Awards and Decisions

Libya ordered to pay US$935 million to Kuwaiti company for cancelled investment project; jurisdiction established under Unified Agreement for the Investment of Arab Capital
Mohamed Abdulmohsen Al-Kharafi & Sons Co. v. Libya and others, Final Arbitral Award

Diana Rosert

A tribunal has ordered Libya to pay US$935 million in a dispute over a land-leasing contract for a tourism project—marking the second-largest known investment treaty award to date.

The March 22, 2013, award upheld the tribunal’s jurisdiction and ruled Libya responsible for breaches of contract, national law and the Unified Agreement for the Investment of Arab Capital in the Arab States (Unified Agreement). Libya’s nominee to the tribunal, Justice Mohamed El-Kamoudi El-Hafi, refused to sign the award.

Background

In 2006, the Libyan Ministry of Tourism approved an investment project proposed by Al-Kharafi & Sons Co. for the construction and operation of a tourism complex. Shortly after, the Kuwaiti company signed a 90-year land-leasing contract with the Tourism Development Authority, comprised of 24 hectares of state-owned land in Tajura, a city in the Tripoli district. The project was to start in 2007, but construction work never commenced. The Ministry of Economy annulled the project approval in 2010; as a result, the land-leasing contract was also invalidated.

Al-Kharafi & Sons Co. launched its claim against Libya and several authorities in 2011, with two main complaints. Firstly, the claimant asserted that the Tourism Development Authority did not hand over the property “free of occupancies and persons” as required by the contract, and that the Libyan State, through various authorities, was responsible for delaying construction. Secondly, the claimant alleged that annulment of the approval and the cancellation of the land-lease contract were both illegal. Considering that these acts and omissions constituted breaches and caused damages, the claimant demanded compensation from the Libya state.

A tribunal was instituted under the Unified Agreement under consideration of the arbitration clause contained in the land-leasing contract.

Background on the Unified Agreement

Libya and Kuwait ratified the Unified Agreement, to which many other Arab League members have acceded, in 1982. Besides capital liberalisation and protection provisions, the Agreement provides that disputes, including those between state parties and Arab investors, shall be settled through conciliation, arbitration or by the Arab Investment Court established for that purpose. The Agreement also states that the two disputing parties “may agree to resort to arbitration” if they cannot agree on conciliation; if the decision of a conciliation is not rendered within the required time or is not unanimously accepted by the parties. Notably, this is commonly considered not to provide the signatory states’ advance consent to arbitration.[1]

Tribunal assumes jurisdiction on basis of land-leasing contract and the Unified Agreement

The claimant argued that it had access to arbitration under the Unified Agreement by virtue of the arbitration clause contained in the land-leasing contract which referred to the Unified Agreement. The contract determined that disputes between the parties “arising from the interpretation or performance of the present contract during its validity period … shall be settled amicably” and, if this failed, “the dispute shall be referred to arbitration pursuant to the provisions of the Unified Agreement.”

The tribunal deemed that the wording of the contract clause established consent to arbitration under the Unified Agreement. “A fortiori, the two parties explicitly chose to resort to arbitration as provided for in Article (29) of the contract,” the tribunal reasoned.

Challenging jurisdiction under the Unified Agreement, Libya maintained that the project did not involve the transfer of Arab capital from Kuwait to Libya and therefore the “substantive scope for the application of this Agreement is not fulfilled ipso facto.” Aside from the undisputed fact that the construction works on the tourist complex never began, Libya pointed out that the claimant failed to deposit 10% of the established value of the investment project in a Libyan bank account as requested by the General Authority. While the claimant was able to show that it had paid 0.1% of the value to the Authority, Libya contended that was not a proof for the existence of an Arab investment.

Nonetheless, the tribunal determined that the Kuwaiti company’s payment of 0.1% of the investment value constituted a transfer of Arab capital, and the tribunal saw no legal obligation for the claimant to pay 10% at a minimum.

