW Wälde, ‘Investment Arbitration under the Energy Charter Treaty’ (1996) 12(4) Arbitration International 429, 430–31. The ostensible benefits of foreign direct investment (FDI) include wage increases, reduced unemployment, increased demand for local goods, inflow of foreign capital, opening of markets, improved balance of payments, transfer of industrial skills and knowledge, transfer of management skills, increased tax revenues and improved infrastructure. TG Telford and HA Ures, ‘The Role of Incentives in Foreign Direct Investment’ (2001) 23(4) Loyola International and Comparative Law Review 605, 615–16.

⁴ Both bilateral and multilateral investment agreements are treaties within the meaning of art 1(1)(a) of the Vienna Convention on the Law of Treaties; Vienna Convention on the Law of Treaties (adopted 23 May 1969, entered into force 23 January 1980) 1155 UNTS 331 (VCLT).

⁵ For the United States, investor-state arbitration ‘requires the federal government’s liability to be decided not by judges appointed by the President with the advice and consent of the Senate, but by a panel of international arbitrators’; B Legum, ‘Federalism, NAFTA Chapter Eleven and the Jay Treaty of 1794’ (2001) 95 ASIL Proc 202. From a Mexican point of view on the extent of derogation from state sovereignty as a result of international investment treaties and the consequent political cost, see B Sepulveda Amor, ‘The NAFTA and the Claims of Mexican Jurisdiction’ (1997) 19 Houston JIntlL 565, 586–91.

⁶ Convention on the Settlement of Investment Disputes between States and Nationals of Other States (adopted 18 March 1965, entered into force 14 October 1966) 575 UNTS 159, Preamble (Washington Convention). For an illuminating and convincing economic analysis of developing countries’ motivation in signing bilateral investment treaties, see AT Guzman, ’Why LDCs Sign Treaties That Hurt Them: Explaining the Popularity of Bilateral Investment Treaties’ (1998) 38 VJIL 639. See also C Salgado Levy, ‘Drafting and Interpreting International Investment Agreements from a Sustainable Development Perspective’ (2015) 3(1) GroJIL 59, 67–68.

⁷ TW Wälde and T Weiler, ‘Investment Arbitration under the Energy Charter Treaty in the Light of New NAFTA Precedents: Towards a Global Code of Conduct for Economic Regulation?’ in G Kaufmann-Kohler and B Stucki (eds), Investment Treaties and Arbitration (Swiss Arbitration Association 2002) 159, 160–62.

⁸ A Lemaire, ‘Le nouveau visage de l’ arbitrage entre État et investisseur étranger: le chapitre 11 de l’ ALENA’ [2001] Revue de l’arbitrage 43, 59.

⁹ Despite the overall benefits introducing the Investor-State dispute resolution regime, it is still unclear whether such a regime has supported host States to attract foreign investments. See J Webb Yackee, ‘Do Bilateral Investment Treaties Promote Foreign Direct Investment? Some Hints from Alternative Evidence’ (2010) 51 VJIL 397; UNCTAD, ‘The Impact of International Investment Agreements on Foreign Direct Investment: An Overview of Empirical Studies 1998–2004’ (IAA Issues Note – Working Draft 2014).

¹⁰ About investment definition and what is protected by international investment treaties, see N Rubins QC, TN Papanastasiou and NS Kinsella, International Investment, Political Risk, and Dispute Resolution. A Practitioner’s Guide (2nd edn, Oxford University Press 2020) 333–54.

¹¹ World Bank, ‘Legal Framework for the Treatment of Foreign Investment: Survey of Existing Instruments – Vol 1’ (Progress Report And Background Studies 24, World Bank 1992) <https://documents1.worldbank.org/curated/en/790571468782168106/pdf/multi-page.pdf> (last accessed 1 June 2025).

¹² UNCTAD, ‘International Investment Agreements: Flexibility for Development’ [2000] UNCTAD Series on Issues in International Investment Agreements UNCTAD/ITE/IIT/18, 70.

