Lao Holdings N.V. v. Lao People’s Democratic Republic, ICSID Case No. ARB(AF)/12/6, and Sanum Investments Limited v. Lao People’s Democratic Republic, UNCITRAL, PCA Case No. 2013-13
On August 6, 2019, tribunals in two parallel proceedings against the People’s Democratic Republic of Lao (Laos) issued final awards dismissing all claims raised by the claimants while awarding Laos legal fees and arbitration costs.
The two proceedings arose from the same facts. In 2007, two American businessmen—John Baldwin and Shawn Scott—established several gambling facilities in Laos via Macau-registered Sanum Investments (Sanum), a subsidiary of their Dutch holding company Lao Holdings N.V. (LHNV). After a few years of operation, several disputes arose between the investors and their Laos local partner centred on issues relating to profit sharing and the early termination of several planned expansions.
Alleging that the government of Laos interfered during the process by conspiring with the foreign investors’ local partner to seek to drive them out of Laos, the investors launched two separate proceedings: LNHV initiated ICSID arbitration under the 2003 Netherlands–Laos BIT; Sanum initiated a PCA-administered UNCITRAL arbitration under the 1993 China–Laos BIT. (At the jurisdictional phase, the Sanum tribunal found the China–Laos BIT applies to Macao under the customary international law rules of state succession.) The proceedings were never consolidated but for the most part were conducted jointly by the two tribunals.
Corruption and bad faith
At the outset of the proceedings, Laos asked the tribunals to dismiss all claims, alleging the investors conducted illegal activities such as bribery and corruption at both the inception and during the operation of the investment. Seeing this as a merits issue, not a jurisdictional challenge, the tribunals provided a detailed analysis of Laos’ defence.
The tribunals first looked at the applicable laws. Recalling that the parties agreed that domestic law is relevant in determining whether an investment needs to be made and operated according to the law of the host state, the tribunals found that “there is no doubt that bribery and corruption are contrary to the domestic laws of Laos” (Sanum award, para. 95; LHNV award, para. 97).
Turning to international law—in particular citing relevant provisions of UN Convention Against Corruption and the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions—the tribunal recognized that as “a principle of customary international law,” corruption should not be used “to obtain or retain business or other undue advantage in relation to the conduct of international business” (Sanum award, para. 103; LHNV award, para. 105). Further, the tribunals considered that “proof of corruption at any stage of the investment may be relevant” (Sanum award, para. 103; LHNV award, para. 105).
The tribunals moved on to examine the applicable standard of proof, and concluded that “given the seriousness of the charge, and the severity of the consequences … ‘clear and convincing’ evidence … must point clearly to corruption,” in other words, “a standard higher than the balance of probabilities but less than the criminal standard of beyond reasonable doubt” (Sanum award, para. 107–108; LHNV award, para. 109–110).
After reviewing the evidence submitted by Laos, although the tribunals found certain transactions “suspicious” or even found plausible evidence indicating that the investors illicitly channelled money to Lao government officials (Sanum award, paras. 147–156; LHNV award, paras. 148–157), the tribunals were disturbed by the fact that “no prosecutions have been brought against any persons alleged to have accepted bribes, nor has there been evidence of due diligence in any investigation” (Sanum award, para. 111; LHNV award, para. 112). As Laos failed to provide a convincing explanation for its failure to track down bribe-takers, the tribunal found it failed to meet its burden of proof per the required standard of “clear and convincing” evidence for those corruption allegations.
On the other hand, the tribunal confirmed that investors have “good faith obligations … in the host country” and that serious conduct incompatible with such obligations “is not without Treaty consequences, both in relation to their attempt to rely on the guarantee of [FET], as well as their entitlement to relief of any kind from an international tribunal” (Sanum award, para. 104; LHNV award, para. 106).
After a review of the evidence, the tribunal found that the circumstances disclosed met a lower standard of “balance of probabilities,” which cast doubts as to the investors’ good faith and the legitimacy of their claims. This, in turn, resulted in the tribunal’s later decision to dismiss all of the investors’ claims.
The investors presented a series of expropriation claims, but the tribunals found that none of them merited relief.
First, the investors referred to a contract dispute between them and their local Lao partner, which resulted in a multi-stage local court proceeding and a later commercial arbitration award in favour of the investors, which they were unable to enforce. Despite their claim that the government had interfered during the earlier judicial process, the tribunal found “simply no persuasive evidence” supporting their argument of alleged interference, and hence no merit in the claim.
(In 2016, the investors filed two separate proceedings claiming that their alleged inability to enforce the commercial arbitration award was a violation of their treaty. These proceedings were consolidated as Lao Holdings N.V. and Sanum Investments Limited v. Lao People’s Democratic Republic, ICSID Case No. ARB(AF)/16/2, ICSID Case No. ADHOC/17/1 and are still pending.)
Second, the investors challenged the government’s termination of a project development agreement due to an alleged breach of its terms by the investors. After examining the facts, the tribunal found that shareholder John Baldwin demonstrated bad faith throughout his dealings with the government and that such bad faith was attributable to the subsidiaries directly or indirectly held by the investors.
Third, the investors challenged the government’s refusal to renew an operation licence for one of their investments. However, the tribunal found that the investors did not have a right to the renewal of their investment and that the investors or investments did not attempt to renew the licence. Once again, the tribunal attributed Baldwin’s bad-faith activities to the companies.
Last, the investors challenged the government’s revocation of a licence to open a gambling facility days after its issuance. Noting lack of insufficient evidence of bad faith on either side in this setting, the tribunals found the licence was mistakenly issued in the first place and concluded that “it was simply a commercial possibility that never reached the stage of agreement” (Sanum award, para. 250; LHNV award, para. 225).
Sanum could not bring claims other than expropriation as China–Laos BIT Art. 8(3) only allows for “disputes over the amount of compensation for expropriation.” As arbitration under the Netherlands–Laos BIT has a broader scope, the ICSID tribunal entertained LNHV in reviewing its claims that Laos allegedly violated other treaty rights, including the provisions on FET, denial of justice, non-discrimination and the umbrella clause.
However, the LHNV tribunal concluded that all those allegations failed on the facts (para. 239). LHNV’s testimonies only served to confirm the tribunal’s conclusion that “in no doubt … Baldwin and LHNV exhibited manifest bad faith in various efforts not only to manipulate the Government to advance their gambling initiatives but…to manipulate the arbitration process itself” (para. 239). Reiterating that “the bad[-]faith conduct of the investor is relevant to the grant of relief under an investment treaty” (para. 237), the tribunal found that Baldwin’s bad-faith conduct provided “added reasons to deny the Claimant LHNV the benefit of Treaty protection” (para. 280).
The tribunals dismissed all claims and ordered the claimants to bear all costs of the arbitrations, totalling USD 3.5 million, and to pay Laos for its legal costs incurred in defending the two proceedings, amounting to USD 2.6 million.
Notes: Both tribunals were composed of Bernard Hanotiau (claimants’ appointee, Belgian national) and Brigitte Stern (respondent’s appointee, French national). The Sanum tribunal was presided over by Andres Rigo Sureda (appointed by the Secretary-General of the PCA, Spanish national). The LHNV tribunal was presided over by Ian Binnie (appointed by the parties, Canadian national). The Sanum award is available at https://www.italaw.com/sites/default/files/case-documents/italaw10708.pdf, and the LHNV award is available at https://www.italaw.com/sites/default/files/case-documents/italaw10703.pdf
Joe Zhang is a Law Advisor in IISD’s Economic Law and Policy Group.