Awards and Decisions
Majority declines jurisdiction in claim against Argentina over domestic litigation requirement
Daimler Financial Services AG v. Argentine Republic, ICSID Case No. ARB/05/1
A claim against Argentina by a subsidiary of the German automotive firm Daimler A.G. has failed on its merits because the claimant did not first bring the dispute to court in Argentina.
The split decision is another reminder of the divisions among arbitrators on the scope of the Most Favoured Nation (MFN) provision and its relation to dispute resolution.
Daimler Financial Services’ (DFS) claim is one of the many springing from Argentina’s policies during its financial crisis in 2001-2002. Among other things, Argentina allowed US dollar denominated debt obligations to be settled in Pesos—a policy change that proved damaging to DFS’s Argentine subsidiary, DCS Argentina, which provided loans denominated in US dollars.
18-month domestic court requirement
Like a number of Argentine BITs—and those of other South American countries—the Argentina-Germany treaty states that disputes shall be referred to the courts of the host state; and if within an 18-month period the dispute has been not been resolved, it may then proceed to international arbitration.
In its 22 August 2012 decision, the majority concluded that the treaty is stringent in demanding that disputing parties obey the domestic court requirement. Quoting the like-minded Wintershall tribunal, “the word ‘shall’ in treaty terminology means that what is provided for is legally binding.”
Nor did the majority accept—as other tribunals have done—that the requirement is a procedural matter, which the tribunal may exercise its discretion to accept or discard, as opposed to a requirement that underpins the tribunal’s jurisdiction.
The majority also considered whether the MFN provisions allowed the claimants to access dispute resolution clauses in other Argentine BITs, such as the treaty with Chile, which do not contain domestic court requirements. Here tribunal determined that the claimant would first need to fulfill the domestic court requirement before the tribunal would have jurisdiction to consider the MFN provision.
However, the tribunal noted the exception: jurisdiction could exist if there is evidence that Germany and Argentina intended for the MFN provisions to apply to the BIT’s dispute settlement provisions.
The majority looked for “affirmative evidence” of state consent. As the tribunal explained: “What is not permissible is to presume a state’s consent by reason of the state’s failure to proactively disavow the tribunals’ jurisdiction. Non-consent is the default rule; consent is the exception. Establishing consent therefore requires affirmative evidence.”
State parties’ intentions
Given that the BIT’s MFN provisions do not state whether they extend to dispute settlement provisions, the majority considered the scope and meaning of the term “treatment” at the time of the BIT’s negotiation in 1991. The majority concluded that treatment was generally considered to concern the direct treatment experienced by the investor in the host country, “not the conduct any international arbitration arising out of that treatment.”
Also important to the tribunal was the MFN provision’s reference to treatment by the host state “in its territory.” Whereas international arbitration “almost without exception takes place outside the territory of the Host State and which per definition proceeds independently of any state control,” stated the majority.
Moreover, the majority doubted whether a requirement to litigate in domestic courts was necessarily less favourable than international arbitration. Using these proceedings as an example— the case began in 2004—the tribunal noted that “the average time required to resolve disputes via international arbitration may equal or exceed that of domestic court processes.”
Similarly, the majority remarked that the Argentina-Chili BIT—the so-called “comparator” BIT—demands that parties choose between either domestic litigation or international arbitration through its fork-in-the-road clause. In contrast, the Argentina-Germany BIT allows claimants to pursue international arbitration in the case that domestic courts fail the resolve the dispute.
For these and other reasons, two members of the three-person tribunal, Pierre-Marie Dupuy (president) and Domingo Bello Janeiro (respondent’s appointee) failed to see evidence that Argentina and Germany intended for the MFN clause to include the BIT’s dispute settlement provisions.
Judge Brower’s dissent
Charles N. Brower, the claimant’s appointee, found flaws with many aspects of the majority’s conclusions on the MFN provisions relationship to the 18-month domestic court requirement. The majority’s discussion “is not simply unconvincing; it is profoundly wrong,” stated Brower in his dissenting opinion. “Regrettably, the type and quality of arguments raised by the Award leave no room for agreement with my Tribunal colleagues.”
Brower rejected the majority’s approach of seeking “affirmative evidence,” which he found overly restrictive and without basis in the relevant BIT or ICSID Convention. “The Award does not cite a single source of public international law that embraces the principle that ‘affirmative evidence’ is required in interpreting dispute resolution or other investment treaty clauses,” wrote Brower.
