State Enterprise v. Moldova (SCC Case No. V 2012/175)
Summary by Natalia Charalampidou, citation details below.
The final award in these proceedings was issued on January 29, 2015.
Invoked instruments, purported breaches & administering institution:
This was an arbitration under the ECT, arising out of alleged breach of the standards of expropriation (Art. 13 of the ECT), fair and equitable treatment (Art. 10(1) ECT) and effective means (Art. 10(12) of the ECT) (¶ 54). The dispute was submitted to a SCC arbitral tribunal under Art. 26(4)(c) of the ECT and Art. 2 of the 2010 Arbitration Rules of the SCC (¶ 4).
Any third parties or parallel proceedings:
Claimant was State Enterprise "Energorynok" (Ukraine) ("Energorynok"), a Ukrainian state enterprise incorporated on June 8, 2000 having its seat in Kyiv (¶ 1). Respondent was the Republic of Moldova ("Moldova") (¶ 2).
In October 1998, an overflow of electricity in the amount of 50,000,000 kWh (the "Overflow") occurred from Ukraine to Moldova and triggered compensation due in the amount of USD1,662,297.81 under Article 4.3 of the Agreement on the Parallel Organization of the Energy Systems of Ukraine and Moldova (the "APO"). The fact of the Overflow and the amount of compensation due for that Overflow were not in dispute (¶ 22).
In November 1998 a surety agreement was signed between Ukrenergo, a state enterprise of Ukraine, Moldtranselectro, a state enterprise of Moldova, and the International Fund for Emergency Assistance for the Black Sea Economic Cooperation States, as guarantor that guaranteed to Ukrenergo Moldtranselectro's obligations to return the unscheduled electricity (¶ 23). Both state entities were entrusted with the performance of the technical and operational conditions under the Agreement on the Parallel Organization of the Energy Systems of Ukraine and Moldova of February 20, 1995 (¶¶ 19, 20, 21). 80% of the obligation under the surety agreement was repaid through equipment, when the Arbitration Court of Kiev on the petition of Ukrenergo declared said surety agreement null and void for the reason that its signature was not authorized by the Ukrainian Ministry (¶ 24). The equipment was then returned, but parties did not agree on the grounds therefor. Respondent submitted that this was done pursuant to other contracts. Claimant asserted that the equipment was returned following the nullification of the surety agreement (¶ 24).
A division of Ukrenergo, Energorynok, claimant in these arbitral proceedings (¶ 1), was established as a separate state-owned enterprise on May 5, 2000. It argued that the transfer to it of the debt due by Moldova for the Overflow under the APO was separately formalized by three documents: (a) the Separation Balance Sheet approved by the Ukrainian party to the APO-the Ministry of Fuel and Energy of Ukraine; (b) the appropriate Separation Protocol; and (c) the Order No. 23 of Ukrenergo. According to said documents, claimant was the due legal successor of the receiver of the debt of the Moldova party under the APO (¶ 25). In an effort of claimant to obtain compensation, it had brought an action before the competent court in Kiev against the Moldovan Ministry. The outcome of this procedure was a judgment ordering the Moldovan Ministry to pay the claimant 1,745,412.71 USD plus litigation costs (the "2002 Decision") (¶ 26).
Following a colorful procedural history, which involved repeated extensions of time that triggered objections on the grounds of unequal and preferential positioning of submission of documents (¶ 40), as well as of infringing the requirement of procedural fairness and causing undue delay in the proceeding (¶ 37), along with submissions without the leave of the tribunal that reserved its right to make all appropriate inferences from respondent's failure to meet deadlines and any late filing of additional materials (¶ 42), engagement of pleadings via e-mail comments, documents without English translation and submission of documents after the cut-off date had passed (¶ 47), the tribunal stated its conclusions.
Respondent's objection to jurisdiction was two-pronged: (a) claimant's claim was fraudulently and illegally obtained in the 2002 Decision and thus it should not be entitled to protection under the ECT (Plama); (¶¶ 71, 77) and (b) claimant did not meet the requirements of a claim under Art. 1(6) of the ECT (¶¶ 75, 77). It noted that it could only determine fraud or illegality of the 2002 Decision, after establishing jurisdiction to determine the dispute. Only then it could decide whether the 2002 Decision would be a bar to that jurisdiction (¶ 78).
