Krederi Ltd. v. Ukraine ICSID Case No. ARB/14/17
On July 2, 2018, an ICSID tribunal denied that Ukraine violated its obligations under the 1993 Ukraine–United Kingdom BIT and rejected the due-process claims raised by the claimant, British investor Krederi Ltd. (Krederi). The tribunal ordered each party to bear its own legal fees and half of arbitration costs, while ordering Ukraine to reimburse Krederi the amount of USD 313,711.67, corresponding to half the costs of the proceedings that the investor had advanced.
Background and claims
Krederi’s subsidiaries acquired two Ukrainian companies that had recently purchased three land plots (Plots 1, 2, and 3) previously owned by the City of Kiev. The Kiev City Council (KCC) approved the land acquisitions, but in the years leading to the dispute they were invalidated through a series of judicial acts.
First, the Kiev City District Administrative Court, following a claim filed by the Deputy Prosecutor of Kiev (DPK), declared KCC’s approval of the acquisitions invalid for reasons of procedural irregularities in the decision making of KCC (Case 1). Second, the Economic Court of Kiev, in proceedings also initiated by DPK, declared the contracts between KCC and Krederi’s subsidiary for the acquisition of the Plot 1 invalid (Case 2). Third, the decision of the Kiev Economic Court ordered the restitution of Plot 1 to the City of Kiev, on DPK’s request (Case 3). Last, the DPK initiated a case to invalidate the KCC’s approval of the acquisition of Plots 2 and 3 by Krederi’s subsidiaries (Case 4).
Krederi launched ICSID arbitration against Ukraine in 2014. It argued that the four cases initiated by DPK were conducted in an irregular fashion and thus fell short of due process, constituting a denial of justice in violation of Article 2 of the BIT.
Ukraine’s jurisdictional objections rejected
In starting its analysis of Ukraine’s jurisdictional objections, the tribunal held that Krederi’s indirect full ownership of the Ukrainian subsidiaries constitutes a covered investment under the BIT. In this regard, the tribunal clarified that specific knowledge of the host state that the investor and its investment are covered by the BIT is not required.
Ukraine’s first jurisdictional challenge relates to its consent to ICSID arbitration. Article 8.2 of the BIT provides for three options for ISDS to which the disputing parties may agree to refer the dispute—among which ICSID—while stipulating UNCITRAL Arbitration as a fall-back “forum” in case of disagreement. Based on its reading of the Ukrainian version of the BIT, Krederi proposed that only the investor could choose a “forum.”
The tribunal attempted to reconcile the alleged difference in meaning by resorting to VCLT Article 33.4 (para. 271). By examining the two versions in light of the interpretative principle of effet utile, it decided to follow the English version and concluded that Ukraine did not consent to ICSID arbitration under the dispute settlement provision (Article 8.2) of the BIT (para. 280–281).
However, accepting Krederi’s alternative argument, the tribunal upheld its jurisdiction by virtue of the operation of the MFN clause contained in Article 3 of the BIT. According to the tribunal, the precise wording of the MFN clause clearly covers the ISDS clause (Article 8). The tribunal held that state parties to a BIT can agree to extend the reach of an MFN clause to importing a host state’s consent to jurisdiction from a more favourable third-party BIT (para. 283–325).
In the present case, the tribunal concluded that Ukraine effectively consented to ICSID arbitration under Article 8.1 and that the operation of the MFN merely extends the availability of ICSID to the investor (para. 327–340). In the tribunal’s view, access to ICSID is a more favourable treatment of investors provided for in other Ukrainian BITs, such as the 1994 Canada–Ukraine BIT (para. 341).
Also as a jurisdictional objection, Ukraine argued that the investment did not comply with the legality requirement under the BIT. The tribunal clarified that only sufficiently serious violations of domestic law would deprive an investor of its BIT rights (para. 348) and concluded that the possible violation of a registration requirement did not meet that threshold. Similarly, it concluded that the lack of clarity of the domestic law on the prohibition of financing the establishment of a company via intra-company loans could not deprive Krederi of its BIT rights (para. 370).
