ICSID tribunal considers claims arising out of settlement of earlier ICSID arbitration

Practical Law Legal Update 5-502-0175 (Approx. 5 pages)

ICSID tribunal considers claims arising out of settlement of earlier ICSID arbitration

by PLC Arbitration

Background

Article II.3(a) and (b) of the bilateral investment treaty (BIT) between the US and Ukraine provide, in the relevant part:

"(a) Investment shall at all times be accorded fair and equitable treatment, shall enjoy full protection and security and shall in no case be accorded treatment less than that required by international law.

(b) Neither Party shall in any way impair by arbitrary or discriminatory measures the management, operation, maintenance, use, enjoyment, acquisition, expansion, or disposal of investments."

The BIT also contains an umbrella clause in Article II.3(c), which obliges the host state to observe specific undertakings towards investors. It provides:

"(c) Each party shall observe any obligation it may have entered into with regard to investments."

Article II.6 of the BIT provides, in the relevant part:

"6. Neither Party shall impose performance requirements as a condition of ... expansion or maintenance of investments, which ... specify that goods or services must be purchased locally, or which impose any other similar requirements."

For information about host states' obligations under investment agreements generally, see Practice note, Investment treaty arbitration: legal issues. For more detailed discussion about the fair and equitable treatment (FET) standard and umbrella clauses, see Practice notes, Fair and equitable treatment and Umbrella clauses.

Facts

The claimant was a US businessman and majority shareholder in a radio station in Ukraine.

The claimant made two claims. The first arose out of a settlement agreed between the parties concluding a previous ICSID case filed by Mr Lemire against Ukraine (Lemire v Ukraine (ICSID Case No ARB(AF)/98/1)). The settlement contained an ICSID arbitration clause and was recorded as an ICSID award on agreed terms. The second claim was for breach of the BIT.

The claimant argued that Ukraine breached its obligations under the settlement agreement to correct interferences with the claimant's radio frequency and allocate radio frequencies to the claimant's radio station.

The claimant argued that the above actions and omissions also constituted violations of Article II.3 and the umbrella clause of the BIT. The claimant further argued that Ukraine, by other acts and omissions, violated the following BIT provisions:

Article II.3: by failing to provide FET to his radio station and subjecting it to arbitrary or discriminatory measures in the process of awarding broadcasting frequencies.
Article II.6: by imposing a 50% Ukrainian music requirement.

Ukraine raised several jurisdictional objections, including that ICSID lacked jurisdiction for claims arising out of the settlement agreement.

Decision

The tribunal dismissed Ukraine's objections to its jurisdiction. It held that Ukraine was in breach of the FET obligation in the BIT, but rejected all of the claimant's other claims, including that of breach of the settlement agreement. The tribunal will now proceed to the quantum phase.

Jurisdiction

The tribunal found that it had jurisdiction in relation to claims arising under the settlement agreement as well as claims arising under the BIT. The tribunal rejected Ukraine's argument that by agreeing to transform the settlement agreement into an enforceable award, the claimant had waived his right to rely on the ICSID arbitration clause in the original agreement. There was no suggestion that, by requesting the tribunal in the original arbitration to issue a consent award in the terms of the settlement agreement, the parties were agreeing to the neutralisation of the arbitration clause.

The tribunal also rejected Ukraine's argument that the arbitration clause in the settlement agreement could not apply because it referred disputes to arbitration under the Additional Facility Rules when those rules could no longer be used following Ukraine's ratification of the ICSID Convention. The tribunal stressed that arbitration clauses must be interpreted to restore the true intention of the parties. The fact that the arbitration clause referred to the Additional Facility Rules was a technicality. The true intention of the parties was clear; disputes arising under the settlement agreement should be resolved through arbitration administered by ICSID and governed by the appropriate rules approved by ICSID (the Additional Facility Rules before Ukraine had ratified the ICSID Convention, and the ordinary ICSID Arbitration Rules after ratification).

