Awards and decisions

Georgia loses dispute with Greek and Israeli oil investors
Ioannis Kardassopoulos and Ron Fuchs v. The Republic of Georgia (ICSID Case Nos. ARB/05/18 and ARB/07/15)

Martin D. Brauch

Two oil traders have been awarded more than US$45 million each in damages from the Republic of Georgia in an ICSID award that advances a broad interpretation of the fair and equitable treatment (FET) standard.

The claimants, Ioannis Kardassopoulos and Ron Fuchs, are the co-owners of Tramex International, which in 1992 formed a joint venture (called GTI) with the state-owned Georgian Oil. A year later, GTI obtained a 30-year concession over Georgia’s main oil pipeline. However, in 1996 Georgia terminated GTI’s concession and turned over some of the rights previously held by GTI to a consortium of transnational oil companies.

A governmental commission established in 1996 considered compensating Kardassopoulos and Fuchs. But a new governmental commission established in 2004 finally concluded that the investors were not entitled to any compensation.

In response, Kardassopoulos, a Greek national, initiated arbitration against Georgia in August 2005, claiming that Georgia breached the expropriation and the FET provisions of the Georgia-Greece BIT and of the Energy Charter Treaty (ECT). A year and a half later, Fuchs, an Israeli national, initiated proceedings on the same facts, but only on FET grounds under the Georgia-Israel BIT.

The same arbitral tribunal adjudicated both cases jointly. The tribunal affirmed its jurisdiction over Kardassopoulos’ expropriation claim under the ECT, as well as over both investors’ FET claims under the two BITs.

Georgia argued that the investors should not be heard because the claim was untimely, having waited ten years to file their case. But the tribunal dismissed this argument on the grounds that the delay was not unreasonable or unjustified—the investors had sought compensation from 1996 until 2004 and were reasonably led to believe that they would receive compensation.

Georgia also raised three contractual defences to the Joint Venture Agreement between Tramex and Georgian Oil—unconscionability, misrepresentation and lack of performance. These arguments were also rejected, as the tribunal concluded that Georgia was not disadvantaged in the negotiations, that the investors did not misrepresent their experience and financial resources, and that they substantially performed the contract until Georgia deprived them of their rights.

In its 3 March 2010 award, the tribunal concluded that Kardassopoulos’ investment was unlawfully expropriated in violation of the ECT, because Georgia neither provided “prompt, adequate and effective” compensation nor conducted the expropriation under due process of law. Endorsing ADC v. Hungary,[1] the tribunal found that the investors did not have a “reasonable chance within a reasonable time” to be heard and claim their rights.

The tribunal then turned to Fuchs’ fair and equitable treatment claim, interpreting the standard broadly as a violation of the investor’s “reasonable expectations.” Although the Georgia-Israel BIT only entered into force after the expropriatory acts, the tribunal considered that Georgia’s assurances of compensation after the investment gave Fuchs legitimate expectations of a fair and equitable compensation process.

In light of the treaty’s preamble, which sets out its object and purpose as promoting “conditions favorable for investors and investments,” the tribunal interpreted the FET protection as far-reaching, both temporally and content-wise. It noted:

“[T]he fact that it was after the investment was made that specific assurances of compensation were given, which assurances gave rise to a specific expectation of compensation, does not preclude Mr. Fuchs from holding throughout the term of his investment the legitimate expectation that Georgia would conduct itself vis-à-vis his investment in a manner that was reasonably justifiable and did not manifestly violate basic requirements of consistency, transparency, even-handedness and non-discrimination.”

On damages, the tribunal invoked the customary international law standard since there were no specific treaty provisions on the amount of compensation for unlawful expropriation. Counsel for Kardassopoulos argued that the unlawful character of the expropriation should result in damages greater than those owing in case of a lawful expropriation. Specifically, Kardassopoulos sought damages equal tothe value of his rights prior to the expropriation, plus any lost profits, or the value of its rights at the date of the award, whichever was determined to be higher.

