Typically investments are made in the territory of a nation State. In that traditional scenario, determining which State is the ‘Host State’ of the investment – and therefore against which State the investor may bring a claim under an investment treaty – is a straightforward matter. But there are circumstances which defy the conventional identification of the Host State.
Part 1 of this series discussed one type of a scenario that may arise – specifically where an investor finds its investment located in a territory that has been illegally occupied by another State. As discussed in Part 1, investors in areas which have become subject to unlawful occupation or illegal annexation may have recourse to investment treaty protections against the illegal occupying State even though that area is not part of its sovereign territory, on the basis of that State’s de facto control over the occupied territory (subject to the relevant definition of ‘territory’ in the applicable investment treaty).
In this second part of our series we turn to considering other scenarios in which the proper Host State may be difficult to identify. Those scenarios typically involve areas where territorial entitlements of two or more States overlap but are not yet delimited, or two or more States dispute sovereignty over the same land and/or maritime area (together, unsettled areas).
These complex scenarios are not uncommon. There are many areas rich with hydrocarbons or mineral resources located in locations over which sovereignty has not been finally determined or boundaries not finally drawn. According to the Ocean and Coastal Management Journal, 39% of the world’s maritime boundaries have not been finally delimited and, according to the World Factbook, there are approximately 150 land disputes presently known. Many of these unsettled areas are rich with valuable mineral or hydrocarbon deposits which attract investors and which States seek to exploit.
Unsettled boundary scenarios are ripe for disputes which can arise either prior or subsequent to investment activities being undertaken. For example:
- disputing States might issue licences or permits to different investors for the exploration or exploitation activities in the unsettled area, leading to conflict between the investors prior to commencing investment activities;
- a disputing State may send its navy or military to the unsettled area to request that an investor authorised by the other disputing State to undertake activities in that area cease its operations; or
- a boundary dispute between State A and State B may be finally resolved and, as a result, a pre-existing investment asset previously located in State A moves into the territory of State B.
It is critical that investors who own or seek to acquire assets located in such areas consider whether their investment is or will be covered by investment treaty protections regardless of the final resolution of any boundary dispute between the States involved.
Set out below are certain considerations of which investors should be mindful.
Does the Host State have the power to authorise the investment in an unsettled area?
Where State A grants an investor the right to operate in an unsettled area, State B may contest the authorisation because there is no agreement between States A and B as to how rights in relation to the area may be exercised.
This occurred in a long-running dispute between Guyana and Suriname over the unsettled maritime boundary between them. Guyana had issued oil exploration licences to several oil companies within the unsettled maritime area. Once the discovery was made of potentially significant hydrocarbon deposits, Suriname expressed concern that Guyana was carrying out exploration activities in the ‘territory of Suriname’ and that, as a consequence, these activities were illegal.
Guyana in turn reaffirmed its claim to the unsettled area and allowed for drilling activities to commence. Suriname responded by sending its navy to the disputed area and evicting the concessionaire’s drilling rig and requesting that the drilling operations cease.
The situation led to a boundary dispute between Guyana and Suriname pursuant to the United Nations Convention on the Laws of the Sea (UNCLOS). The tribunal appointed to hear the case found that UNCLOS requires States with potentially overlapping entitlements to make efforts to enter into practical provisional arrangements (Article 74(3)) and not to jeopardise or hinder the reaching of a final agreement (Article 83(3)). Guyana was found to have violated Article 74(3) when it licensed oil exploration in the disputed waters without first seeking to engage Suriname in discussions.
These obligations have particular consequences for investors involved in resource extraction activities. The message to take away is that States may be restricted from licencing activities in a disputed maritime area where those activities cause permanent physical change.
Until final delimitation has been agreed, investors will only be able to continue activities such as drilling or resource exploitation pursuant to practical provisional arrangements being reached between disputing States.
Is there an investment treaty with the Host State which applies to investments in the unsettled area?
As noted above, considering whether legal protections are available to investors in unsettled areas is particularly important given the high-risk setting and the likelihood that the investment will be caught in an inter-State territorial dispute and suffer economic detriment as a result.
Provided there is an investment treaty in force between the investor’s home State and, ideally, all of the disputing States, the investor may be protected regardless of the outcome of the dispute. Anything short of that exposes the investor to a greater risk that any loss suffered as a result of a boundary dispute will be left uncompensated.
How does the applicable investment treaty define ‘territory’ to which it applies?
Once potentially applicable investment treaties have been identified, it is important to consider how they define the meaning and the geographic scope of ‘territory’ within which investor protections apply.
