When is an investment not an investment?

In Kaloti Metals & Logistics, LLC v Republic of Peru (ICSID Case No. ARB/21/29), an ICSID tribunal has recently ruled in favour of the Republic of Peru (“Peru”) in a decade-long dispute with Kaloti Metals & Logistics, LLC (“Kaloti”), a Miami-based gold dealer. The tribunal found that it did not have jurisdiction on the basis that Kaloti had no qualifying “investments”.

The decision reconfirms the continuing applicability of the double-barrel test for an investment to qualify as a protected investment under ICSID arbitration. Under this test, the investment has to qualify for protection under both the treaty under which the claim has been brought as well as Article 25 of the ICSID Convention. In this case, Kaloti failed, in particular, to establish a qualifying investment under the former.

Background

Kaloti is a provider of gold weighing, assaying, refining and logistical services and is the U.S. arm of Dubai-based Kaloti Group, a gold refiner and producer. In 2013 and 2014, Peru made immobilisation orders against a series of gold shipments allegedly purchased by Kaloti, which were intended to be exported from Peru to the United States. Peruvian authorities seized the shipments as a precautionary measure in the context of investigations and criminal proceedings regarding illegal mining, money laundering, and related crimes.

On 30 April 2021, Kaloti issued a Request for Arbitration against Peru and accused the state of violating the provisions in the United States-Peru Trade Promotion Agreement (the “TPA”) by failing to treat Kaloti’s investments in a fair and equitable manner and expropriating Kaloti’s gold and “going concern business enterprise” in Peru without complying with the requirements of the TPA.

In response, Peru argued that the tribunal did not have jurisdiction ratione materiae over Kaloti’s claims because Kaloti had failed to prove that it owned or controlled an “investment” as defined in Article 10.28 of the TPA and under Article 25 of the ICSID Convention.

Determining an “investment”

The tribunal determined whether Kaloti’s gold shipments and its “going concern business enterprise” met the test for “investment” pursuant to the two-fold test: under the relevant treaty, here the TPA, and under Article 25(1) of the ICSID Convention.

In relation to the TPA the relevant requirements to establish an “investment” were set out by Article 10.28. That provides:

“investment means every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk.” 

In relation to Article 25(1) the leading decision on the criteria is Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco, ICSID Case No. ARB/00/4. The precise parameters are sometimes debated but, in this case, both Kaloti and Peru, proceeded on the basis that they encompassed the same components of commitment of capital, expectation and risk as Article 10.28 as well as (additional) requirements of a certain minimum duration, and a contribution to the economic development of the host state. Generally, aside from issues of ownership/control under Article 10.28, the tribunal was therefore required to consider five criteria in total when determining whether the relevant investment was protected.

Gold as an investment?

The tribunal first considered whether gold was a qualifying investment under Article 10.28 of the TPA. Peru argued that Kaloti did not own or control the gold because it had not paid for all of the shipments. Kaloti asserted that its ownership did not depend on payment but on the terms of sale, which it argued demonstrated that it owned the gold when it was seized. Having reviewed the evidence, the tribunal concluded that Kaloti failed to establish that it had ownership or possession of the gold when it was seized. Therefore, the gold was not an “investment” under Article 10.28.

The “Going Concern Business Enterprise” as an investment?

In assessing whether this was a qualifying investment within Article 10.28, the tribunal considered whether the activities of this “enterprise” constituted a substantial “commitment of capital or other resources”. The tribunal determined that the capital commitment comprised salaries and the lease for an office of an enterprise. These activities did not constitute a commitment of capital or other resources.

The tribunal also found that Kaloti did not have an “expectation of gain or profit” under Article 10.28 as Kaloti did not create revenue in Peru. For example, its activities in Peru, which involved the weighing and shipping of gold, did not add value to the gold.

Further, there was no “assumption of risk” under Article 10.28 given Kaloti was merely leasing an office and paying salaries; which were simply commercial transactions. This was not sufficient “risk” to elevate Kaloti’s operations into investment.

Turning to the further (Article 25(1)) criteria, as to “certain minimum duration”, the tribunal found that the office space and service contracts Kaloti relied upon to establish a “going concern business enterprise” were too short-term. The tribunal identified nothing to suggest Kaloti had made a long-term commitment to creating value in Peru. And, finally, as to whether the investment contributed to the development of the host state, the tribunal found that Kaloti’s payment of rent and hiring of personnel in Peru could amount to a minor contribution to Peru. However, given no other criteria for a qualifying investment were met, the tribunal did not need to consider whether this minor contribution met the required threshold.

The tribunal therefore concluded that Kaloti’s “going concern business enterprise” was not a qualifying investment under the TPA. Kaloti’s Peruvian activities facilitated and were ancillary to the buying and selling operations of the gold trading company based in Miami, rather than constituting an investment.

Consequently, the tribunal rejected the entirety of Kaloti's USD 154 million compensation claim due to lack of jurisdiction and ordered Kaloti to reimburse Peru c. 3.9m in costs (100% of Peru’s costs).

Comment

The tribunal’s approach is not revolutionary, as it applies recognised principles of international law, but it is a useful illustration of the steps to assessing whether a qualifying investment exists for the purposes of a tribunal’s jurisdiction in ICSID arbitration. Investor/claimants in ICSID arbitration need to carefully consider whether their claims qualify for protections under the relevant treaty, and Article 25(1). Otherwise, they could be on the hook for the legal costs of the state should they fail.

Click here for the tribunal’s award.