{"id":6435,"date":"2019-06-27T08:20:36","date_gmt":"2019-06-27T13:20:36","guid":{"rendered":"https:\/\/www.iisd.org\/itn\/?p=6435"},"modified":"2024-08-09T18:29:53","modified_gmt":"2024-08-09T16:29:53","slug":"icsid-tribunal-constituted-by-virtue-of-an-mfn-clause-holds-turkmenistan-liable-for-fet-breach-for-requiring-investors-to-produce-smeta-a-cost-estimate-required-by-turkmen-law-ksenia-koroteeva","status":"publish","type":"post","link":"https:\/\/www.iisd.org\/itn\/2019\/06\/27\/icsid-tribunal-constituted-by-virtue-of-an-mfn-clause-holds-turkmenistan-liable-for-fet-breach-for-requiring-investors-to-produce-smeta-a-cost-estimate-required-by-turkmen-law-ksenia-koroteeva\/","title":{"rendered":"ICSID tribunal constituted by virtue of an MFN clause holds Turkmenistan liable for FET breach for requiring investors to produce “smeta,” a cost estimate required by Turkmen law"},"content":{"rendered":"

Garanti Koza LLP v. Turkmenistan, ICSID<\/span> Case No. ARB\/11\/20<\/h2>\n

On December 19, 2016, an ICSID tribunal ordered Turkmenistan to pay compensation for denial of FET<\/span> to Garanti Koza, a British company ultimately controlled by Turkish nationals.<\/p>\n

Factual background and claims<\/h3>\n

In 2007, Garanti Koza was awarded a contract to build 28 of the 119 bridges along the highway between the cities of Mary and Turkmenabad, for the lump sum price of USD 100 million. The award of the contract between Turkmenistan\u2019s State Concern Turkmenavtoyollary (TAY) and Garanti Koza was approved by Presidential Decree No. 9429.<\/p>\n

Both the contract and the decree required Garanti Koza to complete its work in October of 2008. Work at the bridge sites had been planned to commence on May 1, 2008, but actually began on July 25, 2008. Garanti Koza justified the delay by TAY\u2019s refusal to pay invoices.<\/p>\n

TAY argued that Garanti Koza\u2019s payment application was rejected not because of delays in the completion of the project, but because there was no smeta<\/em>\u2014the document containing approximate estimate of expenses, commonly used in post-Soviet countries. Although the contract did not mention smeta<\/em>, Turkmenistan argued that the contract was governed by Turkmen law, which required Garanti Koza to present smeta<\/em> anyway.<\/p>\n

In 2010, TAY terminated the contract and instructed the Prosecutor General of Turkmenistan to commence proceedings against Garanti Koza in the Arbitrazh<\/em> (Commercial) Court of Turkmenistan, the forum designated by the contract. The next day, the court adopted an order attaching Garanti Koza\u2019s assets as a provisional measure granting TAY security for amounts owed to it by Garanti Koza.<\/p>\n

Garanti Koza initiated ICSID arbitration in 2011, contesting the compatibility of these measures with the 1995 United Kingdom\u2013Turkmenistan BIT<\/span>. It alleged that Turkmenistan\u2019s measures breached, among others, the expropriation, FET and full protection and security (FPS) standards under the BIT.<\/p>\n

Jurisdiction: The tribunal imports consent to ICSID arbitration through the MFN<\/span> clause<\/h3>\n

BIT Article 8(2) identifies three arbitration rules to which an investor and Turkmenistan together may agree <\/em>to refer the dispute: ICSID, ICC<\/span> or UNCITRAL<\/span>. Article 8(2) also says that, if \u201cthere is no agreement to one of the above alternative procedures,\u201d the dispute shall <\/em>be submitted by investor to arbitration under the UNCITRAL Rules.<\/p>\n