Disagreement also emerged on how to interpret the case law on MFN provisions and dispute settlement. The majority described a divided field, stating that “at least nine (tribunals) have found that a particular BIT’s MFN clause (includes dispute settlement), while another ten have reached the opposite result.”
Brower, however, countered that “this conclusion lumps together cases concerning such diverse applications of the MFN clause that the Award’s attempt at presenting a ‘divided field’ is meaningless.” Brower instead zeroed in on those tribunals that have considered the question in disputes involving Argentine BITs, and concludes that of 11 known cases, 9 have ruled that the MFN clause encompasses dispute settlement. The field is “far from being ‘dramatically split’” stated Brower.
Domingo Bello Janeiro explains change of mind
Janeiro departed from his earlier position in the 2004 Siemens A.G. v. Argentina decision on jurisdiction. In that decision, the tribunal—which also included Judge Brower—unanimously agreed that the MFN provision of the Argentina-Germany BIT extends to dispute settlement.
In a separate opinion, Janeiro explained his change of mind, noting at the onset that arbitrators have the freedom to modify their positions. Janeiro noted that three factors have been particularly influential.
First, the case law has become more varied, with cases emerging that are critical of the position taken by the Siemens tribunal. Janeiro notes the Wintershall tribunal, which took a unanimous decision to decline jurisdiction in a case under the Argentina-Germany BIT, as especially convincing.
Second, a number of states, including Argentina, have since sought to clarify that they did not intend for MFN provisions to encompass dispute settlement.
Third, more sophisticated analysis has emerged since Siemens. The “Siemens tribunal did not conduct an analysis of several of the points now covered extensively and very carefully by this award …” stated Janeiro.
Other jurisdictional issues
While the MFN and dispute settlement question preoccupied the tribunal, it also dealt with four other objections to jurisdiction, all of which were dismissed.
First, Argentina argued that the dispute was contractual in nature, and should be dealt with according to the forum selection clauses of the relevant contracts. The tribunal concluded, however, that DFS’s claim was not over contracts with its customers, but over Argentina’s alleged violations of the Argentina-Germany BIT.
Second, Argentina charged that the claimant, as a shareholder of DCS Argentina, was ineligible to bring an “indirect” claim against Argentina. However, the tribunal noted that the BIT’s coverage of investments includes “shares or stock in a company or any other form of participation in a company.”
Third, Argentina argued that the regulation of its currency in response to a national emergency “is a matter falling within its exclusive sovereignty under international law.” In response, the tribunal acknowledged Argentina’s “right to regulate its economy as it sees fit,” but noted that general sovereignty was not at issue in the dispute. Rather, the question was whether that regulation contravenes commitments made in the Argentina-Germany BIT.
Finally, Argentina argued that DFS was not the proper claimant, given that it sold its shares in DCS Argentina to its parent company (DaimlerChrysler AG). Here the tribunal decided that neither international law nor German law (which governs the share price agreement) prevented DFS from filing its claim. Under German law, the tribunal concluded that the right to bring a claim is not automatically transferred along with the shares, but must be explicitly stated in the agreement. The tribunal also decided that ICSID claims do not require “continuous ownership”; rather, what matters is that the claimant suffered damages at the time the host government allegedly breached the BIT.
The tribunal ordered the parties to split the costs of the arbitration, and bear their own legal costs, noting that each presented sound legal arguments during the course of the proceedings.
The award is available here: http://www.italaw.com/sites/default/files/case-documents/ita1082.pdf
The dissenting opinion of Charles N. Brower is available here: http://www.italaw.com/sites/default/files/case-documents/ita1083.pdf
Domingo Bello Janeiro’s separate opinion is available here: http://www.italaw.com/sites/default/files/case-documents/ita1084.pdf
Tribunal qualifies Russia’s actions towards Yukos as expropriatory Quasar de Valores SICAV S.A., Orgor de Velores SICAV S.A., GBI 9000 SICAV S.A., ALOS 34 S.L. v The Russian Federation, SCC
An SCC tribunal added another piece to the Yukos saga, deciding over the claims of its minority shareholders, brought under the Spain-USSR BIT.
The claimants alleged that Russia dispossessed Yukos of its assets and expropriated them by means of several abuses of executive and judicial power. Russia, instead, considered its actions towards Yukos a legitimate application of its tax laws.
In its 20 July 2012 award, the tribunal primarily observed that its mandate was limited to establishing whether Russia committed an expropriation and whether any adequate compensation was paid to the investors. The BIT, in fact, did not demand a determination on the lawful or unlawful character of the expropriation.
