Awards and Decisions
Swiss claimant fails jurisdictional stage for not qualifying as an ‘investor’
Alps Finance and Trade AG v. Slovak Republic
A claim against the government of Slovakia has failed after a three-member tribunal declined jurisdiction. The tribunal determined that the claimant was not an “investor” as intended by the Switzerland-Slovakia bilateral investment treaty.
In a 5 March 2011 ruling on jurisdiction, the tribunal burdened the claimant, Alps Finance and Trade AG,with the full cost of the arbitration proceedings. The claimant was “far from meeting the standard imposed under the BIT,” which requires a Swiss claimant to have its “seat” and show “real economic activity” in Switzerland.
The Alps Finance claim was born out of an agreement with a Slovak company, in which the claimant purchased credit owed by a bankrupt debtor. Efforts to enforce the credits were blocked by a Slovakian regional court, in what the claimant argued was a flawed decision. Alps Finance held the Slovakian government responsible for the alleged incompetence of the regional court.
While the tribunal looked dimly on all aspects of the claim, it was the question of whether the claimant qualified as an investor that led it to decline jurisdiction.
Arguing that it was a Swiss investor, the claimant showed evidence of a company incorporated in Switzerland, as well as a tax declaration. But in the eyes of the tribunal, the claimant failed to display evidence of a “seat” in Switzerland, such as telephone, office rental, and staff, or demonstrate that it was engaged in economic activities in that country.
That conclusion sealed the tribunal’s decision to decline jurisdiction on the grounds the claimant was not a protected investor.
Many international investment treaties decide the nationality of a company by its place of incorporation, but Swiss investment treaties often take pains to not cover so-called mail-box companies.
Other issues addressed
Having decided to decline jurisdiction, the tribunal nonetheless considered two other aspects of the dispute for the sake “completeness”; namely, did the claimant’s business qualify as an “investment” in Slovakia, and second, could the claim, at first sight, plausibly constitute a breach of the BIT.
The tribunal answered no to both questions. On the first, the tribunal considered various attributes given to “investments” under the BIT in question, and under international law more generally. It concluded that the contract in question was a one-off sale-purchase agreement that failed to meet the criteria normally attributed to an “investment” under international investment law.
On the second, the tribunal distinguished between possible errors by the Slovakian courts, which on their own would not constitute a breach of the BIT, and the much more substantial charge of denial of justice, which could constitute the basis of a valid claim. The tribunal predicted that the claimant would not be able to sustain an argument to support a claim of denial of justice, and so would have little success of winning the case if it were to proceed to the merits stage.
The tribunal assigned the full cost of the proceedings to the claimant, arguing that Slovakia should not have to pay costs associated with a “defective claim” that did not come close to passing the jurisdictional test. This is still rare in investment arbitrations, which typically split the costs independent of who wins the case.
The arbitration was conducted under the UNCITRAL rules of arbitration. The tribunal was formed by Antonio Crivellaro (Chair), Hans Stuber (claimant’s appointee) and Bohuslav Klein (respondent’s appointee).
The award in Alps Finance and Trade AG v. Slovak Republic is available in two parts.
Part one: http://ita.law.uvic.ca/documents/AFTvSlovakRepublic_5Mar2011_Part1.pdf
Part two: http://ita.law.uvic.ca/documents/AFTvSlovakRepublic_5Mar2011_Part2.pdf
Majority tribunal defends decision in Lemire v. Ukraine
Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18
In a split decision, two members of the arbitral in Lemire v. Ukraine have ordered Ukraine to pay the claimant roughly US$8.7 million in damages, plus costs and expenses. The tribunal, however, unanimously rejected the claimant’s claim for US$3 million in moral damages in its 28 March 2011 decision.
This award followed a January 2010 decision on jurisdiction and liability in which the majority of the tribunal concluded that Ukraine violated the fair and equitable (FET) obligation in the governing US-Ukraine BIT.
