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Application of the Investment Treaties to the Seabed Investment Activities

by Mr. Turgut Aycan Özcan, LL.M. [1]

The United Nations Convention on the Law of the Sea

A. Introduction

Day by day, the role and volume of seabed investment activities take serious place in energy projects which are being realized all around the world. These seabed investment activities do not only include extraction and exploitation of fossil fuel-based products such as oil, gas and other natural resources and minerals but also installation of structures, platforms, or devices to the seabed in order to capture energy from wind, wave or tidal power.


Increase of seabed investment activities in the worldwide energy projects also raise another important issue: protection of foreign investments related to seabed activities. This issue brings other legal questions as well such as whether if the investment treaties could be applied to the seabed investment activities and if so, how could we determine the geographical scope of the treaties to reach this conclusion? Besides, if these seabed investment activities were made in the disputed maritime zones on which two coastal states claim sovereign rights, what type of remedies that a foreign investor could follow to protect its seabed investments in these maritime zones.


In this Article, we firstly will refer to serious increase in the number of investment disputes arising from the energy projects. Secondly, we will discuss whether the geographical scope of the investment treaties contain the territorial waters and other maritime zones of the host states such as exclusive economic zone and continental shelf. Thirdly, we will assess the possibility of application of investment treaties to the exploitation zones used by two coastal states jointly. And finally, we will analyze whether if it is possible to protect the foreign seabed investments made in the disputed maritime zones over which two coastal states claim sovereign rights based on bilateral or multilateral investment treaties.


B. Serious Increase in the Number of Investment Disputes Arising from the Energy Projects

International Centre for the Settlement of Investment Disputes (“ICSID”) 2023 caseload statistics indicate that 25% of the arbitration cases registered before ICSID in 2023 are related to oil, gas and mining and 17% of these cases are related to electric power and other energy sources. This means that almost half of the investment arbitration cases filed before ICSID in 2023 are related to energy projects in general.[2] Moreover, there is a high possibility that the investment disputes which may arise in the near future could be related to seabed investments as well due to the fact that modern technology has increased the possibilities for greater parts of the oceans and ocean floor to be opened up for exploitation. Oil and gas extraction is still one of the most prevalent seabed investment activities. Almost a third of oil consumed in the world coming from seabed drillings. Besides, it is also noteworthy that one of the fastest growing offshore activities is renewable energy generation which involves the attachment of structures, platforms or devices to the seabed in order to capture energy from wind, wave or tidal power. Many companies are also turning to the deep seabed as a source of valuable minerals cobalt, copper and similar minerals. These examples illustrate the diversity and fast-growing volume of types of “seabed investments”.[3]


C. Does the Geographical Scope of the Investment Treaties Contain the Territorial Waters and Other Maritime Zones of the Host States?

As per Article 3 of the United Nations Convention on the Law of the Sea (“UNCLOS”), the coastal states have a significant degree of control over seabed activities which may take place within their territories including their territorial seas which is up to 12 nautical miles measured from their coasts according to United Convention on the Law of the Sea.[4] Besides, UNCLOS also grants sovereign rights to the coastal states over almost all seabed activities taking place in waters up to 200 nautical miles from their coasts which is called Exclusive Economic Zone.[5] As well as on the seabed up to the edge of the continental margin which is called continental shelf.[6]


In view of the foregoing, while the foreign investors should comply with the laws and regulations of the coastal states with regard to their seabed investment activities in the aforementioned maritime zones, it is also equally important to figure it out how could the bilateral or multilateral investment treaties provide protection to these foreign seabed investments made in the maritime zones of the coastal states.


In order to determine the geographical scope of each investment treaty we should first look at the provisions regulating the scope of territory in terms of its application in the relevant host state. In this regard, most of the early investment treaties simply contain a provision as to the term “territory” without making any explanation about the scope of that territory.


For instance, Article 1 of the Bilateral Investment Treaty between Germany and Türkiye provides that “Each contracting party shall in its territory admit the investment of capital, in accordance with its legislation, by nationals or companies of the other Contracting Party…”[7]


In the absence of a clear provision with respect to the scope of the territory in the investment treaties, the Vienna Convention on the Law of Treaties (“VCLT”) can be used as a guide to make the necessary interpretation to mitigate any question and/or concern about the scope of the term “territory”. In this regard, Article 29 of the VCLT prescribes that “Unless a different intention appears from the treaty or is otherwise established, a treaty is binding upon each party in respect of its entire territory.” It is also noteworthy that when drafting this provision of the VCLT, International Law Commission noted that the reference to the “entire territory” is a comprehensive term designed to cover all the land and appurtenant territorial waters and air space that constitute the territory of the state.[8]


