Amto v. Ukraine (SCC Case No. 080/2005)
Summary by Natalia Charalampidou, citation details below.
The final award in these proceedings was rendered on March 26, 2008.
Invoked instruments, purported breaches & administering institution:
This was an arbitration under the ECT, arising out of an alleged breach of the standards of stable, equitable, favorable and transparent conditions, fair and equal treatment, non-discriminatory measures, the umbrella clause (Art. 10(1) of the ECT), treatment no less favorable (Art. 10(7) of the ECT) (¶¶ 25, 27), effective means by which to assert its legitimate claims (Art. 10(12) of the ECT) (¶¶ 25, 29) and the obligation regarding state and privileged enterprises (Art. 22(1) of the ECT) (¶¶ 25, 31). The dispute was submitted to a SCC arbitral tribunal according to Art. 26(4)(c) of the ECT. Respondent counterclaimed reimbursement of the arbitration costs and related expenses and compensation for non-material injury to its reputation (¶ 35).
Any third parties or parallel proceedings:
At the time of this arbitration, proceedings before the European Court of Human Rights were initiated, yet by AOZT Elektroyuzhmontazh-10, claimant's purported investment in Ukraine, and not claimant itself.
Claimant was Limited Liability Company AMTO ("AMTO"), a limited liability company, incorporated under the laws of Latvia on March 6, 1998 and registered in the commercial registry on February 14, 2005. Since registration in the commercial registry, its total capital was held by Five Key Invest & Assets Limited Holding JSC, registered in Lichtenstein, the shares of which were held by Key's Depository Foundation in Vaduz, Liechtenstein (¶¶ 1, 15). Respondent was Ukraine (¶ 1).
In late 1999, claimant sought an investment in the nuclear energy industry in Ukraine and decided to buy shares in AOZT Elektroyuzhmontazh-10 ("EYUM-10"). EYUM-10 was reorganized as a closed joint stock company registered in Ukraine on December 9, 1994 with its major types of activities stated to be "installation of electric wiring and reinforcement", "installation of fire and security alarm systems" and "painting works" (¶¶ 17, 3). It was the legal successor of the state entity that had participated in the construction of the Zaporozhskaya AES nuclear power plant ("ZAES NPP"). Later it became a supplier of services to ZAES NPP (¶ 18).
Turning to some procedural issues, it is worth noting that EYUM-10 had initially appeared as a claimant in this arbitration, alongside AMTO. Yet, following respondent's request to dismiss the Request for Arbitration for manifest lack of jurisdiction of the SCC Institute pursuant to Art. 7 of the SCC Rules, the SCC Institute, and not the tribunal that had not yet been constituted, dismissed the claims raised by EYUM-10 (¶¶ 3, 4).
By August 2000, claimant had acquired 16% of the shares in EYUM-10, whereas by March 2003 its total shareholding was 67.2% of the total share capital (¶ 19). At this time EYUM-10 had established relationships with ZAES NPP and the National Nuclear Power Generating Company Ergoatom ("Ergoatom"), which was owned by respondent (¶ 20). ZAES NPP was experiencing some financial difficulties and EYUM-10 commenced court proceedings in respect of 11 contracts between itself and Ergoatom/ZAES NPP with successful results. However, enforcement of the court judgements was stalled by the initiated bankruptcy proceedings (¶¶ 20-21). Later that year, the government enlisted Ergoatom in the list of highly hazardous enterprises through a resolution of the Cabinet of Ministers. Two years later, in 2005, a law was enacted aiming to support the environment of the financial standing of the fuel-and-energy sector enterprises, prevent their bankruptcy and enhance their investment attractiveness (¶ 22). In 2006, EYUM-10 and Energoatom entered into an agreement regarding the latter's outstanding debts, two further judgment debts of 2005 and an acknowledgement of debt. Energoatom did not provide a bank guarantee and therefore the agreement did not enter into force, claimant maintained (¶ 23).
