Awards and Decisions

Claim against Slovakia dismissed, as tribunal complains of poorly presented case 

Jan Oostergetel and Theodora Laurentius v. The Slovak Republic

Damon Vis-Dunbar

A tribunal has dismissed a claim by a pair of Dutch investors against the Slovak Republic, finding no evidence that a “financial mafia” colluded with the Slovak government to bankrupt the claimants’ investment.

The dispute centered on bankruptcy proceedings involving BCT, a privatised company acquired by the claimants that produced traditional yarn and thread. The claimants argued that the government had taken a benevolent approach to the company’s tax arrears, before unfairly abandoning its leniency when it pushed the company into bankruptcy proceedings. The claimants also alluded to a “financial mafia” eager to take hold of BCT’s real-estate, and which allegedly pressured Slovakian authorities and courts to act improperly.

However, the tribunal found no evidence to substantiate these claims.

Poorly presented case

The tribunal expressed frustration at the presentation of the claimant’s case at various points in the award. “The Claimants’ submissions did not present the factual allegations in a clear, consistent and systematic,” notes the tribunal.

Indeed, the tribunal struggled at points to make sense of legal arguments underpinning the claim. The claimants made vague references to expropriation, for example, while lacking a clear articulation of concept. “The random sprinkling throughout the pleadings of a strong term with a well-defined legal meaning such as ‘expropriation’ or ‘creeping expropriation’ does not transform that term by itself into an allegation of facts founding a treaty violation,” admonished the tribunal

Claims lack evidence

The claimants asserted breaches of the treaty’s provision on fair and equitable treatment. While not elaborating on the content of the standard, Slovakia identified two aspects to be considered: the investors’ legitimate expectations, and a denial of justice.

With respect to legitimate expectations, the tribunal noted that this is linked stability. Quoting the tribunal in Tecmed v. Mexico, for example, it noted that the standard has been interpreted to “provide to international investments treatment that does not affect the basic expectations there were taken into account by foreign investor to make the investment.”

However, it tribunal also nodded to the more recent El Paso Energy v. Argentina award, which stressed the limits to which an investor can expect stability. That tribunal acknowledged that “economic and legal life is by nature evolutionary,” and thus considered if changes to a legal framework were “unreasonably or contrary to a specific commitment.”

Turning to the facts of case, the tribunal failed to see how the Slovakia had frustrated the investors’ legitimate expectations. In its interpretation, Slovakia’s leniency with respect the BCT’s tax arrears were premised on repeated promises that the investors would modernize the company; while in reality, BCT’s condition continued to deteriorate. As such, the claimants could not expect “that the authorities would invariably maintain a lenient attitude.”

With respect to a denial of justice, the tribunal underlined that this requires a failure of an entire legal system to deliver justice – not the mistakes of one court. In any case, however, tribunal found no convincing evidence of procedural irregularities or unreasonable delays in the bankruptcy proceedings.

The claimants’ allusions to corruption also failed to convince the tribunal, given the lack of concrete evidence.

Claimants’ must contribute to Slovakia costs

The disputing parties invested vastly different amounts in the case: the claimants legal costs amounted to 1.46 million Euros, while Slovakia’s came to nearly 12.5 million Euros. In considering the allocation of costs in light of these different amounts, the tribunal remarked: “Each one made its choices and bears the consequences. The Tribunal does not consider that one should necessarily pay for the choice of the other.”

However, the tribunal also noted that the poor presentation of the claimants’ case placed a burden on the proceedings.

Weighing these considerations, the tribunal decided that the claimants should contribute 2 million Euros to Slovakia’s costs, that being in the range of what the claimants paid for their own case. The claimants were also ordered to pay the costs of the arbitration, which amounted to nearly 800,000 Euros.

The tribunal consisted of Gabrielle Kauffman-Kohler (President), Vojtech Trapl (respondent’s nominee), and Mikhail Wladimiroff (claimants’ nominee).

The award is available here: http://italaw.com/documents/OostergetelvSlovakRepublic.pdf

Decisions published in rare State-to-State dispute between Italy and Cuba

Italy v Cuba, ad hoc tribunal

Larisa Babiy

In 2003 Italy initiated a rare State-to-State arbitration on the basis of the 1993 Italy-Cuba BIT. It espoused the claims of sixteen Italian investors operating in various sectors, from aluminium to pasta sauce production.

