Jurisdictional Conundrum Resolved

Recent Court Decision

Bilateral Investment Treaty – Claim as an investor under the treaty

In The Republic of Korea v Dayyani & Ors [2019] EWHC 3850 (Comm), the Commercial Court has dismissed a jurisdictional challenge to an arbitral award. In this case the court had to analyse various submissions including whether the respondents to the claim could be considered as“investors” for the purposes of the relevant bilateral investment treaty (BIT) that applied between the parties. The court had held that there was no requirement that the “investor” needed to own or have a direct legal interest in the property or asset that constituted the “investment” and therefore held even shareholders who exercise control over a company can be classified as investors in the company’s assests.

Facts to the case

The respondents (the “Dayyanis”) were from Iran and held Iranian citizenship. They owned an Iranian company which was the final preferred bidder for Daewoo, a Korean company majority-owned by the Korean government. As a result of the United Nations sanctions against Iran, the Dayyanis decided to follow a process to avoid the sanction and obtained advice to incorporate a separate company in Singapore for the sole purpose of completing the above transaction. The Singaporean company entered into a share purchase agreement (SPA) for the acquisition, paying a a deposit in the sum of US $50m dollars, which under the terms of the SPA could be forfeited under certain circumstances. After failed negotiations, Daewoo asserted that the SPA had been terminated and therefore the deposit was forfeited.

The Dayyanis commenced arbitration proceedings against the Republic of Korea pursuant to the Iran-Korea bilateral investment treaty. Amongst other findings, the arbitral tribunal held that it had jurisdiction because the Dayyanis were Iranian citizens who qualified as “investors” under the BIT. The Republic of Korea challenged this decision before the court in England and Wales, arguing that the true investor was the Singaporean company as the actual party to the SPA is that company, and therefore argued that the Iran-Korea bilateral investment treaty did not apply.

Court Decision

The Commercial Court dismissed the challenge and decided that under the applicable BIT, shareholders who exercise control over a company can be classified as investors in the company’s assets. The fact that the investments were held directly by the Singaporean company, and only indirectly by the Dayyanis, did not constitute a jurisdictional bar to their claim in these circumstances.

The English courts are therefore willing to adopt a broad interpretation of bilateral investment treaties as well as their supportive approach to arbitration. It is therefore important and relevant that when entering into a cross-border transaction, parties should consider the possibility that a counterparty’s ownership and not just where the company is registered would be relevant to the scope of any dispute that may arise and when claims are filed under bilateral investment treaties.