¹³ Such list of assets consists of real estate and other direct property rights, shareholdings and other forms of participation in local companies, claims to payment or performance, intellectual property and other intangibles and concession or other similar types of agreements; CH Schreuerand et al, The ICSID Convention: A Commentary (2nd edn, Cambridge University Press 2010) 129. The US Model for Free Trade Agreements includes in its broad list of ‘covered’ investments various debt instruments, futures, options and other derivatives as well as concession, project financing or other similar contracts. See, for example, Singapore-United States, Free Trade Agreement (FTA) (adopted 6 May 2003, entered into force 1 January 2004) art 15.1(13) <https://www.ustr.gov/sites/default/files/uploads/agreements/fta/singapore/asset_upload_file708_4036.pdf> (last accessed 1 June 2025).

¹⁴ Colombia-United Kingdom, Bilateral Agreement for the Promotion and Protection of Investments (adopted 17 March 2010, entered into force 10 October 2014) (emphasis added) <https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/3253/download> (last accessed 1 June 2025).

¹⁵ VCLT (Footnote n 4); See CH Schreuer, ‘Diversity and Harmonization of Treaty Interpretation in Investment Arbitration’ in M Fitzmaurice, O Elias and P Merkouris (eds), Treaty Interpretation and the Vienna Convention on the Law of Treaties: 30 Years On (Brill/Nijhoff 2010) 129.

¹⁶ As emphasized in the Ambiente Dissenting Opinion: ‘It is evident that reading away Article 25’s investment requirement is at odds with the treaty interpretation rules of the VCLT which are based on the principle that the text must be presumed to be the authentic expression of the intention of the parties and which incorporate also the principle of “effective interpretation” (effet utile) under the control of good faith and the object and purpose of the treaty subject to the interpretation. As explained by Professor Abi-Saab in his dissenting opinion in 2011 Abaclat decision, the term “investment” in art 25(1) “whilst flexible enough is not infinitely elastic” it has a “hard-core”, which should be identified looking into the general context of the ICSID Convention and the circumstances surrounding its elaboration as well as to its object and purpose’; Ambiente Ufficio SPA and others v the Argentine Republic (Dissenting Opinion of Santiago Torres Bernárdez to Decision on Jurisdiction and Admissibility of 2 May 2013) ICSID Case No ARB/08/9 [203].

¹⁷ GR Delaume, ‘Consent to ICSID Arbitration’ in JJ Norton, M Footer and M Andenas (eds), The Changing World of International Law in the Twenty-First Century: A Tribute to the Late Kenneth R. Simmonds (Kluwer Law International 1998) 155, 155–74.

¹⁸ Generally, tribunals interpret ‘investment’ liberally; Fedax NV v Republic of Venezuela (Decision on Objections to Jurisdiction on 11 July 1997) ICSID Case No ARB/96/3; Fedax NV v The Republic of Venezuela (Award of 9 March 1998) ICSID Case No ARB/96/3.

¹⁹ In the majority of BITs, the territorial requirement is included in the definition of investment clauses. For example, see the Agreement Concerning the Encouragement and Mutual Protection of Investments between Russia and Ukraine (adopted 27 November 1998, entered into force 27 January 2000) art 1(1) <https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/2233/download> (last accessed 1 June 2025), ‘For the purposes of this Agreement: 1. “Investments” shall denote all kinds of property and intellectual values, which are put in by the investor of one Contracting Party on the territory of the other Contracting Party in conformity with the latter’s legislation, and in particular: a) movable and immovable property and any other rights of property therein; b) monetary funds and also securities, liabilities, deposits and other forms of participation; c) rights to objects of intellectual property, including authors’ copyrights and related rights, trade marks, the rights to inventions, industrial samples, models and also technological processes and know-how; d) rights to perform commercial activity, including rights to prospecting, development and exploitation of natural resources. No alteration of the type of investments, which the funds are put in, shall affect their nature as investments, unless such alteration is contrary to the laws of a Contracting Party on whose territory the investments were made’ (emphasis added).

