HSF team play key role in significant ICSID Award dealing with an Intra-EU BIT Case

Members of the HSF Paris disputes team have played a key role in obtaining a successful ICSID award for Chèque Déjeuner (“CD“), the French meal voucher issuer. The claim related to tax reforms introduced by the Orban government which effectively excluded CD (and other foreign voucher-issuers) from the Hungarian market. As a result, CD commenced ICSID proceedings under the France-Hungary bilateral investment treaty (“BIT“) in December 2013, alleging that Hungary had breached its obligations in respect of expropriation and fair and equitable treatment (“FET“).

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English Court of Appeal refuses Micula Appeal against stay of ICSID Award but orders Romania to provide £150m Security

In Micula & Ors v Romania [2018] EWCA Civ 1801 the English Court of Appeal (the “Court”) dismissed an appeal against the High Court’s stay of enforcement of a 2013 ICSID award in favour of Swedish investors Ioan and Viorel Micula (the “Appellants” or “claimants“) against Romania (the “Award“), but allowed an appeal against the High Court’s refusal to order Romania to provide security.

The Court’s judgment is interesting because although it reaches the same conclusion as the High Court in respect of staying enforcement of the Award, it does so for different reasons. In particular, the Court found (by majority) that:

  1. The High Court was correct to find that an ICSID award is res judicata under English law from the time of the award.
  2. Although the English Arbitration (International Investment Disputes) Act 1966 (the “1966 Act“), which implements the ICSID Convention into English law, requires that ICSID awards be treated in the same way as judgments of the High Court, this does not mean that EU law applies in the same way as it would apply to domestic judgments simply because the UK is a member state at the date of registration of the award.
  3. The principle of res judicata cannot be used to circumvent or significantly obstruct state aid rules (per the CJEU case of Klausner).
  4. Only operative terms (and not, for example, recitals) of EU Commission decisions are legally binding.

The Court’s decision is the latest in the long-running Micula saga, which began as a dispute arising out of Romania’s abolition of certain tax incentives in 2005 in order to comply with EU rules on state aid. Please see here for our blog post on the ICSID award.

The Award has been the target of decisions of the European Commission. In its final decision of 30 March 2015 (the “Final Decision“), the Commission found that payment of the Award by Romania would constitute new state aid incompatible with EU law, and was therefore prohibited. Please see here for our blog post on the Final Decision. The claimants have applied to the General Court of the European Union (the “GCEU“) to annul the Final Decision. The GCEU heard the application in March 2018 and a judgment is awaited.

In 2017, the High Court refused Romania’s application to set aside registration of the Award, but granted a stay of enforcement pending the decision of the GCEU on the annulment application. The Commission intervened in those proceedings. The High Court refused the claimants’ application for security in the meantime on the basis that it would itself risk breaching the Final Decision. The Appellants appealed against both the stay of enforcement and refusal to make the stay conditional upon payment of security. Please see here for our blog post on the High Court’s judgment, which was the subject of the present appeal.

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English Court Stays Enforcement of Micula ICSID Award Against Romania

In Micula & Ors v Romania & Anor [2017] EWHC 31 (Comm) the English High Court stayed enforcement of a 2013 ICSID award in favour of Swedish investors Ioan and Viorel Micula against Romania (the "Award"), but refused to set aside registration. Subsequently, in Micula & Ors v Romania & Anor [2017] EWHC 1430 (Comm) the English High Court gave permission to appeal the stay of enforcement but refused to make the stay conditional on the provision of security by Romania.

The English Court’s decisions in this case consider interesting aspects of the interplay between potentially conflicting obligations of national, international and EU law. In particular, the Court found that:

  1. as a matter of English law read with Article 54 of the ICSID Convention, an ICSID Convention award achieves finality, and becomes res judicata, at the time of the award; and
  2. the English Arbitration (International Investment Disputes) Act 1966 (the "1966 Act"), which implements the ICSID Convention into English law, only requires that ICSID awards be treated in the same way as judgments of the English High Court. Therefore, as a judgment of the High Court is subject to EU rules as to state aid, the Court is restrained from taking a decision which conflicts with the European Commission's decisions on state aid.

The Court's decision represents the latest development in the long-running dispute between the parties arising out of Romania’s abolition of certain tax incentives in 2005 in order to comply with EU rules on state aid. Please see here for our blog post on the ICSID award.