As discussed in Part 1 of this series, investment treaty protections typically apply to investments located within a Host State’s ‘territory’. A question that will need to be considered is, therefore, whether the Host State’s ‘territory’ includes the unsettled area where the investment is located.
There are generally two approaches seen across investment treaties: they either contain a definition of ‘territory’ or they do not. If ‘territory’ is not defined in the applicable investment treaty, tribunals will apply accepted norms of treaty interpretation and the law of the sea principles in the case of unsettled maritime areas. Where an investment treaty defines the notion of ‘territory’ with a degree of precision, investors will need to carefully consider any such definition and whether it includes the unsettled area within which their investment asset is located.
Investment treaty jurisprudence does not offer much clarity on how tribunals might interpret the meaning of ‘territory’ in the context of unsettled areas. However, it is clear that complex challenges may arise when trying to establish whether an investment is located within the Host State’s ‘territory’ for the purposes of an investment treaty.
Where no definition of ‘territory’ exists in a treaty, or where that term is defined in general terms as ‘the territory of’ State A, tribunals may find that they have greater flexibility to consider the object and purpose of an investment treaty when interpreting its territorial scope.
Employing the approach of the Stabil tribunal discussed in Part 1, it may be open to tribunals to find that a treaty’s territorial scope extends over investments in areas under the effective control or jurisdiction of the Host State, even if that area is not lawfully part of that State’s sovereign territory.
In Stabil, the bilateral investment treaty between Russia and Ukraine defined ‘territory’ as “the territory of the Russian Federation … as well as [its] … exclusive economic zone and the continental shelf, defined in accordance with international law”. This general definition allowed the tribunal to conclude that the territorial reach of Russia’s obligations in respect of Ukrainian investments included areas over which Russia exercised de facto control and jurisdiction following their unlawful annexation to Russia.
Having regard to the Stabil decision, an investor may be able to bring a treaty claim against the State exercising effective control over an unsettled area in which the investment assets are located, provided there is an investment treaty in force between that State and the investor’s home State, and depending on whether or how that treaty defines ‘territory’.
Further, tribunals may also draw on relevant State documents to determine a State’s intention in relation to the protection of investments within unsettled or disputed territories.
For example, Argentina’s Constitution affirms its sovereignty over the Falkland Islands, despite the United Kingdom’s claims to sovereignty over the same area. A tribunal deciding a treaty case brought by an investor in the Falkland Islands against Argentina would therefore take into consideration the fact that Argentina treats the areas as part of its sovereign territory which evinces an intention to protect foreign investment assets located on the Falkland Islands.
However, where the Host State’s intention is inconsistent with international law, tribunals may also refuse to be guided by it. For example, Israel’s bilateral investment treaties define territory as “the territory of the State of Israel” plus its maritime areas. Israel may treat Palestinian territories as its own but this is not recognised under international law. Investors with assets located in the territory disputed between Israel and Palestine therefore face uncertainty as to whether their assets will be protected under their home States’ investment treaties with Israel.
Similarly, a previous determination by another court or tribunal that the Host State’s claim to sovereignty over a particular land or maritime area is unlawful will likely impact a tribunal’s consideration of whether an investment falls within that State’s ‘territory’, even where the Host State treats the area in question as part of its sovereign territory.
A further complication can arise where the Host State does not have the right under international law to authorise investments in an unsettled area; for example, in a maritime zone claimed by two or more States, as discussed above. Such investments could be rendered unlawful under an applicable investment treaty and, as such, be disqualified from treaty protection. In other words, investors may be disentitled from claiming compensation from a State that treats a particular territorial area as its own where that State’s assertion of sovereignty over the area is not supported by international law.
In circumstances where sovereignty remains unsettled, tribunals may also find it beyond their jurisdiction to determine the validity of a State’s territorial claim or unilaterally drawn boundary over an unsettled area, which in turn may result in the claim being outside the tribunal’s jurisdiction.
These scenarios illustrate the heightened risk involved in investments in unsettled areas and why it is critical for investors to obtain advice in relation to any applicable investment treaties protecting such investments.
Do investments continue to be protected when boundaries are drawn or re-drawn?
Complex situations of a different kind can arise where a new boundary is agreed between two or more States, which results in an investment previously located in State A subsequently being located in the territory of State B.
This situation is illustrated by dispute between Cote d’Ivoire and Ghana before the Special Chamber of the International Tribunal for the Law of the Sea which determined the location of their maritime boundary.