In contrast with a recent judgment of the European Court of Human Rights’ Grand Chamber,[2]  the tribunal agreed with Kardassopoulos that damages should be calculated on the date of the arbitral award, rather than the earlier date of the expropriation. However, in the end, the tribunal considered that Kardassopoulos would likely have sold his shares in GTI in 1995, and for this reason determined that he should not be compensated for the value gained between the expropriation and the award date. Thus, it awarded Kardassopoulos damages of US$15.1 million, based on the fair market value of his rights on 10 November 1995, a few months prior to the final act of expropriation, to ensure restitution of the market value the investment had before any expropriatory act.

The tribunal followed the same reasoning regarding compensation for the FET breach. It found that since the FET breach led to the same consequence as the unlawful expropriation—depriving the investors of their investment without compensation—there was no reason to differentiate between the damage caused to the two claimants; thus Fuchs was also awarded US$15.1 million.

Finally, the tribunal applied pre-award interest (between 1996 and 2010), raising the sum owed by Georgia to each investor to US$45.125 million. In addition, Georgia was condemned to pay the investors about US$8 million in arbitration costs.

Post-award developments can be expected in this case. On 16 July 2010 the ICSID Secretariat  registered an application for annulment, and an annulment committee was constituted on 11 August 2010. Following a request by the claimants, on 18 November 2010 the annulment committee ordered Georgia to post a US$100 million financial guarantee, as a condition for staying the award during the annulment process.

The dispute garnered headlines in October when Fuchs was arrested in Georgia. According to the Georgian media, Fuchs and a colleague are charged with attempting to bribe Georgia’s deputy finance minister to dissuade the government from pursuing its annulment request.

The arrest of Fuchs and the decision to order the financial security were not connected, stressed the annulment committee.

Notes: Mr. L. Yves Fortier, C.C., O.Q., Q.C. (president), Professor Francisco Orrego Vicuña (appointed by Kardassopoulos) and Professor Vaughan Lowe (appointed by Georgia) formed the arbitral tribunal. Skadden, Arps, Slate, Meagher and Flom LLP (UK and US) represented Kardassopoulos and Fuchs. DLA Piper Gvinadze & Partners LLP (UK and US) represented Georgia.  The award of 3 March 2010 in Kardassopoulos v. Georgia is available at:


Tribunal dismisses claims against Hungary in ECT dispute over power stations
AES Summit Generation Limited and AES-Tiza Erömü Kft. v. Republic of Hungary (ICSID Case No. ARB/07/22)

Martin D. Brauch

An ICSID tribunal dismissed all claims by the British energy company AES against Hungary on the grounds that Hungary acted reasonably when it curbed the profits of public energy utilities.

The dispute is rooted in AES’ US$130 million investment in Tisza II and other Hungarian power stations in 1996, at a time when Hungary was privatizing parts of its energy sector.

A Power Purchase Agreement (PPA) between AES and Hungary established a pricing formula to be applied once Hungary ceased to administer energy generation prices.

However, in reaction to public outrage over the allegedly high profits of public utility companies, Hungary enacted price decrees in 2006 and 2007, restoring the administrative pricing regime.

The return of administered prices caused AES significant losses of revenue, prompting the company to seek compensation through ICSID arbitration under the Energy Charter Treaty (ECT), a multilateral trade and investment treaty governing the energy sector. AES argued that the PPA had created legitimate expectations that an administered pricing system would not be reintroduced.

In addition, the company maintained that Hungary breached its duties to respect its contractual obligations, to act in good faith and to provide stability and predictability. It also complained that the reintroduction of the decrees was arbitrary, non-transparent, lacking in due process and discriminatory.

AES based its claims on provisions of the ECT regarding fair and equitable treatment, unreasonable measures, constant protection and security, and expropriation, among others.

In its 23 September 2010 award, the tribunal concluded that it was within Hungary’s rights to reintroduce a regulated pricing system. Importantly, the PPA did not contain a “stabilization clause” that would temporarily limit Hungary’s sovereign right to change its law. Since Hungary did not provide any assurances, AES could have no legitimate expectations, the tribunal concluded.