Lastly, the tribunal rejected Ukraine’s admissibility objection over bad faith, corruption, and “unclean hands,” finding no adequate or sufficient factual evidence to support the allegations (paras. 385–394).
Ukraine’s probable judicial and administrative deficiencies did not amount to a denial of justice
The tribunal considered that due process and the prohibition of the denial of justice are core obligations of FET and are violated when serious deficiencies and failure to accord due process are identified (paras. 436–437). Elements to be considered are undue delay, exhaustion of local remedies, serious defects in the adjudicative process, denial of access to courts and egregiously wrong application of law (para. 449).
Here, the tribunal dismissed the denial of justice claim since the procedural irregularities that may characterize the four cases could not be equated to an “outrageous failure of the judicial system” (paras .447, 469, and 631).
In Case 1, the tribunal recognized some merit in allegations that the case was wrongly litigated before administrative courts and that the statute of limitations had expired. However, it did not consider these irregularities sufficiently grave to satisfy a denial of justice allegation (para. 528).
In Case 2, Krederi reintroduced its argumentation on the violation of the statute of limitations and additionally alleged that the domestic court did not provide equal rights to one of Krederi’s subsidiaries since the court failed to properly notify the subsidiary. However, the tribunal reiterated its analysis on the statute of limitations and further rejected the second argument as Krederi’s subsidiary did not seek to become a party to the dispute in the first place (paras. 566–568).
In Case 3, the tribunal considered that the possible irregularities could not amount to gross violations of due process, finding no indication that the outcome was reached without any fundamental valid reason and noting that Krederi did not raise the due-process allegation during the domestic procedures (paras. 591–600).
Lastly, in Case 4, Krederi’s arguments included a fundamentally wrong outcome and a wrongful application of domestic law. The tribunal reiterated that any possible misapplication of domestic law could not be considered an egregious breach of due process so as to amount to a denial of justice (paras. 622–624).
Tribunal dismisses all other FET, full protection and security (FPS), impairment and expropriation claims
Krederi raised various additional FET violations, such as failure to maintain a stable legal environment and lack of transparency, without substantial analysis, which the tribunal dismissed (para. 634–635).
The tribunal rejected as unfounded Krederi’s allegation that Ukraine abusively harassed its subsidiaries via criminal investigations, as Krederi did not indicate in what regard Ukrainian authorities carried out those investigations (para. 639–640). Similarly, the tribunal considered Krederi’s FPS claim meritless since Krederi had not substantiated how Ukraine failed in its due diligence obligation to prevent interference or attacks by third parties or state organs (paras. 651–656).
Regarding the allegation of unreasonable impairment of Krederi’s investments, the tribunal reiterated its findings under the claim of denial of justice and added that the DPK’s actions for the restitution of the land could not be considered as wholly discretionary (para. 672–673).
Lastly, the tribunal considered that the due-process obligation is inherent in expropriation clauses and that judicial actions could only amount to expropriation if a procedural illegality or denial of justice had occurred (paras. 706, 713–715)—which, as the tribunal reiterated, was not the case here.
Conclusions and allocation of costs and fees
The tribunal clarified that all claims were dismissed but raised concerns that the outcome was unsatisfactory and uncomfortable since the investment was retained by Ukraine while the investor did not recoup its original sale price (para. 718).
Examining the outcome of the arguments raised and the good-faith behaviour of the parties before and during the proceedings, the tribunal ordered each party to bear its own legal fees and half of arbitration costs (para. 739–741).
Notes: The tribunal was composed of August Reinisch (president appointed by the parties, Austrian national), Markus Wirth (claimant’s appointee, Swiss national) and Gavan Griffith (respondent’s appointee, Australian national). Excerpts of the award of July 2, 2018, are available at https://www.italaw.com/sites/default/files/case-documents/italaw11040.pdf
Marios Tokas is an international lawyer based in Geneva. He is pursuing his Master’s in international law at the Graduate Institute of International and Development Studies. He holds an LL.M. in public international law and an LL.B. from the University of Athens. He is currently interning at IISD’s Geneva Office.