Ghana had granted access to investors to exploit resources within a maritime area claimed by both States. While the dispute was ongoing, investors were prevented from continuing their operations as Ghana was precluded from undertaking new drilling activities in the disputed maritime area.
The Special Chamber ultimately found that Ghana had not breached Cote d’Ivoire’s sovereign rights and delimited the maritime boundary on the basis of the customary principle of equidistance, without any adjustment being appropriate for the location of hydrocarbon deposits and the parties’ conduct in granting oil concessions in the previously unsettled area.
As a result, the newly drawn boundary impacted nearly all mineral resource activities off the coast of the two States. Commentators noted that investor disputes could arise given this outcome because an investor could make a claim against:
- the new territorial State, if the State did not honour the investor’s previously granted licences; and/or
- the original territorial State that granted the investor’s rights, for expropriation of the investor’s assets as a result of the State giving up the granted area to resolve the maritime dispute.
Importantly, however, such claims depend on there being available treaties in force between the investor’s home State and the original and/or the new territorial State. As a result of a newly drawn or re-drawn boundary, an investment may fall within another State’s territory which does not have an investment treaty with the investor’s home State. In that scenario, investment assets would no longer benefit from important protections (such as against discriminatory treatment and expropriations) afforded by investment treaties.
Examples of this can also be found closer to Australian shores where maritime delimitation with neighbouring States has already affected and may affect investments in the oil and gas rich Timor Sea.
The maritime boundary settlement with East Timor in 2018 affected hydrocarbon activities in the area. As agreed between Australia and East Timor, the oil and gas fields previously shared between them (in the Joint Petroleum Development Area) as well as the Buffalo field transitioned to East Timor’s exclusive jurisdiction, whereas sovereignty over the Greater Sunrise field was recognised to be shared, with arrangements to be implemented for joint development of the resource.
Following on from the boundary delimitation with East Timor, in 2021, it was reported that Indonesia was pushing to settle its maritime boundary with Australia along the equidistant line, pursuant to the approach adopted in the settlement of Australia’s maritime boundary with East Timor. If such an equidistant line between Australia’s and Indonesia’s coastal baselines were to be drawn, Australian oil and gas assets could be affected because Australia may lose some of its continental shelf to Indonesia.
Were this to occur, commercial arrangements would need to be sought between and with the States involved to preserve ongoing investments. There are also investment treaties in place between Australia and Indonesia that protect Australian investments in Indonesia, including in Indonesian waters. For example, the Indonesia-Australia Comprehensive Economic Partnership Agreement defines the territory of Indonesia to include Indonesia’s continental shelf and exclusive economic zone, which would cover any asset located within any stretch of the continental shelf belonging to Australia and/or Indonesia.
Key lessons for investors
Investors should undertake thorough due diligence before investing in areas where boundaries have not been finally agreed or over which more than one State claims sovereignty or sovereign rights. This involves considering:
- whether an agreement exists between the States involved regarding rights exercisable over an unsettled area;
- whether the Host State authorising the investment exercises de facto control over the unsettled area;
- whether the Host State’s territorial claim to a particular area is consistent or inconsistent with international law;
- in the case of investments in the resources sector, whether the Host State has the right under international law to authorise exploration or exploitation of resources within an unsettled area;
- whether there are any competing licences or authorisations already granted to other investors which overlap with the investor’s proposed activities, or which have been granted by the other States involved;
- whether there are investment treaties in force between their home State and the States claiming sovereign rights over the unsettled area, and whether any such treaties define the ‘territory’ to which the treaty applies; and
- whether there is a material risk of a territorial or maritime boundary being finally settled in a way which moves what was previously an investment in one State into the territory of another State and whether this may impact the availability of treaty protections. If the investor’s home State has investment treaties with both disputing States and investment protections are consistent across both treaties, investors can feel more secure in their investment regardless of the outcome, provided that the definition of ‘territory’ in each treaty is adequately broad (and, in the case of investments in offshore areas, covers the parties’ exclusive economic zones and continental shelves). If this is not the case, investors should consider how they can negotiate with disputing States to protect their investment assets in the event fof an adverse boundary settlement.
This article is Part 2 of our series on investment treaty protections available to investors who hold assets in occupied and disputed territories. Part 1 can be found here.
 Pieter Bekker and Robert van de Poll, ‘Ghana and Cote d’Ivoire Receive a Strict Equidistance Boundary’ (2017) American Society of International Law 21(11); Christine Sim, ‘Investment Disputes arising out of Areas of Unsettled Boundaries’ (2018) Journal of World Energy Law & Business 11(1), 11.
This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.