Limited breach of
The Rompetrol Group N.V. v Romania, Case No. ARB/06/3
In a May 6, 2013 award, an ICSID tribunal ruled that the Rompetrol Group (TRG) had established a limited breach of the Netherlands-Romania bilateral investment treaty () but had failed to establish economic loss or moral damage. The Dutch company had argued that criminal investigations by the Romanian authorities into individual company officers breached the BIT’s provisions on fair and equitable treatment (FET), physical protection and security and non-impairment.
In 1998, an investor group led by Mr. Dinu Patriciu, a Romanian national, purchased a controlling stake in Rompetrol S.A., a Romanian oil services company that was state-owned until 1993. This investment was restructured and came to be held through the Dutch company TRG. TRG purchased from the Romanian state a controlling stake in Petromidia, the owner of a large oil refinery, which later become known as Rompetrol Rafinare S.A (RRC).
In 2004, the National Anti-Corruption Office of Romania commenced investigations relating to the Petromidia privatisation. The file was soon transferred to the General Prosecutor’s Office (GPO). The GPO opened an investigation into RRC, which included the arrest and detention of Mr. Patriciu, the wire-tapping of his telephone calls and the imposition of a travel ban on him.
TRG alleged that the state authorities’ investigations of Mr. Patriciu and his associates were conducted in an oppressive and non-transparent manner and in breach of international standards of due process. It argued that the investigations amounted to state-sponsored harassment and were motivated by a desire to injure Mr. Patriciu for political and commercial reasons. It further claimed that these state entities (or individual prosecutors) were in collusion with a competing oil refinery. TRG also alleged breaches of procedural rights in relation to various criminal charges brought against Mr. Patriciu and another officer of TRG, Mr. Philip Stephenson, shortly following the commencement of the investment treaty proceedings.
Romania responded that the investigations formed part of a national anti-corruption strategy, also involving the investigation of other commercial actors, which was pursued with increasing vigour in order to gain access to the. Romania also claimed that TRG was abusing the investment arbitration process by using it to seek the closure of investigations against Mr. Patriciu.
Need for link between state conduct towards individuals and treaty breach
The tribunal noted that, unusually, the measures primarily complained of were not directed at the claimant or its principal Romanian subsidiary, RRC, but rather at individuals who directed the affairs of those companies. The tribunal held that the rights of such individuals were personal and distinct from those of TRG and stated that, even where an act directed at an individual had been established as being in breach of his personal rights, a claimant would still have to show a connection between such conduct and conduct directed at the investor or its investment in order to establish a BIT breach.
The tribunal considered that the necessary link might take one of two forms: (a) conduct directed against the individuals for actions taken on behalf of, and in the interest of, the investor or (b) conduct directed against individuals (even in their personal capacity) for the purpose of harming the investor.
No evidence of state-sponsored harassment but limited FET breach
While emphasising that an investment treaty tribunal’s role is not to judge whether investigations or criminal prosecutions are justified under domestic law, the tribunal determined that the criminal allegations against Mr. Patriciu and his associates did not appear to be “trumped up” and that the investigation and prosecution of those individuals was not of itself wrongful. In addition, it stated that the allegations of a state-sponsored harassment campaign were not substantiated by evidence, as there was no proof of a common purpose linking the actions of the state authorities.
Despite this, the tribunal accepted that a “pattern of wrongful conduct” during otherwise lawful investigations could give rise to a BIT breach if it is sufficiently serious and persistent enough to affect the interests of the investor and where the state fails to pay adequate regard to how the investor’s interests ought to be protected. The tribunal linked this obligation to the legitimate expectations of the protected investor, taking the view that the investor’s legitimate expectations include the expectation that the host state will seek to avoid unnecessary damage to the investment if the investor’s interests are directly or indirectly affected by the criminal process.
Applying this rationale to the facts, the tribunal determined that the actions of certain individual prosecutors were driven by “animus and hostility” towards Mr. Patriciu. The tribunal also concluded that procedural irregularities had occurred during the criminal investigations together with an unnecessary delay in removing a GPO order that imposed an attachment on RRC shares. Crucially, from a certain point in time, the state authorities were, the tribunal concluded, aware that such actions were adversely affecting TRG and took no steps either to assess or to minimise the possibility of harm. On this basis, the tribunal found that a limited breach of the BIT’s FET clause had occurred.
