ICSID Tribunal declines jurisdiction due to claimants’ failure to obtain environmental impact assessment in breach of local law

In a recent investment arbitration Award, in Cortec Mining v Kenya, an ICSID tribunal has declined jurisdiction over a claim brought by a trio of mining companies on the basis that the mining licences at issue had not been obtained lawfully due to the Claimants’ failure to obtain the required environmental impact assessments.

In its award of 22 October 2018, the tribunal held that the withdrawal of the Claimants’ mining licence by the Kenyan Government could not be challenged under the 1999 UK-Kenya bilateral investment treaty (“BIT“), as the relevant mining licence had not been obtained lawfully. Despite the fact that the BIT contained no express requirement of compliance with local law, the tribunal nevertheless held that the BIT and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 1966 (the “ICSID Convention“) protect only lawful investments. The tribunal affirmed that a principle of proportionality should apply when assessing the impact of unlawful conduct on the right to bring a BIT claim, with minor omissions or inadvertent misstatements not precluding the BIT from applying. However, in this case, environmental considerations were of fundamental importance and non-compliance with the protective regulatory framework was a “serious matter” justifying the tribunal in declining jurisdiction.

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ICSID issues first award involving China as Respondent, finding in host state’s favour

In an award dated 9 March 2017, the Tribunal in an ICSID arbitration between Korean investor Ansung Housing Co., Ltd and China dismissed all claims as time-barred. The Claimant's attempt to circumvent the limitation period by relying on the most favoured nation (MFN) clause did not succeed. The Tribunal came to this conclusion at an early stage of the proceeding, "with relative ease and despatch".

This is the first ICSID arbitration to involve China as the respondent state that has proceeded to a substantive hearing and resulted in an award.

See our previous blog on the case here

Click here for a copy of the Award.

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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

Investor’s claims against Peru thrown out due to abusive corporate restructuring to acquire treaty rights

In an award rendered on 9 January 2015, an ICSID tribunal (Gabrielle Kaufmann-Kohler (presiding), Eduardo Zuleta, and Raúl Vinuesa), determined that one of the Claimants had acquired shares in a Peruvian company only for the purpose of obtaining treaty rights, in relation to a foreseeable dispute and less than two weeks before the announcement of the State measures at issue in the case. The Tribunal concluded that the only plausible reason for the restructuring was to provide an investment treaty claim against Peru. The restructuring was therefore abusive. On that basis, the Tribunal declined to rule on the merits of the case, dismissed the claims, and ordered the Claimants to pay the Republic of Peru more than US$1.5 million in costs.

Investors are increasingly alive to the investment protections offered by bilateral and multilateral investment treaties.  Not all structuring (or re-structuring) of investments will constitute an abuse of process and with careful advance planning, investors can make their investments using the right vehicle and transaction structure to ensure the best treaty protections possible. For more information on this topic, please contact Prudence Heidemans to access our webinar on Structuring Investments and Maximising Treaty Protection.

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Potential risks to investors highlighted by two ICSID tribunals declining to recommend provisional protection against criminal investigations

Investors in some states face a real risk of reprisals after commencing investment claims. Reprisals may range from entirely legitimate (albeit unusually forceful) investigation of serious wrongdoing, which is the prerogative of a sovereign state, to the abuse of power to obtain unfair advantage in the arbitration, which is prohibited.

Consistent with the approach taken by previous tribunals, two ICSID decisions published in December 2014 show the difficulty that the investors faced in overcoming the “particularly high threshold” necessary to convince a tribunal to interfere with a criminal investigation being conducted by the host state – anything short of “concrete instances of intimidation or harassment” may not be sufficient (Churchill Mining Plc and Planet Mining Pty Ltd v. Indonesia (ICSID Case No. ARB/12/14 and 12/40; Caratube International Oil Company LLP & Mr. Devincci Salah Hourani v. Kazakhstan ICSID Case No. ARB/13/13). Despite an apparent link between the criminal investigation and arbitration in each application, provisional relief was refused.

These decisions illustrate that vigorous criminal investigations may be a legitimate state-response to an investment claim, and should be anticipated by investors prior to making a claim. The consequences of such investigations may be particularly difficult to mitigate where the investor relies on an ongoing relationship with the state to conduct its business. Investors might not be entitled to protection against such investigations by way of provisional measures, except where there is compelling evidence that the state’s conduct amounts to intimidation or harassment, or directly prevents an investor from presenting their case. In practice, as the Churchill Mining and Caratube decisions show, this evidentiary burden may be difficult for an investor to discharge and these risks would be better addressed prior to commencing arbitration. Continue reading

A sardine cannot swallow a whale: ICSID tribunal declines jurisdiction under the Egypt-UAE BIT

In an Award on Jurisdiction rendered earlier this year in National Gas S.A.E. v. Arab Republic of Egypt (ICSID Case No. ARB/11/7), an ICSID tribunal declined jurisdiction to hear a claim brought against Egypt under the Egypt-UAE BIT by an Egyptian corporate claimant whose immediate shareholders were two UAE shell companies but who was ultimately controlled by an Egyptian-Canadian dual national. The claimant had sought to argue that despite being an Egyptian company that it was entitled to take advantage of a limited exception in Article 25(2)(b) of the ICSID Convention which provides that in certain circumstances a national of an ICSID Contracting State can include a national of the State party to the dispute if there is an element of “foreign control“. However, these arguments were rejected by the tribunal, not least because the “control” of the claimant rested ultimately with an Egyptian national and not the two UAE shell companies.