The majority opinion was signed by Juan Fernández-Armesto, president of the tribunal, and Jan Paulsson. The third arbitrator, Dr. Jürgen Voss, wrote a lengthy separate dissenting opinion in which he took issue with the majority’s analysis of and conclusions regarding the breach of the FET standard, and the amount of damages owed.
Background on jurisdiction and liability decision
Mr. Lemire had invested in the radio broadcasting business in Ukraine in 1995, after the government opened that sector to private participation. Although his company had obtained some radio frequencies for that business, Mr. Lemire alleged that from 1999 through 2008, the government improperly and repeatedly denied his bids for additional frequencies, awarded broadcasting licenses to other companies, and thereby thwarted his plans of developing several nationwide radio networks.
Among its arguments in defense on the merits, the government asserted that the state entity responsible for the tender processes justifiably awarded frequencies to other applicants. The government explained that Mr. Lemire’s company lacked the necessary resources and capabilities to prevail in its applications, and those other bidders were more qualified. Additionally, it noted that in one of the tenders at issue, Mr. Lemire’s company did not even participate. According to Ukraine, even if the tender processes suffered from some irregularities, Mr. Lemire could not establish he would have been successful in his applications “but for” those issues.
In its January 2010 decision on jurisdiction and liability, the majority of the tribunal concluded that the tender process was irregular, arbitrary, and discriminatory, and amounted to a breach of the FET obligation. That decision, however, left unresolved the amount of damages owed, including whether Mr. Lemire should be able to recover on his claim for moral damages.
The dissenting opinion and award
In the award issued in March 2011, the tribunal tackled the issue of damages that had been left outstanding after the 2010 decision; yet the 2011 award also devoted space to revisiting issues of jurisdiction and liability in response to the dissenting opinion to the award filed by Dr. Voss.
The dissenting opinion took issue with various aspects of the first decision and award that ranged from jurisdiction to damages. On jurisdiction, the dissent asserted that the BIT did not grant Mr. Lemire the right to bring a claim, as a shareholder, based on harms allegedly done to the company, Gala. The majority rejected that contention, stating that Dr. Voss’s arguments on this point were inadmissible because they had not been raised by Ukraine. The majority also made clear that even if Ukraine had raised those arguments, it would have rejected them.
On the merits, the dissenting opinion criticized the majority’s application of the FET standard as being overly broad and having harmful consequences for host states, particularly as applied to review tender processes. Dr. Voss also argued that a reservation taken by the state parties to the agreement should have prevented liability. The United States and Ukraine had specifically included a provision in the annex to the BIT reserving their rights to deviate from the national treatment obligation in circumstances relating to certain activities, including radio broadcasting. According to the dissent, this provision should have informed the tribunal’s interpretation of the agreement and resulted in a finding that Ukraine had not breached the FET obligation.
The majority retorted that it had not applied the FET standard in the overly broad manner suggested by Dr. Voss. It also rejected Dr. Voss’s arguments regarding the reservation to the national treatment obligation, asserting that the national treatment reservation could not protect Ukraine because (1) the reservation applied to national treatment and was flatly “irrelevant” to the scope of the FET obligation; and (2) for the exception to apply, Ukraine was required to, but apparently did not, give prior notice of its intent to deviate from the obligation.
Another issue on which the dissenting opinion and award notably diverged was on the issue of damages. For Dr. Voss, even assuming there was a breach of the BIT, the link between Ukraine’s wrongful conduct in the tender process and Mr. Lemire’s failed nebulous future plans to expand his radio broadcasting business was too weak to support an award of lost profits. The dissent asserted that if damages were to be awarded, they should, as is done in some domestic law systems, be based on the amount expended in the improper tenders, rather than the value of speculative lost profits.
However, the majority did not adopt this approach; it based its award on what it calculated Mr. Lemire’s company would have earned had Mr. Lemire been able to proceed with the plans to expand it that he had when he made the investment in 1995.
The majority included in its reasoning language suggesting that the nature of the investment—e.g., Mr. Lemire’s “courage to venture into a transitional State and to create from scratch a completely new business”—was relevant to assessing the amount of damages owed.