²⁰ The Tribunals underline that both the BIT and the ICSID Convention require a territorial link between the investment and the host State. See Sociedad General de Aguas de Barcelona SA (Agbar) v Argentine Republic (Decision on Jurisdiction of 2 May 2006) ICSID Case No ARB/03/17 [65].

²¹ A Reinisch, ‘Investment Disputes and their Boundaries’ in Société Française pour le Droit International (ed), Droit des Frontières Internationales: The Law of International Borders (Pedone 2016) 207, 208–10.

²² Z Douglas, ‘Property, Investment, and the Scope of Investment Protection Obligations’ in Z Douglas, J Pauwelyn and JE Viñuales (eds), The Foundations of International Investment Law: Bringing Theory into Practice (Oxford University Press 2014) 362, 372.

²³ For example, art 1(6) of Italy-Turkey BIT refers that the term ‘territory’ designates: ‘the land within the land boundaries and the territorial waters of each contracting Party as well as the exclusive economic zone and the continental shelf that extends outside the limits of the territorial waters of each of the Contracting Parties over which they have or could have jurisdiction or sovereign rights’. See Agreement Concerning Reciprocal Promotion and Protection of Investments between Turkey and Italy (adopted 22 March 1995, entered into force 2 March 2004) <https://edit.wti.org/document/show/4cf0850e-3460-4238-9b9c-f9391198a4fc> (last accessed 1 June 2025). See also CR Zheng, ‘The Territoriality Requirement in Investment Treaties: A Constraint on Jurisdictional Expansionism’ (2016) 34 SingLR 139, 147.

²⁴ A Tancredi, ‘Some Thoughts on Deterritorialization and Effectiveness in International Law’ in A di Stefano (ed), A Lackland Law? Territory, Effectiveness and Jurisdiction in International and European Law (Giappichelli 2015) 52.

²⁵ For an analysis of the role of international investment law in mitigating political risk, see TN Papanastasiou, The Legal Protection of Foreign Investments Against Political Risk: Japanese Business in The Asian Energy Sector (Quid Pro 2015).

²⁶ According to Douglas, this is actually the raison d’ être of an investment treaty and the international investment law: ‘the whole architecture of an investment treaty rests upon the imposition of constraints upon the exercise of territorial jurisdiction by the contracting States parties’. Douglas (Footnote n 22) 372–73.

²⁷ Either by actual proof for the locus of a tangible asset or by the host State’s private international law for an intangible asset. With regard to private international law, the territorial link is determined by factors such as choice of law, choice of forum, the situs of financial damage etc; Douglas (Footnote n 22) 373–86. There are also many international investment treaties that incorporate private international law rules when they provide that arbitral tribunals decide on the basis of the contracting party’s laws as well as its rules on the conflict of laws. See Agreement on the Promotion and Protection of Investments between Argentina and Italy (adopted 22 May 1990, entered into force 14 October 1993) art 8(7) <https://edit.wti.org/document/show/5b96aa7a-a6d0–4fa5-be70–660428ddcb86> (last accessed 1 June 2025).

²⁸ In other words, to assess the localization of financial investments fulfilling the requirement of territorial jurisdiction.

²⁹ These approaches are identified in A Pecoraro, ‘Law of the Sea and Investment Protection in Deep Seabed Mining’ (2020) 19 MJIL 530, 530–71; see also C Kleiner and F Costamagna, ‘Territoriality in Investment Arbitration: The Case of Financial Instruments’ (2018) 9 JIDS 315, 315–38.

³⁰ Fedax, NV v Republic of Venezuela (Footnote n 18).

³¹ Cases related to the 2001 Argentinean sovereign debt restructuring and the following request for arbitration by creditors that gave rise to various decisions by arbitral tribunals. For example, Abaclat and others (formerly Giovanna A Beccara and others) v the Argentine Republic (Decision on Jurisdiction and Admissibility of 4 August 2011) ICSID Case No ARB/07/5; Ambiente Ufficio SPA and others v the Argentine Republic (Decision on Jurisdiction and Admissibility of 8 February 2013) ICSID Case No ARB/08/9; Giovanni Alemanni and others v the Argentine Republic (Decision on Jurisdiction and Admissibility of 17 November 2014) ICSID Case No ARB/07/8.