The tribunal took note of two decisions rendered in the wake of Yukos’ liquidation: the RosInvest award and the Yukos v Russia judgment of the European Court of Human Rights. The panel underlined that it was not bound by these decisions. Nevertheless, it stated that it would “pay respectful heed” to the analysis and conclusions reached in the two proceedings, considering that both sides of the present dispute made submissions as to their relevance for the case.
Third party funding did not constitute abuse of process
Russia asserted that the claimants engaged in an abuse of process after they disclosed that the costs of the proceedings were entirely borne by Group Menatep, Yukos’ majority shareholder and party in another arbitration against Russia. Russia argued that the claimants were not the true party in interest in the proceedings, and were “nothing more than willing shills in Group Menatep’s lifetime litigation.”
The tribunal found this objection unpersuasive. It considered that the claimants purchased shares in Yukos and were thus entitled to act under the BIT. It concluded that they had towards Menatep “nothing more than a moral debt of gratitude” and no legal obligation to share the profits of the dispute.
Russia’s collection of taxes from Yukos was part of an expropriatory pattern
In 2003 the Ministry of Taxation began a series of audits into Yukos’ tax strategy. A first regular audit revealed no irregularity. Nevertheless, seven months later, an extraordinary re-audit found vast tax liabilities. Yukos’ tax benefits were then revoked and additional taxes, associated with the income of its affiliated companies, were attributed to it. Yukos was also denied the VAT refunds to which the same trading companies were entitled.
The claimants complained that Russia’s tax claims had no basis in law. Russia, however, countered that Yukos’ tax optimization strategy, based on the use of intermediary affiliates established in domestic low-tax jurisdictions, was illegitimate. Russia affirmed that the company breached a rule of good faith, engaging in sham transactions and reaching tax benefits disproportionate to the investments it made in the domestic tax heavens.
The tribunal was not persuaded by Russia’s arguments. It acknowledged that the existence of low-tax regions in Russia raised a number of policy issues, but stated that corrections to a legal regime should be introduced by way of legislative amendment, and not by “ad hoc administrative determinations.”
The tribunal was equally unwilling to consider that Yukos engaged in sham transactions, finding nothing “surreptitious” or “disguised” in its operations. The tax authorities’ approach in attributing the affiliates’ actions to Yukos was dismissed as “rather cavalier” and “reaching for the nearest available general legal text for the sake of appearance.”
Russia intentionally prevented Yukos from discharging its tax debts
The claimants contended that Russia made it impossible for Yukos to discharge its alleged tax liabilities. They argued that Russia failed to consider any proposal for alternative means of payment and instead chose to seize Yuganskneftegaz (YNG), Yukos’ most valuable asset. For the claimants, Russia’s true desire was to obtain control over YNG, and not to collect Yukos’ taxes.
Russia asserted that the seizure did not affect the capability of Yukos to fulfill its tax obligations. The asset freeze did not encompass the company’s subsidiaries and did not affect its principal activity. Yukos simply did not want to pay.
The tribunal observed that a seizure, by itself, is not an internationally wrongful act. However, it considered that its timing and the scope substantially hampered Yukos from paying its debts. Moreover, the failure to respond to the company’s multiple settlement offers shed significant doubts on Russia’s good faith.
Yukos’ alleged tax delinquency was a pretext for transferring its assets to Rosneft
As a result of the asset freeze, Yukos defaulted on a significant loan issued by a foreign consortium; consequently, the consortium filed a bankruptcy petition before the Russian Courts. After the petition was accepted, Rosneft, a state-owned company, purchased the loan and replaced the consortium in the bankruptcy proceedings. Yukos’ restructuring proposals were rejected and the company was liquidated.
The claimants maintained that Russia manipulated the liquidation auctions. The price was set lower than the one established by the court-appointed expert. The auction was publicly announced in an unusually short time. Finally, the sole bidder and winner of the auction was BFG, an unknown company, which a few days later and before the purchase price was due, was acquired by Rosneft.
Russia objected that the auction was consistent with Russian law and with international practice, but the panel concluded that it was only part of the same scheme of confiscation.
The tribunal finally ruled that Russia’s goal was indeed to expropriate Yukos and considered that the claimants were entitled to an adequate compensation.