Jurisprudence of the international tribunals also supports the idea that the continental shelf should be considered within the scope of “territory” of the host states. For instance, International Court of Justice in one of its seminal judgements on the continental shelf in North Sea Continental Shelf Cases determined that “the submarine areas concerned may be deemed to be actually part of the territory over which the coastal state already has dominion in the sense that, although covered with water, they are a prolongation or continuation of the territory, an extension of it under the sea.” Although ICJ with this conclusion did not make a specific legal interpretation for the term “territory” in terms of protection of foreign investments under the investment treaty law, this conclusion of ICJ at least supports a broad understanding of the concept of territory under international law.[9]


In addition to this, as one of the principal objectives of investment treaties is the protection of investments, it can be argued that an interpretation which is more favorable to the foreign investor can be made in terms of scope of the term territory existing in the investment treaties. Having said this, of course there are limits to this approach. For instance, if a treaty explicitly excludes the continental shelf or the exclusive economic zone from the scope of territory existing in the relevant treaty, then it will not be possible for the investor to argue that this treaty also covers the seabed investments made in these maritime zones of the host state.


Until now, there is not so much controversy on the issue whether the continental shelf or the exclusive economic zone are considered within the scope of territory or not. For instance, in a NAFTA case, Mobil Murphy Oil v. Canada, which contained a claim by two oil companies in relation to their investments on the continental shelf of Canada, the geographical scope of NAFTA was not even raised by the parties and the tribunal assumed that the term territory in NAFTA also covers the investments made in the continental shelf of Canada.[10]


There are also bilateral and multilateral investment treaties that contain explicit terms with respect to maritime zones. For instance, Article 1(4) of Portugal – Korea BIT provides that “term "territory" means the territory of either of the Contracting Parties, as defined by their respective laws, including the territorial sea, and any other zone over which the Contracting Party concerned exercises, in accordance with international law, sovereignty, sovereign rights or jurisdiction.”[11]


Similarly, Article 1(e) of UK Model BIT reads as ““territory” means: (i) in respect of the United Kingdom: Great Britain and Northern Ireland, including the territorial sea and maritime area situated beyond the territorial sea of the United Kingdom which has been or might in the future be designated under the national law of the United Kingdom in accordance with international law as an area within which the United Kingdom may exercise rights with regard to the sea-bed and subsoil and the natural resources and any territory to which this Agreement is extended in accordance with the provisions of Article 12”[12] Besides, under Article 2 of Italy Model BIT, the term “territory” is defined as “the part of a land area, internal and territorial waters, air space above them, the sea area outside the territorial waters, including the seabed and subsoil on which the Party exercises sovereign rights, and subject to its jurisdiction, according to international law.”[13]


Considering that some new investment treaties contain detailed provisions as to the term territory which explicitly include the territorial seas and other maritime zones such as exclusive economic zone and continental shelf, in case where the disputes arise in the future between the foreign investors and host states based on these investment treaties, the arbitral tribunals, without any hesitation, may conclude that they have jurisdiction to hear the claims arising from seabed investments made in those maritime zones of the host states in question.


D. Application of the Investment Treaties to the Maritime Zones Used by Two Coastal States Jointly

Coastal states may decide to jointly develop and exploit the seabed resources in question. Such arrangements are also encouraged by the United Nations Convention on the Law of the Sea. Article 74(3) of the UNCLOS stipulates that pending any agreement between two States regarding delimitation of an exclusive economic zone, these States shall make every effort to enter into provisional arrangements of a practical nature and, during this transitional period, not to jeopardize or hamper the reaching of the final agreement. Such arrangements shall be without prejudice to the final delimitation.


The Memorandum of Understanding signed between Thailand and Malaysia can be given as an example to such cooperation. Thailand – Malaysia MoU identifies an area of overlapping claims and establishes a Joint Authority composed of representatives of both countries. This Authority has a separate legal personality, and it assumes all rights and responsibilities of both Thailand and Malaysia in terms of exploration and exploitation of the natural resources existing in the seabed and subsoil area. The joint authorities such as the one mentioned in Thailand – Malaysia MoU is generally entitled to enter into contracts with oil and gas companies intending to carry out operations in the joint development area.[14]


On the other hand, whether if the investment treaties could be applicable to the disputes arising from the investments made in these joint exploitation zones is a difficult question as the actions and transactions exercised by these joint authorities in principle cannot be attributable to the coastal states which established and delegated their powers to these authorities.


Here, there may be two scenarios. In the first scenario, the foreign investor may file an investment arbitration case separately against these two coastal states by relying on the bilateral investment treaties between the investor’s home state and these host states and/or any multilateral investment treaty which the foreign investor’s home state and these two coastal states are party to. Of course, this remedy may be much costly and risky for the foreign investor if the facts of the relevant case are not too strong.


