Winter 2012

Victory for Cuba in rare inter-State investment arbitration initiated by Italy

An inter-State investment arbitral award regarding a dispute between Italy and Cuba has recently been made publicly available for the first time. The final award, handed down in 2008, reveals that Italy relied on the inter-State arbitration clause in a 1993 Treaty on the Promotion and Protection of Investments with Cuba (the “BIT”), not only to protect its own interests but also in an attempt to exercise diplomatic protection in relation to 16 companies linked to Italy. In the course of the proceedings, Italy withdrew ten of these claims. The Tribunal’s award dismissed (by a majority) the remaining six claims.

Background

In this dispute, Italy raised claims for violation of the BIT in its own interest, claiming symbolic compensation of €1. Simultaneously, Italy tried to espouse the claims of 16 companies linked to it and operating in Cuba in industries ranging from the production of pasta sauce to the beauty and pharmaceutical sector. After failed diplomatic attempts, Italy notified the Cuban Government in May 2003 of its intention to initiate inter-State investment arbitration.

Definition of “investment” and “nationality” and the Tribunal’s consequent lack of jurisdiction
In its 2005 interim award, the Tribunal provided a three-part definition of “investment” requiring contribution, duration and risk. In light of the Tribunal’s invitation to submit only claims which fulfilled the requirements of this definition, Italy reduced the eventual number of claims to six. Nevertheless, with regards to two of these six companies, the Tribunal found itself incompetent to hear the case, stating that contracts for the sale of goods did not qualify as an “investment”.

With regard to the definition of “investor”, Article 1 of the BIT provides for the protection of investments made by “natural or legal persons of one Contracting Party in the territory of the other”. Relying upon the criterion of the “place of incorporation” of a company for determining its nationality, the majority of the Tribunal, consisting of the president, Yves Derains, and Cuba’s appointee, Narciso A. Cobo Roura, deemed the Tribunal incompetent to hear the claims of two companies registered outside Italy (Pasta y Salsa Que Chevere, incorporated under the laws of Costa Rica, and Christal Vetro SA, incorporated under the laws of Panama). The majority’s approach therefore rejected Italy’s argument that these companies were its nationals, irrespective of their place of incorporation, as their capital was derived from Italian nationals.

In his dissenting opinion, the Italian-appointed arbitrator, Attila Tanzi, pointed to the general wording of Article 1 of the BIT, which did not explicitly refer to any criterion of “nationality”. In his opinion, the Article defined investment broadly and was not dependent upon any specific legal form or “upon the legal system of reference” (“indépendamment […] du système juridique de reference”). Arbitrator Tanzi interpreted this provision to mean that the BIT covered Italian capital invested exclusively in Cuba through third-State companies.

The majority finds the Tribunal competent to hear two of the Italian diplomatic protection claims
The Tribunal discussed in detail the two remaining claims that Italy had submitted on the basis of diplomatic protection. The Tribunal found that a three-year contract to train staff and hire equipment for the running of a beauty salon in the premises of a hotel was an “investment”. The fact that the company did not own the equipment was deemed immaterial given that the equipment was destined to remain in Cuba.
The majority determined that the withdrawal of the hotel licence to run the beauty salon was not a wrongful act, inter alia because the withdrawal was based on legitimate reasons. The question then arose as to whether the conduct of the State-owned hotel was attributable to Cuba. The majority of the Tribunal declined attribution on the basis that hotel management did not involve an exercise of governmental authority and was by nature a commercial activity, relying on the earlier decision in Emilio Agustín Maffezini v The Kingdom of Spain (ICSID Case No. ARB/97/7) (“Maffezini”).

By contrast, the dissenting opinion of arbitrator Tanzi classified the hotel as a State organ and on this basis, attributed its conduct to the State. In Tanzi’s view, State organs in general comprise of State-owned companies, particularly so if the company in question is aimed at developing a key national economic sector, is integrated in the State structure and is controlled by the State. He further criticised the majority for its reliance on the Maffezini case. In Tanzi’s opinion, this decision contradicted the International Law Commission’s (“ILC”) Commentary on the Articles on States Responsibility, according to which the criterion of the nature of the act is not relevant in the field of attribution of conduct of State organs.

The second outstanding claim was set against a complicated factual background stemming from an internal investor ownership dispute. The majority of the Tribunal affirmed attribution of the conduct of a State-owned company on the basis of the “control” criterion with reference to Article 8 of the ILC Articles of State Responsibility. Ultimately, however, the majority of the Tribunal denied that the conduct complained of amounted to a breach of the investment promotion obligation in the BIT, holding that the damage alleged was not due to conduct of the State.

Implications of the award

First, the award will attract attention because it represents a rare example of a State-to-State arbitration under a BIT. Diplomatic protection is often seen as a limited and anachronistic method of investment protection. Yet, in circumstances such as those underlying the Ahmadou Sadio Diallo case (Republic of Guinea v. Democratic Republic of the Congo) recently decided by the International Court of Justice, it may still prove to be a useful investment protection tool. Concern that Cuba was unlikely to cooperate with the investor-State arbitration mechanism appears to have been another catalyst for Italy pursuing this avenue.

Second, the award provides a useful discussion regarding the definition of “investment” and “investor” in the BIT. The award may provide guidance on the interpretation of these terms in general and certainly with regard to similar BIT clauses.

Third, the divergent approaches put forward by the majority and the separate dissent are noteworthy for their discussion in relation to the attribution of conduct of State-owned enterprises. This aspect of the decision is of particular interest for those with investments in States with similar economic structures to Cuba, or investments involving cooperation with State-owned enterprises.