Russia has to “pay for what it took”
In assessing the amount of compensation the arbitrators expressed doubts on the date chosen by the claimants for determining Yukos’ last meaningful share price. However, since Russia failed to present any alternative to it, the tribunal followed claimants’ approach and ordered the Federation to “simply pay for what it took,” amounting to US$2 million plus interest in damages for the claimants. The total valuation of Yukos in November 2007 was pegged at US$62.1 billion.
Meanwhile, Russia continues to defend itself in three separate cases brought by the majority shareholders of Yukos, and which are being heard by the same tribunal.
The tribunal was composed by Jan Paulsson (chair), Toby Landau (Russia’s nominee) and Charles Brower (claimants’ nominee).
Macedonia liable for damages for breach of the FET standard Swisslion DOO Skopje v. The Former Yugoslav Republic of Macedonia,
ICSID Case No. ARB/07/5
An ICSID tribunal ordered the Republic of Macedonia to pay the Swiss investor Swisslion DOO Skopje 350,000 euros in damages after concluding that the government’s actions amounted to a “composite” violation of fair and equitable treatment (FET) under the Swiss-Macedonia BIT.
In its 6 July 2012 award, the tribunal dismissed a series of other claims, including claims relating to expropriation and denial of justice. The claimant had been seeking some 21 million euros in damages.
The dispute arose out of a 2006 share sale agreement between Swisslion and Macedonia which gave the Swiss investor a controlling stake in Agroplod AD Resen, a food production company.
The Macedonia Ministry of Economy had concluded that Swisslion breached the agreement, in part by failing to inject sufficient working capital into Agroplod. As a result, the Ministry commenced legal proceedings in 2008 to terminate the agreement.
The Skopje Basic Court ultimately sided with the Ministry, terminating the share sale agreement and ordering the transfer of Swisslion’s Agroplod shares to the Ministry without compensation.
A ‘composite act’ in breach of the FET standard
In examining whether the government of Macedonia violated the obligation to grant Swisslion fair and equitable treatment, the tribunal refrained from discussing in detail its approach to interpreting the standard. The tribunal deemed “it unnecessary to engage in an extensive discussion of the fair and equitable treatment standard,” stating that the “standard basically ensures that the foreign investor is not unjustly treated, with due regard to all surrounding circumstances, and that it is mean to guarantee justice to foreign investors.”
Based on this approach it concluded that Macedonia had breached the FET standard, pointing to acts and omissions taken by the Ministry and other state organs prior to the court’s determination. The tribunal observed that there was a “series of measures that collectively amounted to a composite act in breach of the FET standard.”
In particular, the tribunal frowned on the Ministry’s lack of timely response to Swisslion’s requests for confirmation that its investments were in compliance with the share sale agreement; certain obstructionist actions taken by the Macedonia Securities and Exchange Commission; and the publication by the Ministry of the Interior of a criminal investigation against Swisslion without a subsequent notice of the prosecutor’s decision to drop the investigation.
The tribunal emphasized that while the Ministry and the court were within their rights to determine Swisslion’s contractual non-compliance, a state has “a duty to deal fairly with the investor by engaging with it, in particular to advise it of any concerns it may have had the investment might not be in compliance with the investor’s contractual obligations.”
No judicial expropriation
The tribunal rejected Swisslion’s claim that the Skopje Basic Court had unlawfully expropriated its shares in Agroplod without compensation, emphasizing that a predicate for judicial expropriation is an “unlawful activity of the court itself.” In the tribunal’s view, the actions of the Skopje Basic Court’s actions did not breach the Swiss-Macedonia BIT and therefore were not unlawful.
As for whether the court’s decision to not order the Ministry to pay Swisslion compensation for the confiscation of its Agroplod shares amounted to an expropriation, the tribunal noted that Swisslion was unable to prove a clear right to recover the purchase price of the shares after it made no attempt to claim compensation during the court proceedings.
No violation of the umbrella clause and no analysis of ‘impairment through unreasonable measures’
In its findings of fact, the tribunal noted that ambiguities in Swisslion’s business plan for Agroplod and the share sale agreement “could give rise to differing good faith interpretations” by the contracting parties. As such, the tribunal rejected Swisslion’s claim that Macedonia breached the Swiss-Macedonia BIT’s umbrella clause. That clause requires that either contracting party “shall constantly guarantee the observance of the commitments it has entered into with respect to the investments of the investors of the other Contracting Party.”
The tribunal also dismissed Swisslion’s claim, based on the Switzerland-Macedonia BIT’s non-impairment obligation, that Macedonia impaired its investments by “unreasonable measures” after concluding that these were better addressed within the context of the breach of the FET standard.
