Iran wins its first investor-state case

The Islamic Republic of Iran has won its first ever investor-state arbitration in a decision against Turkish mobile phone company, Turkcell. The tribunal concluded that Turkcell was not a qualified investor under the Iran-Turkey bilateral investment treaty (BIT) given that it had only participated in a tender process (which it won) and had not yet made an investment into the country. It followed, therefore, that Turkcell was not entitled to the protections of the BIT following a change in the law which meant that Turkcell could no longer operate the project it had tendered for.  

For the reasons explained below, the outcome of the arbitration itself was not particularly surprising. However, the fact that it involved, and resulted in a positive outcome for, Iran is significant and has drawn a spotlight on the 48 bilateral investment treaties which Iran has ratified. Assuming the Iranian economy becomes more open to foreign investment in the future, these protections will be an important consideration for those who consider investing.

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Next video post in the “Observations on Arbitration” series: Enforcement of Awards

In the next of our video posts in the “Observations on Arbitration” series, Matthew Weiniger QC discusses the enforcement of arbitration awards, including: when enforcement should be considered; key considerations to assist enforceability; the differences between recognition and enforcement; enforcement under the New York Convention on the Recognition and Enforcement of Arbitral Awards 1958 and other enforcement regimes; and, other ways in which a successful party may realise the benefit of an award. 

The video posts can be downloaded to your computer for offline viewing.

Click here to download the video

Matthew Weiniger QC
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If there are particular topics which you would like us to cover in the series or for further information, please contact Hannah Ambrose or Vanessa Naish.

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New South Wales Supreme Court orders partial enforcement of foreign arbitral award where breach of natural justice found in relation to one claim

In William Hare UAE LLC v Aircraft Support Industries Pty Ltd [2014] NSWSC 1403, the plaintiff, a company incorporated in Abu Dhabi, sought enforcement of a foreign arbitral award under the International Arbitration Act 1974 (Cth).  The enforcement was challenged by the defendant on grounds that a breach of public policy occurred in connection with the making of the award.  The defendant claimed principally, that the tribunal’s finding that the plaintiff was entitled to payment of US$50,000 when a claim for that sum was not made and the tribunal’s alleged failure to consider contentions of the defendant with respect to a variation of the relevant agreement constituted a breach of natural justice.  The defendant also based its challenge on the refusal of the tribunal to allow the defendant to rely on supplementary grounds of defence and the tribunal’s failure to give reasons for a number of its findings.

The arbitration hearing had been held in the UAE in December 2013 after several adjournments (at the request of the defendant).  At the hearing, the defendant made application to rely on certain supplementary defences, including a defence that the tribunal was not competent.  The application was heard de bene esse and the substantive hearing followed.

The award was issued on 1 May 2014.

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A breakthrough for Financial Services Arbitration?

Nicholas Peacock, Dominic Kennelly and Emily Blanshard consider the arbitral award and judgment of the English High Court in Travis Coal Restructured Holdings LLC v Essar Global Fund Ltd – which suggest that summary procedures may be available to tribunals in appropriate cases – and their implications for the use of arbitration by banks and other  financial institutions.

To read the full article please click here.

Nicholas Peacock
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Dominic Kennelly
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Emily Blanshard
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This article has been reproduced with the kind permission of Global Arbitration Review and was first published in GAR MAGAZINE VOLUME 9 ISSUE 5.

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Exxon Mobil is awarded US$1.6 billion in ICSID claim against Venezuela – to be set off against award in parallel contractual arbitration

On 9 October 2014, a tribunal of H.E. Judge Gilbert Guillaume (President), Professor Kaufmann-Kohler and Dr. Ahmed Sadek El-Kosheri rendered a final Award on the case Venezuela Holdings and others v. the Bolivarian Republic of Venezuela, ICSID Case NO. ARB/07/27.

Five subsidiaries of Mobil Corporation (the “Claimants”) initiated the arbitration in 2007 claiming compensation for Venezuela’s alleged breaches of the Netherlands-Venezuela BIT in relation to a series of state actions which affected the Claimants’ investments in the Cerro Negro Project in the Orinoco Belt and the La Ceiba Project adjacent to Lake Maracaibo.