³² Deutsche Bank AG v Democratic Socialist Republic of Sri Lanka (Award of 31 October 2012) ICSID Case No ARB/09/2.

³³ Ceskoslovenska Obchodni Banka, as v the Slovak Republic (Decision of the Tribunal on Objections to Jurisdiction of 24 May 1999) ICSID Case No ARB/97/4.

³⁴ Abaclat and others (formerly Giovanna A Beccara and others) v the Argentine Republic, (Footnote n 31) [374]. According to the Ambiente Ufficio case, ‘in order to identify in which State’s territory an investment was made, one has to determine first which State benefits from this investment …. Accordingly, to assess where the investment was made, the criterion must be to whose economic development an investment contributed’. Ambiente Ufficio SPA and others v the Argentine Republic (Footnote n 31) [499].

³⁵ In the Fedax v Venezuela award, the arbitral tribunal emphasized that: ‘The important question is whether the funds made available are utilized by the beneficiary of the credit, as in the case of the Republic of Venezuela, so as to finance its various governmental needs’; Fedax, NV v Republic of Venezuela (Footnote n 18) [48]; Abaclat and others (formerly Giovanna A. Beccara and others) v the Argentine Republic (Footnote n 31) [374]; Ambiente Ufficio SPA and others v the Argentine Republic (Footnote n 31) [504]; see also Deutsche Bank AG v Democratic Socialist Republic of Sri Lanka (Footnote n 32) [292].

³⁶ Such approach ‘clearly goes against the ordinary meaning of the words included in the treaty’; A Arcuri and F Violi, ‘Reconfiguring Territoriality in International Economic Law’ (2017) 47 NYBIL 175, 202–4. Additionally, it ‘converts the objective condition attached to the localization in the territory of the host State into a subjective criterion’. Kleiner and Costamagna (Footnote n 29) 315–23.

³⁷ It cannot be shown how the host State can gain any benefit from financial transactions that take place in the secondary market (where funds go from the bondholders to intermediaries).

³⁸ In some cases, the arbitral tribunal did not even justify that there was an actual benefit to the economic development of the host State but merely proved that there was an intention to benefit the host State. See Deutsche Bank AG v Democratic Socialist Republic of Sri Lanka (Footnote n 32) [286–87].

³⁹ Douglas (Footnote n 22) 384–85. Actually, concerning the problem of including financial instruments in the notion of investment is not a problem of the intangible character or other characteristics of these instruments; ‘it is rather related to the remoteness of these products from the economic activity, project or enterprises which materialize the investment within the territory of the host State’. See Arcuri and Violi (Footnote n 36) 175–215.

⁴⁰ Pecoraro (Footnote n 29) 530–71. See also Kleiner and Costamagna (Footnote n 29) 315–38. See the dissenting opinion in Abaclat: ‘This requisite territorial link is clearly absent in the present case. The alleged investment, the security entitlements, are not located in Argentina by applying either the legal or the material criteria for determining such location’; Abaclat and others v the Argentine Republic (Dissenting Opinion of Georges Abi-Saab to Decision on Jurisdiction and Admissibility of 28 October 2011) ICSID Case No ARB/07/5 [77]; see also Ambiente Ufficio SPA and others v the Argentine Republic (Dissenting Opinion of Santiago Torres Bernárdez to Decision on Jurisdiction and Admissibility of 2 May 2013) (Footnote n 16) [243–46, 299].

⁴¹ Abaclat and others v the Argentine Republic (Dissenting Opinion of Georges Abi-Saab to Decision on Jurisdiction and Admissibility of 28 October 2011) (Footnote n 40) [95].

⁴² SGS Société Générale de Surveillance SA v Republic of the Philippines (Decision of the Tribunal on Objections to Jurisdiction of 29 January 2004) ICSID Case No ARB/02/6 [99]. See also Deutsche Bank AG v Democratic Socialist Republic of Sri Lanka (Footnote n 32) [292].