The tribunal emphasised that this finding was based entirely on the facts and should not be taken to indicate that breaches of procedural safeguards in the context of a criminal investigation or prosecution automatically give rise to a FET breach.
Failure to establish economic loss
Turning to TRG’s claim for damages, the tribunal stated that, while, as a matter of law, breaches of provisions such as the FET clause do not necessarily require proof of damage, if a party chooses to put its claim in terms of monetary damages, it must prove the extent of its loss and the causal link between the loss or damage and the BIT breach.
In this regard, the tribunal found that, given the limited nature of the FET breach, many of the assumptions on which TRG’s valuation was based no longer held. In particular, the tribunal ruled that the method used by TRG’s valuation experts to calculate the loss was flawed as it proceeded from the premise that all of the criminal investigations conducted by the Romanian authorities should be regarded as unlawful in their entirety under the BIT, which had been established not to be the case. On this basis, the tribunal determined that TRG had failed to prove that the BIT breach had caused any actual economic loss. The tribunal also denied TRG’s request for declaratory relief, given the limited nature of the BIT breach.
Moral damages denied
The tribunal denied TRG moral damages. The tribunal made this determination primarily on the basis that a discretionary amount of moral damages should not be awarded as a proxy for the inability to prove actual economic loss. In this regard, the tribunal noted that costs arising from reputational damage (such as increased financing costs) are actually a form of economic loss that must be proved, and that TRG had failed to adduce sufficient proof that it faced increased problems with its bankers and potential investors during the relevant period. More generally, the tribunal expressed the view that, since moral damages are notional and discretionary, tribunals should adopt “a considerable degree of caution” in awarding such damages to a corporate investor.
While endorsing the principle that costs should ‘follow the event,’ the tribunal determined that costs should be borne equally by the parties as it took the view that the proceedings in fact constituted a series of events. The tribunal noted that TRG was successful in two of these ‘events’ (namely at the preliminary objections phase and in the challenge to TRG’s lead counsel initiated by Romania) but that, at the merits stage of proceedings, the balance of success lay primarily with Romania, as TRG had succeeded in establishing only a limited breach.
The arbitrators in the case are Franklin Berman (president), Donald Francis Donovan (claimant’s nominee) and Marc Lalonde (respondent’s nominee).
The award is available here: http://www.italaw.com/sites/default/files/case-documents/italaw1408.pdf
Majority dismisses Argentina’s objections to jurisdiction in second sovereign bonds claim
Ambiente Ufficio S.p.A. and others (Case formerly known as Giordana Alpi and others) v. Argentine Republic, ICSID Case No. ARB/08/9, Decision on Jurisdiction and Admissibility
The majority of an ICSID tribunal has accepted jurisdiction over a claim by some ninety Italian bondholders against the Argentine government. In coming to that decision, arbitrators Judge Bruno Simma and Professor Karl-Heinz Böckstiegel drew heavily on a controversial 2011 jurisdictional decision in Abaclat and others v. Argentina, a case involving over 60,000 Italian claimants with similar grievances against Argentina.
The third arbitrator, Santiago Torres Bernárdez, dissented from the majority decision. Notably, Mr. Torres Bernárdez also sits as arbitrator in the Abaclat case where he replaced Professor Georges Abi-Saab who resigned shortly after the publication of his dissenting opinion in 2011.
A jurisdictional decision in a third ICSID case dealing with Argentina’s government bonds, Giovanni Alemanni and others v. Argentine Republic (ICSID Case No. ARB/07/8), is pending.
The tribunal was constituted in 2008 after a request to institute proceedings under the Argentina-Italy BIT. The claim began with over 100 Italian bondholders seeking compensation for the alleged failure of the Argentine government to fulfill treaty obligations in the course of the country’s sovereign debt restructuring in 2001.
Based on the consent of both parties, the tribunal allowed 29 claimants who had accepted Argentina’s 2010 offer to exchange bonds for new ones to withdraw from the proceedings. At that point the case formerly known as Giordano Alpi v. Argentina became Ambiente Ufficio S.p.A. and others v. Argentina.
The claimants assert that Argentina’s acts constitute breaches of fair and equitable treatment, full protection and security, and compensation standards for expropriation included in the BIT. They seek a refund of the nominal value of the bonds at issue, interest, other damages and arbitration costs from the Argentine government.