Italy claimed that through the actions of different entities, such as the Cuban Central Bank and the Cuban Chamber of Commerce, Cuba discriminated against Italian investors, including by denying them fair and equitable treatment, national treatment and full protection and security. Italy also sought from Cuba a symbolic compensation of one Euro for the violation of the letter and spirit of the BIT. Cuba, in turn, requested a public apology for the moral damage caused by the initiation of the arbitral proceeding.

In recently published decisions (an interim award from 2005, and final award from 2008), the tribunal accepted jurisdiction over the claims, but the majority went on to dismiss the claims on their merits.

Cuba’s preliminary objections

Cuba raised several preliminary objections. Firstly, it affirmed that Italy was not entitled to initiate a proceeding for diplomatic protection on the basis of article 10 of the BIT. Under this provision, Italy could only bring a dispute in its own name regarding the interpretation and application of the treaty.

Secondly, Cuba maintained that none of the claims espoused by Italy could be considered as relating to investments. It was Cuba’s argument that, since the definition contained in the BIT referred to investments made in conformity with local laws, a unique concept of investment could not be said to exist. Rather, the definition of investment contained in the BIT had to be subordinated to the notion of investment contained in the local law.

Thirdly, Cuba argued that Italy’s claims were not admissible since the claimant had failed to exhaust local remedies.

Finally, Cuba asserted that the tribunal should rule only on Italy’s claims regarding two of the sixteen investors, since the remaining claims were raised after the initiation of the arbitral proceeding.

Tribunal’s analysis

The tribunal rejected Cuba’s preliminary objection on Italy’s legal standing. It acknowledged that while the BIT entitles an investor to initiate a dispute against the host State, that fact does not, in itself, bar the home State from giving diplomatic protection in an arbitration under the same treaty. An investor’s right to diplomatic protection exists as long as he does not submit a claim to arbitration in his own name. Italy, thus, had legal standing in the arbitration, provided that the conditions for the application of the BIT and for the recourse to diplomatic protection had been fulfilled.

The tribunal also rejected Cuba’s argument regarding the definition of investment. It stated that the object and purpose of the BIT would be frustrated if the notion of investment could vary together with the laws of each contracting State. The majority also considered that the requirement of conformity with local laws did not concern the notion, but rather the legality, of the making of the investment. The tribunal looked into scholarly writings and international jurisprudence and concluded that there are three elements that characterize an investment: contribution, duration and risk. The final decision on whether the dispute regarded protected investments was deferred to the merits stage.

In dealing with Cuba’s objection concerning the exhaustion of local remedies, the tribunal distinguished between claims brought by Italy in its own name and claims advanced on behalf of its investors. It concluded that exhaustion of local remedies applies only in the latter case, provided that the remedies were existing and effective. The decision on these points was deferred to the merits stage.

In addressing the admissibility of claims advanced by Italy after the commencement of the arbitration, the tribunal underlined the importance of avoiding potential conflicting decisions. The majority then considered that, since the claims were filed at the beginning of the proceeding, their examination would not have any negative impact on it.

Majority dismisses claims on their merits

At the merits stage, Italy withdrew ten claims and proceeded on behalf of six companies.

Caribe and Figurella Project s.r.l.

Caribe and Figurella Project concluded a contract with a Cuban hotel for the creation of a beauty center. Two years later, Cuban authorities revoked the center’s operating licence after finding that it was providing unauthorized tattooing services. When the licence was re-established, the Cuban hotel failed to notify Caribe and Figurella Project and dismantled the area occupied by the Italian company. Italy claimed that Cuba violated its obligation to encourage Italian investments, discriminated against them and failed to grant fair and equitable treatment.

The tribunal found that Caribe and Figurella Project’s contract constituted an investment in accordance with the criteria of contribution, duration and risk established in the award on jurisdiction.

The tribunal considered the revocation of the licence by Cuban authorities “brutal” but not illicit, since at the time the permit was granted the annex of the contract referring to the tattoo services was not signed. Moreover, the fact that the licence was reestablished 20 days later mitigated the brutality of its withdrawal. Thus, the tribunal found that Cuban authorities did not commit any internationally wrongful act.