After 7 years of proceedings the Tribunal ordered Venezuela to pay to the Claimants: (i) US$9,042,482 in compensation for the production and export curtailments imposed on the Cerro Negro Project; (ii) US$1,411.7 million in compensation for the expropriation of their investments in the Cerro Negro Project; and (iii) US$179.3 million in compensation for the expropriation of their investments in the La Ceiba Project. The compensation amount is much closer to the valuations put forward by Venezuela in the arbitration, than the US$ 16.6 billion requested by the Claimants.

Of particular note in the Award is the Tribunal’s finding that Venezuela’s expropriation of Claimants’ assets was lawful. Even when no compensation was paid, the Tribunal concluded that: the expropriation was conducted in accordance with due process; it was not carried out contrary to undertakings given to the Claimants; and the Claimants did not establish that the offers made by Venezuela were incompatible with the “just” compensation requirement of Article 6(c) of the BIT.

This approach contrasts with the decision of the majority of the tribunal hearing a similar claim against Venezuela brought by ConocoPhillips (ConocoPhillips Petrozuata B.V., ConocoPhillips Hamaca B.V. and ConocoPhillips Gulf of Paria B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/30). In that case, the majority found that the expropriation was unlawful because Venezuela did not approach negotiations with ConocoPhillips in good faith and it only offered book-value, rather than fair market value compensation for the assets (Decision on Jurisdiction and Merits dated 3 September 2013).

There are a number of open questions about the level of compensation payable following an illegal expropriation as compared to a legal expropriation. In this case the Claimants submitted that the expropriation was unlawful and that, as a consequence, Venezuela was under the obligation to make full reparation for the damages caused, in conformity with international law. By contrast, Venezuela contended that even if the expropriation were deemed to be unlawful the indemnity to be paid to the Claimants must represent the market value of the investment at the date of the expropriation. The Tribunal decided that since it had found that the expropriation was lawful it did not need to consider the standard for compensation in case of unlawful expropriation or whether it would differ from the standard for compensation to be paid in case of lawful expropriation. It held that the compensation must be calculated in conformity with the requirements of the BIT which required “just compensation” and that “just compensation” should represent the market value of the investments affected immediately before the measures were taken. Therefore, it employed the date of the expropriation of Claimants’ assets (June 2007) as the valuation date, which had considerable significance in the amount of compensation since the market price of oil increased in the years that followed the expropriations.

The Tribunal also grappled with the parties’ respective cases on whether a risk of confiscation is part of the country risk that is taken into account in determining the discount rate for the purposes of valuing the assets using the Discounted Cash Flow Method. The Tribunal concluded that a confiscation risk remains part of the country risk and must be taken into account in the determination of the discount rate.

To avoid double-recovery, the Tribunal held that the amount already received by the Claimants under a parallel ICC Award should be discounted to the total compensation payable to the Claimants.

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English Court finds that it is “just and convenient” to grant a worldwide freezing order in support of London-seated arbitration even where all assets are outside England

In a further decision in the case of U & M Mining Zambia Ltd v Konkola Copper Mines PLC [2014] All ER (D) 136 (Oct), the English Commercial Court granted U&M Mining Zambia Ltd (“U&M”)’s application to continue a Worldwide Freezing Order (“WFO”) over the assets of Konkola Copper Mines PLC (“KCM”). U&M had been granted the WFO on an ex parte basis to prevent KCM’s dissipation of assets before it had satisfied the various arbitration awards granted by a London-seated tribunal (the “Awards”). For the background to the case, see our blog posts here, here and here.

The Court upheld the application. Where the seat of arbitration is London, it will ordinarily be appropriate for the English court to issue orders in support of the arbitration, but there may be reasons why, notwithstanding that the seat is in England, that it is not appropriate. A WFO, being an order which operates in personam by requiring the defendant not to dissipate his assets in a way that will render enforcement impossible or more difficult, is conceptually different from enforcement of an award, which requires an asset to be attached. The mere fact that enforcement will take place in Zambia was thus insufficient to make it inappropriate to grant a WFO. Even if the Zambian Court could also grant a freezing order, this did not make it inappropriate for the English court to do so.