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NAFTA tribunal considers issues of res judicata and the customary international law minimum standard of treatment

In Apotex Holdings Inc. and Apotex Inc. v United States of America, (ICSID Case No. ARB(AF)/12/1), a NAFTA chapter eleven tribunal considered issues of res judicata and the customary international law minimum standard of treatment.

In a case notable for its discussion of res judicata and the customary international law minimum standard of treatment, a NAFTA Chapter Eleven tribunal has allowed jurisdictional objections over a significant part of the alleged claims. With respect to the claimants’ remaining claims, the tribunal concluded, on the merits, that the US had not breached any of its commitments under international law.

The tribunal analysed international jurisprudence on res judicata in detail, applying a flexible approach to the question of when claims will be precluded by a prior decision. Following previous NAFTA awards, the award explored the complex relationship between the customary international law minimum standard and the guarantee of fair and equitable treatment and full protection and security contained in NAFTA Article 1105(1).

It did so in the context of the claimants’ novel claims about the status of due process among the protections required by the customary international law minimum standard of treatment. However, the tribunal left for a future tribunal to decide whether NAFTA’s guarantee of most-favoured-nation (MFN) treatment can be used to expand the substantive protections under Article 1105 – a critical topic, in the light of all NAFTA states’ unanimous opposition to that interpretation. (Apotex Holdings Inc. and Apotex Inc. v United States of America, (ICSID Case No. ARB(AF)/12/1).)

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China sued by South Korean property developer at ICSID

This week, a South Korean property developer (“Ansung”)  became the second ever investor to request ICSID arbitration against the People’s Republic of China (“PRC”) (Ansung Housing Co., Ltd. v. People’s Republic of China (ICSID Case No. ARB/14/25)).  Little is known about the claims, which are reported to arise from the alleged actions of the provincial government in relation to Ansung’s investment in the construction of a golf and country club.  Ansung’s counsel has told the publication Global Arbitration Review that:

The case is about a development project for a golf country club and condominiums in Sheyang-Xian, Jiangsu province.  Ansung made investments in late 2006.  Due to the various arbitrary and illegal actions and omissions of the Sheyang-Xian government, Ansung has been deprived of the use and enjoyment of its investment as its investment plan has been frustrated.  As a consequence, in October 2011, Ansung was forced to dispose of its entire investment to a Chinese purchaser at a price significantly lower than the amount Ansung had invested toward the project.  Ansung suffered more than CNY100 million and is seeking an award of damages.

The claims were registered by the Secretary-General of ICSID on 4 November 2014. The Tribunal has not yet been constituted.

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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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Churchill Mining v Indonesia: ICSID Tribunal takes cautious approach to request for provisional measure

On July 8, 2014, a tribunal composed of Professor Gabrielle Kaufmann-Kohler (President), Michael Hwang S.C., and Professor Albert Jan van den Berg (the “Tribunal”), issued a Procedural Order No. 9 denying Churchill Mining PLC and Planet Mining Pty Ltd (“Claimants”) their application for provisional measures. Relying on Article 47 of the ICSID Convention and Rule 39 of the ICSID Arbitration Rules, Claimants asked the Tribunal to “recommend,” among other things, that the Republic of Indonesia (“Indonesia” or “Respondent”) (i) “refrain from threatening or commencing any criminal investigation or prosecution against the Claimants, their witnesses in these proceedings, and any person associated with the Claimants’ operations in Indonesia, including their wholly owned subsidiary (…);” and (ii) “stay or suspend any current criminal investigation or prosecution against Claimants’ current and former employees, affiliates or business partners pending the outcome of th[e] arbitration.” The Claimants also requested more general measures seeking to prevent Indonesia from threatening “the exclusivity” of the ICSID proceedings and generally aggravating the dispute.

At a time where the investor-state dispute resolution system is criticized for permitting too lax an access to treaty-based remedies through arbitration, the Churchill Mining Tribunal showed restraint and caution in addressing Claimants’ request to enjoin a host state from initiating or continuing criminal proceedings against Claimants’ witnesses and potential witnesses. The Tribunal did recognize Claimants’ theoretical right to protection against existing or threatened criminal proceedings that would be likely to impair Claimants’ rights in the arbitration. However, the Tribunal set a high bar for the evidence that Claimants would have had to adduce to establish the likelihood that their rights are indeed put at risk by Indonesia’s actions.

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