An ICSID Tribunal splits over whether to hear ancillary claims in dispute over unpaid gas deliveries

By Elizabeth Whitsitt

January 13, 2010

In a split decision, an ICSID tribunal has refused to hear ancillary claims advanced by American company, Itera International Energy LLC (Itera), and its Dutch parent, Itera Group NV (IGNV).

Itera and IGNV commenced ICSID arbitral proceedings against Georgia in June 2008, broadly asserting violations of the US-Georgia BIT and the Netherlands-Georgia BIT with respect to the claimants’ investment in the chemical fertilizer company JSC Azot.  In particular, the claimants asserted that Georgia “…orchestrated the bankruptcy of JSC Azot, a company majority-owned by [the claimants],… and sold Azot’s assets to a third party.”  The claimants acquired Azot as part of a state-sanctioned attempt to restructure debts owed to them by Georgian state-owned entities for unpaid gas deliveries.

In their Request for Arbitration, Itera and IGNV also noted their concerns with respect to another debt restructuring arrangement intended to facilitate the further repayment of amounts owed to the claimants for unpaid gas deliveries.  Specifically, the claimants noted that arbitration proceedings were already pending before the International Commercial Arbitration Court of the Chamber of Commerce of the Russian Federation (ICAC) with respect to this second debt restructuring arrangement.  However, they reserved their rights to introduce additional claims in relation to the latter arrangement “should their losses not be fully compensated as a result of the ICAC proceedings.”

Subsequently, Itera and IGNV attempted to enlarge their case against Georgia in the ICSID proceedings by seeking to admit claims related to the latter debt restructuring scheme.  The claimants’ arguments in support of this maneuver were largely focused on issues of procedural efficiency.  Observing that “…the various claims currently before the Tribunal [were] inextricably linked…”, the claimants went on to argue that “[a] separation [of the claims] would lead to parallel or consecutive proceedings and/or give rise to the avoidable risk of conflicting outcomes.”

For its part, Georgia alleged that there was “no meaningful factual or legal connection” between the claims.  Moreover, Georgia argued that only the tribunal’s dismissal of the claimants’ request for consolidation “…could avoid potentially conflicting decisions [between ICAC and the ICSID Tribunal on the ancillary claims] and serve interests of judicial efficiency and comity.”

On December 4, 2009 a majority of the tribunal, composed of Judge Hans Danaelius and Professor Brigitte Stern, sided with Georgia.  In so finding, the majority of the tribunal first addressed the parties’ arguments regarding the connectivity between the claims.  In particular, the majority recognized that there was a “link” between the claims as both disputes arose out of a common purpose – to ensure the payment of debts owed to the claimants.  In the majority’s view, however, the manner in which those debts were to be repaid involved two separate investments – a fact distinguishing this case from other ICSID cases* in which new claims had been accepted as “ancillary claims.”  Accordingly, the tribunal found that “[w]hile the investor is the same [for both claims], it entered into two different types of relationships with Georgia, which in view of the Tribunal, [could not] be analyzed as a single investment.”

In addition, the majority addressed both parties’ arguments regarding efficiency.  Specifically, the majority clarified that “…efficiency considerations are not in themselves decisive factors for whether or not a new claim shall be accepted as an ancillary claim…”  In the majority’s view ancillary claims should be accepted when “…the link between the claims [is] so strong that the examination of one claim cannot be carried out adequately without the other claim being adjudicated at the same time.”  Having found no such link in the present case, the two-person tribunal concluded that the conditions set out in the ICSID Convention and ICSID Rules regarding ancillary claims had not been satisfied.

In direct contrast to the majority, however, the third member of the tribunal, Professor Fancisco Orrego Vicuña, would have admitted the ancillary claims in this case.  Viewing the test for the admissibility of ancillary claims less strictly, Professor Vicuña posited that “[t]he facts do not need to be identical in one and the other dispute.  It suffices that they both concern the same business operation, the same investor and the same State party.”

Thus, in a two-page dissenting opinion Professor Vicuña, the claimants’ nominee to the tribunal, emphasized that Itera’s and IGNV’s claims arose as a result of “mounting unpaid bills for the supply of gas.”  Accordingly, in his opinion, the claimants’ investments were “…conceived as mechanisms to…make the Claimant[s] whole for the monies owed.”  In that context, the dissenting arbitrator determined that the claims were “…close enough as to require their simultaneous adjudication so that settlement of the dispute [would] be final.”

* See CMS Gas Transmission Co. v. Argentina (ICSID Case No. ARB/01/8), Decision on Objections to Jurisdiction, 17 July 2003; LG&E Energy Corp. LG&E Capital Corp. and LG&E International, Inc. v. Argentina (ICSID Case No. ARB/02/1), Decision on Objections to Jurisdiction, 30 April 2004, Enron Corporation and Ponderosa Assets L.P. v. Argentina (ICSID Case No. ARB/01/3), Decision on Jurisdiction (Ancillary Claim), 2 August 2004.

Sources:

The majority decision and dissenting opinion on Admissibility of Ancillary Claims in Itera International Energy LLC and Itera Group NV v. Georgia is available at:

http://ita.law.uvic.ca/documents/Itera-AncillaryClaims.pdf

and

http://ita.law.uvic.ca/documents/IteraAncillaryClaims-Dissent.pdf