Therefore, the second scenario would be more practical and preferrable. According to this scenario, the foreign investor may sign a specific investment contract with the joint authority established by two coastal States which contains provisions in favor of the foreign investor to protect its investments made in the joint exploitation zones such as fair and equitable treatment, full protection and security, protections against unlawful expropriation and of course the right for the investor to bring its dispute with the joint authority to international arbitration.


E. Application of the Investment Treaties to the Disputed Maritime Zones

When it comes to application of the investment treaties to the disputed maritime zones, we come across with mainly two jurisdictional issues. Namely, (i) Jurisdiction ratione materiae and (ii) Jurisdiction ratione personae.


In case where, the maritime zone is contested among two or more states as to the exercise of their sovereign rights over these maritime zones, these inter-state disputes are ‘implicated’ by the investment dispute because a decision concerning the latter might require, as a preliminary issue or “prior determination”, a decision concerning these inter-state disputes. However, deciding a territorial sovereignty dispute or a maritime delimitation dispute is quite different from interpreting and applying the provisions of an investment treaty, including the provisions concerning the agreement’s geographical scope. Therefore, such implicated issues raise intricate questions of jurisdiction ratione materiae.[15]


In the context of investment arbitration proceedings with respect to the disputed maritime areas, a second jurisdictional problem is frequently related to the jurisdiction ratione materiae of investment tribunals. Given the fact that the maritime area is disputed because of contested sovereign rights over the relevant maritime areas, it is clear that one of the two disputing states will not be a party to the investment arbitration proceedings in question. This raises a problem of jurisdiction ratione personae that will – in these types of cases – almost always exist in together with the abovementioned jurisdiction ratione materiae problems.[16]


In this regard, according to the “indispensable third part” or “Monetary Gold” principle, an international court or tribunal must, in principle, refrain “from deciding a case between two parties amenable to its jurisdiction on the merits if the legal interests of a third state would not only be affected by a merits judgment, but would for ”the very subject-matter of the case”.[17]While this principle is best known from the jurisprudence of the International Court of Justice (ICJ), it has been recognized by other international courts and tribunals.[18] To the best of our knowledge, until now, the investment arbitration tribunals did not take a position as to whether this principle is also applicable to them other than an arbitral tribunal established under UNCITRAL Rules which invoked the Monetary Gold principle proprio motu in support of its decision to decline jurisdiction.[19]


In view of the foregoing legal discussions and assessments, now the question is: if the investor would have a claim against the state which authorized this investor to proceed and carry out seabed investments, who was later forced to stop its activities because of the maritime zone dispute between the host state and another coastal state, will the arbitral tribunal have jurisdiction to hear this investment arbitration case?


There may be several answers to this question. The first possibility is that the arbitral tribunal can make a strict interpretation based on the fact that the relevant maritime zone is not officially under the sovereignty of the host state in question and therefore may conclude that it has no jurisdiction to hear this investment dispute.


In our view, abovementioned approach seems unfair as it allows the host State to escape from liability when this very State has created an impression over the investor that it had jurisdiction over the disputed area. Therefore, instead of dismissing the case due to lack of jurisdiction, the arbitral tribunal may make a wider interpretation by relying on one of the general principles of international law “ex factis jus oritur” which means in English “the law arises from the facts” and may determine that an investment was made in the territory of the host state due to exercise of de facto sovereign rights by the host state in the disputed maritime zone.[20]


Such an approach, in essence, focuses on the host state’s factual exercise of jurisdiction and control over a maritime area which can be called ‘effective control’. It appears that such an approach was also taken by a number of arbitral tribunals hearing cases brought by Ukrainian private investors and state-owned enterprises with investments in Crimea against Russia pursuant to the Russia–Ukraine BIT (1998), which reportedly upheld their jurisdiction– although these decisions are not publicly available.[21]


Another approach that can be followed by the arbitral tribunals may be the application of doctrine of estoppel to prevent the host state from pleading a lack of jurisdiction for the disputed maritime areas where it has previously claimed jurisdiction by granting some concession rights to the foreign investor in question for some seabed activities in the disputed maritime zone.[22]


F. Conclusion

The number of seabed investment activities increases in each day, and this also increases the possibility of investment disputes arising from these projects. Therefore, assessing the application of investment treaties to the seabed investment activities becomes an important legal issue. In this regard, as it is analyzed in a detailed manner in this Article there can be several scenarios where the foreign investors should protect their seabed investment activities. One of these scenarios can be the seabed investments made in the maritime zones which are used by two coastal states jointly. In these cases, the coastal states generally establish a joint authority and delegate their sovereign rights to that authority. Therefore, if there is a dispute between this authority and the foreign investor, the foreign investor may file an investment arbitration against each coastal state separately. However, filing two separate investment arbitration cases against two host states can be very costly and risky especially if the facts of the case are not too strong for the investor in question. Hence, instead of filing two separate investment arbitration cases against the coastal states in question, it would be more preferrable for the foreign investor to conclude an investment contract with the joint authority which contains provisions protecting this investment and allowing the investor to bring its dispute with the authority to international arbitration.


