{"id":7517,"date":"2019-12-17T00:31:13","date_gmt":"2019-12-17T06:31:13","guid":{"rendered":"https:\/\/www.iisd.org\/itn\/?p=7517"},"modified":"2024-08-09T18:30:30","modified_gmt":"2024-08-09T16:30:30","slug":"laos-prevails-in-defending-its-first-known-treaty-based-isds-cases-lao-holdings-n-v-v-lao-peoples-democratic-republic-icsid-case-no-arbaf-12-6-and-sanum-investments-limited-v-lao-uncitral-pca-2013-13","status":"publish","type":"post","link":"https:\/\/www.iisd.org\/itn\/2019\/12\/17\/laos-prevails-in-defending-its-first-known-treaty-based-isds-cases-lao-holdings-n-v-v-lao-peoples-democratic-republic-icsid-case-no-arbaf-12-6-and-sanum-investments-limited-v-lao-uncitral-pca-2013-13\/","title":{"rendered":"Laos prevails in defending its first known treaty-based ISDS cases"},"content":{"rendered":"

Lao Holdings N.V. v. Lao People’s Democratic Republic, ICSID<\/span> Case No. ARB(AF)\/12\/6, and Sanum Investments Limited v. Lao People’s Democratic Republic, UNCITRAL<\/span>, PCA<\/span> Case No. 2013-13<\/h2>\n

On August 6, 2019, tribunals in two parallel proceedings against the People\u2019s Democratic Republic of Lao (Laos) issued final awards dismissing all claims raised by the claimants while awarding Laos legal fees and arbitration costs.<\/p>\n

Background<\/h3>\n

The two proceedings arose from the same facts. In 2007, two American businessmen\u2014John Baldwin and Shawn Scott\u2014established several gambling facilities in Laos via Macau-registered Sanum Investments (Sanum), a subsidiary of their Dutch holding company Lao Holdings N.V. (LHNV). After a few years of operation, several disputes arose between the investors and their Laos local partner centred on issues relating to profit sharing and the early termination of several planned expansions.<\/p>\n

Alleging that the government of Laos interfered during the process by conspiring with the foreign investors’ local partner to seek to drive them out of Laos, the investors launched two separate proceedings: LNHV initiated ICSID arbitration under the 2003 Netherlands\u2013Laos BIT<\/span>; Sanum initiated a PCA-administered UNCITRAL arbitration under the 1993 China\u2013Laos BIT. (At the jurisdictional phase, the Sanum<\/em> tribunal found the China\u2013Laos BIT applies to Macao under the customary international law rules of state succession.) The proceedings were never consolidated but for the most part were conducted jointly by the two tribunals.<\/p>\n

Corruption and bad faith<\/h3>\n

At the outset of the proceedings, Laos asked the tribunals to dismiss all claims, alleging the investors conducted illegal activities such as bribery and corruption at both the inception and during the operation of the investment. Seeing this as a merits issue, not a jurisdictional challenge, the tribunals provided a detailed analysis of Laos\u2019 defence.<\/p>\n

The tribunals first looked at the applicable laws. Recalling that the parties agreed that domestic law is relevant in determining whether an investment needs to be made and operated according to the law of the host state, the tribunals found that \u201cthere is no doubt that bribery and corruption are contrary to the domestic laws of Laos\u201d (Sanum <\/em>award, para. 95; LHNV <\/em>award, para. 97).<\/p>\n

Turning to international law\u2014in particular citing relevant provisions of UN Convention Against Corruption and the OECD<\/span> Convention on Combating Bribery of Foreign Public Officials in International Business Transactions\u2014the tribunal recognized that as \u201ca principle of customary international law,\u201d corruption should not be used \u201cto obtain or retain business or other undue advantage in relation to the conduct of international business\u201d (Sanum <\/em>award, para. 103; LHNV <\/em>award, para. 105). Further, the tribunals considered that \u201cproof of corruption at any stage of the investment may be relevant\u201d (Sanum<\/em> award, para. 103; LHNV<\/em> award, para. 105).<\/p>\n

The tribunals moved on to examine the applicable standard of proof, and concluded that \u201cgiven the seriousness of the charge, and the severity of the consequences \u2026 \u2018clear and convincing\u2019 evidence \u2026 must point clearly to corruption,\u201d in other words, \u201ca standard higher than the balance of probabilities but less than the criminal standard of beyond reasonable doubt\u201d (Sanum <\/em>award, para. 107\u2013108; LHNV <\/em>award, para. 109\u2013110).<\/p>\n

After reviewing the evidence submitted by Laos, although the tribunals found certain transactions \u201csuspicious\u201d or even found plausible evidence indicating that the investors illicitly channelled money to Lao government officials (Sanum <\/em>award, paras. 147\u2013156; LHNV<\/em> award, paras. 148\u2013157), the tribunals were disturbed by the fact that \u201cno prosecutions have been brought against any persons alleged to have accepted bribes, nor has there been evidence of due diligence in any investigation\u201d (Sanum <\/em>award, para. 111; LHNV<\/em> award, para. 112). As Laos failed to provide a convincing explanation for its failure to track down bribe-takers, the tribunal found it failed to meet its burden of proof per the required standard of \u201cclear and convincing\u201d evidence for those corruption allegations.<\/p>\n

