ICSID tribunal constituted by virtue of an MFN clause holds Turkmenistan liable for FET breach for requiring investors to produce “smeta,” a cost estimate required by Turkmen law

Garanti Koza LLP v. Turkmenistan, ICSID Case No. ARB/11/20

On December 19, 2016, an ICSID tribunal ordered Turkmenistan to pay compensation for denial of FET to Garanti Koza, a British company ultimately controlled by Turkish nationals.

Factual background and claims

In 2007, Garanti Koza was awarded a contract to build 28 of the 119 bridges along the highway between the cities of Mary and Turkmenabad, for the lump sum price of USD 100 million. The award of the contract between Turkmenistan’s State Concern Turkmenavtoyollary (TAY) and Garanti Koza was approved by Presidential Decree No. 9429.

Both the contract and the decree required Garanti Koza to complete its work in October of 2008. Work at the bridge sites had been planned to commence on May 1, 2008, but actually began on July 25, 2008. Garanti Koza justified the delay by TAY’s refusal to pay invoices.

TAY argued that Garanti Koza’s payment application was rejected not because of delays in the completion of the project, but because there was no smeta—the document containing approximate estimate of expenses, commonly used in post-Soviet countries. Although the contract did not mention smeta, Turkmenistan argued that the contract was governed by Turkmen law, which required Garanti Koza to present smeta anyway.

In 2010, TAY terminated the contract and instructed the Prosecutor General of Turkmenistan to commence proceedings against Garanti Koza in the Arbitrazh (Commercial) Court of Turkmenistan, the forum designated by the contract. The next day, the court adopted an order attaching Garanti Koza’s assets as a provisional measure granting TAY security for amounts owed to it by Garanti Koza.

Garanti Koza initiated ICSID arbitration in 2011, contesting the compatibility of these measures with the 1995 United Kingdom–Turkmenistan BIT. It alleged that Turkmenistan’s measures breached, among others, the expropriation, FET and full protection and security (FPS) standards under the BIT.

Jurisdiction: The tribunal imports consent to ICSID arbitration through the MFN clause

BIT Article 8(2) identifies three arbitration rules to which an investor and Turkmenistan together may agree to refer the dispute: ICSID, ICC or UNCITRAL. Article 8(2) also says that, if “there is no agreement to one of the above alternative procedures,” the dispute shall be submitted by investor to arbitration under the UNCITRAL Rules.

Turkmenistan argued that it never agreed to refer its dispute with Garanti Koza to ICSID arbitration and, therefore, that the ICSID tribunal lacked jurisdiction to hear the dispute; the dispute may be heard by an UNCITRAL tribunal only. Moreover, under the ICSID Convention, Turkmenistan’s consent to ICSID arbitration must be expressed in writing, which is manifestly absent in the dispute with Garanti Koza.

Garanti Koza argued that Turkmenistan’s consent to submit the dispute to ICSID arbitration may be created by operation of the MFN clause in the BIT. Given that other investors—for instance, Swiss investors under the Switzerland–Turkmenistan BIT—may choose to arbitrate their disputes at ICSID, Garanti Koza claimed that it should be given the same opportunity.

The majority of the tribunal affirmed its jurisdiction over the dispute, given that Turkmenistan:

1. Consented in the United Kingdom–Turkmenistan BIT to submit investment disputes to international arbitration.
2. Promised to accord to British investors and their investments treatment not less favourable than that accorded to investors of other states or their investments.
3. Expressly provided that the MFN treatment “shall apply” to the dispute resolution provision of the BIT.
4. Provided investors of third states, specifically Switzerland, with an unrestricted choice between ICSID Arbitration and UNCITRAL Arbitration.

Arbitrator Laurence Boisson de Chazournes appended a dissenting opinion, saying that consent cannot “be imported from one treaty to another treaty” (p. 22). She considered that for the purposes of ascertaining the tribunal’s jurisdiction, it shall first and foremost analyze “whether consent to ICSID arbitration is or is not established under the UK–Turkmenistan BIT” (p. 22). She argues that in the dispute with Garanti Koza the consent to ICSID arbitration was absent.

Definition of investment: The Salini test does not apply to ICSID arbitration

Turkmenistan also objected to the existence of an investment. Relying on the Salini test, the state argued that Garanti Koza failed to satisfy the criteria of risk, duration and contribution.

Garanti Koza questioned the application of the Salini test in the ICSID context. Alternatively, it argued that the tribunal should follow ICSID cases that view the test as a set of flexible and liberal characteristics. Even so, Garanti Koza maintained that its investment fulfilled the Salini test.

