Spentech Engineering Limited v. United Arab Emirates

What does “manifestly without legal merit” mean? In Spentech Engineering Limited v. United Arab Emirates (ICSID Case No. ARB/24/16), the respondent state sought, at the outset, to challenge the tribunal’s jurisdiction under Rule 41 of the ICSID Arbitration Rules. In doing so, the case raised important questions: Do embassy premises form part of the territory of the sending or receiving state? Can contractual and other intangible rights be detached from the underlying physical works in characterizing an investment? And how should the situs or centre of gravity of a multi-jurisdictional project be determined under a territorial clause in a BIT?

Background on the case

Between 2016 and 2020, the United Arab Emirates (UAE) Embassy in Mogadishu, Somalia, commissioned several construction contracts to Spentech Engineering (the “claimant”). The scope of works included the Hodan Army Barracks Project, the Sheikh Zayed Hospital, the Embassy Project Phase I, and the supply of hospital equipment. To finance the projects, the claimant invested its own funds and obtained loans amounting to USD 3.05 million from Kenya Commercial Bank. Although these contracts were signed in Somalia, they were governed by UAE law and designated the courts of the UAE as the exclusive choice of forum.

Except for the Hodan Army Barracks Project, all the construction works were located in Somalia. The claimant contended that it was not feasible to operate all project-related activities entirely from Somalia. The claimant’s CEO, therefore, purchased office premises in Dubai, from where the claimant carried out significant aspects of the contract performance. This included architectural and engineering drawings, project management meetings, decisions on standards and specifications, sourcing and purchasing of materials, and payment transactions.

The projects were suspended around October 2020, against the backdrop of diplomatic strains between the UAE (the “respondent”) and Somalia and the impact of the COVID-19 Pandemic. The claimant alleged that, at a time when the project was 92% complete, UAE officials initiated a reconciliation exercise with the claimant’s CEO at the UAE Embassy (para. 57). In its account of the reconciliation exercise, the claimant alleges that the respondent officials identified the outstanding balance as approximately USD 6.7 million, while the claimant maintained the correct figure was approximately USD 8.6 million (para. 58). Further, the claimant contended that its CEO was unlawfully detained by respondent officials and subject to cruel and degrading treatment. It argued that this duress led to the acceptance of certain settlement amounts (paras. 62–63). The parties also disputed as to whether the claimant had already collected a cash sum of approximately USD 4.1 million (para. 59). Other allegations included the seizure of construction tools, equipment, and valuables, as well as the appropriation of the claimant’s architectural plans, engineering drawings, and trade secrets (paras. 60–61).

The claimant initiated domestic proceedings before the Administrative Court in Abu Dhabi, where they were dismissed without a hearing. In April 2024, the claimant commenced arbitration proceedings before the ICSID under the 2014 UAE-Kenya BIT, alleging violations of multiple treaty standards.

The Rule 41 objection

On October 31, 2024, the respondent raised its preliminary objection under Rule 41 of the ICSID Arbitration Rules, arguing that the claimant’s averments were manifestly without legal merit. Under this rule, a party may seek early dismissal of claims that are manifestly without legal merit through a streamlined procedure at a preliminary stage of the proceedings. If upheld, the objection results in an award disposing of the case in its entirety.

The claimant emphasized that the tribunals have consistently applied a stringent threshold when concluding whether a claim manifestly lacks legal merit under Rule 41. Relying on PNG Sustainable Development, it argued that doubts concerning the scope or legal sufficiency of a claim should be resolved in favour of allowing the case to proceed. In the claimant’s view, complex questions of treaty interpretation, territoriality, and characterization of investment are ill-suited to a summary disposal at a preliminary stage.

The respondent countered that the presence of disputed facts or legally complex issues does not preclude a Rule 41 application. It further submitted that summary dismissal was appropriate where, even assuming the claimant’s factual allegations arguendo, the tribunal manifestly lacks jurisdiction under the treaty. The respondent also submitted that a lack of evidence does not preclude a Rule 41 outcome where no conceivable evidence could cure the legal defect.

