Cementownia claim against Turkey found to be «manifestly ill-founded»

By Elizabeth Whitsitt

November 3, 2009

On September 17, 2009 an ICSID tribunal dismissed yet another claim initiated against the Republic of Turkey by an entity, Cementownia “Nowa Huta” S.A. (“Cementownia”), operated by the Uzan family.  As previously reported*, the Uzans are a wealthy Turkish family whose members have been enmeshed in multiple disputes around the world related to allegations of fraud – and this case is no different.**

Seeking damages in amounts exceeding USD $4 billion, Cementownia commenced arbitral proceedings against Turkey in the fall of 2006 for alleged breaches of the Energy Charter Treaty (“ECT”).  Similar to the facts in parallel proceedings against Turkey which involve entities operated by the Uzan family, Cementownia asserted its standing to commence international arbitration on the basis of its alleged shareholdings in two Turkish electricity corporations, Çukurova Elektrik A.S. (“CEAS”) and Kepez Elektrik Türk A.S. (“Kepez”), which saw their concession agreements with the Turkish Ministry of Energy terminated in June 2003.

Crucial to the jurisdictional question facing the tribunal was whether Cementownia had in fact acquired an interest in the two Turkish electricity companies prior to the termination of their concession agreements.

As noted by the tribunal, “prior to the date of the alleged sale and purchase of the shares, the matters complained of involved the Turkish State and Turkish nationals, all operating exclusively within the framework of Turkish law. Being a Turkish national holding shares in CEAS and Kepez, under the [ECT], Mr. Kemal Uzan could not bring an international claim against his own State. This could only occur if a person holding foreign nationality owned or controlled the investment.”  Thus, Cementownia argued that it acquired Mr.Uzan’s shareholdings in the two electricity companies 12 days prior to the termination of each corporation’s concession agreements.

In the face of such arguments, however, Cementownia never adduced any concrete evidence substantiating the precise timing of its share acquisitions.  Consequently, after numerous unsuccessful requests for the production of the original bearer share certificates, both parties sought dismissal of Cementownia’s claims on grounds that the tribunal lacked jurisdiction, albeit with different reasoning.

Cementownia requested the tribunal to base its reasoning solely on its inability to produce the original share certificates.  In contrast, Turkey requested the tribunal to render an award which scrutinized all aspects of Cementownia’s standing to sue and to dismiss the claim with prejudice and with an award of damages and costs in its favour.

After considering the arguments of both Cementownia and Turkey, the tribunal sided with Turkey and decided to dismiss the claim with prejudice.  In so doing, the tribunal made a number of findings that foreclosed Cementownia’s ability to recommence arbitral proceedings against Turkey.

Given Cementownia’s failure to produce original share certificates evidencing its shareholdings in CEAS and Kepez, the inconsistent evidence respecting the precise date of Cementownia’s share acquisition, the circumstances in which the share transaction occurred (i.e. via telephone and with rudimentary contracts), and the fact that Cementownia did not record the share transaction in its own financial statements in 2003 and 2004, the tribunal decided that Cementownia “…had not produced any persuasive evidence that could prove either its shareholding in CEAS and Kepez at the relevant time or that it was an investor within the meaning of the ECT.”

In addition, the tribunal found that Cementownia’s claim was “manifestly ill-founded” and noted that the Cementownia “…intentionally and in bad faith abused the arbitration; it purported to be an investor when it knew that this was not the case…” and was “guilty of procedural misconduct: once the arbitration proceeding was commenced, it…caused excessive delays and thereby increased the costs of the arbitration.”

In spite of this finding, the tribunal refused Turkey’s request for damages reasoning that it was more appropriate to sanction Cementownia with respect to the allocation of costs.  As such, Cementownia was ordered to pay Turkey US $5,304,822.06, which represented its legal fees and expenses and its contribution to the costs of the arbitral proceedings.

* “Tribunal dismisses claim by Europe Cement against Turkey; Claimant ordered to bear cost of the arbitration”, by Damon Vis-Dunbar, September 2009, available here: http://www.investmenttreatynews.org/content/archives.aspx

** For example: Europe Cement Investment & Trade S.A. v. Republic of Turkey (ICSID Case No. ARB(AF)/07/2); Libananco Holdings Co. Limited v. Republic of Turkey (ICSID Case No. ARB/06/8); Polska Energetyka Holding SA v. Republic of Turkey (ad-hoc UNCITRAL arbitration)

Award Cementownia “Nowa Huta” S.A. v. Republic of Turkey is available at: http://ita.law.uvic.ca/documents/CementowniaAward.pdf