Parkerings v. Lithuania

Parkerings–Compagniet AS v. Republic of Lithuania, ICSID Case No. ARB/05/8

Award available at https://www.italaw.com/cases/812

Keywords

Broad dispute resolution provision, cultural measures, due diligence, environmental measures, exhaustion of remedies, expropriation, fair and equitable treatment, good faith, investor obligations, jurisdiction, legitimate expectations, like circumstances, most favoured nation treatment, protection

Key dates

Request for Arbitration: 11 March 2005

Constitution of Tribunal: 12 October 2005

Award: 11 September 2007

Arbitrators

Dr. Laurent Lévy (president)

Julian D. M. Lew, QC (claimant appointee)

Hon. Marc Lalonde, PC, OC, QC (respondent appointee)

Forum and applicable procedural rules

International Centre for Settlement of Investment Disputes (ICSID)

ICSID Rules of Procedure for Arbitration Proceedings

Applicable treaty

Norway–Lithuania Bilateral Investment Treaty (BIT)

Alleged treaty violations

  • Equitable and reasonable treatment/fair and equitable treatment
  • Expropriation
  • Most favoured nation treatment
  • Protection/full protection and security

Other legal issues raised

  • Interpretation—reference to other bodies/principles of law
  • Investor obligations—due diligence
  • Investor obligations—exhaustion of remedies
  • Jurisdiction—broad dispute resolution provision

1.0 Case Summary

1.1 Factual background

On December 30, 1999, the Lithuanian city of Vilnius (“the City”) and the Egapris Consortium (a group of entities that included the Claimant’s wholly- owned Lithuanian subsidiary) signed an agreement (“the Agreement”) pursuant to which the Egapris Consortium would design, build and operate a “modern, integrated parking system” in the City (paras. 51–52).

In relevant part, the Agreement required the Egapris Consortium to develop and secure City approval of a public parking plan; design, construct and operate multiple multi-storey car parks (MSCPs); collect parking fees and penalties; and transfer a portion of the sums collected and a separate fixed fee to the City (paras. 96–105). In turn, the Agreement obligated the City to, among other things, assign the Egapris Consortium the right to collect local charges and penalties for parking and provide the Egapris Consortium with information necessary to prepare the parking plan (paras. 94–97).

Subsequent to the Agreement’s execution, multiple developments impaired its performance. In particular, (1) the National Government successfully challenged aspects of the Agreement in court on the grounds that allowing the Egapris Consortium to collect and retain a portion of the parking fees violated national law (paras. 123–126, 180), (2) the National Government enacted a decree restricting municipalities’ authority to enforce parking violations (paras. 130–132, 178, 192), (3) Parliament passed legislation limiting municipalities’ power to contract with private entities (paras. 133–134, 157–166), and (4) various government agencies objected to the Egapris Consortium’s proposed development of an MSCP in the City’s historic Old Town, an area designated as a World Heritage site by the United Nations Educational, Scientific and Cultural Organization (UNESCO) (paras. 135–156, 389). Due to those issues regarding the legality of various key activities contemplated by the Agreement, the parties attempted to renegotiate the deal (paras. 172–187). Yet in January 21, 2004, aer more than a year of negotiations, the City decided to terminate the Agreement (para. 188).

1.2 Summary of legal issues and award

The Claimant, Parkerings–Compagniet AS (“Parkerings”), initiated its ICSID action on the grounds that in negotiating, performing and terminating the Agreement, Lithuania (through its central and municipal authorities) breached its obligations to Parkerings under the governing bilateral investment treaty (BIT) between Lithuania and Norway. More specifically, Parkerings argued that Lithuania violated its obligations under the BIT to (1) grant the investment equitable and reasonable treatment, (2) protect the investment, (3) treat the investor no less favourably than it treated investors from third states, and (4) pay compensation for indirectly expropriating the investor’s property (para. 197). Parkerings asserted that the ICSID Tribunal had jurisdiction over the case because the governing BIT allowed parties to submit to ICSID any disputes arising “in connection with” covered investments (para. 236).

After ruling that it had jurisdiction over the case, the ICSID Tribunal rejected each of Parkerings’ four claims.

2.0 Select Legal Issues

The Tribunal’s treatment of Parkerings’ four claims has several notable implications for sustainable development. In particular, in its examination of the equitable and reasonable treatment standard, Parkerings elaborates upon states’ regulatory flexibility and investors’ obligations under international investment law; in its analysis of the most favoured nation (MFN) obligation, Parkerings illustrates how states may take social and environmental concerns into account in distinguishing between foreign investors. And throughout the case, the Tribunal addresses whether and to what extent contract-based investor–state disputes should be resolved in appropriate local fora before being pursued as treaty claims before international tribunals. These issues are discussed more fully below.

