Discovery Global LLC v. Slovak Republic, ICSID Case No. ARB/21/51

Background and claims

On January 17, 2025, an ICSID tribunal in Discovery Global LLC v. Slovak Republic (ICSID Case No. ARB/21/51) issued its award, upholding jurisdiction under the 1991 Slovakia–U.S. bilateral investment treaty (BIT) while dismissing all claims.

In 2006, a British company obtained three exploration area licences to search for oil and gas deposits in the Prešov region in north-eastern Slovakia. It established a Slovak subsidiary, Aurelian Oil & Gas Slovakia s.r.o. (AOG) to conduct exploration activities. In 2008, AOG, through its subsidiaries, entered into farm-in agreements with two companies, transferring a 25% interest in the exploration licences to each and thereby retaining a 50% stake. In 2014, Discovery acquired AOG and a 50% stake in the exploration licences.

The dispute arose from the setbacks during the exploration activities from 2014 to 2018. The claimant alleged that the measures of Slovakia prevented AOG from drilling exploration wells at Smilno and Krivá Oľka, and obliged AOG to perform environmental impact assessments (EIAs), which hindered AOG from fulfilling its basic obligations under the licences, namely to complete its geological exploration. Specifically, the claimant challenged the following alleged measures:

• With regard to Smilno, the failure to secure its access to the drill site through the access road, which was blocked by local activists, due to the decisions of the police, local courts, and authorities;
• In relation to Krivá Oľka, the refusal to renew a lease over forest land owned by Slovakia to conduct geological works, and the refusal to grant a compulsory access order with undue suspension of the proceedings;
• Concerning the EIAs, the imposition of conducting full EIAs, while the claimant had agreed with local activists to undergo a preliminary EIA in exchange for withdrawing their opposition.

The claimant submitted that these measures constituted (1) unfair and inequitable treatment, (2) arbitrary and discriminatory treatment, (3) failure to provide effective means, and (4) unlawful expropriation under the BIT. In its initial memorial, the claimant, using the discounted cash flow model to calculate the fair market value of the investment, sought monetary compensation of no less than USD 568.2 million, as well as the cost of arbitration and the post-award interest. This claim was later reduced to USD 135 million during the proceedings, with alternative claims as low as USD 3.7 million, covering only the wasted investment costs.

Jurisdiction

Slovakia raised jurisdictional objections on the following grounds: lack of a qualifying investor and investment, the breach of good faith due to the abuse of corporate forms, the unclean hands doctrine, failure to satisfy procedural preconditions, public order exception, and carve-out exception in relation to the discrimination claims.

Regarding the eligibility of the investor, the respondent contested that Discovery is a mailbox company lacking activities and assets and made no contribution or act of investing. The tribunal examined the wording of the BIT, which uses the term “company of a Party” instead of “investor,” and noted that active contribution is irrelevant to the definition of “company of a Party.” The tribunal thus confirmed its jurisdiction ratione personae over the claimant.

In terms of the eligibility of the investment, the tribunal respectively considered the definition of “investment” under the BIT and the ICSID Convention. Pursuant to Article I(1)(a) of the BIT, the tribunal held that the shares of AOG Discovery bought and Discovery’s indirect interest in the licences through AOG had sufficed to constitute a protected “investment” under Art. I(1)(a)(ii) and (v). The BIT does not require the investment to be active. Regarding the ICSID Convention, the tribunal referred to the objective assessment established by previous ICSID jurisprudence comprising three elements: (1) a commitment or allocation of resources, (2) duration, and (3) risk, which includes an expectation of a return or a profit. The tribunal considered that, to the extent the ICSID Convention imposes a “substantial” or “significant” contribution, the amounts herein meet this characteristic. With the claimant’s assumption of risk and no objection to the duration, the tribunal concluded that there is a qualifying investment under the BIT and the ICSID Convention.

The respondent further challenged that the ultimate owner of Discovery, Michael P. Lewis, abused the corporate form to avoid his tax liabilities under U.S. law. It was rejected by the tribunal, given that Discovery has an independent legal personality that owns assets and incurs liabilities, and no allegation or evidence suggests that Lewis improperly reported Discovery’s income and expenses.