Multi-party arbitration found “in harmony” with BIT and
Argentina insisted that this case constituted a class action or mass claim which necessitated its explicit consent, as neither the ICSID Convention nor the BIT covered collective claims. Argentina also argued that the acceptance of the claim could come at the cost of due process.
However, the majority determined that no such risk existed in this particular case. The tribunal also found that sufficient commonalities existed among the claimants, and therefore rejected Argentina’s assertion that the claimants pursued unrelated interests and held different bonds, which forbade them from forming a collective claim.
Further, Judge Simma and Professor Böckstiegel established that numerous ICSID tribunals had accepted jurisdiction over cases with multiple claimants. According to the tribunal, case law and academic literature also regarded multi-party arbitration as common practice.
The tribunal also considered the role played by the North Atlantic Société d’Administration (NASAM) in the proceedings, a company with which the claimants had signed a funding agreement that established, amongst others, the payments the claimants are due to pay to NASAM for its services and the respective shares of any awarded compensation.
According to Argentina, NASAM enjoyed “full control over Claimants’ claims in the arbitration” and distorted the client-attorney relationship. Argentina further asserted that NASAM had canvassed for potential claimants to initiate arbitration against Argentina and that NASAM was the “sole beneficiary” of the dispute.
But the tribunal found that, despite the existence of “a special relationship” between the claimants and NASAM, NASAM did not have the role attributed to it by Argentina and “no substantiated indications” existed that the arrangement would impair the tribunal’s jurisdiction.
Claimants fulfill nationality requirement
Both the ICSID Convention and the Argentina-Italy BIT contain a nationality requirement that is relevant for determining whether the tribunal has jurisdiction. While the BIT requires claimants to be nationals of Italy, the ICSID Convention requires Italian nationality of the claimants on the day of the claimants’ consent to the submission of the dispute to the ICSID Secretariat and its registration date, while disallowing claimants to have Italian-Argentinian double nationality.
Whereas Argentina contended that the documents submitted by the claimants did not satisfy the necessary requirements, the tribunal ruled that the claimants provided sufficient evidence to fulfill the nationality requirements at the jurisdictional stage.
The two arbitrators’ decision to split the burden of proof contributed to this conclusion. They adopted the view that it was upon the claimants to prove Italian nationality, while to disqualify claimants the respondent had to demonstrate Argentinian or Argentinian-Italian double nationality. Argentina had not provided concrete evidence on that matter. The tribunal did not assess whether individual claimants complied with all nationality requirements, but it stated its will to revisit this issue at a later stage if necessary.
“No doubt” that bonds are protected investment
The tribunal endorsed the findings of the Abaclat tribunal on this matter, ruling that there is “no doubt” that the bonds held by the claimants constituted an investment under the ICSID Convention and the Argentina-Italy BIT.
Given the absence of a definition of investment in the ICSID Convention, the tribunal examined the discussions that took place around the adoption of the ICSID Convention and the general climate at that time. While noting the controversy in case law and academic writing over the exact meaning of “investment” under the Convention, the majority found that it was the deliberate decision of the ICSID signatories to leave the definition open and thereby cover a broad range of economic operations. However, the tribunal noted that the Convention’s notification mechanism and the signatories’ BITs gave countries the possibility to impose limits on the scope of covered investment.
The majority also considered that the Argentina-Italy BIT provided an open-ended list covering different types of investments, including bonds. Argentina’s main counter-argument was that the words “obligaciones” and “obbligazioni” used in the authentic Spanish and Italian versions of the BIT should be translated into English as “obligations” not as “bonds.” Argentina disputed that the signatories of the BIT meant to include bonds.
Argentina had also asserted that the claimants “are not the bondholders themselves, they only have, at best, indirect interests in the globally registered bonds” and “have no direct relationship with the bond issuer (in this case, the Respondent) or with the bond underwriter.” Yet, the tribunal agreed with the claimants that the purchase did not alter the nature or quality of the investment.
Argentina also insisted that the tribunal should undertake the so-called “Salini test” for the alleged investment, examining whether the bonds satisfied “a certain duration, regularity of profits and return, risk, a substantial commitment, and a significant contribution to the host State’s economy.” The tribunal agreed with the claimants that the bonds complied with the above criteria, yet concluded that, in any case, the ICSID Convention did not necessitate a test of this kind.
