ICSID award on GEA Group Aktiengesellschaft v. Ukraine: short comment.

April 25, 2011

The decision of the ICSID tribunal on the GEA Group Aktiengesellschaft v. Ukraine case -ICSID Case No. ARB/08/16- was made publicly available on the 31st March (link at the end of the comment). The award is pretty straightforward and does not raise any major issue, but it nevertheless provides insights regarding the definition of ‘investments’, expropriation, the notion of fair and equitable treatment, and the issue of award enforcement (i.e. whether the refusal of a state to enforce a decision systematically amounts to a lack of due process and generates state responsibility). Overall, the decision is interesting because it clearly shows that investment tribunals do not systematically give undue deference to the interests of investors, whilst investment protections do not represent a right to be compensated for everything.

New Klöckner, a company acquired by GEA (the claimant) entered in an agreement with Oriana –a public but independent company– to provide 200.000 tons of fuel per year for conversion. The claimant eventually noticed that a significant quantity of finished product went missing, and a Settlement Agreement was signed whereby Oriana acknowledged being indebted. In addition, the parties agreed on a Repayment Agreement for US$27,6 million, to be paid in finished products rather than cash (at ¶47-55).

In 2001, an arbitral procedure was started before the ICC regarding the execution of the Repayment Agreement. This gave rise to further polemics because Oriana eventually objected to the recognition and enforcement of the award and questioned the tribunal’s jurisdiction and the validity of the various Agreements. Essentially, it argued that its own Vice President had no authority to sign the original Agreement, part of which had never approved by the Ukrainian authorities anyway (at ¶57-61). The ICC Appellate Court, as a matter of fact, confirmed that the agreement was not valid because it had been concluded by unauthorised persons, a point reiterated by Ukrainian Courts which refused to enforce the ICC original decision (at ¶65-69).

The claimant therefore started a procedure before the ICSID on the ground that the respondent failed to honour “repeated promises” (as to the payment of the products) and took “multiple steps” to ensure that no compensation would be paid, thereby breaching its investment commitments (at ¶86-87).

Jurisdiction

The ICISD arbitrators first had to establish their jurisdiction over the claim. For the respondent, the tribunal had no jurisdiction because (i) the claim had originally been brought by an entity (KCH) which had no standing since –although it purchased the company involved in the Conversion Agreement (New Klöckner)– it was not originally involved in the dispute, and (ii) the claimant had not made an “investment” in Ukraine. The tribunal however rejected both arguments.

On the one hand, it found that the agreement by New Klöckner vested in KCH (which acquired the rights when it acquired the company) and that Oriana had expressly recognised that KCH was party to the contract in the Settlement Agreement, if only because it was involved into 147 of the 154 amendments to the Conversion Contract (at ¶91-106). It noted, therefore, that the claimant had the right to bring a request before the ICSID, but nevertheless added that –since it did not prove that it retained the rights when it sold the company in 2004– it overall had no standing regarding the post-2004 controversies attached to the Conversion Contract (at ¶117-118, 125).

On the other hand, the tribunal looked at whether the activity represented an investment protected under the BIT and Article 25 ICSID. The Respondent, indeed, argued that the tribunal had no jurisdiction because the contract was “no more than a sales agreement” which did not confer “rights to the exercise of an economic activity” and did not correspond to the “identifiable inherent core meaning” of the term ‘investment’ insofar as it involved no contribution, no profit and no risk (at ¶131, 133, 136). Having emphasised the absence of a definition of ‘investments’ under Article 25 ICSID, the tribunal nevertheless suggested that the Salini tests (a certain duration, a certain regularity of profit and return, an assumption of risk, a substantial commitment as well as a degree of significance for the host State’s development),despite being questioned, “cannot be set aside” (at ¶137-143). It overall broadly interpreted the contractual relationship of the parties, found that the Conversion Contract conveyed the right for GEA through KCH to exercise an economic activity, and concluded that the Contract constituted an ‘investment’ under the BIT and ICISD Art 25 because “it satisfie[d] all the elements of the ‘objective definition’ that are commonly applied under Article 25” (at ¶149-151). The tribunal however denied that the Settlement Agreement, the Repayment Agreement and the ICC award were investments (at ¶157-164).

Liability

Having established its jurisdiction, the tribunal went on to determine whether the respondent was liable for breaches of its investment commitments. That is, it had to determine whether Ukraine had expropriated the claimant’s assets and breached its obligations regarding full protection and security standards, fair and equitable treatment, arbitrary and discriminatory measures, national treatment and most favoured nation (at ¶204).

The finding that the claimant’s assets had not been taken or expropriated is essential to the overall reasoning of the court for two reasons. One is that it significantly put a limit to the infinitely broad definition of ‘expropriations’ relied upon in arbitral precedents. Another is that the tribunal conditioned the finding of an expropriation to a high burden of proof, which the claimant failed to meet (at ¶211-226). In addition, the tribunal added that the refusal of Ukrainian courts to enforce the ICC award could not be tantamount to expropriation, if only because the ICC award is not an investment (at ¶227-231,237).

The decision also emphasises that the failure of the state company to repay in conformity with the ‘legitimate expectations’ given to the investor did not constitute a violation of the fair and equitable treatment obligation, because the existence of such a ‘promise’ was unclear whilst the signing of the Settlement Agreement was “of no help” since Oriana was a separate entity and Ukraine was not involved as a party to the dispute. Therefore, the tribunal found no breach of the fair and equitable treatment standard (at ¶269, 283, 305) and by the same token concluded on the absence of arbitrary / discriminatory measure (at ¶329).

The tribunal finally looked at whether the failure of Ukrainian courts to enforce the ICC award constituted a breach of Ukraine investment protection commitments. The tribunal, surprisingly, did not refer to the binding nature of the arbitral award but rather considered that the fact that the courts looked at the award was more significant that their decision not to enforce it (“it is not that the courts of Ukraine never addressed the claimant’s argument, it is simply that the courts heard those arguments and rejected them”). It therefore concluded that “the tribunal has not been presented with any evidence that the Ukraininan courts ‘failed to administer due process’ or ‘deprived’ the claimant of a ‘fair procedure’” (at ¶315-322).

As already mentioned, the award (available here) is overall pretty straightforward and does not raise any major issue. It nevertheless provides insights regarding the definition of ‘investments’, expropriation and the notion of fair and equitable treatment.. The award is also interesting insofar as it elaborates on award enforcement controversies and recognises the right of the states to ‘disagree’ with a decision. Overall, the decision clearly shows that investment tribunals do not systematically give undue deference to the interests of investors, whilst investment protections do not represent a right to be compensated for everything.

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