After addressing the jurisdictional objections (¶¶ 36-72), the tribunal decided on the merits (¶¶ 73-115) and on respondent's counterclaim (¶¶ 116-118).
Respondent contented that AMTO's shares in EYUM-10 did not constitute a qualified investment under the ECT, on the ground that they were not associated with an economic activity in the energy sector (¶ 26(a)). The tribunal noted the definition of "investment" in Art. 1(6) of the ECT and "economic activity in the energy sector" in Art. 1(5) of the ECT (¶¶ 36-37) and considered Understandings 2 and 3 that were adopted in the Final Act of the European Energy Charter Conference (¶ 38). It then took the view that the drafters of the ECT required an investment to be solely "associated with" an activity in the energy sector. This phrase involves a question of degree and refers primarily to the factual rather than legal association between alleged investment and said activity, whereas it should be interpreted under the purpose and object of the ECT (¶ 42). Technical services directly related to the production of electrical energy, as here the case was, do qualify as an investment under the ECT, the tribunal found (¶ 43). Respondent argued that claimant did not consent to arbitrate as Art. 26(4)(a) of the ECT required written consent to be provided to the state prior to commencement of arbitration (¶ 26(b)). The tribunal explained the difference of arbitration agreement in commercial and investment arbitration. It stated that Art. 26(3) of the ECT provides an "open offer" of the state parties to the arbitration, whereas claimant's consent, expressed in the Request for Arbitration, to arbitrate was both unequivocal and unconditional. Thus, the agreement was concluded (¶¶ 45-47). Respondent purported that the claims were related to the pre-investment period and thus were not protected under the ECT, as it does not confer substantive protection to said period (¶ 26(c)). The tribunal after examining the facts of the case, decided that jurisdiction ratione temporis began upon first acquiring EYUM-10's shares, that being August 22, 2000 (¶ 48). Further, respondent suggested the lack of dispute between AMTO and Ukraine, as the pending dispute was a trivial commercial dispute between two legal persons, not involving the state (¶ 26(d)). The tribunal found that two Ukrainian legal entities, non-payment of contractual debts and court judgements were at the center of the dispute. However, both parties to this arbitration were directly involved in the dispute, whereas Energoatom had close relationships with the state. Thus, claimant, EYUM-10, Energoatom and respondent were all part of the same dispute (¶¶ 51-52). Respondent asserted that the agreements between EYUM-10 and ZAES NPP/Energoatom exhausted the subject matter of the dispute and thus, no basis for arbitration existed (¶ 26(e)). The tribunal rather decided that merely contractual disputes between EYUM-10 and Energoatom had been settled. Treaty claims of claimant against respondent had not (¶ 54). Respondent suggested that no power of attorney existed (¶ 26(f)). In this regard the tribunal found no requirement in the applicable law, that being applicable rules and principles of international law (Art. 26(6) of the ECT), relating to powers of attorney. Hence, it rejected this objection (¶ 48). Respondent argued that tribunal's jurisdiction, if any, was limited to the claims set out in the "Claim Letters" (¶ 26(g)). Unfortunately, it was not explained in the award what "Claim Letters" stands for; neither was their content and date. In this regard, the tribunal noted that respondent misconceived the nature of the request of amicable settlement. Its purpose is to discuss the dispute, with a view to exchanging views over its causes, the interests involved, clarifying factual uncertainties and any misunderstandings, while identifying possible solutions within the scope of ECT. Hence, open communication is required. Similar views had been expressed in Generation Ukraine, the tribunal advised. From this perspective, the tribunal reached the conclusion that the Claim Letters had satisfied the minimum threshold of advising the state of the dispute and requesting amicable settlement (¶¶ 57-58). Additionally, respondent contended that the case was inadmissible on the grounds of Art. 17(1) of the ECT (¶ 26(h)). The tribunal explained that Art. 17(1) of the ECT requires the fulfilment of two cumulative requirements: investor owned or controlled by citizens or nationals of a third state; and investor having no substantial business activities in the state of its incorporation (¶ 62). It decided that claimant had substantial business activities in Latvia on the basis of its investment related activities conducted from premises in Latvia and involving the employment of a small but permanent staff (¶ 69). Hence, it did not have to decide whether Russia, the nationality of the natural person controlling claimant, is a third country within the meaning of Art. 17(1) of the ECT (¶ 67). Finally, respondent maintained that the present proceeding was suspended or terminated due to parallel international proceeding before the ECtHR (¶ 26(i)). The tribunal, after considering that the parties and the causes of action are different in these two proceedings, concluded that the ECtHR proceedings provided no justification to terminate or suspend the arbitration (¶ 71). Thus, it rejected all jurisdictional objections and found that it had jurisdiction over this dispute (¶ 72).