Violation of the settlement agreement and of the umbrella clause of the BIT

The tribunal found no violations of the settlement agreement. Its reasons included the following:

The settlement agreement required Ukraine to correct interferences within a certain deadline. The interferences relied on by the claimant occurred after that date. The tribunal also analysed whether Ukraine's acts and omissions in relation to these interferences constituted a breach of the BIT and found no such violation.
Although the claimant encountered difficulties and delays in obtaining the frequencies expected under the settlement agreement, Ukraine did not breach any of its obligations under that agreement. However, the practices of the relevant Ukrainian regulator, and of Ukraine at the time when that regulator was inoperative, were found to have breached the BIT (see below).

The tribunal agreed with the claimant that Article II.3(c) of the BIT (the umbrella clause) operated so that any breach of that agreement became a breach of the BIT. However, as the tribunal had found no breach of the settlement agreement, there was no breach of the umbrella clause either.

Violation of the BIT: FET treatment standard

The tribunal considered the scope and meaning of the FET standard expressed in Article II.3 of the BIT. It found that:

The international minimum standard of protection imposed by customary international law operated as a "floor", rather than a "ceiling" for the FET standard under the BIT.
A measure which was either arbitrary or discriminatory could constitute a violation of the FET standard.
The FET standard protected the claimant's legitimate expectation that there would be a level playing field in the Ukrainian radio sector and that its regulations would be consistent, transparent, fair, reasonable, and enforced without arbitrary or discriminatory decisions.

In relation to the process of awarding broadcasting licences, the tribunal found that:

Certain practices allowed by Ukraine were arbitrary or discriminatory and thus violated the FET standard.
The process itself was not arbitrary. However, it had certain shortcomings, such as:
- a possibility to influence the regulator's independence;
- lack of clear criteria for valuation of applications; and
- no reasoning for the regulator's decisions which could facilitate arbitrary or discriminatory decision-making.
Therefore, the tribunal analysed the proceedings complained of by the claimant.
The tribunal applied the test used in Saluka Investments BV v Czech Republic (UNCITRAL, partial award of 17 March 2006), that a practice must be considered arbitrary or discriminatory if it manifestly violates the requirements of consistency, transparency, even-handedness and non-discrimination.
The tribunal found that the following arbitrary or discriminatory practices occurred:
- a political preference in favour of the claimant's competitors;
- distortion of fair competition between applicants in favour of the claimant's competitors by their different treatment in equal conditions, without justification and in violation of applicable tender conditions; and
- the award of frequencies illegally, in non-public and non-transparent proceedings, to companies other than the claimant's at the time when the regulator was inoperative. This practice had been legalised in a first tender held by the regulator after being reconstituted, from which the claimant was also excluded.

Violation of the BIT: prohibition of local content requirements

The tribunal found no breach of Article II.6 of the BIT for the following reasons:

The object and purpose of Article II.6 is trade-related and is to avoid states imposing local content requirements as a protection of local industries against competing imports. The Ukrainian music requirement was not introduced to protect local industries and restrict imports but to promote Ukraine's cultural inheritance.
The requirement applied to all radio broadcasters in Ukraine and was introduced in stages.
Ukraine had the inherent right to introduce regulations defining its cultural policy, of which the promotion of domestic music was a valid reflection. Similar policies were adopted in many countries.

Comment

This case is a good illustration of the types of disputes that may arise post-settlement between investors and host states which may constitute breaches of the settlement agreement or new breaches of the relevant BIT. In general, it clarifies that a breach of the settlement agreement can also constitute a breach of the BIT, if the BIT contains an appropriate umbrella clause. Remedies for acts and omissions that are not covered by the settlement agreement may be sought under the relevant BIT.

The decision contains an in-depth analysis of the FET standard and also provides a useful summary of the approach of a tribunal when determining whether there has been a breach of the FET standard in a BIT (paragraphs 284-286).

The case illustrates the balance that tribunals have to strike between investor protection and the right of a host state which is a young democracy to regulate its internal affairs, especially in the sensitive broadcasting sector.

Case

Joseph Charles Lemire v Ukraine (ICSID Case No ARB/06/18) (Decision on jurisdiction and liability)

ICSID tribunal considers claims arising out of settlement of earlier ICSID arbitration | Practical Law