The Award has been subject to decisions of the European Commission. In its final decision of 30 March 2015 (the "Final Decision"), the Commission found that payment of the Award by Romania would constitute new state aid incompatible with EU law, and was therefore prohibited. Please see here for our blog post on the Final Decision. The claimants in the case invited the Court to assume that the Final Decision was valid.

Given the Court's decision, the parties will now await the outcome of (i) the claimants' application to the General Court of the European Union ("GCEU") to annul the Commission’s Final Decision, which is expected to be heard before the end of the year; and (ii) the claimants' appeal, if brought, against the English High Court's stay of enforcement of the Award.

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ICSID tribunal rules that it is neither necessary nor urgent to grant security for costs from a claimant with the benefit of third-party funding

An ICSID tribunal has rejected a State's application for security for costs in circumstances in which the other party had third-party funding in the form of ATE insurance which specifically provided for cover of the State's costs.

Italy's request for security for costs

The application formed part of arbitral proceedings brought by Eskosol S.p.A. in liquidazione ("Eskosol") under the Energy Charter Treaty and the ICSID Convention against the Italian Republic ("Italy"). Italy sought security for costs in support of its ICSID Arbitration Rule 41(5) application for summary dismissal of Eskosol's claims on the basis that they are manifestly without legal merit. 

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ICSID announces sixteen topics for consideration in its review of the ICSID Arbitration Rules

Following invitations to ICSID member States and the public to submit topics for potential review, ICSID has published a paper on the Rules Amendment Process. The paper lists sixteen topics which are to be canvassed in the next stage of the review. The topics include areas of arbitral practice which have been subject to much broader discussion – such as the disclosure of third party funding (a point picked up in the SIAC Investment Arbitration Rules which took effect earlier this year), and the possible introduction of a code of conduct for arbitrators. Also included for review are aspects of the procedure, such as consolidation, the annulment mechanism, the preliminary objections process and the possible publication of decisions and orders. Further, ICSID will consider security for costs and allocation of costs.

Each of the sixteen topics will be addressed by ICSID in background papers to be published in early 2018.  The goal of the amendments is to (i) incorporate lessons learnt from case law; (ii) to make the process increasingly time and cost effective whilst maintaining due process and a balance between investors and States, and (iii) make the procedure less paper-intensive.

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Live webcast of hearing on jurisdiction and the merits: United Utilities (Tallinn) B.V. and Aktsiaselts Tallinna Vesi v. Republic of Estonia (ICSID Case No. ARB/14/24)

A hearing on jurisdiction and the merits in ICSID Case No. ARB/14/24, United Utilities (Tallinn) B.V. and Aktsiaselts Tallinna Vesi v Republic of Estonia, will be transmitted live via internet feed from Monday, November 7, 2016 to Tuesday, November 15, 2016 (from 9:00 a.m. to approximately 5:00 p.m. CET (Central European Time) on November 10, 2016 and from 10:00 a.m. to approximately 6:00 p.m. CET on all other days).

This webcast is being made available pursuant to the parties’ agreement. To access the webcast, please click here.

Herbert Smith Freehills is co-counsel for the Claimants.

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ICSID issues Practice Notes for Respondents in ICSID Arbitration aimed at helping states avoid investment disputes and demystifying ICSID procedure

ICSID has published Practice Notes for Respondents in ICSID Arbitration (the "Notes"), a 31 page practical guidance note on ICSID arbitration brought under the ICSID Convention or the ICSID Additional Facility Rules. The Notes aim to answer the questions most frequently asked of ICSID by respondent states and investors. In particular, they are intended to assist "novice" states who have never participated in an investment claim before, although their content will be of interest to prospective investor claimants too. The Notes are available in English, French and Spanish.

The Notes begin by considering conflict prevention mechanisms to help states avoid the prospect of an Investment Treaty claim. This section considers points such as:

  • the importance of careful drafting in investment treaties to ensure the scope of their protections are clear; and
  • preventing disputes arising by developing an awareness of investment obligations within government.

The next section of the Notes moves to consider the pre-arbitration phase of an investment dispute. It looks at how notice of a dispute is given by an investor and how states should respond to such notice. It stresses that states "should pro-actively assess the cost-benefit of settlement as soon as they receive notice of a dispute", whether informally through discussions or through formal negotiation, mediation or early neutral evaluation. The section also considers how a state can best prepare once it has become aware of a possible dispute, including developing a case and media strategy, choosing legal counsel and budgeting for legal costs.