Turkmenistan argued that it never agreed to refer its dispute with Garanti Koza to ICSID arbitration and, therefore, that the ICSID tribunal lacked jurisdiction to hear the dispute; the dispute may be heard by an UNCITRAL tribunal only. Moreover, under the ICSID Convention<\/span>, Turkmenistan\u2019s consent to ICSID arbitration must be expressed in writing, which is manifestly absent in the dispute with Garanti Koza.<\/p>\n

Garanti Koza argued that Turkmenistan\u2019s consent to submit the dispute to ICSID arbitration may be created by operation of the MFN clause in the BIT. Given that other investors\u2014for instance, Swiss investors under the Switzerland\u2013Turkmenistan BIT\u2014may choose to arbitrate their disputes at ICSID, Garanti Koza claimed that it should be given the same opportunity.<\/p>\n

The majority of the tribunal affirmed its jurisdiction over the dispute, given that Turkmenistan:<\/p>\n

    \n
  1. Consented in the United Kingdom\u2013Turkmenistan BIT to submit investment disputes to international arbitration<\/em>.<\/li>\n
  2. Promised to accord to British investors and their investments treatment not less favourable than that accorded to investors of other states or their investments.<\/li>\n
  3. Expressly provided that the MFN treatment \u201cshall apply\u201d to the dispute resolution provision of the BIT.<\/li>\n
  4. Provided investors of third states, specifically Switzerland, with an unrestricted choice between ICSID Arbitration and UNCITRAL Arbitration.<\/li>\n<\/ol>\n

    Arbitrator Laurence Boisson de Chazournes appended a dissenting opinion, saying that consent cannot \u201cbe imported <\/em>from one treaty to another treaty\u201d (p. 22). She considered that for the purposes of ascertaining the tribunal\u2019s jurisdiction, it shall first and foremost analyze \u201cwhether consent to ICSID arbitration is or is not established <\/em>under the UK\u2013Turkmenistan BIT\u201d (p. 22). She argues that in the dispute with Garanti Koza the consent to ICSID arbitration was absent.<\/p>\n

    Definition of investment: The Salini test does not apply to ICSID arbitration<\/h3>\n

    Turkmenistan also objected to the existence of an investment. Relying on the Salini<\/em> test, the state argued that Garanti Koza failed to satisfy the criteria of risk, duration and contribution.<\/p>\n

    Garanti Koza questioned the application of the Salini <\/em>test in the ICSID context. Alternatively, it argued that the tribunal should follow ICSID cases that view the test as a set of flexible and liberal characteristics. Even so, Garanti Koza maintained that its investment fulfilled the Salini <\/em>test.<\/p>\n

    The tribunal underlined that BIT Article 1(a) defines \u201cinvestment\u201d to mean \u201cevery kind of asset\u201d and provides a non-exclusive, illustrative list of assets. It found that Garanti Koza negotiated a contract to build bridges in Turkmenistan, put resources into the country and actually built a number of bridges; therefore, its activities qualified as investments.<\/p>\n

    Importantly, the tribunal refused to apply the Salini<\/em> test. According to the tribunal, the term \u201cinvestment\u201d as used in the ICSID Convention refers to the definition of investment in the applicable BIT. The tribunal concluded that by satisfying the definition of investment in the United Kingdom\u2013Turkmenistan BIT, Garanti Koza\u2019s investment satisfied the ICSID Convention\u2019s definition of investment.<\/p>\n

    Existence of protected investor: Place of incorporation matters the most<\/h3>\n

    Turkmenistan also advanced that Garanti Koza was not a British investor. It argued that Garanti Koza undertook no actions of its own accord; rather, the bid was submitted and the tender was won entirely on the basis of the reputation and track record of Garanti Koza \u0130n\u015faat (GKI), its Turkish parent company. Garanti Koza\u2019s managers presented themselves not as representatives of the unknown British company, but rather as representatives of GKI, an experienced and well-known Turkish construction company.<\/p>\n

    Garanti Koza argued that it\u2014not GKI\u2014had made the investment in Turkmenistan. It relied, among others, on the fact that the contract was entered into between Turkmenistan and Garanti Koza and approved by more than nine Turkmen government authorities.<\/p>\n

