Confusion about Settlement Agreement leads to Dismissal of Case Between Dutch Companies and Azerbaijan

By Elizabeth Whitsitt

November 3, 2009

After a disagreement regarding the existence of a settlement agreement, an ICSID tribunal has determined that it has no jurisdiction to hear a dispute initiated by three Dutch companies, Azpetrol International Holdings B.V., Azpetrol Group B.V. and Azpetrol Oil Services Group B.V. against the Republic of Azerbaijan.

The Dutch investors commenced arbitral proceedings on July 13, 2006 alleging that Azerbaijan’s treatment of their investment in Azerbaijan violated various provisions of the Energy Charter Treaty (“ECT”).  In response, Azerbaijan contested the jurisdiction of the Tribunal and a hearing on that issue was held in London at the end of June 2008.  Shortly after its commencement, however, the hearing was adjourned after a director of the investors admitted to bribing officials in Azerbaijan in early 2006.

On December 19, 2008 the parties notified the Tribunal that they had reached “an in principle settlement” and sought an “immediate procedural standstill” of the case until December 31, 2008 in order to finalize their agreement.  This notification came as a result of a series of conversations involving counsel for parties in this dispute and another dispute defended by Azerbaijan, Fondel Metal Participations B.V. v. The Republic of Azerbaijan.  Subsequently, a disagreement arose between the parties regarding the nature of those settlement communications.

Specifically, the disagreement centred on the nature of emails exchanged between the parties in mid-December 2008.  While the investors and Azerbaijan agreed that their correspondence gave rise to a legally binding agreement of some kind, they differed over its scope.  Azerbaijan asserted that such communications resulted in an agreement to settle the case with a consequent agreement on a standstill, while the investors argued that it was merely a standstill agreement to allow time for the parties to negotiate a settlement.

Applying English law as agreed to by the parties, the tribunal, composed of Judge Florentino P. Feliciano, Judge Charles N. Brower, and Sir Christopher Greenwood, sided with Azerbaijan.  Specifically, the tribunal found that the natural meaning of the language in the emails indicated that a binding settlement agreement between the Parties had been reached.  In so doing, the tribunal rejected a number arguments advanced by the Dutch investors, namely that there was no binding agreement because there was no intention to create legal relations, there was no meeting of the minds, and that the agreement was incomplete.

In addition, the tribunal rejected the investors’ attempts to argue for a more limited interpretation of the relevant email exchange by relying on evidence of prior correspondence and subsequent practice between the parties.  Wary of considering such extrinsic evidence, the tribunal reiterated the applicability of English versus international law to the dispute.  It noted that while extrinsic evidence may be admissible under international law, this dispute was to be governed by English law which provides only very limited recourse to extrinsic evidence.  Thus, the tribunal found that there was no “legal dispute” between the parties as required by Article 25(1) of the ICSID Convention, nor was there a “dispute” as required by Article 26(1) of the ECT.  Therefore, it concluded that it did not have the jurisdiction to hear the claim.

Sources:

Award in Azpetrol International Holdings B.V., Azpetrol Group B.V. and Azpetrol Oil Services Group B.V. v. The Republic of Azerbaijan is available at: http://ita.law.uvic.ca/documents/Azpetrolaward.pdf