Libya also objected to the tribunal’s jurisdiction arguing that the case fell outside of the limited scope of the arbitration clause contained in the contract. In its view, the clause excluded disputes relating to non-performance, cancellation of the contract and “anything arising after its expiry and any disputes related to compensation claims for any damages.” It stated that “arbitration is a special judicial system arising from the will of the parties to resort thereto … this leads to conclude that the present claim does not fall within the jurisdiction of the arbitration Tribunal.”

Addressing this objection, the tribunal deemed that it was competent to rule on the “scope of extension of the arbitration clause” so as to cover the annulment of the contract and compensation for damages. Since it had already determined that the Unified Agreement applied to the dispute, the tribunal considered that the arbitration rules stated therein applied to the case, including Article 2.6 of the Unified Agreement’s Annex, which states that the “arbitral panel shall decide all matters related to its jurisdiction and shall determine its own procedure.” The tribunal interpreted this as giving it competence to rule on its own competence as well as the extension of scope of the contract clause.

Another jurisdictional objection related to the contract’s requirement of amicable settlement prior to arbitration. Libya contended that the claimant did not make serious efforts to fulfill it and asserted that the arbitration was therefore filed prematurely, while the claimant argued that it had attempted to settle the dispute amicably. The tribunal found that both parties “made amicable endeavors,” and since all endeavors failed, the claimant was permitted to file the arbitration.

Given that only the Tourism Development Authority was a signatory of the contract, Libya argued that the contract provisions could not be invoked against the Libyan government and the other authorities. Granting the claimant’s request to extend the arbitration clause to non-signatories of the contract, the tribunal determined that “the intervention of multiple government bodies and public institutions as well as ministries in the contract performance or termination” gave the contract a “governmental character.” However, it declined to include the Libyan Investment Authority as a disputing party, considering that, unlike the others, this institution was not involved in the dispute.

The tribunal further established that the land-leasing contract was a private law contract governed by the Libyan Civil Code, national laws on the Promotion of Foreign Capital Investment (Libyan Investment Law) and the Unified Agreement.

Libyan defendants found to have frustrated claimant’s project execution

With respect to the merits, the first contentious issue was whether the Tourism Development Authority had handed over the land to the claimant according to the terms of the contract. The contract signed by both parties stipulated that the tourism authority “undertakes to hand over … the plot of land free of any occupancies and persons, guarantees that there are no physical or legal impediments preventing the initiation of the project execution or operation during the usufruct period immediately upon the signature of this contract, and permit it to take physical possession thereof for the purpose of establishing the project.”

According to the claimant, the tourism authority failed to fulfill this contractual obligation, because other persons and businesses occupied the land and impeded the execution of the project from the outset. The claimant asserted that during several attempts to take over the land and build a fence, it was assaulted by municipal guards and other occupants. It alleged that the tourism authority was aware of these obstacles, but refrained from evacuating the land. Instead the authority demanded that the claimant stall the project until the issues were resolved and offered an alternative plot of land.

However, according to Libya, the claimant took over the site in 2007 “free of any occupancies or impediments.” It maintained that Al-Kharafi & Sons Co. was responsible for the delays due to its failure, among other things, to provide the authorities with final project designs, deposit 10% of the project value on a Libyan bank account, and apply for permits.

The tribunal found that “all the data and facts established” confirmed the claimant’s allegations that the land was not “free of occupancies,” and that Libyan authorities prevented it from starting the project. The tribunal also concluded that the claimant did not cause any “self-inflicted obstacles.” Indeed, it held that Libya’s offer to provide the Kuwaiti company with alternative land was “further proof of the Defendants’ failure.” The tribunal therefore ruled that Libya breached a primary obligation of the leasing contract, as well as the Libyan Civil Code that required it to adhere to such obligations. Furthermore, the tribunal noted that the case involved “administrative corruption.” Even if not “organized or deliberated” by the Libyan state, Libya had committed “gross negligence and disregard of investment rules.”

Decision to annul project considered to have led to “confiscation, liquidation, freezing and control of the investment”

The tribunal went on to consider the claimant’s assertion that the annulment of the project approval by the Ministry of Economy was an “illegal act” in violation of various Libyan laws and provisions of the Unified Agreement.

