Karkey Karadenize Elektrik Uretim A.S. v. Islamic Republic of Pakistan,Case No. ARB/13/1
On August 22, 2017, an ICSID tribunal issued an award in the case filed by Turkish company Karkey Karadenize Elektrik Uretim A.S. (Karkey) against Pakistan under the Pakistan–Turkey approximately USD 800 million (including interest), while dismissing the counterclaim brought by Pakistan against Karkey.. At the provisional measures stage, the tribunal had ordered Pakistan to comply with its international obligations. Ultimately, the tribunal awarded Karkey
Following a power generation crisis in Pakistan, in December 2008 Karkey secured a contract with Lakhra Generation Company (Lakhra), an enterprise owned and controlled by Pakistan, to perform a rental power generation project. The contract was amended in April 2009.
Due to allegations of non-compliance of the contract with Pakistani public procurement rules, in September 2009 the Chief Justice of the Supreme Court of Pakistan registered a case on irregularities in the awarding of the contract. On March 30, 2012, Karkey served a notice of termination of the contract due to Lakhra’s failure to make the payments it was obligated to under the contract. On the same date, the Supreme Court of Pakistan rendered a decision that the contract had been awarded in breach of the procurement rules and was thus void ab initio, ordering the competent authorities to investigate corruption in the awarding of the contract. Shortly thereafter, Karkey’s bank account in Pakistan was frozen, and on April 3, 2012, Karkey was notified that its vessels were prohibited from leaving their moored position until further notice.
Karkey served a notice of dispute according to the Pakistan–Turkey BIT on May 12, 2012, and on January 13, 2013, it lodged its request for arbitration. It argued that Pakistan had breached the BIT by expropriating its investment and violating its right to the free transfer of its investment. In addition, it sought to bring several additional claims under the, and umbrella clauses. Karkey asked for damages exceeding USD 1.4 billion, plus interest (para. 234).
Red flags are insufficient to prove corruption in securing investment
Pakistan objected to the tribunal’s jurisdiction, alleging that Karkey had secured the contract due to corruption. In particular, it argued that Karkey retained Zulqarnain, its local representative, to act as an illegal lobbyist to induce public officials to grant the contract to Karkey (para. 506). Karkey rejected Pakistan’s claims and substantiated that Zulqarnain’s services were plausible and necessary for starting up its business in Pakistan. The tribunal found that Pakistan could not demonstrate Zulqarnain’s involvement “in anything that could qualify as corruption” (para. 517).
Moreover, Pakistan raised 17 questions or “red flags,” which, if not rebutted by Karkey, would indicate that the investment had been made through corruption. However, the tribunal found that these questions did not shift the burden of proof to Karkey. It concluded that it was “unable to find in the elements included in Pakistan’s questions ‘red flags’ suggestive of corruption…still less any positive proof of corruption” (para. 521).
Lakhra acts are attributable to Pakistan
Karkey submitted that Pakistan induced Lakhra to conclude the contract and its amendment and to fail to make its payment under the contract. Pakistan, in turn, claimed that Lakhra is an independent body from the Pakistani government.
The tribunal found that Pakistan designated Lakhra to be the buyer of electricity services from Karkey. Further, according to the tribunal, Pakistan determined Lakhra’s commitments under the contract. Accordingly, it found that Pakistan instructed and directed Lakhra, and thus Lakhra’s acts are attributable to Pakistan under international law.
Karkey did not obtain its investment via fraud
According to Pakistan, Karkey confirmed that it would perform its commitments under the contract within 180 days from the award of the contract but failed to perform. Thus, Pakistan argued that this was a misrepresentation by Karkey to secure the contract. The tribunal noted that Pakistan did not perform its obligations under the contract and that this would have affected Karkey’s ability to execute the contract on schedule. Likewise, due to logistical considerations, the tribunal reasoned that it would be impractical to consider Karkey’s estimation of the time of performance as accurate. Hence, the tribunal concluded that Karkey’s affirmation was a mistake rather than a misrepresentation.
Pakistan is estopped from claiming that Karkey secured its investment via misprocurement
Pakistan contended that the contract was procured in breach of Pakistani procurement laws and rules. However, Karkey rejected this allegation and submitted that the tribunal shall dismiss this claim based on the principle of estoppel. The tribunal agreed with Karkey, highlighting that the bidding process, the contract and its amendments were all performed under the supervision of Pakistani authorities. The tribunal indicated that “Pakistan’s own witness, Mr. Khan, admitted at the Hearing that Pakistan is defending the Contract before the highest court of Pakistan, while at the same time attacking it in this arbitration” (para. 626).
Pakistan expropriated Karkey’s investment via the Supreme Court’s judgment
Karkey argued that Pakistan expropriated its investment via the Pakistani judicial, administrative and executive branches. However, Pakistan rebutted that Karkey failed to show substantial evidence of the deprivation of its investment and that its purported contractual rights may not be subject to expropriation, having been rendered as void ab initio by the Pakistani Supreme Court.
According to the tribunal, the reasoning of the Supreme Court’s judgment relied heavily on the flawed understanding of a parliamentarian, Mr. Salah Hayat, that Pakistan had enough generation power, though this was contrary to a statement by the Pakistani Electric Power Company (PEPCO). Moreover, the judgment assumed an identical liability on all sponsors of rental power projects regardless of the substantial differences between each project. The tribunal found the judgment of the Supreme Court to be arbitrary, given that, in the tribunal’s view, the judgment failed to define “with some particularity the evidential and legal basis” of the liability it imposed (para. 554). Furthermore, it concluded that the judgment deprived Karkey of its enjoyment of its rights under the contract (para. 648).
The tribunal also concluded that Pakistan breached its free transfer obligations under the BIT, but dismissed all other claims based on the MFN, FET and umbrella clauses, “as the damages resulting from these alleged breaches and from the expropriation/free transfer violation would be the same” (para. 657). It ordered Pakistan to pay Karkey, under several heads of damage, a total of over USD 490 million, plus interest. In addition, it ordered Pakistan to pay USD 10 million toward Karkey’s legal costs and expenses and over USD 300,000 as reimbursement for Karkey’s share of the arbitration costs.
Tribunal without jurisdiction to hear Pakistan’s counterclaim
Pakistan intended to bring a counterclaim against Karkey to seek from the tribunal a declaration acknowledging that the contract was void ab initio or, in the alternative, to advance claims for damages arising out of Karkey’s alleged misrepresentations and breaches of contract. According to Pakistan, Karkey had already consented to counterclaims when it filed its claims with ICSID; once the tribunal asserted jurisdiction over Karkey’s claims, it would automatically exert jurisdiction over Pakistan’s counterclaims (para. 1007).
The tribunal noted that the BIT did not provide for the possibility of counterclaims and that “most ICSID tribunals have not found the theory of ipso facto consent to be sufficient to conclude that an investor’s consent to ICSID counterclaims is automatic” (para. 1015). Accordingly, the tribunal decided that it had no jurisdiction over Pakistan’s counterclaim.
Notes: The tribunal was composed of Yves Derains (president appointed by the Chairman of the ICSID Administrative Council, French national), David A. O. Edward (claimant’s appointee, British national) and Horacio A. Grigera Naón (respondent’s appointee, Argentinian national). The award is available in English at https://www.italaw.com/sites/default/files/case-documents/italaw9767.pdf
Amr Arafa Hasaan is an alumnus of the Graduate Institute of Geneva and the University of Geneva, and Counsellor at the Egyptian State Lawsuits Authority.