2.1 Equitable and  reasonable treatment/fair and equitable treatment: Protecting investors’ legitimate expectations

Parkerings contended that Lithuania violated the “equitable and reasonable treatment” (fair and equitable treatment, or FET)[1]standard because, among other failings, Lithuania failed to maintain a stable and predictable legal framework and consequently frustrated Parkerings’ legitimate expectations (paras. 321–322). Evaluating that claim, the Tribunal began by stating that an investor’s expectations are generally only legitimate and protectable under international law if they arise from either the host state’s explicit promises or implicit assurances that the “investor took into account in making the investment” (para. 331). The Tribunal also emphasized that investors should expect legislative and regulatory changes to affect their investments, and must exercise due diligence and structure those investments to ensure that they can “adapt…to the potential changes of legal environment” (para. 333); “any businessman or investor knows that laws will evolve over time. What is prohibited however is for a state to act unfairly, unreasonably or inequitably in the exercise of its legislative power” (paras. 332, 337).

Based on those considerations, the Tribunal noted there was no evidence that Lithuania had “give[n] any explicit or implicit promise that the legal framework of the Agreement would remain unchanged” (para. 335). The Agreement contained no “provision stabilizing the [applicable] legal regime” and specifically “exempt[ed] the City from responsibility for actions taken by the Lithuanian Government” (para. 324). Additionally, as explained by the Tribunal, given that the country was one in transition at the time of the investment, “legislative changes, far from being unpredictable, were in fact to be regarded as likely” (para. 335). Consequently, “no expectation that the laws would remain unchanged was legitimate” (para. 335).

Parkerings’ FET analysis thus suggests that investors are responsible for assessing the certainty of host states’ specific political circumstances and legal frameworks and for contractually protecting themselves against perceived and real risks (paras. 333–335). The legitimacy of investors’ expectations depends on the investors’ exercise of due diligence (para. 333). States, in comparison, do not owe a general duty under international law to inform investors about their own legal concerns or regulatory uncertainties (paras. 340–342, 345–346). Unless a state has specifically contracted away its right to regulate through a “stabilization” clause or there is evidence that the state enacted its measure(s) “specifically to prejudice” a foreign investment, it may alter its laws and regulations affecting foreign investments (paras. 332–337).

That conclusion has several key implications. For one, the Tribunal’s language regarding contractual “stabilization” clauses indicates that the terms of an applicable contract will be relevant to assessing whether there has been a breach of the FET obligation, and further suggests that existence of “stabilization” clauses may be necessaryfor an investor’s expectations about the stability of the legal framework to be legitimate. The Tribunal, however, also makes clear elsewhere in its decision that contract breaches (which could include breaches of stabilization obligations) are generally not sufficientto give rise to FET violations (paras. 344, 360–361, 448).

Moreover, the Tribunal’s language regarding measures aiming “specifically to prejudice” foreign investments indicates that the state’s intent in enacting allegedly offending measures may be important when determining whether the measures will be deemed unfair and inequitable, in violation of international law (para. 337). In this respect, Parkerings arguably diverges from a number of other cases holding that even measures enacted in good faith may be inconsistent with the FET obligation if they harm covered investments.[2]

2.2 Most favoured nation obligation: Permissible differentiation between investors

Another significant aspect of this decision is that, when analyzing whether Lithuania violated the MFN obligation, the Tribunal indicated states may validly differentiate between investors based on (1) the social, cultural and environmental impacts of the investors’ investment projects, and (2) the costs and benefits the investors’ projects would provide for the host state (paras. 392–396, 410, 430).

Parkerings had claimed Lithuania violated the BIT’s MFN provision by according more favourable treatment to Pinus Proprius, another foreign investor in allegedly similar circumstances to the Egapris Consortium. Parkerings argued there were two examples of purportedly improper disparate treatment: (1) the City contracted with Pinus Proprius to build an MSCP in the Old Town, but had rejected Parkerings’ proposal to construct an MSCP in a similar area; and (2) the City sought to avoid legal restrictions on contracting with private entities by entering into a “Cooperation Agreement” with Pinus Proprius but refused to conclude such an agreement with Parkerings (para. 374).

