İçkale İnşaat Limited Şirketi v. Turkmenistan, ICSID Case No. ARB/10/24
An arbitral tribunal at the International Centre for Settlement of Investment Disputes (ICSID) has issued its award on the claims by a Turkish company against Turkmenistan. It found the claims admissible, despite an unusually worded arbitration agreement in the Turkey–Turkmenistan bilateral investment treaty (BIT). The award also found that failure to access local remedies did not preclude arbitration of the dispute.
On the merits, the tribunal declined to endorse the claimant’s theory that Turkmenistan’s substantive commitments in other investment treaties were applicable under the BIT’s most-favoured-nation (MFN) provision.
İçkale İnşaat Limited Şirketi (İçkale), a Turkish company engaged in the design, development and implementation of real estate and infrastructure projects, opened a branch office in Turkmenistan in 2004. Between March 2007 and July 2008, İçkale entered numerous construction contracts with various Turkish state entities.
Subsequently, İçkale began to encounter resistance from its state-owned business partners, which it attributed in large part to the political dynamics following the death of Turkmenistan’s founding President. İçkale alleged that the scope of works was expanded without additional compensation, that there were unjustified delays in payment and that the host state imposed unfair penalties.
The claimant initiated ICSID arbitration under the BIT in 2010. The arbitration related to 13 construction projects, which included schools, kindergartens, a hotel and a cinema. İçkale claimed US$570 million in compensation relating to consequential damages, and loss of reputation, goodwill and business opportunities.
Parties disagree on novel fork-in-the-road clause
The claimant argued that the BIT contains a type of fork-in-the-road clause, which sets out that resorting to local courts is optional, but that if an investor chooses that option, it can only subsequently submit the dispute to arbitration if the local courts have not rendered a decision within a year. For the claimant, only the English and Russian versions of the BIT need be considered, and the Russian version was inaccurately translated from the English version.
The respondent argued that the domestic litigation requirement is apparent from all three versions of the BIT, that is, the English, Russian and Turkish versions. According to the Russian version in particular, the phrase in question could only be understood as “on the condition that” or “provided that.” Furthermore, the English version’s “provided that, if” clause did not have an ordinary meaning.
The tribunal noted that it was undisputed that both the English and Russian versions were authentic, but that the parties disagreed on how the Russian version should be translated to English. It further noted that the relevant rules of treaty interpretation are reflected in the Vienna Convention on the Law of Treaties (VCLT), specifically in Articles 31 through 33. Article 33, in particular, deals with the interpretation of treaties authenticated in two or more languages.
Tribunal addresses interpretation of BIT’s multiple versions
The tribunal considered the first step in establishing the meaning of the BIT to be the general rule of treaty interpretation as set out in VCLT Article 31. When read in this context, it was evident to the tribunal that Article VII(2) of the BIT, and in particular the “provided that, if” clause, is drafted in a manner that effectively leaves its meaning unclear or obscure. Rather than seeking a “corrected” version of the provision (para. 199), the tribunal was obligated to have recourse to supplementary means of interpretation under VCLT Article 32.
According to Article 32, the supplementary means of interpretation to which the tribunal may resort include “the preparatory work of the treaty” and “the circumstances of its conclusion.” However, there was very limited evidence of preparatory works other than in relation to the Turkish version. As such, the tribunal had to decide at this stage whether it could be considered an “authentic” version. The tribunal ultimately determined that only the English and Russian versions of the BIT may be considered authentic versions and, as such, returned to the interpretation of the “provided that, if” in light of the available, albeit limited, supplementary means of treaty interpretation set out in VCLT Article 32. Here, the “the circumstances of its conclusion” took on considerable significance. However, the evidence as inconclusive and did not allow the tribunal to determine the meaning of the English version of the BIT.
The arbitrator appointed by the claimant—in a dissenting opinion, which is referenced below—disagreed with the tribunal on certain characterizations of expert evidence and underlying treaty provisions. Even so, in the context of the facts, treaty language, treaty practice and evidence in this particular case, the dissenting arbitrator accepted the tribunal’s interpretation of Article VII(2).