On the other hand, the tribunal confirmed that investors have \u201cgood faith obligations \u2026 in the host country\u201d and that serious conduct incompatible with such obligations \u201cis not without Treaty consequences, both in relation to their attempt to rely on the guarantee of [FET], as well as their entitlement to relief of any kind from an international tribunal\u201d (Sanum <\/em>award, para. 104; LHNV <\/em>award, para. 106).<\/p>\n

After a review of the evidence, the tribunal found that the circumstances disclosed met a lower standard of \u201cbalance of probabilities,\u201d which cast doubts as to the investors\u2019 good faith and the legitimacy of their claims. This, in turn, resulted in the tribunal\u2019s later decision to dismiss all of the investors\u2019 claims.<\/p>\n

Expropriation claims<\/h3>\n

The investors presented a series of expropriation claims, but the tribunals found that none of them merited relief.<\/p>\n

First, the investors referred to a contract dispute between them and their local Lao partner, which resulted in a multi-stage local court proceeding and a later commercial arbitration award in favour of the investors, which they were unable to enforce. Despite their claim that the government had interfered during the earlier judicial process, the tribunal found \u201csimply no persuasive evidence\u201d supporting their argument of alleged interference, and hence no merit in the claim.<\/p>\n

(In 2016, the investors filed two separate proceedings claiming that their alleged inability to enforce the commercial arbitration award was a violation of their treaty. These proceedings were consolidated as Lao Holdings N.V. and Sanum Investments Limited v. Lao People\u2019s Democratic Republic<\/em>, ICSID Case No. ARB(AF)\/16\/2, ICSID Case No. ADHOC\/17\/1 and are still pending.)<\/p>\n

Second, the investors challenged the government\u2019s termination of a project development agreement due to an alleged breach of its terms by the investors. After examining the facts, the tribunal found that shareholder John Baldwin demonstrated bad faith throughout his dealings with the government and that such bad faith was attributable to the subsidiaries directly or indirectly held by the investors.<\/p>\n

Third, the investors challenged the government\u2019s refusal to renew an operation licence for one of their investments. However, the tribunal found that the investors did not have a right to the renewal of their investment and that the investors or investments did not attempt to renew the licence. Once again, the tribunal attributed Baldwin\u2019s bad-faith activities to the companies.<\/p>\n

Last, the investors challenged the government\u2019s revocation of a licence to open a gambling facility days after its issuance. Noting lack of insufficient evidence of bad faith on either side in this setting, the tribunals found the licence was mistakenly issued in the first place and concluded that \u201cit was simply a commercial possibility that never reached the stage of agreement\u201d (Sanum <\/em>award, para. 250; LHNV <\/em>award, para. 225).<\/p>\n

Other claims<\/h3>\n

Sanum could not bring claims other than expropriation as China\u2013Laos BIT Art. 8(3) only allows for \u201cdisputes over the amount of compensation for expropriation.\u201d As arbitration under the Netherlands\u2013Laos BIT has a broader scope, the ICSID tribunal entertained LNHV in reviewing its claims that Laos allegedly violated other treaty rights, including the provisions on FET<\/span>, denial of justice, non-discrimination and the umbrella clause.<\/p>\n

However, the LHNV <\/em>tribunal concluded that all those allegations failed on the facts (para. 239). LHNV\u2019s testimonies only served to confirm the tribunal\u2019s conclusion that \u201cin no doubt \u2026 Baldwin and LHNV exhibited manifest bad faith in various efforts not only to manipulate the Government to advance their gambling initiatives but\u2026to manipulate the arbitration process itself\u201d (para. 239). Reiterating that \u201cthe bad[-]faith conduct of the investor is relevant to the grant of relief under an investment treaty\u201d (para. 237), the tribunal found that Baldwin\u2019s bad-faith conduct provided \u201cadded reasons to deny the Claimant LHNV the benefit of Treaty protection\u201d (para. 280).<\/p>\n

Dispositions<\/h3>\n

The tribunals dismissed all claims and ordered the claimants to bear all costs of the arbitrations, totalling USD 3.5 million, and to pay Laos for its legal costs incurred in defending the two proceedings, amounting to USD 2.6 million.<\/p>\n

Notes<\/em>: Both tribunals were composed of Bernard Hanotiau (claimants\u2019 appointee, Belgian national) and Brigitte Stern (respondent\u2019s appointee, French national). The Sanum<\/em> tribunal was presided over by Andres Rigo Sureda (appointed by the Secretary-General of the PCA, Spanish national). The LHNV <\/em>tribunal was presided over by Ian Binnie (appointed by the parties, Canadian national). The Sanum<\/em> award is available at https:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw10708.pdf<\/a>, and the LHNV<\/em> award is available at https:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw10703.pdf<\/a><\/p>\n

Joe Zhang<\/strong> is a Law Advisor in IISD<\/span>’s Economic Law and Policy Group.<\/p>\n