Summary

Source: icsid.worldbank.org

Reasons for Prior Bifurcation Decision

Members of the Tribunal
Prof. Gabrielle Kaufmann-Kohler, President of the Tribunal
Ms. Juliet Blanch, Arbitrator
Prof. Philippe Sands KC, Arbitrator

...

III. ANALYSIS

A. Legal Framework

At this juncture, the Tribunal merely provides the reasons underlying the decision to deny jurisdiction which was notified to the Parties on 19 December 2024. When it took that decision, the Tribunal only assessed whether the preliminary objections mentioned in the Request should be heard and decided as a preliminary matter or joined to the merits. It did not decide on the merits of these objections. Its decision was based on the record as it then stood. In other words, the decision did in no way prejudge the Tribunal's jurisdiction or the admissibility and/or the merits of the claims.

Considering that Article 26 of the ECT was silent on preliminary objections, the applicable rules were found in Articles 41(2) of the ICSID Convention and 44 of the 2022 Arbitration Rules. The Tribunal noted that its power to bifurcate proceedings between preliminary objections and the merits was provided in Article 41(2) of the ICSID Convention:

(2) Any objection by a party to the dispute that that dispute is not within the jurisdiction of the Centre, or for other reasons is not within the competence of the Tribunal, shall be considered by the Tribunal which shall determine whether to deal with it as a preliminary question or to join it to the merits of the dispute.

As for the requirements for bifurcation, the Tribunal noted that they were set forth in Article 44(2) of the 2022 Arbitration Rules, which reads as follows:

(2) In determining whether to bifurcate, the Tribunal shall consider all relevant circumstances, including whether:

(a) bifurcation would materially reduce the time and cost of the proceeding;

(b) determination of the preliminary objection would dispose of all or a substantial portion of the dispute; and

(c) the preliminary objection and the merits are so intertwined as to make bifurcation impractical.

The Tribunal further noted that this framework established no presumption in favor of or against bifurcation. As such, it provided the Tribunal with discretion to assess whether bifurcation was warranted or not in the specific circumstances. In the exercise of this discretion, the Tribunal was to consider the three-pronged test established in Article 44(2) of the 2022 Arbitration Rules, which test focuses on whether bifurcation would promote efficiency. More specifically, the test inquires whether, if the objections were upheld, (i) bifurcation would reduce time and costs, (ii) the decision on the preliminary objection would resolve the entirety or a significant part of the dispute, and (iii) the preliminary objection was so closely linked to the merits that bifurcation would be detrimental to the efficiency of the arbitration.43

The Tribunal was further of the view that another relevant circumstance to consider was whether a preliminary objection was prima facie sufficiently serious or substantial to warrant bifurcation.44 As noted in Huawei v. Sweden, this element involved determining "whether, on the basis of the record as it stands, an objection raises a serious issue requiring consideration in a separate procedural phase on the force of the fact allegations and legal arguments as currently formulated".45

B. The Objections

As mentioned above, the Respondent requested bifurcation in order to address the following two jurisdictional objections:

1) The ICC Award is not an investment under Article 25 of the ICSID Convention; and

2) The Put Option breached Hungarian law and Stratius therefore cannot benefit from the substantive protections of the ECT.

1. The First Objection

The Respondent contended that Stratius' "true purported investment" was the ICC Award and that this award did not qualify as a protected investment under Article 25 of the ICSID Convention.46 The Tribunal understood that the ICC arbitration concerned a dispute between Stratius and MVM (a State-owned entity whose conduct, said the Claimant, was attributable to Hungary), and arose out of a memorandum of understanding of 20 June 2007 regarding the construction of a gas-fired power plant, a shareholders agreement of 30 October 2007, and a share purchase agreement of the same date. These provided that Stratius' parent company, Meinl International Power Limited, acquired a 24% stake in Kárpát-Energo, the company that owned the Vásárosnamény power plant, for a price of EUR 12 million.47 Under Article 9.6.1 of the shareholders agreement, Stratius benefitted from the Put Option entitling it to sell its shares for EUR 12 million plus any shortfall in dividends for the first 3 years equal to 10% of the invested amount.48