As to the claim of unclean hands as both jurisdiction and admissibility bar, the tribunal first clarified that since the respondent raised the objection in an untimely manner, according to ICSID Arbitration Rule 41(2), it can only be considered in respect of jurisdiction. The tribunal noted that neither the BIT nor the ICSID Convention requires that an investment be made in accordance with the law of the host state. Absent such a legality clause, the clean hands doctrine may exclude the jurisdiction only in “particularly serious cases” where an investment is made through “illegal, fraudulent, or corrupt means.” As none of the alleged events met the seriousness threshold, and none related to Discovery’s decision to invest, the tribunal dismissed this claim.

Regarding the procedural precondition, the tribunal rejected the respondent’s objection that the claimant had not engaged in negotiations as required by Article VI of the BIT, considering the numerous communications exchanged between the parties without an amicable settlement achieved.

The tribunal then addressed the public order exception invoked by the respondent under Article X(1) of the BIT. The tribunal held that Article X(1) goes not to jurisdiction but liability, since it “has no bearing on the issue of whether the claimant made a protected investment under the BIT.” With respect to the carve-outs in the annex of the BIT, since the precondition of notification required in Article II(1) of the BIT was not satisfied, the respondent cannot establish any applicable exceptions.

The tribunal thus rejected all of the respondent’s preliminary objections.

Liability

In the introductory remarks of the liability section, the tribunal presented a bird-eye view of the evidence and cast overall doubt about the basis of the claims. At Smilno, the right to use the access road to access the drilling sites was placed at the centre of the dispute. However, the evidence indicated that the access road was a private track that AOG had no right to use without the consent of the owner or a ministerial order from the Ministry of Environment (MoE). At Krivá Oľka, the evidence suggested that the contested measures shall be attributable to AOG’s legal and decision-making mistakes. Discovery itself abandoned its drilling programs due to financial constraints after the authority imposed the full EIA obligation on AOG. With these facts in mind, the tribunal addressed the FET, arbitrary and discriminatory treatment, effective means provision under the BIT, and expropriation in turn.

FET

Article II(2)(a) of the BIT reads that “[i]nvestment shall at all times be accorded fair and equitable treatment, shall enjoy full protection and security, and shall in no case be accorded treatment less than that which conforms to principles of international law.” The tribunal first determined the legal standard and the content of FET, given the parties’ disagreements on (1) whether Article II(2)(a) of the BIT is limited to the minimum standard of treatment (MST).

The tribunal relied on Article 31 of the VCLT to interpret the BIT. Textual analysis indicated that Article II(2)(a) of the BIT contains three disconnected components, and the first component, “fair and equitable treatment,” is not coterminous with the third, treatment under “principles of international law.” Also, referring to Vivendi II v. Argentina, the tribunal held that there is “no basis for equating principles of international law with the minimum standard of treatment,” since the former “refers to a broader category of sources than custom.” This interpretation can be further corroborated by the context provided by other articles of the BIT with similar wordings. The object and purpose of the BIT do not suggest the opposite. In addition, the tribunal addressed other tribunals’ interpretation equating FET with the MST, such as El Paso Energy v. Argentina, noting that this inconsistency was because the El Paso tribunal did not refer to the VCLT. The tribunal thus concluded that the FET standard in Article II(2)(a) is an autonomous treaty standard that is not limited to the MST or customary international law.

With regard to the content of the FET standard, the tribunal resorted to existing arbitral and judicial decisions and summarized that “FET may cover the protection of legitimate expectations, the protection against conduct that is arbitrary, unreasonable, disproportionate and lacking in good faith, the principle of due process and protection against denial of justice.”

The tribunal confirmed that legitimate expectations may arise where the state has given clear and specific assurances to an investor, and the investor’s decision to make the investment relied on these assurances. Investors’ own conduct, including the meaningful exercise of due diligence, and the general conditions of the host states should also be considered, referring to the decision in LSG v. Romania.

In the present case, at Smilno and Krivá Oľka, the tribunal found that neither the exploration licences nor their renewals contain any specific representation that Discovery and AOG would be able to drill or exploit. At Smilno, Discovery mistakenly expected that it had the right to use the access road as a public special-purpose road, which was, in fact, private property. This could have been avoided if Discovery had conducted meaningful due diligence before the investment, as a prudent investor would reasonably be expected to do in order to understand the relevant regulatory framework. Instead, it merely “went around and talked to the mayor” and consulted “multiple official maps” without obtaining any legal advice.