Adopting a structural and functional test, the tribunal decided that the hotel’s conduct was not attributable to Cuba. The non-governmental function of the hotel was determinant for excluding Cuba’s responsibility for the hotel’s conduct. As a consequence, all actions that lead to the dismantling of the Italian equipment were considered as contractual faults, rather than violations of the treaty.

Finmed s.r.l.

Finmed Ltd. is an Irish corporation owned by two Italian companies. In 1996 it formed a mixed company with Cubanacan, a state entity, for the creation of a tourist complex. Italy claimed that Cubanacan impeded the replacement of Finmed Ltd. in the mixed company with the Italian Finmed s.r.l. and, as a consequence, that Cuba violated its obligation to encourage Italian investments, discriminated against them and failed to grant fair and equitable treatment.

The tribunal acknowledged that the situation within Finmed Ltd. was confused. The substitution by Finmed s.r.l. was approved by the mixed company’s assembly but never received the necessary governmental authorization. The required documents had not been produced because of an ownership dispute among Finmed Ltd.’s representatives, which rendered it impossible to determine who had the authority to decide on the substitution. As a result, the activity of the mixed company was blocked for 8 months. Finally, Cubanacan decided to recognize a minority shareholder as the legitimate representative of Finmed Ltd, despite serious doubts on the validity of the documents presented by all sides.

The tribunal recognized that Cubanacan’s acts were attributable to Cuba because the entity belonged to the Ministry of Tourism. It considered that its decision was “rushed”, but justified by the desire to put an end to the 8 months paralysis of the mixed company. In doubt, Cubanacan opted for preserving the status quo, continuing to consider Finmed Ltd. the owner of the investment. The tribunal considered that the inability to take control of the investment was due to the situation within Finmed Ltd. itself, rather than to acts or omissions by Cubanacan and Cuba.

Icemm srl and Menarini Società Farmaceutica

The tribunal rejected Italy’s claims regarding Icemm s.r.l. and Menarini Società Farmaceutica, on the ground that their activity did not constitute an investment under the treaty. In both cases the tribunal found that the long term sales contract the Italian companies had with their Cuban partners did not satisfy the required criteria of contribution, duration and risk.

Cristal Vetro SA and Pastas y Salsas Que Chevere

The majority considered that two of the companies defended by Italy lacked a valid link of nationality with the country. Cristal Vetro SA and Pastas y Salsas Que Chevere were incorporated in Panama and Costa Rica respectively, but the capitals and the ownership were Italian. The tribunal looked at the text of the BIT, which referred to companies and individuals of a Contracting State. It deduced that the treaty covered investments made either by an individual, or by a corporation of a signatory State, and could not be extended to third country corporations only because their capitals were Cuban or Italian. The principles of diplomatic protection prevailing at the time of the conclusion of the treaty confirmed this conclusion.

The dissent

Italy’s nominee, Prof. Tanzi, disagreed with the majority on the appreciation of the facts of the dispute.

With regard to Italy’s claims on behalf of Caribe and Figurella Project, Prof. Tanzi considered that Cuban authorities could not have been unaware of the tattoo services offered by the beauty center. Evidence such as price lists including tattoo services and authorizations for the import of tattoo equipment supported his conclusion. Moreover, since the tattoo services constituted only a small portion of the center’s activity, the arbitrator considered the revocation of the licence disproportionate and inequitable.

Prof. Tanzi also disagreed with the tribunal’s finding on the issue of attribution of the hotel’s conduct to Cuba. He criticized the “functional approach” adopted by the majority and focused instead on the control exercised by Cuban authorities over the hotel. He concluded that the hotel’s actions should have been attributed to Cuba, independently from the commercial nature of its activity.

Concerning the Finmed s.r.l. claims, Prof. Tanzi highlighted that the majority acknowledged the questionable validity of the documents on which Cubanacan based its decisions. In his opinion, the tribunal should then have recognized negligence, if not complicity of Cubanacan in the ownership dispute. Furthermore, Prof. Tanzi underlined that to attribute Cubanacan’s actions to Cuba the majority opted for a structural instead of a functional test, in contrast with what it did in the Caribe and Figurella Project case.