Assessing Argentina’s assertion that the investment lay outside of its territory and was thus not covered by the BIT, the tribunal found the most important criterion to be that Argentina had been the beneficiary of the investment, and the investment had contributed to its economic development, which was deemed sufficient to establish that the investment was made “in the territory” of Argentina.
No lack of standing established
The tribunal also ruled that the investment was made in accordance with host state law, as required by the Argentina-Italy BIT.
Argentina had contended that the claimants’ purchase of the bonds violated the selling restrictions that existed for bonds under Italian law. The laws allegedly prohibited the sale of bonds to retail customers like the claimants.
Contrary to Argentina’s pleading, however, the tribunal found that the provisions of the BIT did not extend to an investment’s legality under the Italian (i.e. home state) law, but rather only referred to the laws of the host state. Furthermore, the tribunal added that the alleged illegality would have been committed by the banks and thus not affected the claimants’ standing.
Based on its decision to accept bonds as a protected investment, the tribunal also denied Argentina’s objection concerning the claimants’ alleged lack of standing. Despite the fact that the bonds were purchased through intermediaries on a secondary market outside of Argentinian territory, the claimants were deemed to have entitlements with respect to Argentina. The majority ruled that “there is neither too remote a relation between the Claimants and Argentina nor does there exist […] any ‘cut-off point’ beyond which the Claimants could not rely on the bonds/security entitlements vis-à-vis the Respondent.”
Most of the respondent’s arguments concerning the lack of standing of claimants were rejected because Argentina could not convince the tribunal that its objections applied to all or most claimants or were based on “omnipresent” problems.
However, one of Argentina’s arguments was partly accepted. The tribunal agreed with Argentina that those claimants that pursue separate domestic proceedings against the seller bank to invalidate sale contracts might risk their standing as an investor. However, the tribunal determined that the claimants would only have to withdraw from the ICSID proceedings in the event that “those Claimants’ whole loss has been wholly compensated for” in a domestic court decision. Parallel proceedings at the domestic and international level were not deemed to create conflicts with ICSID jurisdiction per se. The assessment of individual claimants’ situation in this respect was postponed to the merits stage.
“Potential breaches” of Argentina-Italy BIT determined
The tribunal had to establish whether the claimants’ allegations might constitute breaches of BIT provisions or whether, as alleged by Argentina, this was a contractual dispute relating to non-payment of debts that lay outside of treaty provisions. The tribunal found that the case was capable of demonstrating potential breaches of treaty provisions to the extent that it involved Argentina’s use of its sovereign powers, law and acts.
Claimants did not violate prerequisites of amicable consultations and recourse to domestic courts
Argentina alleged that the claimants had failed to fulfill the BIT requirement to attempt amicable consultations and submit the dispute to an Argentinian domestic court before the initiation of international arbitration. While Argentina argued that these were two “mandatory jurisdictional requirements,” the claimants argued that the provision at question “merely provides for procedural prerequisites which do not need to be strictly followed.”
The tribunal acknowledged that ICSID case law was inconsistent on these questions.
In accordance with the findings of the Abaclat majority decision on jurisdiction, it deemed the prerequisites to be “requirements of admissibility rather than jurisdiction”; however it also supported Professor Abi-Saab’s dissenting opinion which considered them to be of a binding nature.
The tribunal stressed two features in the precise wording of the article for amicable consultations. First, it noted that the dispute should be settled amicably “insofar as possible.” Second, it attached importance to the absence of a minimum consultations period that is common in other treaties.
It ruled that the claimants, although they did not enter into consultations, did not breach the article because various circumstances made consultations for the settlement of the case with the Argentine government impossible. The majority pointed to the adoption of an Exchange Offer in 2005 and Law No. 26.017 regulating the eligibility and exchange of bonds, which it held prevented Argentina from entering into consultations.
While the claimants also failed to submit the case to domestic courts before initiating international arbitration, the majority concluded that such an effort would have been “futile,” and therefore an exception to the 18-month domestic court requirement was justified. The tribunal also pointed out that the article demanded a “temporary recourse to domestic courts, as opposed to a fully-fledged exhaustion of local remedies requirement.”
The decision is available in English here: http://www.italaw.com/sites/default/files/case-documents/italaw1276.pdf
And in Spanish here: http://icsid.worldbank.org
Spanish investors clear jurisdictional hurdle in claim against Argentina some 5 years after case is registered
Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, ICSID Case No. ARB/07/26
An ICSID tribunal has accepted jurisdiction to hear a claim by Spanish claimants who invested in water and sewage services in Argentina.
