ILLEGALITY IN INVESTMENT ARBITRATION Sylvia T. Tonova Warsaw, Poland 7 June 2013
Investor-State Arbitration System Instruments: Bilateral Investment Treaties (BITs) Multilateral treaties (e.g. Energy Charter Treaty) Trade Agreements with investment chapters (e.g. NAFTA, CAFTA-DR) National laws containing investment guarantees and arbitration provisions Investment contracts with host states containing arbitration clauses (ICSID, ICC, LCIA, etc.) Common investment protections: Unlawful expropriation Fair and equitable treatment Full protection and security Most favoured nation (MFN) and national treatment Umbrella clause Free transfer of capital 2
Arbitration Rules for Investor-State Disputes ICSID Convention / ICSID Rules: legal disputes that the parties agreed to submit to ICSID in writing arising directly out of an investment between a Contracting State and a national of another Contracting State, including a juridical person that the parties to the Convention agreed to treat as a national of another Contracting State because of foreign control Other possibilities: UNCITRAL Rules ICC Rules SCC Rules 3
Bilateral Investment Treaties of Poland Country Entry into Force Date Country Entry into Force Date Albania Aug 09, 1993 Korea, Republic of Feb 02, 1990 Argentina Sep 01, 1992 Kuwait Dec 18, 1993 Australia Mar 27, 1992 Latvia Jul 19, 1993 Austria Nov 01, 1989 Lithuania Aug 06, 1993 Azerbaijan Feb 10, 1999 Macedonia, Former Yugoslav Republic of Apr 22, 1997 Bangladesh Nov 19, 1999 Malaysia Mar 23, 1994 Belarus Jan 18, 1993 Moldova Jul 27, 1995 Belgium-Luxembourg Aug 02, 1981 Mongolia Mar 21, 1996 Bulgaria Mar 09, 1995 Morocco May 29, 1995 Canada Nov 22, 1990 Netherlands Feb 01, 1994 Chile Sep 22, 2000 Norway Oct 24, 1990 China Jan 08, 1989 Portugal Aug 03, 1994 Croatia Oct 04, 1995 Romania Dec 30, 1994 Cyprus Jul 06, 1993 Serbia Jan 23, 1997 Czech Republic Jun 29, 1994 Singapore Dec 29, 1993 Denmark Oct 30, 1990 Slovak Republic Mar 14, 1996 Egypt, Arab Republic of Jan 17, 1998 Slovenia Mar 31, 2000 Estonia Aug 06, 1993 Spain May 01, 1993 Finland Mar 29, 1991 Sweden Jan 04, 1990 Finland Mar 11, 1998 Switzerland Apr 17, 1990 France Feb 10, 1990 Thailand Aug 10, 1993 Germany Feb 24, 1991 Tunisia Sep 22, 1993 Greece Feb 20, 1995 Turkey Aug 19, 1994 Hungary Jun 16, 1995 Ukraine Sep 14, 1993 India Dec 31, 1997 United Arab Emirates Apr 09, 1994 Indonesia Jul 01, 1993 United Kingdom of Great Britain and N. Ireland Apr 14, 1988 Iran, Islamic Republic of Oct 26, 2001 United States of America Aug 06, 1994 Israel May 06, 1992 Uruguay Oct 21, 1994 Italy Jan 10, 1993 Uzbekistan Apr 29, 1995 Jordan Oct 14, 1999 Vietnam Nov 24, 1994 Kazakhstan May 25, 1995 ICSID Database of Bilateral Investment Treaties 4
Denmark-Poland Bilateral Investment Treaty Art. 1 (a), Definition of Investment [A]ny kind of assets invested in accordance with the laws of the Contracting Party receiving the investment in its territory in particular: (i) (ii) (iii) (iv) (v) movable and immovable property and any other property rights such as mortgages, liens or pledges, shares in and stock and debentures of a company and any other form of participation in a company, claims to money or other rights relating to services having a financial value, industrial and intellectual property rights, technology, trademarks, goodwill, know how and any other similar rights, business concessions having financial value, that are required to conduct economic activity in accordance with the law of the Contracting Party concerned and are conferred by law, administrative decision or contract, including concessions to search for, cultivate, extract or exploit natural resources. (emphasis added) 5
Invested in Accordance with Law Investments illegal under the host state s laws will lose investment protections: If a State, for example, restricts foreign investment in a sector of its economy and a foreign investor disregards such restriction, the investment concerned cannot be protected under the ICSID/BIT system. (Phoenix Action, Ltd. v. Czech Republic, ICSID Case No. ARB/06/5, Award, 15 April 2009, para. 101) The treaty cannot protect investments made in violation of the laws of the host State, or investments not made in good faith, obtained for example though misrepresentations, concealments, or corruption. (Id., para. 100) De minimis violations of local laws would not deprive the investment of protections. (Tokios Tokelės v. Ukraine, ICSID Case No. ARB/02/18, Decision on Jurisdiction, 29 April 2004, para. 86) 6
Fraud Submission of false financial and qualification information during the bidding process [B]ecause Inceysa s investment was made in a manner that was clearly illegal, it is not included within the scope of consent expressed by Spain and El Salvador in the BIT and, consequently, the disputes arising from it are not subject to the jurisdiction of the Centre. (Inceysa Vallisoletana S.L. v. Republic of El Salvador, ICSID Case No. ARB/03/26, Award, 2 August 2006, para. 257) 7
Misrepresentation Deliberate concealment of information necessary for obtaining the State s approval of the investment The principle of good faith encompasses, inter alia, the obligation for the investor to provide the host State with relevant and material information concerning the investor and the investment. (Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Award, 27 August 2008, para. 144) Claimant is not entitled to any of the substantive protections afforded by the ECT [Energy Charter Treaty]. (Id., para. 325) 8
Bribery In light of domestic laws and international conventions relating to corruption bribery is contrary to the international public policy of most, if not all, States or, to use another formula, to transnational public policy. Thus, claims based on contracts of corruption or on contracts obtained by corruption cannot be upheld by this Arbitral Tribunal. (World Duty Free Company Limited v. Republic of Kenya, ICSID Case No. ARB/00/7, Award, 4 October 2006, para. 157) [A] request for a bribe by a State agency is a violation of the fair and equitable treatment obligation owed to the Claimant pursuant to the BIT as well as a violation of international public policy. (EDF (Services) Limited v. Romania, ICSID Case No. ARB/05/13, Award, 8 October 2009, para. 221) 9
Illegality: Jurisdiction or Merits? If the legality of the Claimant s conduct is a jurisdictional issue, and the legality of the Respondent s conduct is a merits issue, then the Respondent Host State is placed in a powerful position. In the Biblical phrase, the Tribunal must first examine the speck in the eye of the investor and defer, and maybe never address the beam in the eye of the Host State. Such an approach does not respect the fundamental principles of procedure. (Fraport AG Frankfurt Airport Services Worldwide v. Republic of the Philippines, ICSID Case No. ARB/03/25, Dissenting Opinion of Mr. Bernardo M. Cremades, 16 August 2007, paras. 37-8) 10
Consequences of Illegality The tribunal may deny jurisdiction or the claims may be considered inadmissible The implicated party may be required to compensate the opposing party for corruption or other illegality The arbitrators may be required to report suspicions of corruption or other illegality under the law of the seat (e.g. Singapore, Germany) or ethics rules Evidence of corruption revealed during public arbitral proceedings may be used in national criminal proceedings or vice versa Evidence of corruption or other illegality in the arbitral process may preclude enforcement of the final award 11
Questions?
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