Libya argued that the ministry cancelled the approval due to a four-year delay in construction. It maintained that the step was taken in accordance with national laws as well as the contract, which in Article 24 expressly stated the authority’s right to terminate the contract if the project was not executed in time.

Meanwhile, the claimant argued that the “real reason” behind the annulment was that Libya neglected its obligation to hand over the land free of occupants.

The tribunal ruled that the annulment constituted a second serious violation of Libya’s obligations. While recalling that all evidence confirmed that Libya was responsible for the delay, it disproved Libya’s factual allegations concerning the claimant’s faults one by one. Examining liability under different law, it found that the annulment was “an arbitrary decision” that led to confiscation, liquidation and freezing of project which was prohibited by Libyan Investment Law and Article 9(1) of the Unified Agreement. The tribunal decided that the Libyan authorities were liable for those breaches and obliged to pay compensation according to the Libyan Civil Code.

US$935 awarded for lost profits, moral damages, and material losses and expenses

The tribunal ordered Libya to pay US$5 million for value of losses and expenses suffered by the Kuwaiti company, US$30 million for moral damages and US$900 million for “lost profits resulting from real and certain lost opportunities.”

It is noteworthy that, in the course of the proceeding, the claimant increased the compensation claim to more than US$2 billion covering lost future profits for 83 years, corresponding to the length of the revoked land-leasing contract. Originally, Al-Kharafi & Sons Co. had claimed US$55 million which it amended to US$1,144,930 billion in September 2012. Libya maintained that the company “incurred damages, if any, due to its own faults” and considered the compensation claim to be “characterized by corruption.”

Compensation for moral damages to claimant’s reputation awarded

The claimant demanded US$50 million in moral damages, in addition to US$5 million for material losses and expenses related to the opening of an office in Tripoli. It argued that it should receive this “merely symbolic” amount because the cancellation of the project damaged its high national and international reputation.

The Libyan defendants contested that moral damages had not occurred and pointed out that the claimant had not submitted proofs in this regard.

Ultimately, the tribunal decided that compensation for moral damages was permitted under Libyan law and that the claimant was entitled to it. It considered that the claimant suffered moral damages “to its reputation in the stock market, as well as in the business and construction markets in Kuwait and around the world.”

The tribunal’s decision on moral damages is an outlier in the field of investment arbitration. Moral damages claims have been raised in other investment treaty arbitrations, but tribunals commonly placed strict conditions on the validity of such claims. For instance, in Rompetrol v. Romania, the tribunal considered that moral damages were “subject to the usual rules of proof.” [2] It eventually rejected the claimant’s demand of US$46 million for moral damages “for loss of reputation and creditworthiness.” The tribunal in Arif v. Moldova[3] dismissed a moral damages claim of €5 million, holding that the “different actions did not reach a level of gravity and intensity” sufficient to justify it.

US$2 billion considered “sound and convincing” estimation of future lost profits

The company’s claim of US$2 billion for lost profits was based on four reports that Ernst & Young, Prime Global (Khaled El-Ghannam), Habib Khalil El-Masri and Ahmad Ghatour & Partners prepared on the claimant’s request and based on documents submitted by it.

Libya asserted that the reports lacked credibility because they were based solely on data and information provided by the claimant, which were not independently verified. Libya did not, however, present its own expert estimations.

Firstly, the tribunal determined that the Libyan Civil Code (Article 224), supported by Libyan Supreme Court rulings, covered compensation for lost profits. It deemed that the UNIDROIT Principles of International Commercial Contracts confirmed that it had discretion to decide on such issues. It then interpreted the Libyan law on compensation for damages, concluding that the lost profit claim was valid only if damages resulted from opportunities that were “real and certain.”

Secondly, the tribunal found that the submitted reports on lost profits were “scientific and unbiased reports” by firms with good reputations. The tribunal noted that Libya’s criticism of the reports was not on “the same level of expertise,” since it had not submitted own expert reports disproving any of the findings.

