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ICSID tribunal rejects contractual claims brought under BIT
Practical Law UK Legal Update Case Report 4-503-5323 (Approx. 5 pages)
ICSID tribunal rejects contractual claims brought under BIT
by PLC Arbitration
| Published on 06 Oct 2010 • International, USA (National/Federal) |
In Gustav F W Hamester GmbH & Co KG v Republic of Ghana (ICSID Case No ARB/07/24), an ICSID tribunal considered the difference between commercial and treaty claims.
Speedread
An ICSID tribunal has rejected an investor's claims under a bilateral investment treaty (BIT) on the basis that they were contractual claims and did not constitute breaches of the BIT. The claimant, a German company, sought damages in connection with a dispute with its joint venture partner, the Ghana Cocoa Board. The claimant failed. The tribunal analysed the nature of the claims and decided that:
- The relevant activities of the Ghana Cocoa Board could not be attributed to Ghana and were purely commercial in nature.
- The activities of other entities which were attributable to Ghana did not amount to a breach of the Germany-Ghana BIT.
- The claimant's claims were contractual claims and did not constitute a breach of the BIT.
The dispute is a good example of a failed attempt to "repackage" purely contractual and commercial claims into investment treaty claims by a creative interpretation of the umbrella clause. (Gustav F W Hamester GmbH & Co KG v Republic of Ghana (ICSID Case No ARB/07/24).)
Background
Article 9(2) of Germany-Ghana bilateral investment treaty (BIT) (umbrella clause) provides:
"Each Contracting Party shall observe any other obligation it has assumed with regard to its investment in its territory by nationals or companies of the other Contracting Party."
The effect of umbrella clauses is to "elevate" breaches of contract to treaty claims. For further discussion of umbrella clauses, see Practice note, Umbrella clauses.
Facts
The claimant was a German company involved in the international cocoa trade. In 1992, the claimant concluded a joint venture agreement with the Ghana Cocoa Board (the Board). Under the joint venture agreement, the claimant and the Board set up a company (West African Mills Company (Wamco)) to which the Board contributed an old factory, the modernisation of which was financed by the claimant. Wamco was supplied with cocoa beans by the Board and the entire output of the Wamco factory was sold to the claimant. Throughout the life of the project, there were constant payment disputes and problems between the claimant, Wamco and the Board.
The claimant first unsuccessfully brought proceedings against Ghana under an arbitration agreement contained in the joint venture agreement. In the present proceedings, the claimant advanced claims under the BIT.
Ghana objected to the tribunal's jurisdiction on the following grounds:
- The claimant had no investment in Ghana as a matter of Ghanaian law because, from the very beginning, the investment involved fraud and breaches of fiduciary duty.
- The conduct complained about by the claimant was that of the Board and not Ghana itself, and the Board's actions were not attributable to Ghana. Furthermore, the claims were, in truth, contractual in nature and were not "elevated" to treaty breaches by the umbrella clause in Article 9.2 of the BIT.
Decision
The tribunal held that it had jurisdiction to hear the case, and that:
- Most of the actions complained about by the claimant were not attributable to Ghana.
- Of the actions complained about by the claimant and attributable to Ghana, none amounted to a breach of the BIT.
Objections to jurisdiction
The tribunal found that, with regard to fraud, only the legality of the creation of an investment was relevant for the establishment of the tribunal's jurisdiction. The subsequent legality of an investor's conduct during the life of the investment was a merits issue. Although there was evidence that some invoices for the modernisation of the factory were inflated, there was no proof that these invoices induced the Board to sign the joint venture agreement.
With regard to attribution, to constitute a violation of the BIT, the Board's actions not only had to be attributable to Ghana but also had to constitute a violation of the international obligations provided for in the BIT. This issue was therefore closely linked with the substance of the claims, and was analysed by the tribunal together with the merits claims. As a result, the tribunal found that:
- None of the acts of the Board were attributable to Ghana. The Board was not, de jure or de facto, a state organ. It was entrusted with some governmental functions but none of these functions were exercised in its relations with the claimant. The Board was a commercial company created by statute, and the Ghanaian government could not issue binding instructions overriding the Board's commercial obligations. Furthermore, there was no evidence that the Board acted on the instructions of or under direction or the control of the State. The acts of the Board complained of by the claimant were "purely commercial".
- On the facts, the principal conduct attributable to Ghana of which the claimant complained was a temporary and partial ban on export of Wamco's products by the claimant, imposed by the Ministry of Finance at Wamco's request. This was a clear government interference with the parties' commercial relationship. However, it did not amount to a breach of the BIT.
The umbrella clause
The tribunal found further that:
- Even on the assumption (contrary to the tribunal's findings) that the acts complained of by the claimant were attributable to Ghana, no liability would have arisen due to the contractual nature of these acts.
- The umbrella clause in Article 9(2) of the BIT did not operate to transform the purely contractual claims into treaty claims. Properly interpreted, Article 9(2) applied only to obligations assumed by the state itself and not by other separate entities. The tribunal concluded that an automatic and wholesale elevation of any and all contract claims into treaty claims was not in line with the general purpose of the ICSID-BIT mechanism for the protection of foreign investment.
Legitimate expectations and fair and equitable treatment
The tribunal also observed that the mere existence of a contract between the investor and the host state was not enough to create legitimate expectations protected at the international level. Consequently, it was not sufficient for the claimant to invoke allegedly violated contractual rights to sustain a claim for the violation of the fair and equitable treatment standard.
Comment
The dispute is a good example of a failed attempt to "repackage" purely contractual and commercial claims into investment treaty claims by a creative interpretation of the umbrella clause. The tribunal emphasised that these kinds of claims did not fall within the investment protection offered by investment treaty arbitration.
By concentrating essentially on the jurisdictional issues, the tribunal avoided analysing the merits of the relationship between the parties. This was perhaps disappointing to the respondent, which had paid the claimant's advance on costs in order for the tribunal to give a signal that the claimant's behaviour would "not be endorsed by international investment community".