Metal-Tech v. Uzbekistan

Metal-Tech Ltd. v. The Republic of Uzbekistan, ICSID Case No ARB/10/3

(Published in 2018 in International Investment Law and Sustainable Development: Key cases from the 2010s and on this website on October 18, 2018. Read more here.)

The award is available at https://www.italaw.com/sites/default/files/case-documents/italaw3012.pdf

Keywords

Corruption, burden of proof, standard of proof, transparency

Key Dates

Request for Arbitration: January 26, 2010

Constitution of Tribunal: August 3, 2010

Award: October 4, 2013

Arbitrators

Gabrielle Kaufmann-Kohler (president)

Claus von Wobeser (respondent appointee)

Geraldine Fischer (claimant appointee)

Forum and Applicable Procedural Rules

International Centre for Settlement of Investment Disputes (ICSID)

ICSID Rules of Procedure for Arbitration Proceedings

Applicable Treaty

Israel–Uzbekistan Bilateral Investment Treaty (BIT)

Alleged Treaty Violations

• Expropriation
• Fair and equitable treatment
• Full protection and security

Other Legal Issues Raised

• Counterclaim
• Import of Definition of investment through most-favoured-nation (MFN) clause
• Jurisdiction
• Legality of investment

1.0 Importance for Sustainable Development

Corruption undermines the economic development of a country as well as the achievement of good governance; both are important for the sustainable development of the host state. Investment tribunals are not per se the appropriate bodies to punish acts of corruption. They are, however, frequently confronted with a party or parties to a dispute that have engaged into acts of corruption. Issues of corruption typically arise when a respondent invokes corruption as a defence on the merits or as a counterclaim. Yet corruption defences are rarely successful due to the lack of evidence.

The award of Metal-Tech v. Uzbekistan is an example of a successful corruption defence.[1] The tribunal dismissed its jurisdiction due to corruption related to Metal-Tech’s investment in Uzbekistan. In its decision to dismiss Metal-Tech’s claims on the ground of lack of jurisdiction, the tribunal relied mainly on the interpretation of the applicable BIT, which defined “investment” as “any kind of assets, implemented in accordance with the laws and regulations of the Contracting Party in whose territory the investment is made.” The tribunal interpreted this requirement to mean that the investment must be made “in compliance with the law at the time when it was established” (para. 193), and that in case of non-compliance the dispute would not fall under its jurisdiction. Thus, according to the tribunal’s interpretation, corruption during the establishment of the investment must lead to a dismissal of jurisdiction. It leaves open, however, the question whether corruption occurring after the establishment of the investment, that is, in the course of its operation, would lead to a similar or different consequence.

The approach taken by the Metal-Tech tribunal is also interesting because the tribunal decided to undertake an ex officio investigation on whether or not the establishment of the investment was flawed by corruption. In this respect, it found that enough evidence existed based on an application of the “red flags” list. The red flags are a set of indicators that can serve as a tool to detect instances of corruption. Red flags are thus only indicators and not conditions for a finding of corruption. They serve to establish circumstantial evidence

In the present case, Uzbekistan was able to invoke Metal-Tech’s corrupt conduct as an absolute bar of its own liability under international law. The company remains equally free of liability at the international level. Awards like Metal-Tech v. Uzbekistan could serve as an incentive, nevertheless, to increase the level of due diligence of foreign investors when choosing to establish in the territory of a host state offering investment opportunities. However, if the consequence for the investor is simply to lose access to international arbitration, more may be needed to increase the responsibility of investors not to engage in corruption when investing across the border.