⁴³ The ‘economic unity of the investment’ (or the ‘overall operation’) approach, which stems from the investment tribunals’ jurisprudence, as a name and theory is analyzed in Pecoraro (Footnote n 29) 530–71; see also Kleiner and Costamagna (Footnote n 29) 315–38.

⁴⁴ SGS Société Générale de Surveillance SA v Republic of the Philippines (Footnote n 42) [102].

⁴⁵ For example, the Tribunal in the CSOB Award held that ‘[t]he contractual scheme embodied in the Consolidation Agreement shows, however, that the CSOB loan to the Slovak Collection Company is closely related to and cannot be disassociated from all other transactions involving the restructuring of CSOB’; CSOB v The Slovak Republic (Decision on Objections to Jurisdiction of 24 May 1999) ICSID Case No ARB/97/4 [80].

⁴⁶ There are also studies that advocate about the application of the ‘economic unity of the investment’ test in some transboundary activities that are performed in areas where no State can exercise sovereign rights. Such a case is, for example, the extracting activities in high seas and in the Area, which according to the International Law of the Sea has a special status as the common heritage of mankind. If the deep-seabed mining activities operating in the Area constitute an integral part of the investment in the territory of the sponsoring State (the host State), then such activities could qualify as protected investment under the international investment law. These mining activities performed in the Area are usually structured in an interrelated way to the main operation and assets, which are localized in the territory of the sponsoring State. See, for example, Pecoraro (Footnote n 29) 530–71.

⁴⁷ SGS Société Générale de Surveillance SA v Philippines (Footnote n 42) [101–12]. Similarly, see SGS Société Générale de Surveillance SA v Pakistan (Decision on Objections to Jurisdiction of 6 August 2003) ICSID Case No ARB/01/13; SGS Société Générale de Surveillance SA v Paraguay (Decision on Jurisdiction of 12 February 2010) ICSID Case No ARB/07/29.

⁴⁸ The activity at stake performed outside the host State was related to the delivery of hybrid satellite and terrestrial telecommunication services in the host State; Deutsche Telekom AG v India (Interim Award of 13 December 2017) PCA Case No 2014-10.

⁴⁹ In this case, although the Tribunal adopted the ‘economic benefit’ test applied in the Abaclat Award, it accepted that the financial instrument at case (a hedging agreement) was interconnected with the main activity taking place in the territory of the host State: ‘[i]n the present case, it is undisputed that the funds paid by Deutsche Bank in execution of the Hedging Agreement were made available to Sri Lanka, were linked to an activity taking place in Sri Lanka and served to finance its economy which is oil dependent. The Tribunal therefore decides that the condition of a territorial nexus with Sri Lanka is satisfied’. Deutsche Bank AG v Democratic Socialist Republic of Sri Lanka (Footnote n 32) [292].

⁵⁰ So at least, it must be proven that these activities constitute an ‘indivisible whole’ of an overall operation that is performed in the territory of the host State. See, for example, Enron Corporation v Argentina (Decision on Jurisdiction of 14 January 2004) ICSID Case No ARB/01/3 [70].

⁵¹ Arcuri and Violi (Footnote n 36) 175.

⁵² See, for example, Grand River Enterprises Six Nations Ltd v United States of America (Award of 12 January 2011) Arbitral Tribunal (North American Free Trade Agreement Chapter 11) [23–25]; Bayview Irrigation District et al v United Mexican States (Award of 19 June 2007) ICSID Case No ARB(AF)/05/1 [102, 104].

⁵³ D Costelloe, ‘Conceptions of State Jurisdiction in the Jurisprudence of the International Court of Justice and the Permanent Court of International Justice’ in S Allen et al (eds), The Oxford Handbook of Jurisdiction in International Law (Oxford University Press 2019) 455, 455–60.

⁵⁴ The ECtHR has repeatedly affirmed the extraterritorial jurisdiction and international responsibility of contracting States for violation of human rights treaty provisions and has recognized state jurisdiction in interpreting the various forms of state power and control. A typical example is the emblematic Loizidou Judgement. See Loizidou v Turkey [GC] (18 December 1996) Application no 15318/89 [52, 56].

