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Helnan v Egypt: award partially annulled for requiring exhaustion of local remedies
Practical Law Legal Update 5-502-9190 (Approx. 5 pages)
Helnan v Egypt: award partially annulled for requiring exhaustion of local remedies
by Joanne Greenaway and Ruth Byrne, Herbert Smith LLP
| Law stated as at 28 Jul 2010 • International, USA |
An update on Helnan International Hotels A/S v Arab Republic of Egypt (ICSID Case No ARB/05/19) (Annulment proceeding) in which the tribunal partially annulled an award for requiring exhaustion of local remedies.
Speedread
In Helnan International Hotels A/S v Arab Republic of Egypt (ICSID Case No ARB/05/19) (Annulment proceeding), an ICSID ad hoc committee partially granted an application by Helnan International Hotels A/S for annulment.
The committee held that the tribunal had manifestly exceeded its powers when it found that, as a substantive matter, Helnan was required to exhaust local remedies before commencing ICSID proceedings. However, as the element of the award annulled was merely confirmatory and not dispositive of the dispute, the rest of the award, including the dismissal of Helnan's claims, continues to stand.
The decision is interesting because of the discussion about the important issue of the extent to which an investor must exhaust local remedies as a pre-condition to ICSID arbitration.
Background
Articles 52(1)(b), (d) and (e) of the ICSID Convention provide:
"(1) Either party may request annulment of the award by an application in writing addressed to the Secretary-General on one or more of the following grounds: ...(b) that the Tribunal has manifestly exceeded its powers; ...(d) that there has been a serious departure from a fundamental rule of procedure; or(e) that the award has failed to state the reasons on which it is based."
For further discussion on annulment, see Practice note, Procedure in ICSID arbitration.
Article 26 of the ICSID Convention provides:
"Consent of the parties to arbitration under this Convention shall, unless otherwise stated, be deemed consent to such arbitration to the exclusion of any other remedy .... A Contracting State may require the exhaustion of local administrative or judicial remedies as a condition of its consent to arbitration under this Convention."
In Generation Ukraine v Ukraine (ICSID Case No ARB/00/9), an ICSID tribunal held that even if there is no requirement to exhaust local remedies, the fact that an investor had not made efforts to seek redress at a local level could justify a tribunal in rejecting a claim "because the very reality of conduct tantamount to expropriation is doubtful in the absence of a reasonable … effort by the investor to obtain correction ...".
Facts
Helnan was the manager of the Shepheard Hotel in Cairo, a hotel owned by the Egyptian Organisation for Tourism and Hotels (EGOTH). Helnan and EGOTH had entered a long-term management contract in 1986, which required that the hotel maintain a five-star status. After several inspections of the hotel, most recently in September 2003, the Egyptian Ministry of Tourism decided to downgrade the hotel's classification to four stars. EGOTH then commenced arbitration proceedings to terminate the management contract and an arbitral tribunal was appointed under the aegis of the Cairo Regional Centre for International Commercial Arbitration (Egyptian Arbitration).
In the Egyptian Arbitration, Helnan challenged EGOTH's claim that the downgrade warranted termination of the contract, arguing that EGOTH was responsible for the downgrade and therefore could not terminate the contract on the basis of it. The tribunal, however, found that both parties were responsible for the downgrade, and that the downgrade had rendered the contract "impossible to execute". Accordingly, the tribunal terminated the contract, but it awarded Helnan EGD12.5 million in damages.
ICSID arbitration
In 2005, Helnan filed a request for arbitration alleging, among other things, that Egypt had orchestrated a campaign to evict it from the management of the hotel, violating the bilateral investment treaty (BIT) between Denmark and Egypt. Helnan alleged in particular that the Ministry of Tourism's inspections did not conform to accepted policy and practice, suggesting that the September 2003 investigation was so lacking in substance that it was a mere pretext justifying the Ministry of Tourism's previously made decision to downgrade the hotel's rating.
Egypt responded that the tribunal in the Egyptian Arbitration had already found that there had been no campaign to downgrade the hotel, and therefore the question was res judicata. Furthermore, Egypt argued that Helnan was not entitled to bring its claims before ICSID because it had not yet challenged the downgrade in the Egyptian courts.