2.0 Case Summary

In 2000, Metal-Tech entered into the joint venture Uzmetal with two Uzbek state-owned enterprises (SOEs). The purpose of the joint venture was to build and operate a modern plant to produce molybdenum in Uzbekistan (para. 7). Subsequently, Metal-Tech concluded three consulting agreements having a total value of USD 4.4 million with individuals that were closely connected to the Uzbek government. In the course of 2006 and 2007, the two SOEs filed domestic court proceeding against Uzmetal seeking the distribution of dividends of their shares. Uzmetal was ordered to distribute the unpaid dividends but did not do so. As a consequence the two SOEs initiated bankruptcy proceedings against Uzmetal. In 2007, the Court of the Tashkent Region awarded the liquidation and transfer of all Uzmetal’s assets to the two SOEs (para. 34 et seq.). In January 2010, Metal-Tech then submitted a Request for Arbitration to ICSID. Metal-Tech claimed violations of Uzbek laws as well as a breach of the fair and equitable treatment standard, of full protection and security and of expropriation contained in the Israel–Uzbekistan BIT (para. 107). It sought compensation of approximately USD 174 million.

Uzbekistan’s principal defence was that the tribunal lacked jurisdiction because Metal-Tech’s investment was “made and operated corruptly” and in violation of Uzbek laws on bribery (para. 110). The tribunal ultimately found corruption to have existed with respect to two of the three consulting agreements. The investment was thus established illegally, and therefore the tribunal declined its jurisdiction.

3.0 Select Legal Issues

3.1 Standard of Proof: The red flags of corruption

The tribunal first set out that since the international responsibility of Uzbekistan is at stake, it would be appropriate to apply international law to the burden of proof. It indicated that the general rule and widely recognized principle under international law is that each party bears the burden of proving the facts on which it relies (para. 237).

In the case of corruption, however, the tribunal questioned whether the burden of proof should not be shifted from the respondent to the claimant, so that the latter has to establish that there was no corruption (para. 238). The tribunal explained that usually such shift would be foreseen in the applicable law, but that the BIT in question was silent on this matter. Consequently, in the opinion of the tribunal, it disposed of relative freedom in determining the principles to sustain a determination of corruption.

The tribunal found that the facts submitted by Uzbekistan and those mentioned during the hearings created “the suspicions of corruption” (para. 239). In particular, it highlighted that payment of a sum of more than USD 4 million to consultants raised suspicion (para. 240). Thus, in a procedural order, the tribunal exercised its ex officio power to ask Metal-Tech for additional evidence that it was not engaged in corruption (para. 241). By doing so the tribunal accepted to reverse the burden of proof on Metal-Tech.

The tribunal stated that “corruption is by essence difficult to establish and that it is thus generally admitted that it can be shown through circumstantial evidence” (para. 243). In corruption cases, circumstantial evidence is frequently referred to as indicators or so called “red flags” of corruption. According to the tribunal, the several lists of these red flags can be worded differently, but they have essentially the same content (para. 293). The tribunal used six factual findings as constituting a “red flag” of corruption: the amount of payments, the fact that there was no proof of services, the lack of qualification of the consultant, the sham consulting contracts, the lack of transparency of the payee, and the connections of the consultants with public officials in charge of Metal-Tech’s investment.

As regards the proof of services, the tribunal sought to understand what services the payments were intended to compensate. It gave Metal-Tech an opportunity to substantiate the legitimacy of the services. For instance, in one of the consulting agreements, the consultants were to visit Israel. The tribunal thus asked for evidence for such travels; however, Metal-Tech was unable to provide them. Metal-Tech tried to justify it by arguing that many documents were left in Uzbekistan after the enterprise left the country, but the tribunal found such explanations unrealistic. In addition, it held that the few documents that were provided by Metal-Tech—such as the minutes of the General Meetings of Uzmetal—were useless as they did not illustrate what services the consultants rendered (paras. 257–261).

The tribunal stressed more than once that Metal-Tech was not concealing evidence. Rather, it found that Metal-Tech was unable to provide evidence of services because no services or at least no legitimate services were performed at the time of the establishment of the investment (para. 265). Applying the “red flags” analysis, the tribunal concluded that there was sufficient circumstantial evidence to find that corruption existed with respect to two of the three consulting agreements. It then analyzed whether this affected the legality of Metal-Tech’s investment.

3.2 The Legality of the Investment

Many BITs contain differently framed “in accordance with host state law” clauses. Investment tribunals generally consider such clauses as having the effect of excluding illegal investment from protection under the BIT. However, there is no unanimous approach on whether illegality is a matter affecting the jurisdiction of the tribunal, the admissibility of the claim, or the merits of the case.