Prof. Tanzi disagreed with the majority ruling on the absence of nationality link in the Cristal Vetro and Pastas y Salsas Que Chevere claims. He focused on the broad wording of the BIT, which did not indicate a test for the determination of corporate nationality. He argued that, although customary international law refers to the place of incorporation as relevant standard, it also provides several exceptions. One of those is contained in article 9 of the ILC draft articles on diplomatic protection. Prof. Tanzi considered that Italy’s claims met such an exception, since they concerned two companies who were lacking effective connection between ownership and place of incorporation.

The tribunal was composed by Mr. Yves Derains (president), Prof. Attila Tanzi (Italy’s nominee) and Dr. Narciso Cobo Roura (Cuba’s nominee, in substitution of Dr. Olga Miranda Bravo).

All decisions are available in French.

The interim award is available here: http://italaw.com/documents/Italy_v_Cuba_InterimAward_15Mar2005.pdf

The final award is available here: http://italaw.com/documents/Italy_v_Cuba_FinalAward2008.pdf

The dissenting opinion is available here: http://italaw.com/documents/Italy_v_Cuba_FinalAward2008_Dissent.pdf

Paraguay in breach of treaty with Switzerland for non-payment of invoices

SGS Société Générale de Surveillance S.A. v. Republic of Paraguay, ICSID Case No. ARB/07/29

Damon Vis-Dunbar

The government of Paraguay has been ordered to pay damages of US$ 39 million plus interest following a February 2012 ruling in favour of a Swiss claimant. Paraguay has since moved to annul the award.

The claimant, SGS Société Générale de Surveillance S.A (SGS), lodged its claim under the Swiss-Paraguay BIT in 2007 over unpaid invoices. SGS was contracted by Paraguay to inspect imports to ensure that correct customs duties were collected. Many of those invoices went unpaid, as officials within the government questioned the legality of the contract with SGS.

SGS argued that Paraguay’s failure to pay the invoices breached the treaty’s Article 11 (a so-called umbrella clause), which states that “either Contracting Party shall constantly guarantee the observance of the commitments it has entered into with respect to the investments of the other investors of the Contracting Party.” The claimant also asserted breaches of the treaty’s provisions on discriminatory measures and fair and equitable treatment.

Paraguay’s defense

Paraguay did not contest the fact that the invoices had not been paid. However, it made three arguments in its defense: 1) that any breach of the contract by Paraguay were made as a “normal market player” rather than as a sovereign power; 2) the forum selection clause in the contract precludes liability under the BIT, because the contract calls for disputes to be submitted to local courts; 3) that SGS breached the contract, relieving Paraguay of its contractual commitments.

Umbrella clause is clear

In its first line of defense, Paraguay argued that the claimant must “establish that Paraguay abused its government power,” in order for it to constitute a breach of the BIT. It Paraguay’s view, the non-payment of invoices “are the kind that can and often do occur in private commercial transactions, and without more, they cannot be characterized as instances of ‘abuse of government power.’”

The tribunal dealt with similar arguments during the jurisdictional phase of the proceedings, when it declined to accept Paraguay’s arguments with respect to “sovereign action.” In re-affirming that decision, the tribunal pointed to the plain language reading of the BIT’s umbrella clause – to “guarantee the observance of commitments” – should include the obligation to observe its contractual commitments.

Local courts vs. arbitration

The tribunal also found flaws in the assertion that the dispute must first be settled in local courts (according to the forum selection clause in the contract) before it could be found in breach of its contractual commitment. In the tribunal’s eyes, Paraguay had two distinct commitments: one to fulfill the payment obligations, and another to not frustrate efforts to litigate in local courts.

As the tribunal explained, the “Respondent’s argument, taken on its face, lacks logical coherence. Paraguay argues that the ‘commitment’ that Paraguay made was to pay SGS or to resolve disputes about payment in the local courts. This cannot be correct. It cannot be that Paraguay had the option of either paying its invoices or submitting the dispute to local courts.”

The tribunal also stated that forum selection clause in the contract does not negate its commitment to international arbitration under the BIT.  “The BIT arbitration mechanism formed part of the applicable legal framework and became, in effect, an irrevocable part of the bargain,” wrote the tribunal.