On the issue of moral damages, the three arbitrators were generally in agreement. The majority stated, and Dr. Voss concurred, that such damages would only be available in “exceptional circumstances.” It added that such “exceptional circumstances” were limited to those in which the state’s actions implied “physical threat, illegal detention or other analogous situations,” and “cause[d] a deterioration of health, stress, anxiety, other mental suffering such as humiliation, shame and degradation, or loss of reputation, credit and social position”. Both “cause and effect,” the award added, would have to be “grave or substantial.”
Applying that standard, the award stated that Ukraine’s conduct did not warrant payment of moral damages. It further noted that one factor supporting its decision was the claimant’s not “consistently adroit” behavior in the course of his dealings with the Ukrainian government.
Notably, the majority stated that Ukraine should bear the burden of paying the full portion of the costs and expenses that were incurred as a result of Ukraine’s challenge of one of the arbitrators due to the fact that the challenge had been unsuccessful. There is no indication in the award, however, that this challenge was frivolous or otherwise improper.
Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18 (US/Ukraine BIT), is a available at: http://ita.law.uvic.ca/documents/LemireVUkraine_Award_28March2011.pdf
The dissenting opinion of arbitrator Dr. Jürgen Voss is available at: http://ita.law.uvic.ca/documents/LemireVUkraine_DissentOfJurgenVoss_1March2011.pdf
Ukraine cleared of claim by German investor over stolen fuel
GEA Group Aktiengesellschaft v. Ukraine, ICSID Case No. ARB/08/16
A three-member ICSID tribunal has rejected a claim by a German firm that sought to hold the Ukraine liable for losses incurred in a failed agreement with a financially troubled chemical company.
The dispute is rooted in an agreement between a German firm, New Klöckner, and a Ukraine chemical company, Oriana, in which New Klöckner was to provide fuel to Oriana for conversion. New Klöckner underwent a number of name changes and mergers, before being acquired by the claimant, GEA Group Aktiengesellschaft.
The conversion agreement began to unfold in the late 1990s when 125,000 tons of fuel went missing. The parties subsequently entered into a settlement and repayment agreement for the missing fuel, which also stipulated that disputes would be settled at the International Court of Arbitration (ICC).
A dispute was eventually lodged with the ICC, which found Oriana liable for some US$30 million. However, efforts to enforce the award failed, when Ukraine courts determined that the repayment agreement had been improperly authorized.
In 2008 GEA filed a request against Ukraine with ICSID under the German-Ukraine bilateral investment treaty, claiming that Ukraine failed to honor its “repeated promises” to ensure that GEA was paid for its products.
The question of defining ‘investment’
The claimant argued that its investment consisted of the original agreement to convert fuel, the subsequent settlement and repayment agreement, as well the ICC award.
The tribunal agreed that the conversion agreement constituted an investment, noting that in addition to a substantial amount of fuel delivered to Oriana for conversion, the arrangement also involved “the contribution of the Claimant’s know-how on logistics, marketing, and the mobilization of repairs and other services”.
However, the settlement and repayment agreements were not deemed an investment. The first was considered “merely an inventory of undelivered goods and recorded the difference as a debt …” and the latter “merely established a means for repayment …”. To the tribunal, neither agreement could be equated with the original conversion agreement.
The tribunal would also reject the argument that the ICC award should be viewed as an investment. According to the tribunal, “the fact that the Award rules upon rights and obligations arising out of an investment does not equate the Award with the investment itself”, noting that the “Award itself involves no contribution to, or relevant economic activity…”.
The decision diverges somewhat from a jurisdictional ruling in Saipem S.p.A. v. The People’s Republic of Bangladesh, in which a tribunal found Bangladesh liable for the failure of its courts to enforce an arbitration award. The GEA v Ukraine tribunal dismisses that decision on the grounds that it “made statements that are difficult to reconcile…” —specifically, that Saipem tribunal decides at one point that the arbitration award was not part of the investment, and later that it was not necessary to determine whether the award was an investment.