    The tribunal concluded that the BIT contains no specific definition of \u201cinvestor,\u201d but that its substantive provisions protect \u201cinvestments of nationals or companies of the other Contracting Party.\u201d According to the tribunal, Garanti Koza satisfied the sole requirement of the BIT to bring its investments within the protection of the treaty, namely, that it be incorporated in the United Kingdom.<\/p>\n

    Never-ending debate: Treaty and contract claims<\/h3>\n

    Turkmenistan also contended that ICSID was not the proper forum for the resolution of a purely contractual dispute, but that it must be submitted to the Arbitrazh<\/em> (Commercial) Court of Turkmenistan, selected by the parties in the contract.<\/p>\n

    However, the tribunal agreed with Garanti Koza that ICSID was the proper forum, as the causes of action arise out of provisions of the BIT, rather than the contract. The tribunal also endorsed the \u201celevating\u201d effect of umbrella clauses, applying their ordinary meaning in accordance with VCLT<\/span> Article 31.<\/p>\n

    Expropriation: Turkmenistan\u2019s measures fall within the legal procedure under domestic law<\/h3>\n

    Garanti Koza claimed that Turkmenistan\u2019s measures amounted to direct and indirect expropriation. It also proposed importing an additional requirement for lawful expropriation from Article 5 of the France\u2013Turkmenistan BIT, namely, that an expropriation must not be contrary to a specific commitment of the host state.<\/p>\n

    However, the tribunal refused this proposal as well as Garanti Koza\u2019s expropriation claims. It concluded that the termination of the contract and the seizure of Garanti Koza\u2019s factory and equipment was a matter of normal legal process under Turkmen law, following Garanti Koza\u2019s default under the contract.<\/p>\n

    FET and FPS: Imposing smeta on foreign investors is unfair and inequitable<\/h3>\n

    The tribunal ruled that Turkmenistan\u2019s insistence that Garanti Koza\u2019s payment invoices conform to smeta<\/em> was a breach of Turkmenistan\u2019s FET obligation. It underlined that the insistence on smeta<\/em> invoicing forced Garanti Koza to choose between submitting accurate invoices, and consequently accepting less compensation than it had bargained for, or manipulating its invoices to receive the full compensation that TAY had agreed to pay. The tribunal considered that using governmental power to put an investor in such a situation is fundamentally unfair and therefore amounts to an FET breach.<\/p>\n

    The tribunal refused to address the FPS claim, as it substantially overlapped with Garanti Koza\u2019s FET submissions. It also rejected Garanti Koza\u2019s claims for termination of the contract, loss of factory and equipment as well as tax penalties imposed by Turkmenistan.<\/p>\n

    Costs and damages<\/h3>\n

    The tribunal awarded the investor damages of USD 2,529,900 for Turkmenistan\u2019s requirement to use smeta<\/em>. It noted that although Garanti Koza prevailed in the arbitration, it was awarded only about 5 per cent of the compensation it sought; accordingly, the tribunal denied Garanti Koza\u2019s application for reimbursement of its legal fees and expenses. Each party was ordered to bear its own legal costs.<\/p>\n

    Notes<\/em>: The tribunal was composed of John M. Townsend (U.S. national, president appointed by the Chair of the ICSID Administrative Council), George Lambrou (Greek national and British resident, claimant\u2019s appointee) and Laurence Boisson de Chazournes (French and Swiss national, respondent\u2019s appointee). The decision on the objection to jurisdiction for lack of consent, the award and the dissenting opinion of arbitrator Boisson de Chazournes are available at https:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw8189_12.pdf<\/a><\/u><\/p>\n

    Ksenia<\/strong>\u00a0Koroteeva<\/strong>\u00a0is pursuing the MIDS LL.M. in International Dispute Settlement in Geneva. Previously, she worked as legal counsel and tribunal secretary at the Russian Arbitration Center (RAC).<\/p>\n