The decision, rendered on December 19, 2012, deals with the contentious question of whether claimants must abide by a rule to litigate disputes in domestic court for 18 months prior to resorting to international arbitration—a requirement that features in a number of Argentina’s investment treaties, and has been the subject of significant attention by arbitral tribunals.
The claimants also overcame Argentina’s arguments that they lacked legal standing as shareholders in the concessionaire, and that their investment was not protected under the Argentina-Spain BIT.
Like the majority of investment claims facing Argentina, the dispute is rooted in the measures the country introduced to combat its financial crisis in 1999-2002.
A ruling on the merits in a separate case involving an Italian investor (Impregilo S.p.A.) in the same water and sewerage concession was rendered in June 2011. Impregilo was awarded $21 million plus interest. The Urbaser case has progressed very slowly, in contrast. While the case was registered in 2007, the parties struggled for a number of reasons to agree on the selection of arbitrators.
The claimants, Urbaser and Consorcio de Aguas Bilbao Bizkaia (CABB), collectively held a 47 percent share of Aguas del Gran Buenos Aires S.A. (AGBA), an Argentine company with a concession to supply drinking water and sewage services in 7 districts of Buenos Aires.
As Argentina entered a deep financial crisis, tariffs were reduced and frozen. Later, the Province of Buenos Aires reversed the privatization of certain public services, which ultimately pushed AGBA into liquidation. The claimants seek over $100 million in damages, plus interest, for alleged breaches of the Argentina-Spain BIT.
Argentina counters that its dealings with AGBA tell a “story of a total failure to comply with the expectations that the State had.” Even before the emergency measures were introduced to respond to the financial crisis, Argentina holds that AGBA failed to meet its obligations.
18 months litigation period is a “precondition,” but “unfair” in this case
Roughly a third of the tribunal’s decision is focused on Article X (2) and (3) of the BIT, which sets out conditions for proceeding to international arbitration. This Article, and similar articles in other Argentine BITs, has preoccupied over a dozen tribunals—and arbitrators have drawn conflicting conclusions.
Argentina has consistently argued that the Article, which requires disputes to be tried by a competent tribunal in the home state for at least 18 months before it is submitted to international arbitration, is a jurisdictional condition that must be met. Nonetheless, a majority of tribunals—including this tribunal— have found reason why claimants may bypass the requirement.
Some tribunals have focused on whether Article X is a matter of jurisdiction or admissibility, on the basis that matters of jurisdiction are unalterable by the tribunal, while matters of admissibility may be waived at the tribunal’s discretion. However, this tribunal dismissed such categorizations as “misguided theoretical constructs,” noting that “the ICSID Convention does not contain a concept akin to ‘admissibility’ of claims. The Convention distinguishes between jurisdiction and the merits of a claim.”
Setting aside the ‘admissibility’ versus ‘jurisdictional’ distinction, the tribunal settled on two questions: “were Claimants required to submit the dispute to the competent tribunals of the Republic of Argentina before resorting to ICSID arbitration?”; and second, “was Argentina deprived of a fair opportunity address the dispute within the framework of its own domestic legal system because of Claimants’ disregard of the 18 months litigation requirement?”
In answering those questions, the tribunal affirmed that Article X indeed presents a “precondition” to accessing arbitration. Yet it went on to state that the Article also implies an obligation on the part of the host state. Specifically, the host state must allow “its courts to operate in a manner that the opportunity to reach a suitable remedy is provided in efficient terms.”
According to the tribunal, Argentina failed to provide such an opportunity to the claimants. The options available would “far exceed” 18 months before reaching a decision on the substance, and it would therefore be unfair to the claimants to insist on proceedings that had no hope of reaching a conclusion within that time-frame.
The tribunal also noted that Argentina has argued that the claimants lack legal standing before domestic courts on the grounds that they are asserting rights that belong to the Argentine concessionaire, AGBA, rather than to its shareholders. “The Respondent cannot have it both ways,” wrote the tribunal.
The claimants had also argued that they could by-pass the 18-month local litigation requirement by means of the BIT’s most-favoured nation clause—as Argentina has also signed BITs that do not contain the same rule. But having concluded that it would be “unfair” to impose the requirement on the claimants, the tribunal found it unnecessary to consider the application of theclause.