Claims dismissed, costs of proceeding left with claimant
While conceding that GEA had a protected investment in the form of the conversion agreement, the tribunal would nonetheless reject the claim that Ukraine was liable for a long list of various breaches of the BIT, including expropriation, full protection and security, fair and equitable treatment, arbitrary and discriminatory measures, national treatment, and most favoured nation treatment.
At the heart of the tribunal’s decision on these matters was the claimant’s failure to convince the tribunal that the Ukraine government was responsible for the missing fuel, or that it negligently failed to pursue the thieves.
On the question of whether the Ukraine was liable for not enforcing the ICC award, the tribunal referred back to its conclusion that the award cannot be considered an investment. But even if it had been considered an investment, the tribunal rejected the claim that GEA was discriminated against by the Ukraine courts; rather, “the Ukrainian courts came to a conclusion different to what which GEA had hoped.”
The claimant was ordered to bear the full cost of the arbitration, having failed partially on jurisdiction, and fully on liability. In addition to its own costs, GEA must reimburse the Ukraine some US$1.6 million.
The arbitral tribunal was formed by Albert Jan van den Berg (President), Toby Landau (claimant’s appointee) and Brigitte Stern (respondent’s appointee).
The award in GEA Group Aktiengesellschaft v. Ukraine, ICSID Case No. ARB/08/16, is available at: http://ita.law.uvic.ca/documents/GEA_v_Ukraine_Award_31Mar2011.pdf
Mongolia not in treaty-breach over windfall tax on gold
Sergei Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company v. Mongolia, UNCITRAL
Mongolia’s 2006 windfall tax on gold was not in breach of the Russia-Mongolia bilateral investment treaty, according to an April 2011 award on jurisdiction and liability.
The challenge to Mongolia’s 68 percent tax on gold, which was repealed this year, was one of several complaints by three Russian claimants in connection with a troubled mining operation in Mongolia. The claimants, Sergei Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company, owned KOO Golden East-Mongolia (GEM), one of Mongolia’s largest gold mining companies.
Windfall tax may be ‘excessive’, but not in breach of Treaty
The claimants argued that the windfall tax, levied on gold sales at prices over US$500 an ounce, ran afoul with the Mongolia’s obligations to provide ‘fair and equitable treatment’ and ‘full legal protection and security’, and amounted to expropriation, under the terms of Russia-Mongolia BIT. The claimant would also argue that the tax breached the international minimum standard of treatment under customary international law.
To support these allegations, the claimant argued that the tax was “extraordinary” in scale, and rushed through parliament in haste. The claimants also complained that the tax was discriminatory, as it did not apply to other industries, such as copper.
The tribunal conceded that the windfall tax “was generally considered excessive … and, from the evidence submitted, it appears that Mongolia paid a heavy price fiscally and economically …” However, it would not agree that it went so far as to breach the Treaty.
The tribunal explained that “to conclude from this that it was arbitrary and unreasonable under the terms of the Treaty is a step that the Tribunal is not ready to take, especially when it comes to dealing with fiscal legislation which on its face is not targeting Claimants in particular or foreign investors in general.”
The question of whether the wind-fall tax on gold was discriminatory was broken into two parts: i) should it have applied to other sectors other than the mining industry; and ii) did it discriminate between gold and copper?
On the first part, the tribunal acknowledged that governments routinely apply different fiscal treatments to various industries. Nor are there provisions in the BIT that oblige Mongolia to apply the same rates of taxation across industries.
“Many will argue that this is not wise economic policy but this does not mean it would constitute a breach of a BIT, particularly in the area of taxation, in respect of which States jealously guard their sovereign powers,” stated the tribunal.
The tribunal reached the same conclusion with respect to whether Mongolia was in breach of the BIT for applying different levels of taxation to gold and copper.
Foreign workers fee challenged by claimant
Under Mongolia’s 2006 Minerals Law, a 10 percent quota was placed on foreign workers; for each foreign worker hired in excess of the quota, mining companies were obliged to pay a fee equal to ten times the minimum salary in Mongolia.
The claimants argued that the foreign workers fee was arbitrary, discriminatory and contrary to their legitimate expectations. A shortage of skilled workers in Mongolia meant that GEM had little choice but to use workers from outside the country, they claimed.