Finally, the tribunal found that Paraguay’s arguments that SGS had breached the contract did not meet the burden of proof.

Having determined that Paraguay breached Article 11, it did not deem it necessary to consider the claims based on discriminatory measures and fair and equitable treatment.

The tribunal consisted of Stanimir A. Alexandrov (president), Donald Francis Donovan (claimant’s appointee), and Pablo Garcia Mexia (respondent’s appointee).

The award is available here: http://italaw.com/documents/AWARD.pdf in English; and here: http://italaw.com/documents/LAUDO.pdf in Spanish

Prominent arbitrator opines on denial of justice in Chevron vs. Ecuador

Chevron & TexPet v. Ecuador (PCA Case No. 2009-23)

Damon Vis-Dunbar

A well-known investment lawyer has given his opinion on Chevron’s claim that Ecuadorian courts committed a denial of justice when it ordered the US oil company to pay billions of dollars in punitive damages.

Jan Paulsson, one of the most prolific investment arbitrators, was asked by Chevron to give his expert opinion to the tribunal hearing the dispute between Chevron and Ecuador under the US-Ecuador BIT. The case is part of a long-standing set of legal battles that involves Chevron, Ecuador, and residents of the Amazon over environmental damage in Lago Agrio allegedly caused by Texaco Petroleum (TexPet), which Chevron acquired in 2001.

Chevron is seeking a ruling from the tribunal that would rid it of a multi-billion dollar judgment by Ecuadorian courts rendered in favor of Ecuadorian citizens. The oil company asserts that Ecuador’s judiciary was pressured by Ecuador’s executive office, leading to numerous procedural defects.

Denial of justice?

Chevron claims that Ecuador has committed a denial of justice under customary international law, and breached Article II(7) of the US-Ecuador BIT, which states that “Each Party shall provide effective means of asserting claims and enforcing rights with respect to investment, investment agreements, and investment authorizations.”

Chevron’s argument is novel in that claims over “asserting rights” normally come from investors that have pursued claims in domestic courts. Here, Chevron argues that it has not been able to assert its rights as a defendant.  According to Paulsson, however, that is not a problem: “An investor must equally be able to ‘enforce rights’ in defence of a claim brought against it in a domestic court.”

Exhausting local remedies – futile

Paulsson’s concludes the conduct of Ecuador’s courts alleged by Chevron, if assumed true, would establish a claim of denial of justice. But he notes that a denial of justice claim also requires the claimant “exhaust local remedies” – that is, test the legal system as a whole.

In this case, Chevron has further avenues to defend itself in the Ecuadorian legal system – and, indeed, continues to pursue them. At the same time, however, the judgment against Chevron is enforceable, allowing the plaintiffs in the Lago Agrio proceeding to seek enforcement in Ecuador or abroad.

Leaving aside the question of enforcement, Paulsson argues that a claimant does not need to exhaust local remedies “where they offer no reasonable possibility of effective redress to the foreign litigant.”

“The broader form of futility arises where an international tribunal is satisfied that the local courts are notoriously lacking in independence, such that, even though theoretically available remedies might theoretically satisfy the claim, the lack of independence of the judiciary in the relevant domestic litigation renders the pursuit of those remedies futile …,” explains Paulsson.

Notably, Paulsson indicates that, assuming Chevron’s account of its treatment before Ecuadorian courts to be true, it would be futile to expect those options to deliver justice. “The executive has taken an active interest in these proceedings in an institutional context in which there is no meaningful chance of the judiciary assessing the matter independently of the executive’s expressed wishes,” writes Paulsson.

What remedy?

That conclusion leads Paulsson to discuss how the tribunal may remedy Chevron’s claim.

One response is a declaration stating that Ecuador’s judgment is unlawful under international law. “A declaration is the most obvious mechanism to record this nullity and to communicate it to any court, anywhere, hearing an application for recognition and enforcement of the Lago Agrio judgement,” writes Paulsson.

Paulsson states that the tribunal may also order Ecuador to annul the punitive damages ordered by the court. He acknowledges the separation of powers between the judiciary, executive and legislative branches of government may pose a challenge in this respect, but argues that the state as a whole would remain obligated to abide by the tribunal’s ruling.