Based on those conclusions, the tribunal decided that the reports with estimations ranging from US$1.7 to 2.6 billion were “sound and convincing.” Two of the experts that had drafted reports, Khaled El-Ghannam and Habib Khalil El-Masri, confirmed during a hearing that the amounts were “certain lost profits” and constituted a “minimum” of what the claimant “would have otherwise certainly realized in the normal conditions currently prevailing in Libya.”

However, instead of awarding the arithmetic average of US$2.1 billion, the tribunal decided to reduce the amount of compensation for lost profits, “by virtue of its discretionary power,” to US$900 million. In light of the Libyan revolution, the tribunal noted that “this arbitration will serve as an incentive to government agencies” and “reassure the Arab investors.”

Lost profit claims are not unusual in treaty or commercial arbitration, yet the amount awarded in under the circumstances of the present case appears to be distinct. For example, in a seminal case, PSEG v. Turkey, the tribunal declined to grant the claimants compensation for future lost profits of US$223.742 million for a power plant project that was not constructed.[4] The PSEG award recalled that other investment tribunals were also hesitant to award lost profits for not established businesses that, consequently, lacked historical evidence for profits.

The tribunal is composed of Dr. Abdel Hamid El-Ahdab (presiding arbitrator), Dr. Ibrahim Fawzi (claimant’s nominee) and Justice Mohamed El-Kamoudi El-Hafi (respondent’s nominee).

The award is available at http://www.italaw.com/sites/default/files/case-documents/italaw1554.pdf

ICSID tribunal finds Venezuela liable for not negotiating market value compensation for takings in good faith; other claims rejected
ConocoPhillips Petrozuata B.V., ConocoPhillips Hamaca B.V. and ConocoPhillips Gulf of Paria B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/30, Decision on Jurisdiction and Merits

Diana Rosert

A tribunal has issued a decision on jurisdiction and merits in a claim by subsidiaries of the U.S. energy company ConocoPhillips against Venezuela some 5 years after the case was registered at ICSID.

The tribunal’s September 3, 2013, ruling unanimously dismisses parts of ConocoPhillips’ claims, both on jurisdiction and merits. However, Judge Kenneth Keith and L. Yves Fortier found a breach of the expropriation provision contained in the Netherlands-Venezuela BIT, while the third arbitrator, Prof. Georges Abi-Saab, dissented from the majority finding. The majority’s decision on damages is forthcoming.

Background

ConocoPhillips’ claims relate to its interests in three on- and off-shore oil projects in Venezuela: the Petrozuata Project, the Hamaca Project and the Corocoro Project. The Dutch incorporated subsidiaries of ConocoPhillips, which are the claimants in this case, invoke provisions of the Netherlands-Venezuela BIT, while the claims of the US parent company are based on the Venezuelan Law on the Promotion and Protection of Investments (Investment Law).

ConocoPhillips alleged that Venezuela violated fair and equitable treatment (FET) obligations and committed an unlawful expropriation. These complaints are linked to changes to the fiscal regime that applied to the oil projects, as well as migration and nationalization laws that involved a partial transfer of the claimants’ rights to the national oil company, PdVSA, in order to establish mixed companies in the oil sector.

Negotiations between Venezuela and ConocoPhillips took place regarding the terms of the transfer, compensation, and the claimants’ participation in the new mixed companies. However, after failing to reach an agreement after four months, the period foreseen in the nationalization decree for that purpose, Venezuela nationalized ConocoPhillips’ interests in the three projects. The amount owed in compensation, and other related issues, remained unsettled.

Against this background, ConocoPhillips originally claimed damages amounting to some US$30 billion, while Venezuela insisted that “the claims […] should be dismissed in their entirety.”

Although not addressed in the tribunal’s decision, it is noteworthy that Venezuela terminated its BIT with the Netherlands in 2008 and withdrew from the ICSID Convention in 2012.