Jurisdictional grounds raised under Rule 41

Characterization of the alleged investment

The respondent argued that the claimant’s request for arbitration initially described the investment as the infrastructural projects carried out at the UAE Embassy in Somalia. However, following the Rule 41 objections, the claimant reframed the investment as comprising “intangible investments” including contractual rights, claims to money, and intellectual property (“IP”), all of which are expressly protected under the BIT. The respondent contended that this modification should not be permitted because the project infrastructure was constructed on embassy premises and does not belong to the claimant, thus making it outside the scope of a protected investment under the BIT. In its view, the tribunal should only assess the claims as originally framed in the Request for Arbitration, as any subsequent reliance on intangible rights amounts to a “recast” of the case to satisfy the treaty definition (paras. 91–93, para. 205).

The claimant denied these allegations. It insisted that the investment described in the Request for Arbitration was identical to that relied upon in its subsequent submissions. It argued that it had continuously asserted the existence of a protected investment under the BIT and that it did not claim the physical infrastructure as the investment. Rather, it relied on intangible elements arising from the project, consisting of contractual rights, payment claims, and IP in architectural and engineering designs. The claimant further argued that these rights were governed by UAE law and enforceable before UAE courts under the contracts, bringing the investment within the UAE’s legal sphere (para. 94–98).

Whether the alleged investment was made “in the territory” of the UAE

At the heart of the Rule 41 objection was whether the claimant’s investment could be considered as being “in the territory” of the UAE for purposes of the BIT, despite physical works being carried out and related to projects located on the premises of the UAE Embassy in Somalia.

Article 1(1)(a) of the BIT defined an investment as assets invested “in the territory of the other Contracting Party.” The respondent argued that the construction projects fell outside the territorial scope of the BIT because they were located entirely within Somalia, including on embassy premises. In support of its argument, the UAE relied on Article 29 of the VCLT, 1969, and court precedents to make clear that diplomatic premises of the UAE Embassy did not form part of the sending state’s territory, nor did they constitute areas over which the UAE exercised sovereign rights. Further, the BIT’s definition of a treaty was geographically specific and did not expressly extend to investments connected to diplomatic missions (paras. 124–133).

The claimant disputed a strictly geographical interpretation and contended that Article 1(1)(a) of the BIT referred to “territorial prescriptive and enforcement jurisdiction.” This interpretation of “territory” extended beyond physical borders and also included situations wherein the state exercised regulatory and enforcement authority. It reasoned that because the intangible assets could not be geographically located, the territoriality requirement must not be interpreted as strictly physical (paras. 140–141).

The centre of gravity and the situs of the alleged investment

The respondent argued that the territorial nexus of an investment must be determined with reference to its economic activity, or centre of gravity, as observed in Alpha Projektholding GmbH v Ukraine and SGS v Philippines. Here, the centre of gravity, i.e., the physical construction, was located in Somalia itself. Their situs, it argued, could not be detached from the physical project. In any event, contractual links to a UAE embassy, choice of UAE law, and court jurisdiction did not transform the projects into an investment in UAE territory. The respondent invited the tribunal to treat the alleged investment as a unified whole whose centre of gravity lay in Somalia, both geographically and economically (paras. 152–174).

The claimant argued for a broader and functional approach. It contended that the territorial link should be evaluated in light of the UAE’s authority over embassy premises. It also maintained that the choice of law and choice of forum are indicia of territoriality. Drawing on the Inmaris Perestrokia case, the claimant argued that an investment is considered to be made in a host state if that state ultimately benefits from it. Per the claimant, the projects benefited the UAE and that the claimant’s funding of these projects constituted an “injection of funds” into the UAE’s economy. The claimant also emphasized that many of its alleged assets were intangible, including payment claims and IP rights, which lack a physical location. In its submission, such rights should be localized where they are legally enforceable, namely in the UAE. It pointed to the project-related operations undertaken in Dubai to reinforce the territorial nexus to the UAE. Finally, the claimant maintained that these issues, especially the territorial situs of intangible rights and the application of a centre of gravity test, were novel and unsettled, requiring full factual development and nuanced legal analysis. On that basis alone, it argued, the dispute could not be said to be manifestly without legal merit and should proceed beyond the Rule 41 stage (paras. 175–196).​

The tribunal’s decision and analysis

Upholding the respondent’s Rule 41 objection, the tribunal dismissed the case at the preliminary stage. It refrained from making any determinations of fact at this stage of the proceeding. The enquiry was limited to whether it had jurisdiction to entertain the claimant’s case, because a lack of jurisdiction would preclude any further consideration (para. 199). The tribunal noted, and the parties largely agreed, that a dismissal under Rule 41 requires two elements: the claim must lack legal merit, and that lack of legal merit must be “manifest” (para. 69).