The tribunal was comprised of H.E. Judge Gilbert Guillaume (President), Daniel M. Price (Claimant’s Nominee) and J. Christopher Thomas, Q.C. (Respondent’s Nominee).
The award is available at: http://italaw.com/cases/documents/1517
Tribunal defers to Guatemalan judiciary, finds investor’s claims over electricity tariffs not a matter for international law
Iberdrola Energia S.A. v. The Republic of Guatemala, ICSID Case No. ARB/09/5
An ICSID tribunal has rejected a Spanish investor’s claims against Guatemala on the merits in a dispute over setting electricity tariffs.
In a decision handed down on 17 August 2012, the tribunal described the investor’s claims as presenting a mere dissatisfaction with the decisions of local courts and not a violation of international law.
In 1998 the Spanish-owned energy company Iberdrola led a consortium that won a public tender to purchase a majority stake in Guatemala’s recently privatized state electricity utility, EEGSA, for US$520 million. Under the terms of the agreement and relevant Guatemalan law, electricity rates were to be set every five years based on an estimate of what an efficiently run company would need to make a reasonable return on its investment.
The dispute arose during the process of setting tariffs for the 2008-2013 period. Following Guatemalan law EEGSA hired a consultant from a list pre-qualified by Guatemala’s National Electricity Commission (CNEE) to determine the new tariffs. In April 2008 a tariff report was submitted to CNEE, but the commission rejected it as deficient and asked for changes.
After some back and forth the two sides were unable to reach an agreement and the CNEE then called for an expert committee to determine if the amended report conformed to the law. The three-member expert committee eventually ruled that EESGSA’s report did not conform to the law, and ordered revisions to the report.
However, CNEE quickly disbanded the commission arguing that under Guatemalan law its role was simply to rule on whether the tariff report confirmed to the law. With EEGSA’s tariff study rejected, CNEE then adopted its own consultant’s study to set the tariff rates.
Iberdrola challenged both the disbanding of the commission and the adoption of tariffs from CNEE’s consultant through administrative and judicial processes in Guatemala. Ultimately Guatemalan courts determined that the expert committee only had jurisdiction to decide whether EEGSA’s consultant’s report conformed to the law, and that the CNEE was within its rights to disband the commission and adopt its own consultant’s report.
After failing in local courts, Iberdrola registered its dispute with ICSID on 17 April 2009. The company’s principal claim was that Guatemala’s actions amounted to an expropriation of its investment in violation of the Guatemala-Spain bilateral investment treaty. The company also alleged violations of Guatemala’s duties under the BIT to provide just and equitable treatment, full protection and security, and not to interfere with its investment by arbitrary measures. In its reply brief the company also added a denial of justice claim.
Guatemala objected to the tribunal’s jurisdiction, alleging that the dispute was a contractual one involving Guatemalan law and did not amount to a treaty violation.
The tribunal upheld Guatemala’s objections to jurisdiction on most claims, concluding that the company was merely appealing decisions that went against it in local courts.
“Beyond labeling the conduct of CNEE as treaty violations, the claimant did not present a dispute under the treaty and international law, but instead a technical, financial and legal debate over the provisions of the law of the respondent state,” said the tribunal.
“A tribunal constituted under the Treaty, cannot determine it has competence to judge, according to international law, the interpretation that a State has made of its internal regulations simply because the investor does not agree with it or considers it arbitrary or in violation of the Treaty,” it added.
Denial of justice claim
The tribunal upheld its jurisdiction to consider the denial of justice claim, stating: “In the case of a claim for denial of justice, the question is different. Even if only issues of domestic law are raised an international claim can arise if in this domestic arena justice has been denied.”
Based on previous cases the tribunal concluded there were three situations that could lead to a denial of justice: (1) unjustified refusal by a court to hear a matter within its competence or another state action having the effect of preventing access to justice, (ii) a improper delay in the administration of justice, and (iii) decisions or actions of state bodies that are clearly arbitrary, unfair, idiosyncratic or late.
In Iberdrola’s case, the tribunal found that the CNEE’s decisions and the Guatemalan judiciary’s subsequent upholding of the same did not fall into any of these categories; hence a denial of justice had not occurred.
Given the claimant lost on all counts, the tribunal held Iberdrola should pay all of its own costs and all of the costs of Guatemala.
The award is available here: http://www.italaw.com/sites/default/files/case-documents/ita1081.pdf