In 2008, the tribunal issued an award on the merits, dismissing all of Helnan's claims (see Helnan International Hotels A/S v Arab Republic of Egypt (ICSID Case No ARB/05/19) (Award)). This dismissal turned on two principal findings:
- First, although the tribunal agreed that the September 2003 inspection of the hotel was a mere pretext for a downgrade, it found that it did not follow that Egypt had violated the BIT. It reasoned that the Ministry had already determined, before the September 2003 inspection, that the hotel lacked the requisite qualities for five-star status. Helnan had objected to this determination on a single ground: that EGOTH, not Helnan, was responsible for the downgrade. Given that this objection was a contractual matter, of which the Egyptian Arbitration had already disposed, Helnan had presented no outstanding objections to the Ministry of Tourism's determination. As such, the pre-September 2003 evidence indicated that the downgrade was warranted, and thus the fact that the September 2003 inspection was a mere pretext was harmless (and could not constitute a BIT violation).
- The second ground for dismissing the claim was that Helnan had failed to challenge the downgrade before the Egyptian administrative courts before commencing ICSID proceedings. Although it accepted that there was no requirement to exhaust local remedies, the tribunal followed the reasoning of the tribunal in Generation Ukraine and found that, as a matter of substance, the failure by Helnan to challenge the decision to downgrade in the Egyptian courts meant that that decision could not be seen as a treaty breach.
For more detailed discussion on the award, see Legal update, Relevance of contractual arbitration findings in ICSID arbitration.
Annulment proceedings
In 2008, Helnan filed an application for annulment of the award. It argued in particular that, in relation to the finding regarding the failure to pursue local remedies, the tribunal had failed to:
- Support this finding with reasons (Article 52(1)(e), ICSID Convention).
- Mention Helnan's pleadings in reaching its decision, departing from a fundamental rule of procedure (Article 52(1)(d)).
- Apply the relevant treaty standard, thereby manifestly exceeding its powers (Article 52(1)(b)).
Decision
The committee rejected the majority of Helnan's arguments, but agreed that the tribunal had manifestly exceeded its powers in finding that Helnan's failure to challenge the downgrade in the Egyptian courts warranted dismissal of its claims. However, as the annulled part of the award was not decisive of the dispute, the overall result of the proceedings remains the same.
Article 9 of the BIT between Denmark and Egypt, under which Helnan had referred its claims to arbitration, did not require investors to exhaust local remedies before commencing ICSID arbitration. As such, there was no agreement qualifying the consent to ICSID arbitration contained in Article 26 of the ICSID Convention. By finding nevertheless that Helnan's treaty claim could not be sustained because it had not pursued local remedies, the committee considered that the tribunal had done "by the back door that which the Convention expressly excludes by the front door". By failing to observe the clear requirements of Article 9 of the BIT and Article 26 of the ICSID Convention, the tribunal had manifestly exceeded the powers there conferred upon it.
Addressing the tribunal's reliance on Generation Ukraine, the committee noted that that was an award regarding a low-level governmental decision. The investor's failure to seek local redress in that case was grounds for disqualification of the claim, not because of a requirement to exhaust local remedies, but because the low-level decision was not sufficiently grave to amount to a breach of international law. In the present case, a ministerial decision was involved, for which a state may undoubtedly be held responsible in international law, and in respect of which no substantive requirement that an investor seek local redress should have been imposed.
Comment
The committee's comments in relation to the underlying policy reasons for its partial annulment of the award are illuminating. In particular, they confirm that investors cannot be required to pursue local remedies as a pre-condition to ICSID arbitration, unless there is a clear agreement between the host and home states that local remedies should first be exhausted. The committee dismissed the notion that Generation Ukraine supported the conclusion that a claimant must challenge a ministerial decision in the local courts in order to bring a valid treaty claim through ICSID arbitration. As the committee put it, such an approach would "inject an unacceptable level of uncertainty into the way in which an investor ought to proceed when faced with a decision on behalf of the Executive of the State, replacing the clear rule of the Convention which permits resort to arbitration".