The tribunal underlined that BIT Article 1(a) defines “investment” to mean “every kind of asset” and provides a non-exclusive, illustrative list of assets. It found that Garanti Koza negotiated a contract to build bridges in Turkmenistan, put resources into the country and actually built a number of bridges; therefore, its activities qualified as investments.

Importantly, the tribunal refused to apply the Salini test. According to the tribunal, the term “investment” as used in the ICSID Convention refers to the definition of investment in the applicable BIT. The tribunal concluded that by satisfying the definition of investment in the United Kingdom–Turkmenistan BIT, Garanti Koza’s investment satisfied the ICSID Convention’s definition of investment.

Existence of protected investor: Place of incorporation matters the most

Turkmenistan also advanced that Garanti Koza was not a British investor. It argued that Garanti Koza undertook no actions of its own accord; rather, the bid was submitted and the tender was won entirely on the basis of the reputation and track record of Garanti Koza İnşaat (GKI), its Turkish parent company. Garanti Koza’s managers presented themselves not as representatives of the unknown British company, but rather as representatives of GKI, an experienced and well-known Turkish construction company.

Garanti Koza argued that it—not GKI—had made the investment in Turkmenistan. It relied, among others, on the fact that the contract was entered into between Turkmenistan and Garanti Koza and approved by more than nine Turkmen government authorities.

The tribunal concluded that the BIT contains no specific definition of “investor,” but that its substantive provisions protect “investments of nationals or companies of the other Contracting Party.” According to the tribunal, Garanti Koza satisfied the sole requirement of the BIT to bring its investments within the protection of the treaty, namely, that it be incorporated in the United Kingdom.

Never-ending debate: Treaty and contract claims

Turkmenistan also contended that ICSID was not the proper forum for the resolution of a purely contractual dispute, but that it must be submitted to the Arbitrazh (Commercial) Court of Turkmenistan, selected by the parties in the contract.

However, the tribunal agreed with Garanti Koza that ICSID was the proper forum, as the causes of action arise out of provisions of the BIT, rather than the contract. The tribunal also endorsed the “elevating” effect of umbrella clauses, applying their ordinary meaning in accordance with VCLT Article 31.

Expropriation: Turkmenistan’s measures fall within the legal procedure under domestic law

Garanti Koza claimed that Turkmenistan’s measures amounted to direct and indirect expropriation. It also proposed importing an additional requirement for lawful expropriation from Article 5 of the France–Turkmenistan BIT, namely, that an expropriation must not be contrary to a specific commitment of the host state.

However, the tribunal refused this proposal as well as Garanti Koza’s expropriation claims. It concluded that the termination of the contract and the seizure of Garanti Koza’s factory and equipment was a matter of normal legal process under Turkmen law, following Garanti Koza’s default under the contract.

FET and FPS: Imposing smeta on foreign investors is unfair and inequitable

The tribunal ruled that Turkmenistan’s insistence that Garanti Koza’s payment invoices conform to smeta was a breach of Turkmenistan’s FET obligation. It underlined that the insistence on smeta invoicing forced Garanti Koza to choose between submitting accurate invoices, and consequently accepting less compensation than it had bargained for, or manipulating its invoices to receive the full compensation that TAY had agreed to pay. The tribunal considered that using governmental power to put an investor in such a situation is fundamentally unfair and therefore amounts to an FET breach.

The tribunal refused to address the FPS claim, as it substantially overlapped with Garanti Koza’s FET submissions. It also rejected Garanti Koza’s claims for termination of the contract, loss of factory and equipment as well as tax penalties imposed by Turkmenistan.

Costs and damages

The tribunal awarded the investor damages of USD 2,529,900 for Turkmenistan’s requirement to use smeta. It noted that although Garanti Koza prevailed in the arbitration, it was awarded only about 5 per cent of the compensation it sought; accordingly, the tribunal denied Garanti Koza’s application for reimbursement of its legal fees and expenses. Each party was ordered to bear its own legal costs.

Notes: The tribunal was composed of John M. Townsend (U.S. national, president appointed by the Chair of the ICSID Administrative Council), George Lambrou (Greek national and British resident, claimant’s appointee) and Laurence Boisson de Chazournes (French and Swiss national, respondent’s appointee). The decision on the objection to jurisdiction for lack of consent, the award and the dissenting opinion of arbitrator Boisson de Chazournes are available at https://www.italaw.com/sites/default/files/case-documents/italaw8189_12.pdf

Ksenia Koroteeva is pursuing the MIDS LL.M. in International Dispute Settlement in Geneva. Previously, she worked as legal counsel and tribunal secretary at the Russian Arbitration Center (RAC).