To judge those claims, the Tribunal applied the rule that a breach of the MFN obligation arises when a state accords different treatment to another foreign investor in “like circumstances” (para. 369). It clarified that investors will only be in “like circumstances” if they are “in the same economic or business sector” (para. 371). The Tribunal also added that if the state possesses a legitimate objective for treating the two investors differently, no violation of the MFN provision will be found (paras. 371, 375–376).

The Tribunal held that Lithuania did not breach the MFN obligation because, although it treated Parkerings and Pinus Proprius differently, it possessed legitimate reasons for distinguishing between the two investors’ investments. In particular, the Tribunal stated:

The fact that [Parkerings’] MSCP project extended significantly more into the Old Town as defined by the UNESCO is decisive…. The [goals of ]  historical  and archaeological  preservation  and environmental protection could be and in this case were a justification for the refusal of the project. The potential negative impact of the [Parkerings] project in the Old Town was increased by its considerable size and its proximity with the culturally sensitive area of the Cathedral. Consequently, [Parkerings’] MSCP…was not similar with the MSCP constructed by Pinus Proprius. (para. 392; see also 393–396)

The Tribunal similarly concluded that due to the substantive differences between the City’s contract with Pinus Proprius and the proposed Cooperation Agreement with Parkerings, the City justifiably decided to conclude a Cooperation Agreement with the former, but not the latter (paras. 411, 430).

Parkerings thus seems to allow environmental concerns, cultural values, domestic and international obligations, and other assessments of relative costs and benefits to influence “likeness” determinations.[3]It also suggests that characteristics of the actual investment projects are relevant to determining whether the investors are in “like circumstances” for purposes of MFN analysis (para. 410).

2.3 Contract claims as breaches of international law

Another notable aspect of the Tribunal’s decision is its emphasis on the need for foreign investors to seek relief in the appropriate contractually specified legal forum before pursuing IIA-based claims in international arbitration.

One example of this can be seen in the Tribunal’s resolution of Parkerings’ expropriation claim. Parkerings had argued that Lithuania indirectly expropriated its property when the City wrongfully terminated the Agreement (para. 440). The Tribunal acknowledged that breaches of contract may in some circumstances give rise to expropriation claims, but clarified that to do so, the party alleging breach must generally have first sought relief in the forum selected by the contracting parties (paras. 437–456). The Agreement specified that disputes would be resolved in Lithuanian courts (para. 453). Because Parkerings had neither sought relief for any alleged breach before those courts nor provided any “objective reason to question Lithuanian courts’ ability to dispose of the case fairly,” its expropriation claim failed (paras. 453–454).

The Tribunal similarly cited Parkerings’ failure to resort to Lithuanian courts (or to show why such efforts would have been futile) as a key reason for rejecting the investor’s FET and protection claims (paras. 344, 360–361, 448). Parkerings consequently might counsel   other foreign investors to refrain from framing what are fundamentally contract-based claims as IIA violations. The decision’s emphasis on the need to pursue local, contract- based remedies also may help counterbalance the “umbrella clause” effect that broad grants of ICSID jurisdiction in governing IIAs might have. Based on the Tribunal’s reasoning regarding jurisdiction and the merits, it seems that even if the Agreement had specified that contractual disputes be resolved through arbitration (as opposed to domestic courts), the Tribunal still would have rejected Parkerings’ claims, because allegations of contract breach need to be pursued as such before rising to violations of international law.


Notes

[1] Parkerings had argued that the “equitable and reasonable” treatment standard set forth in the BIT was different from and stricter than the “fair and equitable” treatment standard used in many other international investment agreements (para. 198). The Tribunal held that the two standards were in fact identical (para. 278).

[2] See, e.g., Occidental Exploration & Prod. Co. v. Ecuador, Final Award, 1 July 2004 (LCIA Case No. UN3467), at paras. 185–86 (noting that the requirement of “fair and equitable treatment” was “an objective requirement that does not depend on whether the Respondent has proceeded in good faith or not”); The Loewen Group, Inc. v. U.S.A. (ICSID Case No. ARB(AF)/93/3, 26 June 2003), 42 ILM 811 (2003), at para. 132 (noting that “bad faith” does not need to be shown to establish a violation of fair and equitable treatment).

[3] This approach is analogous to that used by tribunals in other investor–state disputes to refer to or draw from other bodies of law when evaluating the scope of investors’ rights and states’ obligations. See, e.g., World Duty Free v. Kenya, ICSID Case No. ARB/00/7, Award dated 4 October 2006, IIC 277 (2006); SPP v. Egypt, ICSID Case No. ARB/84/3, Award dated 20 May 1992, 32 ILM 933 (1993).