Another scenario can be the seabed investments which were made in the disputed maritime zones over which two coastal states claim sovereign rights. In this case, there may be problems about the jurisdiction of the arbitral tribunals as it may not be certain for these tribunals to determine the liability of the coastal state for actions carried out in the maritime zone which may not officially belong to that state. In these cases, the arbitral tribunals may make a narrow interpretation and dismiss the case due to lack of jurisdiction. However, we are in the opinion that such approach would not be fair as this coastal state has encouraged the foreign investor in the first place and issued the relevant permits for carrying out seabed activities in the disputed maritime zones and therefore has created an impression as if this state has sovereign rights over that region. Therefore, instead of dismissing the case due to lack of jurisdiction, the arbitral tribunals may focus on effective control of the coastal states over the disputed maritime zones and could hold that state liable for any unjust actions that prejudiced the seabed investments in question.


Finally, the arbitral tribunals may also apply the doctrine of estoppel to prevent the host state from pleading a lack of jurisdiction for the disputed maritime areas where it has previously claimed jurisdiction by granting some concession rights to the foreign investor in question for the seabed activities in the disputed maritime zone.


 

[1]Turgut Aycan Özcan is a Managing Partner at Özcan Legal. He is acting as counsel and arbitrator in international arbitration proceedings. Mr. Özcan is also lecturing on international arbitration at the several law faculties in Türkiye and in some other countries. [2]https://icsid.worldbank.org/sites/default/files/publications/2023.ENG_The_ICSID_Caseload_Statistics_Issue.2_ENG.pdf [3] International Investment Law and the Regulation of the Seabed, James Harrison [4] Article 3 of the UNCLOS: “Every State has the right to establish the breadth of its territorial sea up to a limit not exceeding 12 nautical miles, measured from baselines determined in accordance with this Convention.” [5]Article 55 of the UNCLOS: “The exclusive economic zone is an area beyond and adjacent to the territorial sea, subject to the specific legal regime established in this Part under which the rights and jurisdiction of the coastal State and the rights and freedoms of other States are governed by the relevant provisions of this Convention.” Article 57 of the UNCLOS: “The exclusive economic zone shall not extend beyond 200 nautical miles from the baselines from which the breadth of the territorial sea is measured.” [6]Article 76(1) of the UNCLOS: “The continental shelf of a coastal State comprises the seabed and subsoil of the submarine areas that extend beyond its territorial sea throughout the natural prolongation of its land territory to the outer edge of the continental margin, or to a distance of 200 nautical miles from the baselines from which the breadth of the territorial sea is measured where the outer edge of the continental margin does not extend up to that distance.” Article 77(1) of the UNCLOS: “The coastal State exercises over the continental shelf sovereign rights for the purpose of exploring it and exploiting its natural resources.” [7] Article 1 of Türkiye - Germany Bilateral Investment Treaty [8] Draft Articles on the Law of Treaties with Commentaries – 1966, p.213 [9]International Investment Law and the Regulation of the Seabed, James Harrison [10] International Investment Law and the Regulation of the Seabed, James Harrison [11] Article 1(4) of Portugal – Korea BIT [12] Article 1(e) of the UK Model BIT [13] Article 2 of the Italy Model BIT [14] International Investment Law and the Regulation of the Seabed, James Harrison [15]The Protection of Foreign Investments in Disputed Maritime Areas, Marco Benatar and Valentin J Schatz, p.12 [16] Id. p.14 [17]Tobias Thienel, ‘Third States and the Jurisdiction of the International Court of Justice: The Monetary Gold Principle’ (2014) 54 German YB Int’l L 322 [18]The Protection of Foreign Investments in Disputed Maritime Areas, Marco Benatar and Valentin J Schatz, p.15 [19] Larsen v Hawaiian Kingdom, PCA Case no 1999-01, Award (5 February 2001) paras 11.8 et seq, 12.1 et seq. [20] International Investment Law and the Regulation of the Seabed, James Harrison [21]The Protection of Foreign Investments in Disputed Maritime Areas, Marco Benatar and Valentin J Schatz, p.18 [22] International Investment Law and the Regulation of the Seabed, James Harrison

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