Claimants’ legal standing upheld
The tribunal swiftly dismissed Argentina’s objection to the claimants’ legal standing. Argentina had charged that claimants’ were asserting a “derivative or indirect” claim, given their status as shareholders in AGBA. However, the tribunal accepted the claimants’ response that their claims related to their own rights, not those of AGBA.
The tribunal also rejected Argentina’s argument that the claimants’ were asserting claims of a contractual nature, rather than claims relating to the BIT. The tribunal noted claimants’ assurances that their claims related to their rights as shareholders, and also emphasized that the BIT refers to “shares” and “participation in a company” within its description of protected investments.
In response to Argentina’s concern that the claimants could benefit from a “double recovery” in the event that they also initiated a case in domestic courts, the tribunal acknowledged that this is a risk that is “inherent in many investment disputes …” However, it added that in such an event, compensation provided in either international arbitration or domestic courts would affect a decision on compensation in the other forum.
A protected investment under the BIT?
Argentina provided several reasons why the claimants’ investment is not protected by the Argentina-Spain BIT, all of which were dismissed by the tribunal.
First, Argentina argued that Urbaser acquired shares in AGBA from a company named Dycasa in violation of Argentine law. Dycasa held two categories of shares—those which were transferrable, and those that needed government approval to be transferred within the first six years of the concession. Argentina alleged that Dycasa transferred non-transferable shares to Urbaser without the requisite authorization.
However, the tribunal determined that while there was an agreement to transfer the non-transferable shares to Urbaser within the six year timeframe, the actual transfer took effect after the six years had elapsed.
Second, Argentina asserted that CABB had illegally transferred its shares to Urbaser. As the technical operator of the concession, CABB was obliged to hold a minimum of 20 percent of the nominative shares and voting rights. Argentina alleged that CABB had transferred shares that it was obligated to retain, but again the tribunal determined this was not the case. Rather, Urbaser had provided financing to support CABB’s shareholder interests, but did not take ownership of the shares.
Finally, Argentina characterized CABB as an agency of the Spanish government (CABB serves a large number of municipalities in Spain, and its membership includes municipalities and the Basque government). Referring to Article 25 (1) and (3) of the ICSID convention, Argentina argued that CABB required the approval of the Spanish government to commence an ICSID claim.
The claimants accepted that CABB was indeed a public agency, but one that pursues private activities. They also emphasized that CABB’s legal nature was distinct from its membership.
Turning to Article 25 (1) and (3), the tribunal concluded that the reference to consent in cases involving a government agency referred to the host state (i.e., cases where an agency of a state becomes a party to an arbitration as a respondent.) The same rule does not apply to the contracting state of the investor.
On costs related to the arbitration, the tribunal reserved its decision for a later stage in the proceedings.
The arbitrators in the case are Andreas Bucher (president), Pedro J. Martinez-Fraga (claimant’s appointee), and Campbell McLachlan (respondents appointee).
The decision is available here: http://www.italaw.com/sites/default/files/case-documents/italaw1324.pdf
German companies awarded 3 million euros in sailing ship dispute against Ukraine
Inmaris Perestroika Sailing Maritime Services GmbH and others v. Ukraine, ICSID Case No. ARB/08/8, Award
An ICSID tribunal has ruled in favour of four German companies in a dispute over the use of a Ukraine government-owned sailing ship. According to Grischenko & Partners, the law firm representing Ukraine in this case, the claimants were awarded some 3 million euros plus interest out of 13 million euros claimed.
ICSID recently published excerpts of the award rendered in March 2012. The redacted award contains the tribunal’s findings on the disputed issues, but omits much of factual background to the dispute, the positions of the disputing parties, the sums claimed and awarded. A detailed description of the factual background is contained in the tribunal’s jurisdictional decision of March 2010.
The dispute relates to the joint operation of a ship by the German claimants, the Inmaris companies, and a Ukrainian state institute, the Kerch Maritime Technological Institute (KMTI). The Inmaris companies used the ship for commercial sailing tours and events, while KMTI used it to train Ukrainian cadets.