No jurisdiction over ConocoPhillips’ claims under Venezuelan Investment Law

The tribunal dismissed the claims of the U.S. parent company with respect to its “loss of future tax credits” for lack of jurisdiction under Venezuela’s Investment Law. Controversy surrounded the question whether Article 22 of the Investment Law conferred jurisdiction to the ICSID tribunal.

The article in question refers to disputes arising between an international investor from a contracting party of a BIT with Venezuela, as well as to disputes under ICSID, which was understood by the claimants as containing Venezuela’s unilateral consent to ICSID arbitration, an assertion that Venezuela contested.

The tribunal concluded that “Venezuela has not consented to ICSID jurisdiction by enacting that provision.” Given this decision, the tribunal did not further assess Venezuela’s contention that ConocoPhillips was not an “international investor” in the sense of Article 22. The tribunal continued by addressing only the Dutch claimants’ claims based on the BIT.

Notably, claimants in three other arbitrations against Venezuela—Mobil, Cemex and Tidewater—had also attempted to establish jurisdiction on the ambiguous wording of Article 22, but the respective tribunals ruled against them.[5]

Jurisdiction over BIT claims accepted despite allegations of treaty abuse

Venezuela also raised objections concerning the tribunal’s jurisdiction under the BIT, asserting that the U.S. company established its three Dutch subsidiaries and transferred ownership to them solely to gain access to ICSID. In support of its argument, Venezuela alleged that the restructuring took place only after some of the disputed measures had occurred, meaning that “the Dutch claimants were not in existence or had not been inserted into the corporate chain of ownership” at that time. Venezuela also cited other ICSID cases that addressed “abuse of the corporate form and blatant treaty or forum shopping.”

In response, the claimants asserted that “no principle of law” prohibited a restructuring “to benefit from the protection of another country’s laws” and countered that it was carried out “before the changes were made in the tax law and before the investments were confiscated.”

The tribunal confirmed that access to ICSID was “the only business purpose” of the restructuring, but it rejected Venezuela’s objections. In its view, it was decisive that “the transfers of ownership in 2005 and 2006 did not attempt to transfer any right or claim arising under ICSID or a BIT from one owner to another.” According to the tribunal, no ICSID or BIT claim existed or was “in prospect” at that time. The tribunal further stated that ConocoPhillips’ continued expenditure on the projects after the restructuring was a “very weighty” factor speaking against treaty abuse.

It then decided that jurisdiction only existed over claims related to measures that entered into force after the restructuring of the respective projects. Accordingly, all three subsidiaries were allowed to claim breaches in respect of an income tax increase in 2007, the expropriation, and migration of interests. However, the tribunal determined that ConocoPhillips Hamaca could make no claim concerning an increase of the extraction tax in 2006 which entered into force before the restructuring of the Hamaca project took place.

Finding that the BIT’s definition of investment was “written in broad terms,” the tribunal briefly rejected Venezuela’s contention that the investments of two companies, ConocoPhillips Hamaca and Gulf of Paria, were not covered by the BIT’s investment definition, because they allegedly constituted indirect investments owned through intermediaries.

FET obligation in BIT considered not applicable to claims relating to tax measures

While ConocoPhillips claimed that several tax measures taken by Venezuela breached FET obligations, some contentions surrounded the question whether, in the first place, such matters fell within the scope of the FET provision expressed in Article 3 of the BIT. Article 4 of the BIT specifically addressed “taxes, fees, charges, and … fiscal deductions and exemptions” but provided for non-discriminatory treatment, in the absence of FET. Assessing the interaction between the two articles at length, the tribunal concluded that ConocoPhillips’ taxation claims were not covered by the FET provision. The disputed fiscal measures, understood to encompass royalties, were found to be subject to Article 4 exclusively. Given that ConocoPhillips did not claim breaches of the latter, the tribunal did not consider the issue any further.

Majority finds breach of expropriation provision in respect of “good faith” negotiations and “market value compensation”

At the outset, the tribunal noted that ConocoPhillips did not call into question “the Respondent’s sovereign prerogative to nationalize,” yet alleged that the expropriation was unlawful in that it breached conditions for expropriation set out in Article 6 of the BIT. Venezuela, in response, maintained the nationalization’s lawfulness and denied liability.