Domestic litigation requirement found in Russian version of treaty
The tribunal therefore turned to the interpretation of the Russian version of the BIT. While the respondent argued that the Russian uses language that is clearly mandatory on its face, the claimant maintained that it “can be translated in a manner that is literally the same as the English version” (para. 219). Having carefully reviewed the expert evidence, including both the expert opinions and the oral evidence, the tribunal decided to accept the respondent’s expert’s evidence on the proper translation. While the English version remained obscure, the Russian version was clear and unambiguous. The BIT did not establish which version prevails in case of divergence. Pursuant to the relevant rule of treaty interpretation in VCLT Article 33(4), the tribunal concluded by majority, to interpret Article VII(2) of the BIT so as to require recourse to domestic courts before international arbitration proceedings may be commenced.
International arbitration claims are admissible
Having found that Article VII(2) contains a domestic litigation requirement, the tribunal had to consider whether İçkale had failed to comply. The tribunal found that Article VII(2) sets out an admissibility requirement, rather than a question of jurisdiction.
The claimant acknowledged that it had not submitted the dispute to the local courts, but argued that domestic litigation would have been futile and was therefore unnecessary under well-established international law dating back to the 1903 Selwyn case. The tribunal found that the BIT’s requirement was not a reflection or incorporation of a rule of customary international law, but rather a lex specialis in the treaty itself. As a matter of admissibility, the consequences of İçkale’s non-compliance had to be determined in light of its procedural nature. In view of various facts related to the existence of related litigation in Turkish courts, the tribunal concluded that it would not be appropriate to require the claimant to first submit the present dispute to local courts.
Although in agreement with the final outcome, the arbitrator appointed by Turkmenistan disagreed with the tribunal’s interpretation of Article VII(2). According to the dissent, Article VII(2) went to jurisdiction rather than admissibility. The dissent also disagreed, on the facts of this case, that İçkale’s failure to take prior recourse to the national courts was not a bar to the admissibility of the claims.
No grounds for importing substantive protections in Turkmenistan’s other treaties
The tribunal also had to address the issue of MFN protection. The claimant sought to rely on the BIT’s MFN clause and non-derogation clause to advance claims relating to fair and equitable treatment (FET), full protection and security (FPS), non-discrimination standard and the umbrella clause. According to İçkale, the term “treatment” in the relevant articles of the BIT should be understood to cover at least the substantive protections provided to other foreign investors. Turkmenistan argued that the MFN clause does not allow such “importation” and that in any event the scope of application of the clause is limited to “similar situations” (para. 327).
The tribunal found the ordinary meaning of the MFN clause’s terms to suggest that each party agreed to treat investments in a manner no less favourable than the treatment accorded in similar situations to investments by investors of any third state. In particular, the words “treatment accorded in similar situations” suggested that the MFN obligation required a comparison of the relevant factual situations.
The tribunal disagreed with İçkale’s argument that any matters, including substantive protections, which are not expressly excluded from the scope of the MFN clause should be considered to be within in its scope. Nor was the tribunal able to agree with the argument that it can rely on the BIT’s derogation clause to import substantive investment protection standards included in other investment treaties concluded by Turkmenistan.
On the remaining allegations of unlawful expropriation, the tribunal was unable to conclude on the facts that such claims could be sustained. Ultimately, İçkale’s claims were dismissed in their entirety for lack of merit.
Claimant ordered to reimburse 20 per cent of respondent’s arbitration costs
The relevant rule on costs was Article 61(2) of the ICSID Convention, which does not prescribe any particular approach to the allocation of costs and thus granted the tribunal a considerable degree of discretion. Both parties accepted the “costs follow the event” principle. In view of the substantially greater amount spent by Turkmenistan on legal and expert fees and keeping in mind that the hearing was postponed at the respondent’s request, the majority found it appropriate to order İçkale to reimburse 20 per cent of the respondent’s arbitration costs (US$1.7 million).
Notes: The tribunal was composed of Veijo Heiskanen (President appointed by the Chairman of the Administrative Council, Finnish national), Carolyn Lamm (claimant’s appointee, U.S. national), and Philippe Sands (respondent’s appointee, British national). The final award as well as the partially dissenting opinions by Carolyn Lamm and by Philippe Sands, dispatched to the parties on March 8, 2016, are available at http://www.italaw.com/sites/default/files/case-documents/italaw7163_1.pdf.
Matthew Levine is a Canadian lawyer and a contributor to IISD’s Investment for Sustainable Development Program.