Article 1(1) of the Israel–Uzbekistan BIT defines investment as meaning “any kind of assets, implemented in accordance with the laws and regulations” of the host state (para. 164). According to the tribunal, the scope of the legality requirement covers not any kind of violation of host state laws; it has to be a non-trivial violation. At any rate, according to the tribunal, corruption falls within this scope. The BIT provision by referring to “implemented in accordance” with the host state law refers to the time when the investment was made, but is silent on whether it must also be operatedin accordance with the laws of the host state after it is in place (para. 193).

The tribunal analyzed Uzbek law and concluded that: (i) it is unlawful to give or to promise anything of value to a public official or an intermediary of that public official in exchange for the performance or non-performance of a certain action that the official must or could have performed; (ii) it is unlawful to enrich a third party, such as a member of an official’s family, to induce an official’s performance or non-performance of certain action; and (iii) the timing of payment is irrelevant; it can occur before or after the act or omission sought (para. 289). The tribunal held that Uzbek law is in conformity with international law and the laws of the vast majority of states.

In addition, the tribunal pointed to the adoption of several international legal instruments to combat corruption, such as the Code of Conduct for Law Enforcement Officials and the Declaration against Corruption and Bribery in International Commercial Transaction, both adopted by the United Nations General Assembly. It referred also to other legal instruments elaborated by the African Union, the Council of Europe and the Organisation for Economic Co-operation and Development (OECD). Lastly, the tribunal referred to the award in World Duty Free v. Kenya, which held that corruption is “contrary to international public policy of most, if not all States, or to use another formula, to transnational public policy” (paras. 289–291). Against this legal framework the tribunal analyzed each consulting contract separately. For each consultant, the tribunal scrutinized the legality by taking into account the factual circumstances circumscribed by the “red flags” mentioned above.

In conclusion, the tribunal found that the fact that two of the consulting agreements were made through corruption affected the legality of the establishment of the investment, which was thus not “implemented in accordance” with the laws of Uzbekistan. The tribunal held that “Uzbekistan’s consent to ICSID arbitration, as expressed in Article 8(1) of the BIT, is restricted to disputes concerning an investment, as defined in Article 1(1) of the BIT.” The tribunal held that the dispute did not “come within the reach of Article 8(1) and [was] not covered by Uzbekistan’s consent” (para. 373). The tribunal, thus, declared that it lacked jurisdiction over the dispute.

3.3 Shared Responsibility With Respect to the Corrupt Conduct

The tribunal underscored an important point with the following remark: “[w]hile reaching the conclusion that the claims are barred as a result of corruption, the Tribunal is sensitive to the ongoing debate that findings on corruption often come down heavily on claimants, while possibly exonerating defendants that may have themselves been involved in the corrupt acts. It is true that the outcome in cases of corruption often appears unsatisfactory because, at first sight at least, it seems to give an unfair advantage to the defendant party. The idea, however, is not to punish one party at the cost of the other, but rather to ensure the promotion of the rule of law, which entails that a court or tribunal cannot grant assistance to a party that has engaged in a corrupt act” (para. 389). This statement specifically points to the difficulties of cases where corruption is involved. Uzbekistan was in this case able to invoke Metal-Tech’s corrupt conduct as an absolute bar of its own liability under international law. The company remains equally free of liability at the international level.

Lastly, the tribunal acknowledged that Uzbekistan had also participated in the corrupt conduct through the allocation of costs. In the present case, the tribunal ordered each party to bear its own costs. The tribunal thereby seems to have tried to remedy that the investor bears alone the consequences of the corrupt conduct, stating that “[b]ecause of this participation, which is implicit in the very nature of corruption, it appears fair that the Parties share in the costs” (para. 422).

Note

[1] World Duty Free v. Kenya is another example where tribunals accepted a defence based on corruption. World Duty Free Co. Ltd. v. Republic of Kenya, ICSID Case No. ARB/00/7, Award of October 4, 2006. Retrieved from https://www.italaw.com/cases/documents/3281.