Moreover, Hungary’s acts were deemed a valid, reasonable and proportionate exercise of regulatory power, consistent with their rational public policy objectives. “Excessive profits,” according to the tribunal, “may well give rise to legitimate reasons for governments to regulate.”

AES also maintained that the constant protection and security standard also included the obligation to ensure legal protection and security. The tribunal rejected this claim, however, reasoning that the standard does not rise to the level of protecting the investor against state regulations based on rational public policy grounds, such as Hungary’s price decrees.

Finally, AES argued that the decrees amounted to expropriation, entitling the company to compensation from the Hungarian government. In dismissing this claim, the tribunal asserted that not every state regulation with negative effects on a foreign investor amounts to an expropriation. The price decrees did not deprive AES of its ownership or control over its investment, nor did they cause a substantial devaluation of the investment—in fact, AES continued to make significant profits.

Rejecting all claims, the tribunal determined that each party bore its own costs and equally shared in the charges of the tribunal and the ICSID secretariat.

Notes: Mr. Claus von Wobeser (president), J. William Rowley QC (appointed by AES) and Professor Brigitte Stern (appointed by Hungary) formed the arbitral tribunal. Allen & Overy (London) and Polgár & Bebők Law Office (Budapest) represented AES. Arnold & Porter (Washington and Brussels) and Law Office of Dr. János Katona (Budapest) represented Hungary. The full arbitral award is available at


Ukrainian government on the hook for intervention in hotel investment
Alpha Projektholding GmbH v. Ukraine (ICSID Case No. ARB/07/16)

Martin D. Brauch

An ICSID award dated 8 November 2010 ordered Ukraine to pay US$5.25 million in damages to Austrian investor Alpha Projektholding in a dispute over a failed hotel renovation deal.

Beginning in 1994, Alpha concluded several joint-activity agreements (JAAs) with Hotel Dnipro, a Ukrainian State-owned enterprise in Kiev, for the reconstruction of the hotel building. Under the agreements, Alpha would take a bank loan to pay Pakova—the company that would undertake the renovation—and would receive minimum monthly payments from Dnipro.

However, Dnipro’s deteriorating finances led it to renegotiate one of the JAAs in 2000, suspending the minimum monthly payment until 2006 and prolonging the term of the agreement.

Ultimately, the hotel’s dire financial straits led the Ukrainian government to transfer the authority to manage Dnipro from the State Tourist Administration to the State Administration of Affairs (SAA), which requested an official audit of Dnipro’s financial activities. The audit indicated that Alpha’s investment in Dnipro and its implementation were unlawful under Ukrainian law, due to misappropriations of funds and noncompliance with accounting standards.

Although Dnipro’s new management reassured Alpha that the JAAs remained valid, Alpha no longer received payments under any of the JAAs as of July 2004.

After consultations between the Austrian and Ukrainian governments broke down, Alpha initiated ICSID arbitration against the Ukraine under the Austria-Ukraine Bilateral Investment Treaty (BIT) in 2007. Alpha claimed that the cessation of payments and other acts by Dnipro and the Ukrainian government amounted to breaches of several BIT provisions, including those on expropriation, fair and equitable treatment, and the umbrella clause.

Specifically, the tribunal found that Ukraine had ordered Dnipro to stop payments to Alpha and was responsible for Dnipro’s continued failure to fulfill its contractual obligations.

With respect to the expropriation claim, the tribunal considered that neither Ukraine nor Dnipro indicated an intention to resume payments after they were terminated in 2004 or to pay Alpha its share in the JAAs. In light of the evidence, the tribunal concluded that Ukraine expropriated Alpha’s rights under the agreements, by substantially and permanently depriving the investment of economic value.

Although the tribunal agreed with the Ukraine that Alpha did not precisely articulate what legitimate expectations were undermined by the Ukraine, it found that Alpha had a legitimate expectation that the Ukraine would not interfere with the JAAs. According to the tribunal, the Ukraine and the SAA frustrated this expectation by effectively negating the JAAs, thus breaching the fair and equitable treatment standard under the BIT.