On the latter question, the claim of “manifest” lack of legal merit in prior ICSID jurisprudence (such as Trans-Global Petroleum v Jordan) required the respondent to establish its objection “clearly and obviously, with relative ease and despatch.” Although the tribunal recognized that the bar for summary dismissal is high, it rejected the idea that complex or novel questions can never be decided under Rule 41 (para. 202). It noted that tribunals remain free to address jurisdictional issues at an early stage, where legal analysis can be conducted on assumed facts. As a starting point, the tribunal held that its assessment had to be based on the original claims in the Request for Arbitration. The claimant’s attempt to modify its case at the Rule 41 stage by shifting focus to “intangible assets” was not considered permissible (para. 221).

In its determination on the lack of legal merit, the tribunal first distinguished legal merit from factual merit. It emphasized that, in a summary assessment under Rule 41, the tribunal must accept the claimant’s pleaded facts as true (Para 69). Based on this, it proceeded on the main jurisdictional question of whether the claimant had an investment “in the territory” of the UAE under Article 1(1)(a) of the BIT.

First, it considered the legal status of diplomatic premises under international law. Referring to instruments such as the Vienna Convention on Diplomatic Relations, the tribunal observed that although embassy premises are inviolable and under the control of the sending state, they remain part of the territory of the receiving state. It found no basis to treat an embassy compound abroad as forming part of the sending state’s territory for an investment treaty (paras. 223–238).

Second, the tribunal turned to the rules of treaty interpretation set out in the VCLT to interpret the phrase “in the territory of the other Contracting Party” against the treaty’s object and purpose. It concluded that this clause assumes a geographical connection to the territory of the host state. Neither the text nor context supported extending protection to investments physically located in a third state simply because they were connected to the host state’s diplomatic activities (paras. 225 and 231).

Third, the tribunal acknowledged that certain modern investments are multi-jurisdictional and that tribunals have often examined where the economic activity is centred or where regulatory control is exercised. It is the claimant’s case that the primary economic activity was carried out in Somalia, and the alleged benefits (such as local infrastructure and services) accrued principally in Somalia, even if they served the UAE’s diplomatic presence and image. The tribunal found that the alleged contractual and payment rights could not be detached from the underlying projects to relocate the investment to the UAE. The fact that the contracts were governed by UAE law, that disputes could be brought before UAE courts, or that certain managerial activities took place in Dubai did not alter the investment’s main territorial connection. Adopting a unity-of-investment approach, the tribunal treated the alleged investment as a single complex of interrelated components whose centre of gravity lay in Somalia. It rejected the claimant’s reliance on prescriptive jurisdiction, contractual choice-of-laws clauses, and the benefits theory as sufficient to establish a territorial nexus with the UAE (paras. 235–237).

The tribunal accordingly held that the claims were manifestly without legal merit under Rule 41. It issued an award dismissing the case in its entirety and ordered the claimant to bear the respondent’s legal costs and its share of the arbitration costs, together with interest (para. 269).

Implications and outlook

The claimant has reportedly initiated annulment proceedings. Pending the outcome of those proceedings, the award stands as a notable example of a complete dismissal under ICSID’s summary mechanism. The tribunal’s conclusion that the claims were manifestly without legal merit shows willingness on the part of investment tribunals to police the jurisdictional limits of treaties and dispose of deficient claims early. By doing so, it supports early dismissal procedures such as Rule 41 in investor–state arbitration as a response to criticisms that ISDS allows weak disputes to advance further in the system.^[1]

Note

The arbitral tribunal was presided over by Loretta Malintoppi (an Italian national) and comprised Christopher Adebayo Ojo (a Nigerian national appointed by the claimant), Sir Christopher Greenwood (a British national appointed by the respondent), and Fedelma C. Smith as assistant to the tribunal.

Author

Vismaya Hari is an India-qualified lawyer, currently pursuing the NUS-MIDS Double Degree Program in International Arbitration and Dispute Settlement.

^[1] UN Trade and Development. (2015). World investment report 2015: Reforming international investment governance, Chapter IV. This chapter provides suggestions to reform the ISDS System by including mechanisms for early discharge of frivolous claims to avoid wasting resources on full-length proceedings in case of manifestly unmeritorious claims.