⁵⁵ PM Dupuy, ‘Unification Rather Than Fragmentation of International Law? The Case of International Investment Law and Human Rights Law’ in PM Dupuy, EU Petersmann and F Francioni (eds), Human Rights in International Investment Law and Arbitration (Oxford University Press 2009) 45; M Fanou and VP Tzevelekos, ‘The Shared Territory of the ECHR and International Investment Law’ in Y Radi (ed), Research Handbook on Human Rights and Investment (Edward Elgar 2018) 93.

⁵⁶ J Coleman, K Cordes and L Johnson, ‘Human Rights Law and the Investment Treaty Regime’ in S Deva and D Birchall (eds), Research Handbook on Human Rights and Business (Edward Elgar 2020) 290; E de Brabandere, ‘Human Rights and International Investment Law’ in M Krajewski and RT Hoffmann (eds), Research Handbook on Foreign Direct Investment (Edward Elgar 2019) 619.

⁵⁷ TN Papanastasiou, ‘The Role of Human Rights in International Investment Arbitration: Arguments Raised by the Parties and Procedural Implications’ (2022) 21 LPICT 149, 170–73; N Jansen Calamita, ‘International Human Rights and the Interpretation of International Investment Treaties: Constitutional Considerations’ in F Baetens (ed), Investment Law within International Law: Integrationist Perspectives (Cambridge University Press 2013) 178.

⁵⁸ This section does not focus on the definition of investment and territoriality requirement of intangible investments that determines the scope ratione materiae of most international investment treaties. It is about the interpretation of the term ‘territory’ and the ratione loci application of the international investment treaties when the investment is in a contested or occupied area.

⁵⁹ Investments that became foreign because of the change of effective control in the territory in question.

⁶⁰ Effective control means the exercise of any jurisdictional function or power over the territory in question, despite the fact that such exercise is illegal under international law. The effective control notion has elaborated by the rich ECtHR’s case law. The latest ECtHR’s case (Ukraine and the Netherlands v Russia), the effective control of Russia over the occupied territory of Ukraine was confirmed. In this case, the Grand Chamber stated that certain ‘areas [of Ukraine] were, from 11 May 2014 and subsequently, under the effective control of the Russian Federation’; Ukraine and the Netherlands v Russia [GC] (25 January 2023) App nos 8019/16, 43800/14 and 28525/20 [695].

⁶¹ O Kuchmienko, ‘To BIT or not to BIT? The Effects of Changes in Effective Control and Temporal Scope on Investment Tribunal Jurisdiction under Ukraine-Russia BIT’ (master’s thesis, Uppsala University 2019).

⁶² For the arbitral tribunal to recognize effective (or de facto) control of the aggressor State over the territory, this State should demonstrate any of the following behaviours: ‘1. ability to legislate; 2. substitution of the state authorities; and 3. obtaining a permission of the other state to the wrongdoer’s presence in the territory etc’. See O Kuchmiienko, ‘The ECHR findings in the Case Ukraine and The Netherlands v Russia’ dated 25 January 2023; and Investment Arbitration “Crimean Cases”: Any Positive News for Ukrainian Investors?’ (Kluwer Arbitration Blog, 13 March 2023) <https://arbitrationblog.kluwerarbitration.com/2023/03/13/the-echr-findings-in-the-case-ukraine-and-the-netherlands-v-russia-dated-january-25-2023-andinvestment-arbitration-crimean-cases-any-positive-news-for-ukrainian-investors/> (last accessed 1 June 2025).

⁶³ This strategy changed after Russia’s decision on participation in PJSC DTEK Krymenergo v the Russian Federation, PCA Case No 2018-41.