He acknowledges that international tribunals have been reluctant to order states to repeal regulatory frameworks when they are found in breach of international law – preferring to order compensation instead. But Paulsson argues that “concern is inapplicable where what is unlawful is not a generally-applicable regulatory framework, but a single defective judgment …”

The Expert Opinion of Jan Paulsson in Chevron & TexPet v. Ecuador, PCA Case No. 2009-23 is available here: http://italaw.com/documents/JPaulssonOpinion.PDF

Committee upholds stay of enforcement in Libananco’s dispute with Turkey

Libananco Holdings Co. Limited v. Republic of Turkey, ICSID Case No. ARB/06/8

Damon Vis-Dunbar

Libananco Holdings has been given a reprieve from paying a $15 million dollar award in favour of Turkey, while an ad-hoc ICSID committee considers its application to annul the award.

Libananco, a company registered in Cypriot, had earlier lost its US$10 billion claim against Turkey for alleged breaches of the Energy Charter Treaty. Moreover, the tribunal ordered Libananco to pay US$ 602,500 in reimbursement of the Turkey’s advance the arbitration costs, as well as US$ 15,000,000 for legal fees and out of pocket expenses.

In December 2011 Libananco filed a request to annul the award, which also contained to request for a stay of enforcement of the award.

Exchange of allegations

In its request, Libananco accuses Turkey of spying on its legal counsel and intercepting privileged information, thus tainting the arbitration. Libananco also argues that it would be premature to decline the stay of enforcement, before the committee had a chance to hear the facts behind its request for annulment. Libananco stresses that the award will continue to accrue interest, and so Turkey will be no worse off if the award in not annulled.

For its part, Turkey complains that Libananco is a “shell”, behind which lay the Uzans, a wealthy Turkish family. “The Uzans are fugitives from justice that have accumulated enormous wealth by illegal means, in particular by committing massive fraud in the telecoms … and banking sector …” said Turkey. Turkey accuses the Uzans of using litigation as a form of harassment.

Turkey also points out that the award does not order payment of compound interest, thus dismissing Libananco’s assertion that a delay in payment would do no harm.

Tribunal balances interests

In its 7 May 2012 decision, the committee acknowledged that each party faced a potential burden depending on which way it decides. Libananco, for example, feared it would not recoup the award, should it be annulled. Turkey, similarly, said the backers of Libananco could not be trusted to respect the award.

However, on balance, the committee found that Libananco’s interest in staying enforcement outweighed those of Turkey’s. It also indicated the annulment proceedings were scheduled to proceed swiftly, and so a stay of enforcement would not last long.

In coming to its conclusion, the committee declined Turkey’s argument against the stay due to Libananco’s “vexatious character,” finding no basis that the request for annulment is “abusive.”

It also noted Turkey’s wish to bring “closure” to the dispute, but explained that “enforcement of the Award would not bring this proceeding to closure.”

Provisional measures denied

Citing Turkey’s alleged espionage, Libananco also requested provisional measures “to preserve the [Applicants] rights, including the right to due process of law, the right to a fair hearing, the right to confidentiality and legal privilege and, ultimately, the right to prepare and present its case without interference from the Respondent’s illicit espionage.”

Turkey countered that the ICSID Convention does not grant the committee the power to grant provisional measures, apart from ordering a stay of enforcement.

In a separate decision, the committee doubted that it held competence to grant provisional measures, but side-stepped the issue by first considering the necessity of Libananco’s request. The committee determined that it did not see a basis for the provisional measures, given that it lacked evidence that Turkey has, or will, spy on the applicants.

The members of the committee are Hans Danelius, Andres Rigo Sureda (President), and Eduardo Silva Romero.

The Decision on Applicant’s Request for a Continued Stay of Enforcement of the Award is available here: http://italaw.com/documents/LibanancoAnnulmentStay.pdf

The Decision on Applicant’s Request for Provisional Measures is available here: http://italaw.com/documents/LibanancoAnnulmentProvisionalMeasures.pdf

For a summary of the earlier jurisdictional award, see “Turkey defeats US$ 10.1 billion claim, as tribunal finds no ‘investment’ under the Energy Charter Treaty”, available here: http://www.IISD.org/ITN/2012/01/12/awards-and-decisions-6/