The main portion of the Notes aims to demystify the procedural steps in an ICSID arbitration, setting out the typical sequence of the arbitration from the Request of Arbitration through to the Post Award phase. The analysis focuses on aspects of procedure which may be important to a Respondent while arbitral proceedings are ongoing, suggesting factors that may guide the state's position and providing an occasional warning of consequences (e.g. that non-participation will not prevent the formation of a Tribunal). The Notes also offer guidance on the typical split of costs between legal counsel, Tribunal and ICSID fees.

For all sections there is a list of further reading for those interested in more detail.

Comment

This is a useful publication pitched at true ICSID novices, offering both practical and tactical advice for states in how to avoid disputes and prepare effectively when disputes do arise. It also seeks to guide those states through the ICSID process. While relatively high-level, the Notes, together with the additional reading guide in each section, offer a strong foundation for those states with limited awareness of investment arbitration to educate their officials and approach future claims from a firmer foundation of knowledge. In particular, the Notes have the potential to help states to avoid taking steps that may, in the long term, harm their position. Those with practical experience of ICSID arbitration will likely be aware of the majority of what is contained in the Notes, but they may also find one or two helpful reminders or suggestions of matters to think about.

Iain Maxwell
Iain Maxwell
Of Counsel
+44 20 7466 2646
Maximilian Szymanski
Maximilian Szymanski
Associate
+44 20 7466 2596

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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Argentina settles five outstanding investment treaty arbitration claims in historic break with its anti-enforcement stance

Argentina has agreed to settle five separate investment treaty arbitration claims at a cost of around USD 500 million, in an historic departure from the Latin American state’s refusal to comply with awards made by international investment treaty arbitration bodies.

It was reported in an Argentine newspaper last Thursday, and confirmed by the counsel involved, that the settlements relate to the French media conglomerate Vivendi SA, British electricity and gas utility National Grid PLC, Continental Casualty Company (a subsidiary of the American financial and insurance products provider CNA Financial Corp), the American water company Azurix, and Blue Ridge Investments, the wholly owned subsidiary of Bank of America Corp. These companies were each successful in bringing claims against Argentina through the International Centre for the Settlement of Investment Disputes (ICSID) over the past 12 years, with the exception of National Grid which brought its claim under the Rules of the United Nations Commission on International Trade Law (UNCITRAL Rules) and Blue Ridge Investments, which acquired the ICSID award from the original claimant, CMG Gas Transmission.

While the details of the settlement are not yet clear, local newspapers in Argentina report that the settlement agreement involves a reduction of 15% of the original amount of the awards (USD 677 million) and 45% of the interest accrued, leading to an overall nominal discount of 25% on the amount originally claimed. The settlement is to take the form of sovereign bonds, which is a controversial choice given that Argentina has also been subject to ICSID claims regarding the state’s default on sovereign bonds, several of which are still outstanding. The settlement agreement is also reported to commit the parties benefiting from it to reinvest 10% of the amount (USD 67 million) in the purchase of additional sovereign bonds (BAADE).

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Ecuador to establish commission to audit bilateral investment treaties

On 5 October 2013, the President of Ecuador, Rafael Correa, confirmed that a commission is to be established to audit the bilateral investment treaties (BITs) that Ecuador currently has with other countries.

According to the national Ministry of Planning and Development, Ecuador intends to audit 26 BITs which are considered prejudicial to national interests. This figure establishes that the scope of the audit would thereby cover the majority of Ecuador’s current BITs, although further guidance from the government is needed as to which specific BITs will be targeted – it is highly likely that Ecuador’s BIT with the U.S. will be one. The audit committee will comprise of individuals, including academics, specialists and former judges, from various Latin American countries.

Ecuador’s actions follow a recent ministerial summit in Ecuador itself where a bloc of Latin American countries, including Bolivia and Venezuela, agreed to take collective action to oppose an ever-increasing number of lawsuits brought by multinational corporations against the governments of developing countries for alleged violations of trade agreements. Indeed, according to a study released earlier this year by the Institute for Policy Studies, a Washington think-tank, Latin American countries were the focus of around half of all investor-state lawsuits pending in March 2013 before the International Center for Settlement of Investment Disputes (ICSID).

Those wishing to invest in Ecuador, and more widely in Latin America, should, as always, continue to include appropriate contractual investment protection mechanisms as well as actively managing the structure of their investments to obtain access, where possible, to international law protections and investor-state arbitration. Although Ecuador’s actions currently only extend to the establishment of an audit committee, investors would be well-advised to keep a close eye on developments in the region.

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