The foreign shareholders of a local company may be left with no choice but to contemplate whether to retain their shares once their rights have been violated under the applicable investment treaty by the host State. In such cases, the procedural puzzle of whether these shareholders should be permitted to bring a claim under ICSID after the share transfer requires a clear solution. Although there is a considerable increase in the number of investors exiting the host State after the violation of BIT rights, there are not many ICSID tribunal decisions on their legal standing afterwards. 

First, it is worth mentioning that there exists no requirement for continuous ownership of an investment under ICSID Convention Article 25/2(b). This is well-established by ICSID decisions which did not require investors to retain their investments throughout the arbitration. For instance, in EnCana v. Ecuador, with respect to the legal standing, the ICSID tribunal underlined that it was irrelevant whether the claimant retained its investment throughout the proceedings.

In Daimler v. Argentina, it wasobserved that investment claims are separable from the underlying investment and, they are not transferred in conjunction with the share sales unless explicitly agreed otherwise. Therefore, the essential issue is to determine the date that entitles the shareholder to bring forth an ICSID claim, also referred to as the “critical date”. 

With reference to identifying the critical date, one possibility is that the shareholder transfers their shares after the institution of the proceedings. It was observed in those cases that respondents generally raise a jurisdictional objection based on the loss of legal standing. In response, claimants generally respond to this allegation by arguing that the legal standing is a matter of jurisdiction and, the jurisdiction of the tribunal should be determined at the time of the institution of the proceedings. The ICSID tribunals generally favored claimants in these instances. 

In this context, the time of “the institution of the proceedings” is also critical. The definition of the institution of the proceedings is not precise and depends on the applicable arbitration rules. According to 6(2) of the ICSID Institution Rules, “A proceeding under the Convention shall be deemed to have been instituted on the date of the registration of the request”. In Ceskoslovenska Obchodní Banka, A.S. v. Slovak Republic, the ICSID tribunal specifically referred to the date of the registration of the request for arbitration as the critical date. 

On the subject of whether the investor could exit right after the institution of the proceedings, the ICSID tribunal in El Paso v. Argentina noted that El Paso’s request for arbitration was registered on 12 June 2003 and, El Paso transferred its interests on 23 June 2003, one-half weeks after bringing its claims. Although the tribunal found it disturbing that there was such a short time between bringing its claims and the transfer of its interests, in the end El Paso’s claim was found admissible.

On the other possibility of share transfer prior to the institution of the proceedings, Douglas refers to the critical date as investors having control over the investment in the host State at the time of the alleged breach under the BIT. If this determination is accepted, not only can the investor establish legal standing prior to the institution of the proceedings (i.e. registration of the request for arbitration by ICSID) but also long before officially filing a claim. The tribunal in Philip Morris Asia Ltd. v. Commonwealth of Australia adopted the same principle by reasoning that: “the test for a ratione temporis objection is whether a claimant made a protected investment before the moment when the alleged breach occurred”. 

However, according to Schreuer, a foreign shareholder must have strictly retained its share in a local company of the host State at the time of consent by the host State on equal treatment. ICSID tribunals are seeking this requirement for jurisdiction at the time of the consent but have also indicated some concern regarding subsequent developments. 

In light of the above, for investors contemplating an exit while retaining their investment related claims, the current precedent favors the registration of the request for arbitration as an appropriate time for the disposal of shares. However, even if such transfer may not affect the legal standing of shareholder, it will have an impact on the quantum of damages to be awarded by the ICSID tribunals. In case the share transfer generates profits, ICSID tribunals tend to reduce the compensation to prevent double recovery. Hence, shareholders should observe these referred precedents of ICSID tribunals prior to developing any exit strategies.

Specifically, the PPP structure is based on a series of tender contracts, often concluded between a special purpose vehicle (SPV) established by the successful tenderer and the administration whereby the SPV becomes the leading private party in that PPP project. The main obligations of SPVs arising from a successful tender usually include timely construction of the project and continuous performance of the public services specified therein. As PPP projects are comprised of complex specifications, they usually require various technical capabilities and input of specialized expertise. Hence, the SPV often chooses to sub-contract the works either fully or partially to achieve the results. Therefore, the allocation of risks and liabilities are passed down from the SPV to those sub-contractors through back-to-back contracts. 

In this interconnected set of agreements, the sub-contractor plays a crucial role as they agree to physically perform either all or a part of the works (or services) that the SPV has undertaken legally in the contract agreement. Thus, legal compatibility in this vertical back-to-back contractual basis is crucial to create and maintain a sustainable PPP project. 

As a further complication to the picture, in cases where a single sub-contractor is not specialized enough for the entire works and services, various subcontractors (and sub-subcontractors) specialized in different services such as security, technology, cleaning or laboratory services may be required. Hence, coherence of these sub-contracts become more important within the construction and operation of the projects as the burden and the risks shift down to sub-subcontractors. 

Despite the highly crucial role of the subcontracts, Turkish law lacks an effective mechanism to protect the rights of sub-contractors (and sub-subcontractors) in potential disputes. As the general reference point of contractual rights, the Turkish Code of Obligations (TCO) is the applicable legislation to the PPP agreements and sub-contracts resulting thereof. However, the TCO is not always sufficient for complex and large-scale disputes between contractors, sub-contractors, sub-subcontractors, SPVs and the administration. Since each contract in the back-to-back basis is separate, it is generally not possible to make a claim directly to the administration or the main contractor. This system is also preferable for the administration as they are only faced with claims from one party i.e. the successful tenderer. This is particularly disadvantageous for sub-subcontractors who can contractually make claims against only the party to that sub-subcontract.  

In practice, some sub-contracts contain relief clauses in the agreements enabling sub-contractors to claim parallel rights up the chain. However, in case the main contractors are organized as SPVs, they may possess little to no capital and assets. Hence, by the time, the sub-contractor manages to exercise parallel rights up the chain, they may be left empty handed, facing a shell company. 

This detriment of the subcontractors become particularly prominent in cases of pay when paid clauses which are often included in these types of models. Therefore, deductions made higher up the contract chain will affect the downstream flow of payments disturbing the income and commercial expectations of the subcontractor significantly. 

In summary, encountering problems in the PPP practice arising from insufficient downstream protection is highly common. Hence, potential solutions can be sought while drafting subcontracts (and sub-subcontracts) as specified below: 

• The risks contained in pay when paid clauses should be balanced out with rights of subcontractors to pursue parallel rights up the contract chain, potentially reaching the highest contracting party i.e. the administration.
• While doing so, the subcontract should contain a dispute resolution mechanism that allows pursuing such parallel rights. These mechanisms should either enable subcontractors to force their contracting party to take action higher up the contract chain or better yet, allow the subcontractor to directly bring claims higher up the contract chain themselves. Having such a dispute resolution mechanism with the option to co-fund claims higher up the contract chain may also be beneficial for parties to a subcontract. For example, if the administration defaults on their obligations, a co-fund mechanism would allow all of the subcontractors and successful tenderer to share the risks and costs of a potentially complex, expensive arbitration or litigation. 
• In case a subcontract is based on local currency, foreign exchange rate adjustment clauses will also protect these subcontractors from fluctuating income. 
• If possible, subcontractors that have significant negotiation leverage may also request a third-party guarantee from the administration which is only usually available to a successful tenderer depending on the type of PPP model.