This case confirms that a WFO in support of sums awarded by a London-seated tribunal can be granted by the English court, even if the assets against which the award will be enforced are outside the jurisdiction and it may be appropriate for another court to grant that same relief. The willingness of the English court to issue such relief should provide reassurance to parties who choose to seat their arbitrations in London, even where the contractual arrangements and/or the assets against which an award will ultimately be enforced are located outside England.

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Thwarting attempts to avoid execution: English Court orders appointment of receivers over foreign assets to assist enforcement of a London award

In a judgment handed down on 2 October 2014 in Cruz City 1 Mauritius Holdings v Unitech Limited & Ors, the English High Court made an order under s37 of the Senior Courts Act 1981 for the appointment of receivers over the foreign assets of two foreign Defendants, as well as ancillary orders it considered necessary to render that order effective, to assist the Claimant in realising an arbitration award in its favour. In doing so, the English Court emphasized yet again its commitment to the policy that arbitration awards should be enforced.

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A unique interactive convention: Shaping the Future of International Dispute Resolution

A convention being held next month at the Guildhall, London, on Shaping the Future of International Dispute Resolution will bring together an extensive cross-section of ADR and arbitration service providers, corporate users and thought leaders to discuss the future direction of international dispute resolution (IDR) mechanisms.

The Lord Mayor of London is supporting the convention as the keynote speaker and Herbert Smith Freehills is delighted to be the platinum sponsor.

Organised by the International Mediation Institute, the IDR Group and the Centre for Effective Dispute Resolution, the convention has been brought together with the cooperation of a host of other leading ADR and arbitration institutions and users from across the globe (listed below).   With panellists and speakers from BP, Shell, BT, Standard Chartered Bank, GE, Orange, Marks and Spencer, Hinduja Group, Thales and Northrop Grumman, this will be an occasion for corporate users of ADR and arbitration to discuss with their peers – and to influence – the way forward for IDR.

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Long-awaited EU-Canada trade agreement agreed – a blueprint to set the standard for future investment protection?

On Friday 26 September, after five years of negotiations, the EU and Canada agreed in principle to a text for the Comprehensive Economic Trade Agreement (CETA). It is certainly comprehensive, running to 1,500 pages. It is the first such agreement signed by the EU as part of its policy (since the Lisbon Treaty) of assuming competence for trade and investment from the individual Member States. Its contents have therefore been keenly anticipated as an indication of the tone of future agreements, particularly as regards investment protection and investor-state dispute resolution (ISDS) contained in Chapter X.

CETA’s provisions are comprehensive as regards both of these areas, but with significant caveats, largely mirroring the drafts that have so far been made public in the EU-US forthcoming agreement in the Transatlantic Trade and Investment Partnership (TTIP) (see our earlier post on the TTIP consultation here).

As its Preamble sets out, the agreement expressly recognizes “that the protection of investments… stimulates mutually beneficial business activity“. At the same time, it stresses principles of governmental autonomy (including enforcement of labour and environmental laws) which can in some circumstances limit the rights of the investor. It also points out the responsibility of businesses to respect “internationally recognized standards of corporate social responsibility“, bringing these soft law norms into the ambit of the agreement.

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Bhutan and Guyana become the 151st and 152nd States party to the New York Convention

On 26 September 2014, Bhutan and Guyana deposited instruments of accession to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (commonly known as the New York Convention), becoming the 151st and 152nd States party to the Convention. Guyana has acceded to the Convention without any reservations, while Bhutan has made two: the “commerciality reservation”, which means that the Convention will only apply to disputes characterized as commercial under municipal law, and the “reciprocity reservation”, which means that the State party may choose to recognize and enforce only arbitral awards that are made in other States party (the Convention provides otherwise that all arbitral awards should be recognized and enforced wherever they are made). The Convention will enter into force for both countries on 24 December 2014.

For further information, please contact Andrew Cannon, Partner, Vanessa Naish, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.

Andrew Cannon
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Vanessa Naish
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