UNCITRAL Tribunal determines that wheat supply contracts are not «investments» under Swiss-Uzbekistan BIT

By Elizabeth Whitsitt

January 13, 2010

Swiss-based firm Romak S.A. has lost a protracted dispute against the Republic of Uzbekistan regarding alleged non-payment for wheat shipments to the country during the mid-1990s.

On November 26, 2009 an arbitral tribunal composed of Fernando Mantilla-Serrano, Nicolas Molfessis and Noah Rubins dismissed Romak’s claims against the Republic of Uzbekistan on jurisdictional grounds.  Specifically, the tribunal determined that it did not have jurisdiction in the case given the absence of any “investment” underlying the dispute.

In the aftermath of the dissolution of the Soviet Union, Romak and several companies entered into a set of contracts for the supply of wheat to Uzbekistan.  Having experienced difficulties in obtaining payment for wheat deliveries, Romak commenced arbitral proceedings against one of its Uzbek counterparties under the auspices of the Grain and Feed Trade Association (GAFTA).  After obtaining an arbitral award in its favour, however, Romak was unable to enforce the award in several countries, including Uzbekistan.  As a result, the Swiss company commenced arbitral proceedings against Uzbekistan under the Swiss-Uzbek BIT in accordance with the UNCITRAL Arbitration Rules.

Seeking more than USD $30 million in damages, Romak alleged that Uzbekistan violated its obligations under the BIT.  Arguing that the actions of its Uzbek counterparties were attributable to Uzbekistan, Romak claimed that Uzbekistan violated numerous obligations under the BIT, including the guarantee of fair and equitable treatment, and the prohibition against expropriation or nationalization without compensation.  Additionally, Romak argued that by refusing to enforce the GAFTA award Uzbekistan had violated its treaty obligations.

Uzbekistan denied those assertions and contested the jurisdiction of the arbitral panel.  Specifically, Uzbekistan contended that the tribunal lacked jurisdiction in the case because neither the wheat supply contracts nor the GAFTA award qualified as an “investment” subject to protection under the BIT.  In support of its arguments, Uzbekistan relied upon the “Salini test” sometimes used by ICSID tribunals as an analytical tool to determine the same jurisdictional question as the one presented in the instant dispute (i.e. whether there is an arbitral investment subject to BIT protection).

In response, Romak alleged that the Salini criteria were “inapplicable and irrelevant” to UNCITRAL proceedings given their development within the ICSID system.  Pushing for a literal interpretation of the definition of “investments”, Romak argued that the wheat supply contracts and the GAFTA Award fell squarely within the Swiss-Uzbek BIT.  Alternatively, Romak asserted that the wheat supply contracts and the GAFTA award qualified as investments under the Salini test.

Romak could not, however, convince the tribunal that its long-running dispute was the proper subject for arbitration under the Swiss-Uzbek BIT.

In particular, the tribunal rejected Romak’s literal construction of the term “investment” in the Swiss-Uzbekistan BIT.  In so doing, the tribunal found that an ostensibly broad definition of “investment” in the Swiss-Uzbekistan BIT should not be interpreted in a way that “render[s] meaningless the distinction between investments, on the one hand, and purely commercial transactions on the other.”  Using the approach advanced by Romak, the tribunal postulated that “…every contract entered into between a Swiss national and a State entity of Uzbekistan…as well as every award or judgment in favor of a Swiss national…would constitute an investment under the BIT.”  Finding such a possibility untenable, the tribunal indicated that one-off sales contracts could constitute investments under the terms of a BIT only in cases where the wording of the BIT left “no room for doubt” that the contracting parties intended the term to carry such an extraordinary meaning.

The tribunal also disagreed with Romak’s contention that “the definition of ‘investment’ in UNCITRAL proceedings (i.e. under the BIT alone) is wider than in ICSID Arbitration.”  According to the tribunal, Romak’s suggestion would lead to unreasonable results by narrowing or widening the substantive protections afforded an investor under a BIT depending on the investor’s choice of various dispute settlement mechanisms.  Consistent with this reasoning, the tribunal held that there is no basis to suppose that the term “investment” has a different meaning in the ICSID Convention than it bears in relation to the Swiss-Uzbekistan BIT.  Thus, the tribunal observed that “the term ‘investments’ under the Swiss-Uzbekistan BIT has an inherent meaning…entailing a contribution that extends over a certain period of time and that involves some risk.”

The tribunal went on to determine that the wheat supply contracts and the GAFTA Award were “inextricably linked” and that any determination as to the existence of an “investment” under the BIT must be made with reference to the entire economic transaction at issue.  On that basis the tribunal found that the Romak’s wheat supply arrangement with, and subsequent arbital award against, Uzbekistan failed to display the hallmarks of an “investment” under the Swiss-Uzbekistan BIT (i.e. contribution, duration and risk).

Specifically, the tribunal determined that Romak’s delivery of wheat could not be considered a contribution indicative of an investment as it was “a mere transfer of title over goods in exchange for full payment.”  Similarly, the tribunal considered that the duration of Romak’s wheat deliveries, which lasted some five months, did not reflect the sort of commitment normally associated with “investments.”  Finally, the tribunal noted Romak’s economic transaction did not involve the risk normally associated with an investment.  Specifically, the tribunal described the risk assumed by Romak as “…circumscribed to the possible non-payment of the wheat delivery, which is the ordinary commercial or business risk assumed by all those who enter into a contractual relationship.”

Sources:

Award in Romak S.A. (Switzerland) v. The Republic of Uzbekistan is available here:

http://www.PCA-CPA.org/upload/files/ROMAK-UZBEKISTAN%20Award%2026%20November2009.pdf