⁶⁴ All awards remain confidential; Everest Estate LLC et al v Russia (‘Everest Estate’) (Decision on Jurisdiction of 20 March 2017) PCA Press Release, 9 August 2016; Aeroport Belbek LLC and Mr Kolomoisky v Russia (‘Aeroport Belbek’) (Interim Award Addressing Certain Issues of Jurisdiction and Admissibility of 24 February 2017) PCA Press Release, 9 March 2017; JSC CB PrivatBank v Russia (‘PrivatBank’) (Interim Award Addressing Certain Issues of Jurisdiction and Admissibility of 24 February 2017) PCA Press Release, 9 March 2017; PJSC Ukrnafta v Russia (‘Ukrnafta’) (Awards on Jurisdiction of 26 June 2017) PCA Press Release, 4 July 2017; Stabil LLC et al v Russia (‘Stabil) (Awards on Jurisdiction of 26 June 2017) PCA Press Release, 4 July 2017; Limited Liability Company Lugzor et al v Russia (‘Lugzor’) (Tribunal’s letter dated 29 August 2017) PCA Press Release, 13 December 2017; Oschadbank v Russia (‘Oschadbank’) (Judgment of the Paris Court of Appeal dated 30 March 2021); NJSC Naftogaz of Ukraine, PJSC State Joint Stock Company Chornomornaftogaz, PJSC Ukrgasvydobuvannya and others v The Russian Federation (‘Naftogaz’) (Award on Jurisdiction and Liability of 22 February 2019) PCA Case No 2017-16.

⁶⁵ The annulment proceedings before the Federal Court in Switzerland were related to the previous arbitration awards on jurisdiction in PJSC Ukrnafta v Russia and Stabil LLC and others v Russia; see Swiss Federal First Civil Law Court, Russian Federation v PJSC Ukrnafta (Judgment of 16 October 2018) 4A_396/2017; Swiss Federal First Civil Law Court, Russian Federation v Stabil LLC (Judgment of 16 October 2018) 4A_398/2017.

⁶⁶ In fact, Crimean arbitration tribunals have recognized that sovereignty is not a prerequisite for the definition of the term ‘territory’ under international law, so areas where effective control has unlawfully changed are also included in the concept of ‘territory’ for the purposes of investment protection, unless the BIT provides otherwise. See J Hepburn and R Kabra, ‘Investigation: Further Russia Investment Treaty Decisions Uncovered, Offering Broader Window into Arbitrators’ Approaches to Crimea Controversy’ (Investment Arbitration Reporter, 17 November 2017) <https://www.iareporter.com/articles/investigation-further-russia-investment-treaty-decisions-uncovered-offering-broader-window-into-arbitrators-approaches-to-crimea-controversy/> (last accessed 1 June 2025).

⁶⁷ ‘Territory’ shall denote the territory of the Russian Federation or the territory of the Ukraine and also their respective exclusive economic zone and the continental shelf as defined in conformity with the international law; see Agreement Concerning the Encouragement and Mutual Protection of Investments between Russia and Ukraine (Footnote n 19) art 1.4.

⁶⁸ It is stated in the Preamble that the Contracting Parties seek ‘to create and maintain favorable conditions for mutual investments’ and ‘to create favorable conditions for the expansion of economic cooperation’ among themselves; see Agreement Concerning the Encouragement and Mutual Protection of Investments between Russia and Ukraine (Footnote n 19) art 1.4.

⁶⁹ Russian Federation v PJSC Ukrnafta (Footnote n 65) [4.4.2].

⁷⁰ Footnote ibid; Russian Federation v Stabil LLC (Footnote n 65) [4.4.3]. See also L Rees-Evans, ‘Litigating the Use of Force: Reflections on the Interaction between Investor-State Dispute Settlement and Other Forms of International Dispute Settlement in the Context of the Conflict in Ukraine’ in FK Gómez, A Gourgourinis and C Titi (eds), International Investment Law and the Law of Armed Conflict (Springer 2019) 173, 187.

⁷¹ R Happ and S Wuschka, ‘Horror Vacui: Or Why Investment Treaties Should Apply to Illegally Annexed Territories’ (2016) 33(3) JIntArb 245, 245–68.

⁷² A similar conclusion was taken in Sanum Inv Ltd v Lao People’s Democratic Republic (Award on Jurisdiction of 13 December 2013) PCA Case No 2013-13. See also critiques in OG Repousis, ‘On Territoriality and International Investment Law: Applying China’s Investment Treaties to Hong Kong and Macao’ (2015) 37 MichJIntlL 113, 113–90; Y Wang, ‘The Fight between Interpretation and Modification: A Critique of Sanum v Laos’ (2020) 35(1) ICSID Review – Foreign Investment Law Journal 236, 236–53.