Turning to the merits, the tribunal opined that Art. 10(1) of the ECT is a complex provision of five sentences, within which there is clearly overlapping (¶¶ 73-74). It set forth that denial of justice is a manifestation of a breach of state's obligation to provide fair and equitable treatment and the minimum standard of treatment required by international law and referred to Mondev v. USA (¶ 75). In the present case, the tribunal found that claimant was unsuccessful in proving its allegations of irregularities related to court and bankruptcy proceedings in Ukraine (¶¶ 78-80, 83). Then the tribunal examined the Ukrainian bankruptcy legislation. This was drafted by Deloitte & Touche and a U.S. Bankruptcy judge and assessed by USAid and the European Bank for Reconstruction and Development. The tribunal did accept that the domestic bankruptcy legislation had weaknesses, but identified the notion of effectiveness to be crucial for the purpose of applying Art. 10(12) of the ECT. It found that effectiveness is a systematic, comparative, progressive and practical standard (¶¶ 86-88). Having said that, it decided that claimant failed to prove its claim (¶ 89). Equally, it concluded that claimant had not established any state interference in the bankruptcy proceedings through the enacted legislation (¶ 95), unreasonable or discriminatory treatment by the tax authorities (¶¶ 96, 99), intimidation or obstruction (¶ 105) or that the decision of Energoatom not to pay EYUM-10 and to resist enforcement in bankruptcy proceedings was made on the instructions of, or under the direction or control of Ukraine (¶ 108). With regard to the umbrella clause, the tribunal stressed that said clause of the ECT is of wide character as it imposes a duty not only in respect of an investor, but also vis-à-vis a subsidiary company. However, it found that it was not applicable in the present case as the contractual obligations had been undertaken by a separate legal entity (¶ 110). Finally, in regard to Art. 22 of the ECT, the tribunal advised that it imposes a mere general obligation to the states and does not constitute an obligation of the state to assume liability for any failing of a state-owned legal entity to discharge a commercial debt in a given instance (¶ 112). Lastly, the tribunal rejected the counter-claim of the respondent, as it did not present any basis for a claim of non-material injury to reputation (¶ 118).
This dispute involved shareholding in a company that installed electric wiring, fire and security alarm systems and performed painting works to a nuclear power plant according to the relevant contracts. The tribunal underscored that under the ECT, an investment needs to be solely "associated with" an activity in the energy sector. Art. 17(1) of the ECT was not applicable here, as claimant had substantial business activities in Latvia. Then the tribunal rejected the claim of breach of denial of justice, as the alleged irregularities with regard to court and bankruptcy proceedings were not established. It then found that state interference in the bankruptcy proceedings, intimidation, unreasonable or discriminatory treatment by the tax authorities were equally not established. Invoking the umbrella clause was also not successful, as the contractual obligations had been undertaken by a separate legal entity. Finally, the tribunal noted that Art. 22 of the ECT does not constitute an obligation of the state to assume liability for a state entity not satisfying a commercial debt.
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