Designation under Article 25(1) crucial for a contracting state's province to raise claims in ICSID arbitration

Practical Law UK Legal Update Case Report 8-504-4617 (Approx. 5 pages)

Designation under Article 25(1) crucial for a contracting state's province to raise claims in ICSID arbitration

by PLC Arbitration

Background

Article 25(1) of the ICSID Convention provides in the relevant part:

"The jurisdiction of the Centre shall extend to any legal dispute ... between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State" (emphasis added).

For further details on Article 25 of the ICSID Convention generally, see Practice note: Investment treaty arbitration: legal issues.

Facts

The underlying dispute related to a contract between the government of Indonesia and PT Kaltim Prima Coal (PT KPC) for coal mining in Indonesia (contract). The contract required PT KPC to offer, over a particular time, 51% of its shares to "the Government or Indonesian nationals or Indonesian Companies controlled by Indonesians". The contract contained an ICSID arbitration clause.

PT KPC was incorporated in Indonesia by BP PLC and Rio Tinto PLC. Each held 50% of the PT KPC shares indirectly through their subsidiaries, the remaining respondents. The claimant is a province of Indonesia.

In 2001, PT KPC offered 51% of its shares to the government. Negotiations as to the purchase price and the entities which would purchase the PT KPC shares were protracted. In the process, the claimant and the Regency of East Kutai expressed their interest in purchasing the shares. The claimant put pressure on the government and on PT KPC to sell the shares to the claimant. The government noted the claimant's interest.

In July 2002, the government decided that it would purchase 51% of the PT KPC shares and allocate 31% of the PT KPC shares to the claimant and the Regency, retaining the remaining 20% shares. The claimant rejected this decision and demanded 51% of the shares for itself and the Regency.

In August 2002, the government and the PT KPC concluded an agreement under which the PT KPC offered 51% of its shares to the government (agreement). The government reserved its right to assign the shares to more than one Indonesian entity. The agreement listed companies owned by the claimant and by the Regency on the list of potential assignees. The agreement referred to the dispute resolution clause included in the contract. The claimant and the Regency successfully challenged the validity of the agreement in the Indonesian courts.

The negotiations concerning the sale of shares continued. In the meantime, BP PLC and Rio Tinto PLC sold their subsidiaries which held 100% of the PT KPC shares to an Indonesian company (which had been listed in the agreement as a potential purchaser).

In July 2002, the claimant initiated civil proceedings in Indonesia against, among others, the respondents. The claimant demanded compensation for the PT KPC's failure to sell 51% of its shares to the claimant. The respondents argued that the Indonesian courts lacked jurisdiction because the dispute was covered by the ICSID arbitration clause in the contract and in the agreement. The Indonesian courts found they did not have jurisdiction and the dispute should have been submitted to the ICSID arbitration. The claimant's appeals against that decision were unsuccessful.

In the current proceedings, the respondents objected to the ICSID tribunal's jurisdiction arguing, among other things that:

The claimant was not a contracting state or a designated subdivision of a contracting state for the purposes of Article 25(1) of the ICSID Convention.
The government neither consented to the present dispute nor approved submission of the claimant's claims to ICSID arbitration.
The claimant did not represent the government in the proceedings.
The claimant could not have represented the government by virtue of a (disputed) acceptance of a share purchase offer.

The claimant argued that the respondents were estopped from objecting to the tribunal's jurisdiction because they challenged jurisdiction of the Indonesian courts on the basis of the ICSID arbitration clause contained in the contract and the agreement.

During the proceedings, the claimant stated that the Regency of East Kutai wished to join and participate in the proceedings together with the claimant. The respondents objected to such request for joinder.

Decision

The tribunal held that it did not have jurisdiction. Further, the respondent was not estopped from claiming that the tribunal did not have jurisdiction.

No jurisdiction

The tribunal held that it did not have jurisdiction. The claimant had no right to bring the claim because:

The claimant did not represent Indonesia. Indonesian law required the government to consent to ICSID arbitration on behalf of Indonesia and to nominate or designate a third party to assume such representation. In the present case the government did not nominate or designate the claimant to represent it. Moreover, it expressly indicated that it had never authorised the claimant's representation in the present case.
The claimant was not a constituent subdivision of Indonesia designated by Indonesia for the purposes of the ICSID arbitration. The claimant generally qualified as a constituent subdivision of a contracting state. However, the claimant had not been designated as such by Indonesia for the purposes of Article 25(1) of the ICSID Convention. Although designation did not have to be made in any particular form or through a specific channel of communication, the intention to designate had to be clearly communicated to ICSID. The documents relied on by the claimant did not evidence such intention. Moreover, the government clearly denied it had designated the claimant as such.

No estoppel

The tribunal held that the respondents were not estopped from claiming that the ICSID tribunal lacked jurisdiction.

The tribunal adopted the following test for estoppel, based on the proposition in Estoppel before International Tribunals and its Relation to Acquiescence, Derek Bowett (1957) 33 BYIL 176:

The statement of fact must be clear and unambiguous.
The statement of fact must be made voluntarily, unconditionally, and must be authorised.
There must be reliance in good faith on the statement, either to the detriment of the party relying on the statement or to the advantage of the party making the statement.

The burden of showing that the above test had been met was with the claimant. The claimant had not met this burden. Moreover, the tribunal concluded that even if the respondents were estopped from objecting to its jurisdiction, it would not have done away with the requirement of designation under Article 25(1) of the ICSID Convention.

No joinder

The tribunal held that the claimant did not substantiate its request for the joinder of the Regency to the proceedings. In particular, there was no indication that the Regency (being a subdivision of an Indonesian province) satisfied the designation test under Article 25(1) of the ICSID Convention. The tribunal concluded that there were no grounds to accept the joinder.

Comment

The case shows that, even though the ICSID Convention does not prohibit contracting states or their designated subdivisions from bringing claims against investors, in the case of designated subdivisions, the designation by the contracting state under Article 25(1) of the ICSID Convention is critical for the tribunal's jurisdiction. Even if the respondents had been estopped from objecting to ICSID's jurisdiction, the lack of designation would still be a bar to the tribunal's jurisdiction.

Case

Government of the Province of East Kalimantan v PT Kaltim Prima Coal, Rio Tinto PLC, BP PLC, Pacific Resources Investments Ltd, BP International Ltd, Sangatta Holdings Ltd and Kalimantan Coal Ltd (ICSID Case No ARB/07/3) (Award on jurisdiction) (28 December 2009).

Designation under Article 25(1) crucial for a contracting state's province to raise claims in ICSID arbitration | Practical Law