Following a condition established in the BIT’s Article 6(b), the tribunal assessed whether Venezuela’s taking of assets breached an “undertaking” or “promise” that it allegedly made to the claimants in respect of taxation. It deemed that the claimants did not provide evidence of the existence of such a promise. Instead of substantiating “express stabilization commitments” or “fiscal guarantees,” ConocoPhillips invoked “legitimate expectations.” However, since the tribunal had ruled out the availability of FET provisions with respect to fiscal claims, it reasoned that the taking was not unlawful in the sense of Article 6(b).

The tribunal also dismissed ConocoPhillips’ claims that Venezuela’s measures between 2004 and 2007, including changes to the fiscal regime, constituted a single unlawful taking that should make it necessary for the tribunal to calculate compensation based on the value of assets under the original royalty and income tax rate regime. Recalling that such measures were outside of the scope of FET and were not in breach of the Article applicable to taxation, the tribunal decided that they were not relevant for the determination of quantum.

However, the tribunal found that Venezuela breached condition 6(c) of the expropriation provision in that it failed to negotiate in good faith with claimants over market-value compensation. Venezuela required oil companies, including the claimants, to migrate to mixed contracts or relinquish their rights in the projects. The terms of the transfer and the amount of compensation were to be negotiated between Venezuela and the claimants within a fixed period of four months. No agreement was reached within or after the period and the compensation issue remained unresolved, while the claimants’ assets were fully nationalised in 2007.

Venezuela maintained that “ConocoPhillips refused to participate in the negotiation process in any meaningful manner,” while it made attempts to discuss “reasonable compensation.” Contrary to this, the claimants alleged that the amounts of compensation offered by Venezuela during negotiations were “far below” the fair market value prescribed by the BIT and rather corresponded to the assets’ book value which was deemed not to be an “adequate” standard of compensation.

Taking into consideration the accounts of two key witnesses for both sides, former President of ConocoPhillips Latin America, Mr. Lyons, and former Vice-Minister of Hydrocarbons, Dr. Mommer, the tribunal inferred that during meetings and through letters to Venezuelan ministers and officials, ConocoPhillips raised critical issues with respect to fair and book market valuation of assets that Venezuela indeed failed to respond to. For this reason it determined that “Venezuela at that time was not negotiating in good faith by reference to the standard of “market value” set out in the BIT.” The tribunal also considered the fact that Venezuela did not make compensation offers for Corocoro, the third project.

Addressing a crucial issue for the amount of compensation, it determined that the valuation date for the assets should be the date of the award and not, as demanded by Venezuela, the date of the taking. Presumably, the latter would have led to lower compensation. The determination of quantum as well as the allocation of costs and expenses was postponed to a later stage.

The tribunal is composed of Judge Kenneth Keith (presiding arbitrator), L. Yves Fortier (claimants’ nominee) and Prof. Georges Abi-Saab (respondent’s nominee).

The award is available at http://italaw.com/sites/default/files/case-documents/italaw1569.pdf

Claim against Romania dismissed for lack of jurisdiction; claimants failed to abide by domestic litigation requirement
Ömer Dede and Serdar Elhüseyni v. Romania, ICSID Case No. ARB/10/22

Maria Antonieta Merino

In a decision dated September 5, 2013, a Turkish claimants’ case before an ICSID tribunal was dismissed for failing to first pursue the dispute before Romanian’s domestic courts.

Background

The claimants, Ömer Dede and Serdar Elhüseyni, acquired a 55% share in SC IMUM SA, a producer of agricultural equipment. As a condition of the share purchase agreement, the claimants were required to provide guarantees securing the performance of certain investment obligations.

Subsequent to the share purchase agreement, the Romanian Authority for Privatization and Management of State Ownership ordered an inspection of the company. Alleging non-fulfillment of several obligations relating to the share purchase agreement, the authority requested that the claimants’ shares be transferred to its name. Soon afterwards, the company declared bankruptcy.