It appeared uncontested that, in January 2011, MVM cancelled the project for the construction of the Vásárosnamény power plant, that Stratius thereafter exercised its right under the Put Option, and that MVM refused to comply with the Put Option. The dispute was referred to an ICC tribunal, which awarded Stratius EUR 13.2 million plus arbitration costs.49 Thereafter, according to the Claimant, Hungary prevented Stratius from recovering the amounts awarded and thereby deprived it of "the value of its investment".50

In ruling on the request for bifurcation, it was the Tribunal's view, that bifurcating the First Objection would neither dispose of the entire case nor significantly reduce its scope, if that objection were upheld. The Respondent appeared to accept that the Claimant had pleaded a wide notion of investment and, in the context of its Second Objection, did not rule out the possibility that Stratius' rights under the Put Option may constitute an investment albeit an illegal one.51 In its Memorial, the Claimant contended that the 24% stake in the Vásárosnamény power plant, the rights under the shareholders agreement, including the Put Option, the right to arbitration and the right to receive payment under the ICC Award, qualified "separately and together" as protected investments under Article 1(6) of the ECT and Article 25 of the ICSID Convention.52

At the stage of its decision on bifurcation, the Tribunal considered that it was not in a position to determine whether the ICC Award was the Claimant's "true" investment, as the Respondent argued, or whether the various investments identified by the Claimant could be said to constitute investments under the ECT and the ICSID Convention. What was clear to the Tribunal, however, was that, in due course, it would have to rule on whether each alleged investment fell within the ambit of Article 1(6) of the ECT and Article 25 of the ICSID Convention. Accordingly, regardless of whether the ICC Award qualified as an investment, the Tribunal would still have to assess whether its jurisdiction derived from one or several of the other alleged investments. It thus appeared that bifurcating the First Objection would not increase efficiency, and for that reason the Tribunal decided not to hear that objection in a bifurcated phase.

2. The Second Objection

In the Request, the Respondent contended that the Put Option violated Hungarian law, because the Hungarian criminal courts had found that the former MVM executive who signed the option had breached his fiduciary duty and thus committed a criminal offense.

The Claimant responded by arguing that the criminal proceedings against that executive did not involve the parties to the Put Option, MVM and Stratius, that the Hungarian courts did not declare the Put Option null and void, and that the ICC tribunal considered it valid.

In reviewing the Second Objection, the Tribunal considered that it was so closely linked to the merits of the case that bifurcation would be impractical, or very difficult.

Determining whether Stratius benefitted from an allegedly "illegal" Put Option would require the Tribunal to assess the circumstances surrounding the conclusion of the Put Option and possibly the content and import of the criminal proceedings. At first sight, this would require examining the same facts and evidence at the jurisdictional and merits stages. Moreover, it seemed doubtful to the Tribunal that determining this objection as a preliminary question would materially reduce the scope of the dispute. Indeed, irrespective of whether the Put Option was illegal as a matter of Hungarian law, the Tribunal considered that it would in any event need to consider Hungary's conduct in relation to the ICC Award when addressing Stratius' effective means and denial of justice claims.

Accordingly, the Tribunal decided not to bifurcate the Second Objection.

C. Conclusion

For the reasons set out above, the Tribunal decided to deny the Request, which denial was communicated to the Parties on 19 December 2024. As the Parties were further advised then, the arbitration has since followed Scenario 2(b) of the procedural calendar.

At this stage, the Tribunal also rejects the Claimant's request that the Respondent be ordered to pay the costs associated with the Request and it reserves its decision on costs for subsequent determination.

On behalf of the Tribunal,

[signed]

Prof. Gabrielle Kaufmann-Kohler
President of the Tribunal
Date: 12 February 2025

Footnotes omitted