However, the tribunal dismissed Alpha’s umbrella-clause claim—which would have elevated a breach of contract to a breach of the BIT—on the grounds that Alpha did not enter into any contracts with the Ukraine, but only with Dnipro, which was not acting in a governmental capacity.

One noteworthy aspect of the award is the tribunal’s treatment of the definition of “investment” under the ICSID Convention. Finding that Alpha had made an “investment” within the meaning of the BIT, the tribunal noted that the ICSID Convention does not define the term. To determine whether Alpha had an “ICSID investment,” the arbitrators considered Salini v. Morocco (2004), an often-used starting point in ICSID jurisprudence for determining the existence of an “investment.”

In this case, the tribunal expressed unease with the Salini test, in large part because it purports to evaluate the contribution of an investment to the host country’s economic development. According to the tribunal, such criterion has little independent content and allows a tribunal to improperly second-guess the investor’s business, economic, financial or policy assessment in making an investment. The arbitrators argued that, in most cases, when an investment is found to exist under the BIT, it also meets the definition of “investment” under the ICSID Convention:

[W]hen the State party to a BIT agrees to protect certain kinds of economic activity, and when the BIT provides that disputes between investors and States relating to such activity may be resolved through ICSID arbitration, it is appropriate to interpret the BIT as reflecting the State’s understanding that the activity constitutes an “investment” within the meaning of the ICSID Convention as well. […] A tribunal would have to have very strong reasons to hold that the States’ mutually agreed definition of investment should be set aside (para. 315).

Having decided that Alpha had made an “ICSID investment” by implication of the definition of “investment” under the BIT, the tribunal nonetheless applied the Salini test, and concluded that Alpha satisfied its four criteria—sufficient duration, assumption of risk, financial contribution or commitment, and contribution to Ukraine’s development.

Notes: Hon. Davis R. Robinson (chairman), Dr. Yoram Turbowicz (appointed by Alpha Projektholding), and Dr. Stanimir A. Alexandrov (appointed by Ukraine) formed the arbitral tribunal. Specht Rechtsanwalt GmbH (Vienna, Austria) and Sullivan & Worcester LLP (Boston, USA) represented Alpha Projektholding. The Ukranian Ministry of Justice, Grischenko & Partners (Kiev, Ukraine), and Proxen & Partners (Kiev, Ukraine) represented Ukraine.  The award of 8 November 2010 in Alpha Projektholding v. Ukraine is available at:

EU investment treaties examined in health insurance dispute
Eureko B.V. v. The Slovak Republic (PCA Case No. 2008-13)

Martin D. Brauch

An arbitral tribunal has affirmed jurisdiction over a €100 million dispute between the Dutch company Eureko B.V. and Slovakia. The jurisdictional award of 26 October 2010 deals mainly with the relationship between European Union (EU) law and BITs between EU member states.

In response to the deficit accumulated by its universal public health insurance system, Slovakia liberalized the system in 2004. Based on those reforms, Eureko invested in Slovakia in 2006, offering health insurance through a subsidiary. However, the Social Democratic government elected in 2006 amended the 2004 reforms in a way that, according to Eureko, systematically reversed the liberalization carried out in 2004.

Arguing that the new policies did not comply with EU law, on 28 February 2008 Eureko filed a complaint with the European Commission. Later, based on that complaint, the Commission initiated infringement proceedings against Slovakia, which remain ongoing.

Eureko also initiated UNCITRAL arbitration against Slovakia on 1 October 2008. The company maintained that, by reversing the liberalization policies of 2004, Slovakia breached the provisions of the Dutch-Slovak BIT on expropriation, fair and equitable treatment, discrimination, full protection and security, and free transfer of profits and dividends. Both the Dutch government and the European Commission (EC) submitted written observations, as per the tribunal’s invitation.

In particular, the Commission characterized intra-EU BITs (BITs between EU member states) as “anomalies within the EU internal market” which would eventually need to be terminated. It stated that the tribunal, being bound to apply EU law, should recognize the principle of supremacy of EU law and refuse to apply any incompatible BIT provisions, including the arbitration clause. Finally, it suggested that the tribunal suspended the arbitration pending the infringement proceedings.