A number of contracts between the Inmaris companies and KMTI established the framework for the joint operation. The first contract agreed that the Inmaris companies would cover operational expenses, while being entitled to the income from the tours. Later, a complex financing and operational structure was set up to fund the restoration of the sailing ship, amounting to some 550 thousand euros, including a leasing agreement and multiple side contracts.
The dispute mainly concerns an alleged ‘travel ban’ on the ship imposed by a Ukrainian ministry in 2006, as well as actions taken by the government shortly before the ban. According to the claimants, these measures caused serious damages to its investments and led to the insolvency of two of the Inmaris companies, in violation of the Ukraine-Germany BIT. Specifically, the claimants alleged that Ukraine’s acts breached the obligation to provide fair and equitable treatment, were arbitrary and discriminatory and amounted to compensable expropriation.
Apart from rejecting any wrongdoing vis-à-vis the Inmaris companies, Ukraine raised a counterclaim in which it sought compensation for the ship’s winter operation costs.
Denial of fair and equitable treatment
The claimants alleged that a “series of actions” taken by the Ukrainian government violated fair and equitable treatment obligations. The first violation allegedly occurred in the aftermath of the 2005 change of government in Ukraine, when a Ukrainian ministry “arbitrarily questioned the legality” of the contracts and demanded the claimants to pay 50,000 euros as a “non-repayable loan” to the state institute. According to the claimants, another, more significant violation occurred a year later when a minister’s order prohibited the ship from leaving port. Due to this ‘travel ban,’ or what the claimants considered an “arrest” of the ship, the Inmaris companies cancelled their scheduled summer tours, and have not operated the ship since.
Ukraine insisted that, to amount to a breach of the standard, a government’s actions needed to be “gross” and “shocking” violations as established under the international minimum standard of treatment and customary international law. However, the tribunal upheld that the BIT did not prescribe such an interpretation and decided to adhere to the “language as written” in the BIT.
It then ruled that the travel ban was indeed a state act that constituted a violation of fair and equitable treatment. It also deemed the travel ban to be an “arbitrary measure” that impeded the use of the investment and was thus not permissible.
However, the tribunal found that Ukraine’s actions prior to the travel ban—including the non-repayable loan—did not amount to a breach. It also considered that Ukraine had not “acted in bad faith or otherwise denied Claimants due process” when it questioned the contractual arrangement. In the tribunal’s view, the contracts “were far from clear” and “contained many apparent internal inconsistencies, that require significant interpretive effort to decipher.” For instance, the tribunal noted that one contract failed to determine how the revenues and profits should be distributed, while another one did not identify who was responsible for the winter costs of the ship.
Expropriation without compensation
The tribunal held that the travel ban deprived the claimants of their investment, caused “substantial harm” and thus constituted expropriation without compensation in breach of the BIT. Rejecting the Ukraine’s argument that the travel ban was temporary in nature, the tribunal determined that the ban led to the insolvency of two of the claimants’ companies. In coming to that decision, the tribunal did not consider it important to determine whether the travel ban was a case of direct or indirect expropriation.
Contrary to Ukraine’s assertions, the tribunal also decided that the BIT did not contain a pre-requisite to exhaust local remedies.
Notably, the tribunal accepted that the “Ministry’s actions were genuinely motivated by an intent to protect the public interest,” but added that they nonetheless amounted to expropriation and compensation must be paid.
While the redacted award does not shed light on the government’s intent, a press release from the Agrarian Policy Ministry 2006 hints at its concerns. The ministry asserts that the government’s expenses on the boat increased eleven fold over 7 years, “but no money was earned through leasing” the ship. The press release also claims that the KMTI “had no right to sign” contracts with the claimants, since it was not in charge of the ship’s property management. The press release explains that the travel ban was imposed due to “multitudinous legal irregularities.”
Compensation for damages
The tribunal determined that Ukraine’s actions directly caused damages to the claimants, the insolvency of the Inmaris companies being the most evident one. It awarded the claimants compensation for the insolvency-related claims, including a proportion of a loan agreement and lost profits. The calculation of the lost profit was based on the average past performance, which was lower than the “overly optimistic” revenue projections claimed by the claimants.
The tribunal did not award damages for “either disputed or unverified” items and noted mistakes in the claimants’ calculation of damages. It also rejected the claim for compensation of terminal expenses and the repayment of the non-repayable loan given to the institute in 2005. Since it considered the dispute to be the result of a “genuine misunderstanding,” it decided not to compensate for “moral damages.”
