Petrobart v. The Kyrgyz Republic (SCC Case No. 126/2003)
Summary by Natalia Charalampidou, citation details below.
The final award in these proceedings was rendered on March 29, 2005. Legal remedy requesting its annulment was filed against it before the Svea Court of Appeal, which upheld the award in its judgment of January 19, 2007.
Invoked instruments, purported breaches & administering institution:
This was an arbitration under the ECT, arising out of an alleged breach of the standards of expropriation or measures equivalent to expropriation (Art. 13(1) of the ECT), the obligation of stable, equitable, favorable and transparent conditions for investment, fair and equal treatment, full protection and security, unreasonable impairment of use and enjoyment of one's investment, no less favorable treatment and the umbrella clause (Art. 10(1) of the ECT), effective means for the assertion of claims and the enforcement of rights (Art. 10(12) of the ECT) and a state entity conducting its activities in a manner consistent with the Republic's obligations under Part III of the ECT (Art. 22(1) of the ECT) (pp. 25-30). The dispute was submitted to a SCC arbitral tribunal according to Art. 26(4)(c) of the ECT.
Any third parties or parallel proceedings:
Concurrently to this arbitration, parallel proceedings before domestic courts as well as UNCITRAL proceedings took place.
Claimant in this procedure was Petrobart Limited ("Petrobart"), a joint stock company incorporated under the laws of Gibraltar, and respondent was the Kyrgyz Republic ("Republic") (pp. 4, 24).
On February 23, 1998, Petrobart and the state joint stock company Kyrgyzgazmunaizat ("KGM") concluded a contract about the supply and transfer of ownership of 200,000 tons of gas condensate from Petrobart to KGM on a monthly basis and paid for by KGM at a fixed price per metric ton. In February and March 1998, Petrobart delivered altogether about 17,205 tons of gas to KGM for the price of USD 2,457,620. Out of the five invoices that were issued KGM paid only two that amounted to USD 951,976. This resulted into Petrobart stop delivering the remaining quantities of gas and taking legal action against KGM. On September 23, 1998, respondent decided to restructure the supply of oil and gas and to this end, created a new company, Kyrgygaz, on the basis of KGM's assets, which were later transferred to the new entity. Yet KGM's debts, including the outstanding invoices of Petrobart, were to remain with KMG. Petrobart obtained a judgment in its favor on December 25, 1998, attached KGM's assets and initiated two public auctions. Yet, on the day of the first auction, February 16, 1999, the competent court granted a request by KGM for a three months' stay of execution of the judgment, following a letter addressed to it by the Vice Prime Minister, which included this request. On March 9, 1999 the state company Munai was entrusted with the task of organizing and carrying out state policy in the petrol area, whereas on March 13, 1999, KGM leased to Munai a large complex of its assets. Before the stay of execution expired, KGM filed an application to be declared insolvent and was subsequently declared bankrupt on April 15, 1999 (pp. 6-8, 60, 74).
Before examining the alleged breaches of the ECT, the tribunal considered the following issues: (a) the applicability of the ECT; (b) the denial of benefits clause (Art. 17 of the ECT); (c) res judicata; (d) collateral estoppel; (e) the definition of investor and investment; and (f) preliminary requirements to arbitration (Art. 26(1) and (2) of the ECT). The tribunal first addressed respondent's contention that Petrobart could not be considered an investor that made an investment under the ECT on the ground that the UK did not ratify the ECT on Gibraltar's behalf. Although this argument was raised too late in view of Art. 10(2) of the Rules of the SCC Institute and in violation of the parties' agreement on procedural matters, the tribunal did examine it (p. 61). The tribunal decided to follow a formal approach based on the wording of the ECT and noted that the UK had made a declaration under Art. 45(1) of the ECT according to which such application should extend to the UK and to Gibraltar. Having regard to the manner of terminating the provisional application prescribed in Art. 45(3)(a) of the ECT and the fact that no notification or declaration in connection to terminating the provisional application was made, it concluded that the ECT continued to apply on a provisional basis to Gibraltar (pp. 62-63). Regarding Art. 17 of the ECT, the Republic contested that claimant conducted business through Mr Josif Todorovski and Mr Ratko Zatatelo, in all probability nationals of Serbia and Montenegro, while having no substantial business in or from Gibraltar. Petrobart rebutted this and explained that it was managed by Pemed Ltd, a company registered in England and having its registered office in London. Thus, it argued that it had substantial business activities in the Area of a Contracting Party as requested by Art. 17 of the ECT. The tribunal attached weight to this information and considered that the conditions for the application of Art. 17 of the ECT were not present (p. 63). Then the tribunal addressed the res judicata objection on the grounds of domestic court proceedings and the UNCITRAL Arbitration. After affirming that the notion of res judicata is undoubtedly recognized in international law and applies only when there is identity of object and does not prevent a new examination of a matter that differs significantly from what was previously decided, the tribunal found that the domestic proceedings concerned interpretation and application of domestic law. In addition, same proceedings were initiated by the Republic. Therefore, they did not unfold a res judicata effect. This also applied to the UNCITRAL proceedings, as they were based on Art. 23(2) of the Kyrgyz Foreign Investment Law and not on the ECT (pp. 64-66). The tribunal noted that, although collateral estoppel has been primarily developed in American law, similar rules do apply in other jurisdictions. In addition, a doctrine of estoppel is recognized in public international law. Thus, it took the view that the question was whether the ECT could be interpreted in such a manner as to deprive an investor of his procedural rights under the ECT due to him having failed to raise the relevant issues in a previous case of litigation or arbitration. The tribunal referred to its reasoning regarding res judicata and the lack of a fork-in-the-road provision in the ECT, and rejected this objection in line with SGS v. Pakistan (pp. 66-68). It then turned to the objection regarding whether Petrobart could be regarded as an investor, who benefited from the protection offered by the ECT. It clarified that the contract between Petrobart and KGM was a sales contract and that the contract along with the judgment were not themselves assets, but merely legal documents or instruments, which were bearers of legal rights. Hence, the question was whether these rights constituted assets and were an investment in the meaning of the ECT. The tribunal considered Fedax v. Venezuela, Salini v. Morocco and SGS along with Art. 1(6)(c) and (f) and Art. 1(5) of the ECT and decided that Petrobart was an investor within the meaning of the ECT (pp. 71-72). Finally, regarding the three-month period under Art. 26(2) of the ECT, the tribunal accepted that letters addressed to and sent to the Prime Minister of respondent on April 22, May 16 and July 17, 2003 satisfied this requirement (p. 73).