According to Slovakia, as a matter of international law, EU law, Slovak law, and German law (applicable to the dispute as the law of the seat of the arbitration), the country’s accession to the EC Treaty on 1 May 2004 effectively terminated the Dutch-Slovak BIT or rendered its arbitration clause inapplicable, leaving the arbitral tribunal without jurisdiction over the dispute.

In support of its first argument, Slovakia posited that the Dutch-Slovak BIT was terminated by way of Article 59 of the Vienna Convention on the Law of Treaties (VCLT), which concerns the termination of treaties that deal with the same subject matter.

The tribunal rejected this argument for three reasons. First, the termination of treaties under the VCLT generally has to be invoked, which did not happen in the case of the BIT in question. Second, the EC Treaty cannot be considered as a successive treaty dealing with the same subject matter of the BIT. The tribunal found neither an intention that the EC Treaty terminated the BIT, nor an incompatibility that prevented concurrent application of both treaties. Third, the investor’s right to bring the host State before an international arbitral tribunal (under the BIT) could not be equated with the right to bring a law suit against it before its domestic judiciary (under EU law).

The arbitrators also denied Slovakia’s contention that the BIT provisions regarding fair and equitable treatment, expropriation, and full protection and security were covered by the EU law provisions on freedom of establishment and the prohibition on discrimination. Conversely, the tribunal held that there are rights under the BIT that are neither covered by nor incompatible with EU law. It also stated that the wider protections given by the BIT, although arguably in violation of EU law prohibitions on discrimination among EU Member States, were not a reason to deny Eureko’s rights under the BIT.

In its second argument, Slovakia maintained that, pursuant to VCLT Article 30, the arbitration clause in the BIT was not applicable, as the EC Treaty was a successive treaty with provisions that are incompatible with that clause. The tribunal, however, saw no incompatibility. Particularly, it established that EU law did not prohibit investor-State arbitration, and that Slovakia could observe its BIT obligations without violating EU law.

Slovakia’s third argument was that, under EU law considered as part of Slovak law, the arbitration clause in the BIT was invalid because it was incompatible with the EC Treaty, and with the principles of autonomy and supremacy of EU law. Slovakia further maintained that the BIT was superseded by EU law, which had direct effect, prevailed over both national law and international treaties, and could only be interpreted by the European Court of Justice (ECJ). The tribunal did not accept this argument, concluding that it was bound to apply EU law, as part of the applicable law—effectively rejecting the claim that the ECJ has “interpretative monopoly” over EU law.

The final argument by Slovakia was that the dispute was not arbitrable under German law because it was outside the jurisdiction of the tribunal by virtue of EU law, which in turn is part of German law. However, having found that EU law did not deprive the tribunal of jurisdiction, the arbitrators dismissed this final contention.

Therefore, rejecting each of Slovakia’s four arguments, the tribunal dismissed the country’s jurisdictional objection. It also decided, for the time being, not to suspend the arbitration while the infringement proceedings are pending.

Further developments are expected as the tribunal proceeds to the merits of this case. While the tribunal acknowledged that it could be called to apply EU legal doctrines, it stressed that it has jurisdiction to rule upon breaches of the BIT, but not of EU law.

Notes: Professor Vaughan Lowe QC (president), Professor Albert Jan van den Berg (appointed by Eureko), and Mr. V.V. Veeder QC (appointed by Slovakia) form the arbitral tribunal. De Brauw Blackstone Westbroek N.V. (Amsterdam) represents Eureko. The Slovak Ministry of Finance, Rowan Legal s.r.o. (Bratislava), KSD Štovíček advokátska kancelária, s.r.o. (Bratislava), and Baker Botts LLP (Washington, DC) represent Slovakia.  The award on jurisdiction, arbitrability and suspension of 26 October 2010 in Eureko v. Slovakia is available at:

[1]               ADC v. Hungary, ICSID Case No. ARB/03/16, Award, 2 October 2006.

[2]               Guiso-Gallisay v. Italy (Application No. 58858/00), Grand Chamber judgment of 22 December 2009; See also the 2008 Chamber judgment of 21 October, 2008