The tribunal dismissed the Respondent’s counterclaim for the compensation of the ship’s winter costs. While the tribunal assumed jurisdiction over the counterclaim, it found that, under the applicable contract, Ukraine had to bear the costs.
The tribunal ordered both parties to cover their own costs and fees. It explained this decision by emphasizing that “the facts of the dispute and the parties’ own contractual relationship were complex and, at times, ambiguous” and pointed to “deficiencies in both Parties’ presentations.”
The members of the tribunal are Dr. Stanimir A. Alexandrov (presiding arbitrator), Prof. Bernardo Cremades (respondent’s nominee) and Mr. Noah Rubins (claimant’s nominee).
The decision on jurisdiction is available at:
Dutch investor overcomes preliminary jurisdictional objection by a narrow margin
Tulip Real Estate and Development Netherlands B.V. v. Republic of Turkey, ICSID Case No. ARB/11/28
In a decision that was “close to the margin,” an ICSID tribunal has accepted that a Dutch claimant satisfied a mandatory notification and negotiation period before initiating arbitration against Turkey.
The March 5, 2013, decision comes in response to Turkey’s earlier request for bifurcation in which it asked that the tribunal deal with three jurisdictional objections as preliminary questions: 1) the claimants asserted contractual, not treaty claims; 2) it is premature to consider any treaty claims; and 3) claimant had not respected a requirement to seek resolution of the dispute first through consultation.
The tribunal agreed on November 2nd, 2012, to deal with the third objection, while postponing a decision on the other objections to the merits stage of the proceedings.
The claimant, Tulip Real Estate and Development, is a Dutch-based company that invested in a Turkish real-estate project, in partnership with a company named Emlak, owned by Turkey’s Housing Development Administration (TOKI). TOKI and Emlak also share the same the director.
Some four years into the project, Emlak terminated the contract with Tulip for delays in the project, and soon after seized control of the construction site. The claimant argues that Emlak ended the contract as a pretext to seize its assets, and complains that Emlak was the responsible for the delays.
Article 8(2) sets our “essential” requirements
Article 8(2) of the Turkey-Dutch BIT requires claimants to initially seek to resolve disputes through consultation and negotiation for a year, before resorting to arbitration. The tribunal noted at the outset that there is no consensus among arbitrators on how to interpret provisions.
“Lines of decisions that have decided that such consultation and negotiation provisions are not of a jurisdictional nature, and do not have to be strictly followed, are matched by a lesser number of decisions that have held that compliance with such requirements for notice and negotiation ensure as a pre-condition to the jurisdiction of the Tribunal, and must be strictly complied with,” wrote the tribunal.
Positioning itself in the latter category, the tribunal determined that the language in Article 8(2) is “mandatory in form.”
The tribunal considered the first step in fulfilling the requirement to be providing notice to the respondent of an investment dispute. Turning the characteristics of that notice, the tribunal clarified that the claimant need not “spell out its legal case in detail.” Rather, it is sufficient have informed the host state that it faced allegations of a treaty breach that could lead to arbitration should efforts at negotiation fail.
Turning to the claimant’s correspondence with TOKI and Emlak, the tribunal asked whether notice had been given a year in advance of the arbitration claim, along with efforts to negotiation a resolution to the dispute. On the whole, the tribunal found the correspondence to be “confusing,” and later admitted that that is was “at a loss to understand why explicit notice was not given.”
Nonetheless, the tribunal was convinced that the claimant had sought to resolve the dispute through negotiation. And one letter to the president of Turkey served as notification of the investment dispute. The letter outlined the alleged illegal actions by Elmak, and also made reference to ICSID as a forum in which it could seek recourse.
The letter was imprecise and appears to have been misunderstood by the president’s office. It was therefore with “with difficulty and hesitancy” that the tribunal accepted it as fulfilling the notification requirement set out in Article 8(2).
The decision is available here: http://www.italaw.com/sites/default/files/case-documents/italaw1340.pdf
 Grischenko & Partners, Press Release of 29.03.2012, available at http://gp.ua/en/Press/review/itm/142/
 Government of Ukraine, Agrarian Policy Minister’s decision to ban Chersonese from sailing triggers vocal protests in Ukraine and abroad, 20 April 2006, available at http://www.kmu.gov.ua/control/en/publish/article?art_id=34549021&cat_id=32598.