Consequently, the tribunal examined whether respondent's actions were in breach of the ECT. It expressed the view that respondent undoubtedly had good reasons for restructuring the supply system, yet it was under the obligation to carry it out in a manner that showed due respect for investors. It noted that respondent transferred and leased KGM's assets to other state entities and left the debts with KGM. Further, it regarded the letter of the Vice Prime-Minister to the court as an attempt by the government to influence a judicial decision to the detriment of Petrobart. It underscored that such government intervention in judicial proceedings is not in conformity with the rule of law in a democratic society and demonstrated lack of respect for Petrobart's rights as an investor having an investment under the Treaty. Through these two actions, the tribunal found that respondent had failed to accord Petrobart a fair and equitable treatment of its investment and therefore breached Art. 10(1) of the ECT. It also found that the letter of Vice Prime-Minister violated Art. 10(12) of the ECT, although the measures taken did not attain the level of de facto expropriation and thus Art. 13(1) of the ECT had not been breached. Similarly, the tribunal was not convinced of the claim regarding Art. 22(1) of the ECT (pp. 75-77).
As a result of the breaches found, the tribunal addressed the damages. Petrobart's first claim was monetary compensation. Its second claim related to lost profits. The tribunal took the view that specific performance would not be appropriate in this case, as claimant did not have any more activity in the Kyrgyz Republic. Thus, monetary compensation had to be awarded. The tribunal then assessed the effects of KGM's transfer of property on the basis of its balance sheets of October 1, 1998, the individual program for privatization of KGM of February 11, 1999 and the figures stated in the bankruptcy decision of April 15, 1999. It reached the conclusion that the transfer and lease of property aggravated, rather than created, the company's troublesome economic situation (pp. 78, 80-81). However, the tribunal decided that there was a strong likelihood that Petrobart, as a creditor, suffered considerable damage as a result of the massive transfer of assets (p. 82). Regarding the size of the claims against KGM and the transactions with Kyrgyzgaz and Munai, the tribunal encountered inconsistent figures in various documents submitted. In the absence of information and explanations by the parties it was unable to establish the total amount of such claims. Thus, it made a more general assessment of these matters based on probabilities and reasonable appreciations and concluded that respondent had to compensate claimant for damage that it estimated at 75% of its justified claims against KGM (pp. 83-84). Regarding the stay of proceedings, the tribunal did not make a specific finding, as it could not establish with a sufficient degree of likelihood that Petrobart would had been able to execute the judgment, even if there had been no decision to stay the execution (p. 85). With reference to lost profits, the tribunal noted that the contract was not terminated and, as a consequence of the parties' actions, their legal relations became ambiguous. In view of the claim having been insufficiently established, it rejected it. It equally rejected claimant's request for relief as the tribunal might deem appropriate, as it was of a general and imprecise nature and made it difficult, if not impossible, for respondent to present an effective defense. Interest was awarded on the basis of UNCITRAL Principles of International Commercial Contracts (pp. 86-88).
The state gas company KGM failed to comply with its statutory obligations towards claimant, which obtained a court judgment and proceeded with its enforcement. Respondent decided to restructure the supply of oil and gas and created a new company with KGM's assets; KGM's liabilities were not transferred. The enforcement of the court judgment was stayed following a letter of the Vice Prime Minister and by the end of the stay period KGM was declared bankrupt. The tribunal found that the ECT was applied provisionally to Gibraltar, where claimant was incorporated. Thus, claimant was an investor. Res judicata was not applicable due to lack of identity of object and parties. Turning to the merits, it decided that the manner of restructuring showed no due respect to investors, as it left KGM solely with debts. Moreover, governmental intervention in judicial proceedings equally demonstrated lack of respect to investors. Thus, Art. 10(1) and (12) of the ECT were breached. Claims were calculated on probabilities and reasonable appreciations, due to inconsistent figures in the submitted documents and absence of information and explanations by the parties.
This summary comes from the following paper:
The paper is part of the joint OGEL/TDM/ArbitralWomen Special Issue:
TDM 7 (2018) - OGEL/TDM/ArbitralWomen - Strategic Considerations in Energy Disputes