Cyprus fends off SCC expropriation claim by Polish investors over bank bail-in measures

Tomasz Częścik and Robert Aleksandrowicz v. Cyprus, SCC Case No. V 2014/169

In an award dated February 11, 2017, an SCC tribunal dismissed expropriation claims against Cyprus brought by two Polish investors in relation to various measures taken by Cyprus in 2013 to recapitalize its banking industry. In particular, the tribunal was not convinced, on the evidence before it, that the “value of the Claimants’ investment was so significantly affected as to reach the level of expropriation” (para. 221).

Background and claims

The claimants, Tomasz Częścik and Robert Aleksandrowicz, were Polish nationals and the only shareholders of an undisclosed Cypriot Limited Company. In March 2013, the Central Bank of Cyprus issued a decree to initiate certain legislative and regulatory measures to restructure its banking system (bail-in measures), in particular the two largest banks—the Bank of Cyprus (BoC) and Laiki Bank. Taking into considerations the risks of implementing this decree, the Cypriot Ministry of Finance declared a bank holiday for March 19 and 20, 2013.

Around this time, the claimants instructed BoC to make two payments for the purchase of shares in a related Polish start-up. While BoC executed the first transaction, it blocked the second one as it fell on a bank holiday. When the bank holiday elapsed, Cyprus had opted to bail-in BoC, by freezing or converting into shares deposits over EUR 100,000.

On December 5, 2014, the claimants initiated SCC arbitration pursuant to the Poland–Cyprus BIT (the BIT), claiming that “the legislative acts of the State (Cyprus) and the restrictive measures undertaken by the organs of the Cypriot State and its dependents limiting and partially blocking the transfer of the Company’s capital deposited in BoC resulted in expropriation of the business of the Claimants’ Company” (para. 120).

In addition to the claim for damages amounting to the value of the lost funds (PLN 1.3 million, approx. USD 340,000), the Claimants sought more than PLN 16 million (approx. USD 4.1 million) in compensation as lost profits, alleging that Cyprus’s conduct prevented them from consolidating their position in the Polish start-up and thus shielding that investment from external hostile takeovers.

Tribunal declines to expand jurisdiction beyond expropriation claim

Cyprus objected to the tribunal’s jurisdiction on several grounds and requested to bifurcate the proceedings to discuss its objection based on the limited scope of the BIT’s dispute resolution clause. Cyprus argued that BIT Article 9 only provided for arbitration in case of “disputes … concerning expropriation of an investment” and that the claimants could not invoke the MFN clause under BIT Article 7 to broaden the tribunal’s jurisdiction to hear the investors’ claims for a breach of the FET standard under BIT Article 3. The tribunal granted Cyprus’ request to bifurcate the proceedings. In a partial award dated March 4, 2016, it sided with Cyprus, deciding that it did not have jurisdiction over the investors’ FET claim on the basis of the MFN clause (para. 165).

Tribunal has prima facie jurisdiction; expropriation claim found admissible

Cyprus’s second jurisdictional objection relied on the alleged incompatibility between the treaty-based expropriation claims and EU law. First, Cyprus relied on VCLT Article 59 to argue that, by acceding to the EU through the Lisbon Treaty on May 1, 2014, both Cyprus and Poland agreed to transfer certain competencies to the EU, namely the direct effect of EU law and the primacy of the EU law. Therefore, according to Cyprus, the BITs concluded between EU member states before their accession to the EU, covering areas governed by EU law, were superseded by EU law. Next, it argued that the expropriation claim under the BIT conflicts with the EU law on banking regulation and capital transfers (TEFU Articles 63 and 65).

The tribunal dismissed Cyprus’ objections by stating that, since neither Cyprus nor Poland had taken any steps to terminate the BIT, the treaty was prima facie still in force and the tribunal had prima facie jurisdiction over the claims. However, it noted that “this prima facie conclusion would be reversed” if it were to be established by the CJEU in Slovak Republic v. Achmea BV that intra-EU BITs are incompatible with EU law” (para. 170).

No expropriation absent “substantial deprivation” of investment

A preliminary question significant to the expropriation claim was whether the allegedly expropriated funds in BoC, which belonged to their Cypriot subsidiary, could qualify as an investment under the BIT. The claimants relied on the expansive scope of BIT Article 1(3) to argue that the funds transferred to the bank account in BoC can be characterized as an investment protected by the BIT. In the alternative, they argued that the shareholding in their Cypriot entity was their investment, whose value had been affected by the expropriation of the fund in BoC.

As regards the claimants’ initial position, the tribunal found that the funds that were subjected to the bail-in measures were not intended to be invested “in Cyprus” and were therefore not an investment under the BIT, which applied to “investments made into the territory of Cyprus.” However, the tribunal agreed that the claimants’ shares in the Cypriot entity would constitute an investment in accordance with both the subjective and objective notions of investment.

The claimants contended that their investment was indirectly expropriated by Cyprus’s actions, starting with the imposition of extraordinary bank holidays and combined with the issuance of the decrees authorizing the bail-in measures.

Given the absence of definition of expropriation in the BIT, the tribunal reviewed the arbitral jurisprudence on expropriation, particularly the discussion in LG&E v. Argentina and Azurix v. Argentina, and found that the test of an expropriation was whether there was a permanent and substantial deprivation of the value of the investment. The tribunal, however, noted that the claimants neither attempted to prove that they were deprived totally of these shares nor proved that a substantial deprivation of the value of the shares occurred. On the contrary, the tribunal found evidence during the hearing that undermined the claimants’ allegations that the value of the shares in the Cypriot entity was substantially affected by the disputed measures. Therefore, it concluded that the bail-in measures did not amount to an expropriation of their investment under BIT Article 4.

Costs

The tribunal first noted that, since the claimants failed in all their claims, including with respect to Cyprus’s jurisdictional objections, they are to bear the costs of the arbitration and refund Cyprus the amount paid to the SCC as advance on costs. At the same time, however, it noted the “huge difference” between Cyprus’s and the claimants’ legal costs (with the latter amounting only to EUR 170,000). According to the tribunal, Cyprus’s costs had been disproportionate, notably in view of the amounts at stake, and thus ordered the claimants to reimburse 70 per cent of Cyprus’ legal costs.

Notes: The tribunal was composed of Yves Derains (chair, appointed by the SCC Board, French national), Sophie Nappert (claimants’ appointee, Canadian national) and Andrea Giardina (respondent’s appointee, Italian national). The award is available at https://www.italaw.com/sites/default/files/case-documents/italaw10243_0.pdf

Gladwin Issac is a graduate of the Gujarat National Law University, India.