The claimants contended that the confiscation of their shares amounted to an illegal expropriation in violation of the 1996 version Romania-Turkey BIT (two versions of the Romania-Turkey BIT exist, and the claimants’ relied on the earlier version).

Recourse to domestic courts deemed a pre-condition to accessing arbitration

Romania argued that the tribunal lacked jurisdiction over the dispute based on Articles 6(2) and 6(4) of the BIT, which require a good-faith attempt at amiable settlement and recourse to local courts, respectively.

However, the claimants attempted to draw a distinction between types of arbitrable disputes based on the use of different terms in the BIT. While Article 6(1) refers to “investment disputes,” Article 6(2) refers to “any dispute” arising out of an investment. Considering this distinction, the claimants asserted that the investor could directly raise an “investment dispute” and submit it to ICSID, while the precondition to arbitration exists applies to “any dispute,” which encompasses a broader category of controversies than the defined term “investment disputes.”

The tribunal rejected this line of reasoning. It determined that the BIT does not comprise any additional category of controversy other than an “investment dispute” defined as “involving either (i) the interpretation or application of any investment authorization or (ii) the breach of any right conferred by the BIT.” In both cases the definition of an “investment dispute” does not provide the investor the right to submit a dispute directly to ICSID.

Moreover, the tribunal confirmed that the entitlement to arbitrate is subject to express conditions of either exhaustion of local remedies or submission to local courts for a minimum of a year.

Tribunal rejects satisfaction of jurisdictional preconditions

Alternatively, the claimants asserted that even if the BIT contained jurisdictional preconditions, these were satisfied. However, in this case the tribunal determined that the claimants neither exhausted local remedies, nor litigated the dispute in local courts for a year.

Regarding the exhaustion of local remedies, the tribunal noted that the claimants could have sought relief through one of two general courses of action under Romanian law: (1) actions to obtain performance and (2) action whereby claimants could have sought termination of the SPA and compensation for damages. Yet the claimants did not pursue either course.

Failures on futility and MFN arguments

In cases where claimants have failed to abide by pre-arbitration requirements, it is common for them argue that: a) the most-favoured nation provision allows them to ‘borrow’ from third-party treaties that do not contain such requirements; or that litigating in local courts would be futile. However, neither of those arguments was raised by the claimants; a fact noted by the tribunal.

The scope of the tribunal’s decision

Although the parties raised other arguments, the tribunal determined that since it lacked competence over the dispute, it was unnecessary and unwise to give its opinion on matters not pertinent to its conclusion.

Referring to the Article 48(3) of the ICSID Convention, which provides that the award shall deal with “every question submitted,” the tribunal reasoned that this does not mean that it should comment on arguments that will have no effect on the award. Conversely, the tribunal expressed its disagreement with awards that addressed issues unnecessarily, considering such decisions inappropriate and needless.

Costs

None of the factors that justify cost allocation (such as unreasonable argument, exaggerated claim, or obstructionist tactics) was present in the arbitration, and the tribunal considered both parties conducted themselves in a way that furthered procedural efficiency.

Consequently, the tribunal concluded each side should bear its own legal expenses, and the costs of the arbitration should be divided on an equal basis.

The tribunal is composed of Professor William W. Park (President), Professor Brigitte Stern (respondent’s appointee) and Dr. Nicolas Herzog (claimant’s appointee).

The award is available here: http://italaw.com/sites/default/files/case-documents/italaw5010.pdf

UNCITRAL tribunal declines jurisdiction in claim against Kazakhstan due to a lack of valid agreement to arbitration
Ruby Roz Agricol LLP v. The Republic of Kazakhstan, Ad hoc Tribunal (UNCITRAL)

Marina Ruete

An UNCITRAL tribunal declined jurisdiction on August 1st, 2013, in a dispute between a poultry company and the Republic of Kazakhstan, having determined that there was no valid agreement to arbitrate.

The claimant, Ruby Roz Agricol LLP, had sought US$214,705,778 in damages.