⁷³ See Russian Federation v PJSC Ukrnafta (Footnote n 65) [4.4.2]. See also Happ and Wuschka (Footnote n 71) 245–68. For views that ‘territory’ should not be interpreted in such a fashion, see P Dumberry, ‘Requiem for Crimea: Why Tribunals Should Have Declined Jurisdiction over the Claims of Ukrainian Investors against Russian under the Ukraine–Russia BIT’ (2018) 9(3) JIDS 506. For additional takes on the Crimea Investor-State arbitrations, see indicatively D Tamada, ‘War in Ukraine and Implications for International Investment Law’ (2024) 26 ICLR 187; GM Vaccaro-Incisa, ‘Crimea Investment Disputes: Are Jurisdictional Hurdles Being Overcome Too Easily?’ (EJILTalk!, 9 May 2018), <https://www.ejiltalk.org/crimea-investment-disputes-are-jurisdictional-hurdles-being-overcome-too-easily/> (last accessed 1 June 2025); E Leikin et al, ‘A Decade of Investment Treaty Claims Arising from Russia’s Invasion of Ukraine: Lessons and Expectations (Part I)’ (Freshfields Risk & Compliance, 2024) <https://riskandcompliance.freshfields.com/post/102j57i/a-decade-of-investment-treaty-claims-arising-from-russias-invasion-of-ukraine-l> (last accessed 1 June 2025); A Fouchard Papaefstratiou, ‘Crimea as Russian Territory for the Purposes of the Russia-Ukraine BIT: Consent v International Law?’ (Kluwer Arbitration Blog, 5 February 2023) <https://arbitrationblog.kluwerarbitration.com/2023/02/05/crimea-as-russian-territory-for-the-purposes-of-the-russia-ukraine-bit-consent-v-international-law/> (last accessed 1 June 2025).

⁷⁴ See Hepburn and Kabra (Footnote n 66).

⁷⁵ Regarding the Crimea region, the UN General Assembly adopted a Resolution titled ‘Territorial integrity of Ukraine’, affirming Ukraine’s sovereignty and territorial integrity and calling upon all states not to recognize any change in the status of Crimea region; UNGA, ‘Res 68/262: Territorial Integrity of Ukraine’ (27 March 2014) UN Doc A/Res/68/262.

⁷⁶ Russian Federation v PJSC Ukrnafta (Footnote n 65) [4.2].

⁷⁷ Rees-Evans (Footnote n 70) 188.

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Accessibility Information

The HTML of this chapter complies with version 2.2 of the Web Content Accessibility Guidelines (WCAG), offering more comprehensive accessibility measures for a broad range of users and attains the highest (AAA) level of WCAG compliance, optimising the user experience by meeting the most extensive accessibility guidelines.

Content Navigation

Table of contents navigation
Allows you to navigate directly to chapters, sections, or non‐text items through a linked table of contents, reducing the need for extensive scrolling.

Index navigation
Provides an interactive index, letting you go straight to where a term or subject appears in the text without manual searching.

Reading Order & Textual Equivalents

Single logical reading order
You will encounter all content (including footnotes, captions, etc.) in a clear, sequential flow, making it easier to follow with assistive tools like screen readers.

Short alternative textual descriptions
You get concise descriptions (for images, charts, or media clips), ensuring you do not miss crucial information when visual or audio elements are not accessible.

Visualised data also available as non-graphical data
You can access graphs or charts in a text or tabular format, so you are not excluded if you cannot process visual displays.

Visual Accessibility

Use of colour is not sole means of conveying information
You will still understand key ideas or prompts without relying solely on colour, which is especially helpful if you have colour vision deficiencies.

Use of high contrast between text and background colour
You benefit from high‐contrast text, which improves legibility if you have low vision or if you are reading in less‐than‐ideal lighting conditions.