As a starting point, the tribunal established that Art. 1(7) of the ECT does not preclude a government agency from being an investor. It then made clear that the issues to be decided were: (a) whether there was an investment; (b) whether claimant qualified as an investor; and (c) whether investment was in respondent's area (¶ 79).
Then the tribunal agreed with claimant's position and ruled that the APO was an agreement that met the requirement in ECT Understandings IV (2)(iii), since it related to transportation, distribution and supply of Energy Materials and Products by way of transmission and distribution grids. In particular, it adopted the view that the right to undertake an economic activity concerning the transit of electricity in the host state conferred by the APO to the Party/ Ministry constituted an investment under the ECT (¶ 81). In addition, it found that the Overflow was not a mere triggering event, but an investment, as it took place in respondent's area and arose out of the APO (¶ 82).
The tribunal agreed with the position on circularity of Art. 1(6)(c) of the ECT recognized in Petrobart and mentioned that it was also discussed in Electrabel. Yet, it stressed that in the present case, unlike Electrabel, claimant was not a shareholder in an entity performing economic activities, which were found to constitute investments under the ECT. In addition, claimant in Petrobart, unlike the present dispute, had at all times during the period of the underlying contract full control over its own sales and deliveries and was a full party to the sale and delivery contract. Petrobart had committed resources to the economy of the host state entailing the assumption of risk in expectation of commercial return (¶¶ 84-87). The tribunal further agreed that said provision required the investor to own or control the asset. Aiming to setting out the meaning of control, the tribunal took into consideration ECT Undertakings ¶ 3 and thus, concluded that the factors to be considered were: (a) financial interest, including equity interest, in the investment; (b) ability to exercise substantial influence over the management and operation of the investment; and (c) ability to exercise substantial influence over the selection of members of the board of directors or any managing body. While it had no hesitation to acknowledge claimant's financial interest in recovering the debt, it noted that no proof was offered of claimant's interest in the economic activity, out of which the investment arose. Additionally, the tribunal noted claimant's lack of ability to exercise any influence on the activity under the APO, (¶¶ 89-92) while stressing that the APO continued to operate at the time of arbitration proceedings without claimant having any role, control or activity in it. Claimant had neither a right nor an obligation under the APO, as the contractual position of the investor under said agreement was never assigned to it. In fact, claimant did not even exist at the time of the Overflow (¶ 95). Further, the tribunal refused to accept that a decision of a court in a host state to enforce a claim in that host state is an investment in the territory of the host state by the plaintiff in said case (¶ 96). The tribunal concluded that passing on rights to a claim for money via transfer to a balance sheet seems to disassociate claimant from the APO. Rather, claimant seemed to be a debt collector of a single debt (¶ 98) and not a party to the APO (¶ 99). The tribunal decided that claimant failed to prove that its claim to money was associated with an investment made by it or validly assigned it. Claimant's acquiring a debt did not equal to acquiring an investment under the ECT (¶ 101). Thus, the tribunal found that it had no jurisdiction over this dispute (¶ 103). The second objection on fraud and illegality was not addressed (¶ 102).
Regarding costs, the tribunal took into consideration the complexity of the dispute, the uncertainty of purported facts, the difficulty of legal issues and the behavior of the parties during the arbitration. Thus, it ordered that the parties share equally the arbitration costs (¶ 113).
This dispute related to an overflow of electricity from Ukraine to Moldova in October 1998. This gave rise to compensation under the applicable agreement between Ukraine and Moldova. Claimant that was established in May 2000, was a legal successor of the debt's receiver under said agreement. The tribunal found that both conferring the right to undertake an economic activity concerning the transit of electricity in the host state and the overflow were an investment under Art. 1(6) of the ECT. It then underscored that claimant was not a party to said agreement. Moreover, claimant did not exist at the time of the overflow. Rather, the tribunal found that claimant was a debt collector of a single debt. Hence, it found that it had no jurisdiction over this dispute.
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