However, the tribunal doubted that is was impossible for GEM to reduce its dependence on foreign workers. Indeed, the tribunal noted evidence that suggests that GEM’s preference to work in the Russian language was a barrier to hiring Mongolian workers, rather than a shortage of skilled local labour. It would also note that it is not uncommon for countries to impose restrictions of foreign workers.
Ultimately, the tribunal would find no evidence to support the claimant’s argument that the foreign workers fee was arbitrary, discriminatory and unreasonable.
Stability agreements form part of claim
Unlike its main competitor in Mongolia, the Canadian mining company KOO Boroo Gold, GEM did not have a so-called stability agreement to shield it from the tax hike. Stability agreements freeze aspects of the regulatory environment for a set period of time, such as tax rates.
The claimants would argue that granting a stability agreement to Boroo Gold, but not to GEM, amounted to a violation of the BIT. Mongolia countered that, under its mining act, stability agreements are available to investors who pledge to invest at least US$2 million—a commitment it argued that GEM was unwilling to make. The parties disagreed over what GEM had actually committed to invest going forward.
Given the uncertainty as to what future investment commitments had been made by GEM, the tribunal settled on the question: “Was Mongolia obligated to reach with GEM an agreement on the same terms as the once concluded with Boroo Gold …?” It concluded that Mongolia was not obligated for two reasons: Mongolia is granted a degree of administrative discretion in awarding such agreements; and second, Boroo Gold represented a major new investor, and it was understandable that Mongolia would want to afford it exceptional concessions.
Actions of Mongolia central bank breaches treaty
The claimant had sought to delay payment of the windfall tax through an agreement with Mongolia’s central bank, MongolBank. In a complex arrangement, gold was deposited with the bank, in exchange for a partial payment of the value of the gold.
GEM charged the bank with exporting and selling the gold prematurely, in breach of their agreement. Having determined that the state could be held accountable for the actions of the bank—which the tribunal determined excised governmental authority in certain respects—the tribunal concluded that GEM had been deprived of its ownership of the gold deposited with MongolBank, in breach of the BIT’s fair and equitable treatment provision.
It now sits with the claimants to prove what damages they suffered from this action.
Mongolia submitted a number of counterclaims, alleging that the claimants are liable for unpaid taxes, foreign workers fees, and failures to abide by environmental regulations, among other charges.
In considering whether it had jurisdiction to hear a counterclaim, the tribunal asked “whether there is a close connection between them and the primary claim”, and also whether the domestic laws of Mongolia covered the alleged infractions. It ultimately determined that the Mongolian public law and its courts were the more appropriate mechanism for settling these claims.
The tribunal noted that if it “extended its jurisdiction to the Counterclaims, it would be acquiescing to a possible exorbitant extension of Mongolia’s legislative jurisdiction without any legal basis under international law to do so …”
The claimants were given 60 days to inform Mongolia and the tribunals if they intended to claim damages for treaty-breach connected to MongolBank’s premature sale and export of its gold.
The respondent and claimants must bear their own legal costs and share the costs of the arbitration proceedings.
The arbitration was conducted under the UNCITRAL arbitration rules. The tribunal was formed by Marc Lalonde (President), Horacio A. Grigera Naón (claimant’s appointee) and Brigitte Stern (respondent’s appointee).
The decision on jurisdiction and liability in Sergei Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company v. Mongolia is available at: http://ita.law.uvic.ca/documents/PaushokAward.pdf
 Most of those frequencies were obtained in connection with a settlement agreement between Mr. Lemire and Ukraine that the parties entered into in 2000 to dispose of a previous ICSID case filed by Mr. Lemire against the country. See Lemire v. Ukraine, ICSID Case No. ARB(AF)/98/1, Award (embodying settlement agreement) 18 Sept. 2000.
 Award, para. 303.
 Dr. Voss’s dissenting opinion took issue with only select aspects of the tribunal’s finding here. See, Dissenting Opinion, n.180.
 Award, para. 333.