At Krivá Oľka, the tribunal held that even if any legitimate expectations existed, the respondent did not frustrate them. Regarding the refusal to lease renewal, it was caused by AOG’s failure to fulfill the conditions and meet the time limit. Even considering the Ministry of Agriculture’s decision as excessively formalistic as a matter of Slovak law, the tribunal held that this decision was not arbitrary or biased to amount to a BIT breach, and this “temporary setback that did not doom AOG’s exploration plans altogether.” In terms of the refusal to grant a compulsory access order, no evidence supported the claimant’s assertion that the MoE’s decision was instructed by higher-level officials. The suspension of the proceedings was to ascertain the factual precondition under Slovak law for issuing the order, i.e., the disagreement between private parties on a new lease. AOG could have easily resumed the proceedings by confirming the existence of the disagreement while it remained inactive.

As to the EIA, the tribunal determined that AOG could not reasonably assert the legitimate expectation that it would not have to undergo EIA procedures for its exploration drills, since no stabilization clause or specific commitment to regulatory stability existed in the BIT or the licences. Moreover, the EIA requirement was to incorporate the EU EIA Directive into domestic law. According to Electrabel v. Hungary, in principle, EU members cannot be held liable for complying with the EU’s legally binding decision, especially considering that herein, Discovery could have expected the regulatory change if meaningful due diligence had been conducted. In any event, despite some formal deficiencies of the EIA decisions, the tribunal did not consider them as “serious flaws” that amounted to a treaty breach. It could be further substantiated by the fact that AOG could have appealed the decisions, but it refrained from doing so without providing convincing reasons.

As to reasonableness, proportionality, and due process, the tribunal took into account whether the conduct of different branches of states is consistent, whether the measure pursues a rational policy for a legitimate public purpose, whether it is excessive when weighing the interests, and whether the measure is transparent. The tribunal found no inconsistency in the state’s conduct. No evidence suggested that the measures were adopted to prevent AOG from conducting its activities. Instead, the Slovak authorities were “largely supportive of AOG’s operations.”

In relation to the denial of justice, the tribunal referred to Infinito Gold v. Costa Rica to circumscribe its content to “a fundamental failure in the host State’s administration of justice.” The delays in court proceedings alleged by the claimant were either attributable to the investor or not severe enough to justify a finding of denial of justice.

In conclusion, the tribunal held that the respondent did not breach its FET obligations.

Arbitrary and discriminatory treatment

Compared with a Slovak entity controlled by foreign interests, the tribunal held that the claimant failed to establish an unjustified difference in treatment. The difference in relation to the compulsory access order was due to NAFTA’s diligent submission of documentation as required by the MoE, in contrast with AOG’s refusal to provide required evidence. Regarding the refusal of the lease extension, the longer time taken to approve the lease was within the time limit and should not be considered a sign of discrimination. The EIA requirement was applied to other exploration licences as well. Therefore, the tribunal dismisses the claim for arbitrary and discriminatory treatment.

Effective means

The claimant invoked Article II(6) of the BIT to challenge several delays in the judicial and administrative proceedings. Article II(6) reads that “[e]ach Party shall provide effective means of asserting claims and enforcing rights with respect to investments and authorizations relating thereto and investment agreements.” The tribunal found this claim ungrounded, given that the duration of the process with specificities was reasonable, and the delays were attributable to the claimant’s own actions.

Expropriation

The tribunal rejected this claim for two reasons. First, Discovery still owned shares in AOG, and its interests in the exploration licences expired due to AOG’s relinquishment. Second, the tribunal stated that the measures discussed above had not risen to a level of treaty breach, and “[a] measure that does not breach FET or a similar standard cannot conceivably constitute an expropriation.”

Conclusion

The tribunal in Discovery Global v. Slovakia concluded that the respondent clearly prevailed despite a few instances of questionable conduct that did not amount to a treaty breach. It provided a detailed analysis of the FET standard under the BIT, clarifying that investors must conduct meaningful due diligence to generate legitimate expectations, and that temporary setbacks during the course of an investment do not per se frustrate legitimate expectations.

Having dismissed all of Discovery’s claims, the tribunal ordered the claimant to bear the full costs of the arbitration and pay 75% of the respondent’s legal expenses and other costs at around 2.3 million EUR, plus simple interest at the rate equivalent to the yield of 2-year Slovak government bonds.

Author

Weitong Shan is a former ELP Intern with the Investment team at IISD.

Note

The tribunal was composed of Gabrielle Kaufmann-Kohler (chair, appointed by the co-arbitrators), Stephen L. Drymer (claimant’s appointee) and Philippe Sands (respondent’s appointee).