Article 1 of the BIT provides as follows:

The underlying dispute concerned the effect of Slovakian health insurance legislation on two Slovakian companies, "Dôvera" and "Apollo". Dôvera and Apollo were subsidiaries of Dôvera Holding (also incorporated in the Slovak Republic), which was in turn wholly-owned by the claimant, HICEE BV, a company incorporated in the Netherlands. The claimant's claim related to the Slovakian government's enactment of legislation which prohibited health companies from distributing profits and imposed a cap on their permissible administrative expenses. The claimant argued that this legislation prohibited it from earning a return on its investment and thus alleged that the respondent had breached certain provisions of the BIT.

The respondent argued that the claimant was not entitled to the protection afforded by the BIT, as its interest in Dôvera and Apollo did not fall within the BITs definition of "investment". The question, therefore, was whether the tribunal had jurisdiction to hear this claim.

It was the respondent's position that, on a true interpretation of the wording of the definition of "investment" contained within the BIT, the use of the word "directly" was not intended to cover investments made with intervening subsidiary owners. It argued that here, as Dôvera and Apollo were not assets that the claimant had directly invested in Slovakia, but rather an investment channelled through Dôvera Holding, a Slovak company, the claimant's investment did not fall within the scope of the BIT's protection. The structure of the claimant's investment, the respondent submitted, "introduced a separate legal owner into the investment chain which is distinct from the holding company which is owned directly by the Dutch investor."

The claimant, however, argued that the wording of the BIT, which was expressed in terms of an "either … or" construction, signified that there were two mutually exclusive alternatives available. The claimant's investment could either be made through companies in third states, which would be invested "indirectly", or without the involvement of third-state entities, which would be "directly", in order to fall within this definition.

In order to support its argument, the respondent sought to rely on some explanatory notes to the BIT submitted by the Netherlands as part of its domestic ratification process. These notes made it clear that Czechoslovakia (as it then was before its split) wished to exclude investments made by a "sub-subsidiary" from the scope of the BIT because this would be a company created by a Czechoslovakian legal entity. The claimant argued that this language pertained to the definition of "investor" rather than "investment": a sub-subsidiary could be deemed not to be a Dutch investor but still be an "investment".

The tribunal, by majority, held that the terms of the BIT were to be understood not to protect the claimant's investment in Dôvera and Apollo, as it was made by a third-party intermediary in the host state and, as such could not be considered to be "investments by investors". It followed that the tribunal lacked jurisdiction to determine the substantive claims.

In reaching its conclusion, the majority of the tribunal reasoned that the BIT was to be interpreted in accordance with the principles set out in the Vienna Convention on the Law of Treaties, which required the tribunal to interpret the BIT in good faith and give the terms of the BIT their ordinary meaning, assessed in context and in the light of the BIT's object and purpose (Article 31). However, in case of ambiguity, it was permissible to refer to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion (Article 32).

Since the definition of "investment" was capable of more than one interpretation (a "directional meaning", in which investments by subsidiaries, wherever located, were permitted, or a "relational meaning", in which investments through intermediaries were permitted only if the intermediary was in a third country), Article 32 permitted the tribunal to refer to the explanatory notes.

Although the explanatory notes did not fit within any specified categories in the Vienna Convention, these categories were not exhaustive. Further, as the content of the notes was highly pertinent, they could not be left out of the interpretive process, as to do so would not accord with the general good faith requirement. A powerful factor was that, had the interpretation of the BIT arisen in inter-state litigation, the Dutch Government would have been bound by its statements in the explanatory notes and a BIT must have the same meaning, whatever the context.

The dissenting arbitrator considered that the meaning of the definition of "investment" was not ambiguous and, therefore, there was no basis for applying Article 32. Even if Article 32 was applied, the explanatory notes were not a reliable source.

This is another case which emphasises the fact that every treaty must be applied in accordance with its specific terms. Indeed, this decision provides an interesting contrast to the decision in Azurix Corp v Argentine Republic (ICSID Case No ARB/01/12) (Annulment proceeding) (see Legal update, Azurix annulment decision: full report), which concerned a similarly structured investment whereby Azurix, an American-owned company, had invested in a subsidiary and sub-subsidiary, both of which were based in the host state of Argentina. The relevant definition of "investment" in the Azurix case provided that an investment included "every kind of investment". As a result of this broad definition, the tribunal ruled that Azurix's investment fell within the provisions of the treaty and the tribunal, therefore had jurisdiction to hear that claim. The specific wording of the definition of "investment" can, therefore, have a decisive impact on the scope of a treaty's protection.

The award also includes an interesting analysis of the application of the Vienna Convention, and in particular, the circumstances in which extraneous materials can be used as an aid to construction of a BIT. In particular, the tribunal's decision makes it clear that the good faith requirement of the Vienna Treaty can be widely interpreted, and the tribunal uses this as a basis for including the explanatory notes in the interpretative process.

It is, however, worth noting the dissenting arbitrator's view that it would have been sufficient here to apply Article 31 of the Vienna Convention to the interpretation, as, in his view, the ordinary meaning of the BIT was that sub-subsidiaries in the host state were within the scope of "investment" given the context, which was to support and encourage foreign investment. He argued that Article 31 requires a "reality check" on the "ordinary meaning" analysis, and as such, it was unnecessary to move on to an application of Article 32 and an analysis of the explanatory notes.

It is particularly noteworthy that, according to the tribunal's construction of the treaty, had the claimant made this investment through its direct subsidiary, Dôvera Holding, rather than through the two Slovak sub-subsidiaries, this would have qualified as an "investment". As the dissenting arbitrator asserts, there is therefore an implicit, and arguably arbitrary, distinction made between an investment consisting of additional corporate structures, such as here, and certain other types of indirect investment made through the direct subsidiary.

Accordingly, this conclusion does not sit well with original aim of the treaty, which was of course to maximise foreign investment. Indeed, the decision in the NAFTA case of SD Myers Inc v Government of Canada 8 ICSID Rep 3 addressed this question of the "spirit" of a treaty and concluded that otherwise meritorious claims should not fail simply by reason of the corporate structure adopted by the claimant in order to organise its business affairs. However, there is also a need to ensure that investments are not manipulated to cover what are effectively domestic investments. Here, given that the claimant undoubtedly controls the entity that has made the foreign investment, and could have advanced a claim through its direct subsidiary, Dôvera Holdings, it appears that it is a victim of its own corporate organisation. Although the tribunal here states that "a Tribunal takes a BIT as it is; its task is one of interpretation, not criticism", there is an argument that certain policy considerations should also be taken into account when making such decisions.

HICEE BV v Slovak Republic (PCA Case No 2009-11).