Background

The Kazakh State Investment Agency entered into an investment agreement with the claimant in 1999. Owned at the time by Mr. Badaoui and his wife, the investment was encouraged by tax concessions and other preferences.

The company later became embroiled in a political dispute between President Nursultan Nazarbayev and his former son-in-law, Rakhat Aliyev. Kazakhstan asserted that the company was forcefully sold to Kassem Omar, a businessman with connections with Mr. Aliyev, while Ruby Roz alleged unlawful interference from the government as part of a reprisal against Mr. Aliyev. Intimidations continued during the proceedings, frustrating the presence of witnesses during hearings.

Consent to arbitration lapses after foreign investment law is repealed

The tribunal’s decision on jurisdiction focused whether there was a valid agreement to arbitrate in Kazakhstan’s domestic legislation and an investment contract.

The claimant argued that Kazakhstan’s earlier foreign investment law – it was repealed in 2003 and replaced with a new law — contains Kazakhstan´s standing offer of consent to international arbitration.

While Kazakhstan’s new investment law does not include a standing offer to arbitrate investment disputes, the claimant argued it could rely on the repealed investment law given its stabilization clause.

Specifically, Article 6 of the old investment law provided that, in the case of changes in legislation or international treaties, foreign investments will be treated in accordance with the legislation in force at the time of the investment for a period of ten years.

In Kazakhstan’s opinion, the old investment law, as a piece of domestic legislation, could be amended or repealed as the government wishes. In the case the tribunal considered that the stabilization clause survived the 2003 repeal, Kazakhstan offered the alternate argument that the ten-year period had, in any case, already expired.

The tribunal agreed with Kazakhstan’s position, concluding that the offer of consent lapsed together with the repeal of the foreign investment law. It also pointed out that the right to arbitration needed the claimant´s written consent and this occurred only in June 2010.

Notably, the tribunal disagreed with the ICSID tribunal in Rumeli Teleko & Telsim Mobil v. Kazakhstan, which decided that the claimant had an “accrued right” to arbitrate under the same foreign investment law, and took the repealed law as a basis for its jurisdiction.

Ruby Roz is not a “foreign investor”

Kazakhstan also argued that the repealed foreign investment law and the investment agreement provided consent to arbitration only in the case of disputes with a foreign investor, which Ruby Roz was not.  On this point the tribunal also agreed, finding that Ruby Roz was not incorporated under the laws of a foreign jurisdiction.

On the base that the stabilization period expired and the claimant was not a foreign investor, the tribunal decided there was no valid agreement to arbitrate and, consequently, that it lacked jurisdiction.

On the issue of costs, the tribunal drew up a separate procedural order with its decision on the arbitration costs and invited the parties to submit comments.

The tribunal is composed of Mr. Alan Redfurn (president), Mr. Bruno Boesch (respondent´s appointee), and Mr. Joseph Neuhaus (claimant´s appointee).

The decision is available here: http://www.italaw.com/sites/default/files/case-documents/italaw1558.pdf


[1] As Walid Ben Hamida puts it, arbitration under the Unified Agreement is “subordinated to an agreement between the parties.” See Walid Ben Hamida (2006), The First Arab Investment Court Decision, Journal of World Investment & Trade, Vol. 6, Issue 5, pp. 699-721 (p. 709).

[2] The Rompetrol Group N.V. v. Romania, ICSID Case No. ARB/06/3, Award.

[3] Mr. Franck Charles Arif v. Republic of Moldova, ICSID Case No. ARB/11/23, Award.

[4] PSEG Global Inc. and Konya Ilgin Elektrik Uretim ve Ticaret Limited Sirketi v. Turkey, ICSID Case No. ARB/02/5, Award.

[5] Mobil Corporation et al. v. Venezuela, ICSID Case No. ARB/07/27, Decision on Jurisdiction; CEMEX Caracas Investments B.V. et al. v. Venezuela, ICSID Case No. ARB/08/15, Decision on Jurisdiction; Tidewater Inc. et al. v. Venezuela, ICSID Case No. ARB/10/5, Decision on Jurisdiction.

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