Summary

Nykomb v. Latvia (SCC Case No. 118/2001)

Summary by Natalia Charalampidou, citation details below.

The final award in these proceedings was issued on December 16, 2003.

Invoked instruments, purported breaches & administering institution:

This was an arbitration under the ECT, arising out of an alleged breach of the standards of treatment no less favorable than required by international law (Art. 10(7) of the ECT), of fair and equal treatment, of non-discriminatory measures (Art. 10(1) of the ECT) and of expropriation (Art. 13(1) of the ECT), along with Art. 22 of the ECT (p. 5). The dispute was submitted to a SCC arbitral tribunal according to Art. 26(4)(c) of the ECT.

Any third parties or parallel proceedings:

No.

Factual background:

Claimant was Nykomb Synergetics Technology Holding AB ("Nykomb"), a joint stock company organized in 1995 under the laws of Sweden, and respondent was the Republic of Latvia ("Latvia") (p. 1).

In September 2000, Nykomb acquired all shares of SIA Windau ("Windau"), a joint stock company organized in 1991 under the laws of Latvia. Windau had entered into a number of agreements regarding building and installing cogeneration plants with the State Joint-Stock Company Latvenergo ("Latvenergo"), which was the main domestic producer, sole distributor of electricity and sole purchaser of electricity produced by private entrepreneurs. Also, Windau undertook to sell and Latvenergo to buy any surplus electric power from the plants. These agreements were Contract No. 16/97 of March 24, 1997 regarding a plant at Bauska, Contract No. 17/97 of March 24, 1997 regarding plants in Jelgava, Dobele and Iecava and Contract No. 18/97 of March 26, 1997 regarding 12 plants in various unspecified cities of Latvia (pp. 1, 12, 13). The Bauska cogeneration plant was completed and ready for operation on September 17, 1999 but production started on February 28, 2000 due to the dispute over the purchase price for electric power (p. 15). This dispute was over the double sales tariff, which was set out in domestic law at the time that said agreements were concluded. The tribunal saw this as an originally investment incentive that was gradually limited and eventually abolished by statute (p. 21).

The undisputed facts that formed the basis of claimant's claims were that the start-up of production at the Bauska plant was delayed from September 17, 1999 until February 28, 2000 and that all electric power delivered after the start-up on February 28, 2000 had been paid at 0.75 of the average tariff (p. 29).

Tribunal's conclusions:

In these proceedings, it was not disputed that Nykomb was an investor and that its acquisition of shares and its giving of credits to its subsidiary in Latvia constituted investments within the meaning of the ECT (p. 8). Yet, respondent raised jurisdictional objections for the following four reasons: (a) claimant was not party to the agreements in issue; (b) the agreements had explicit jurisdiction clauses giving exclusive jurisdiction to respondent's courts; (c) claimant could bring the same alleged breaches before Latvian courts with a risk of double payment; and (d) respondent did not agree to this arbitration. The tribunal found, respectively, that: (a) this arbitration was based on alleged treaty breaches and not contractual ones; (b) claimant was no party to the agreements and therefore not bound by their jurisdiction clauses; (c) double recovery risk did not exclude or limit the ECT based right; and (d) since respondent had not filed any reservations concerning the scope or interpretation of Art. 26 of the ECT, it was obliged to accept the ECT arbitration. Further and in relation to the purported competence of domestic courts, the tribunal noted that a general obligation to exhaust local remedies could be derived neither from the ECT nor from international law in general. As a result, the tribunal found that it had jurisdiction (pp. 9,10).

Following consideration of the agreements in issue, along with their structure, domestic legislation and judgments of the Supreme Court of Latvia, the tribunal found as a matter of fact, that Contract No. 16/97 was neither revoked nor replaced. In addition, the price clauses were legally binding contractual obligations under domestic law and the contracts were to be interpreted as fixing the multiplier in effect at the moment of signing the contract (pp. 26, 28). Thus, the tribunal concluded that the contractually agreed price between Latvenergo and Windau was double tariff for a period of eight years from the time, when Windau was ready to start production and the plant had been commissioned, which was both statutory and contractually established (p. 29).

The tribunal then addressed the issues of attribution, violation of Part III of the ECT and loss or damage to the investment. It found that the central government had full knowledge of Latvenergo's failure to pay the double tariff. Therefore, the breach of Windau's contractual rights was allowed to continue and, in that sense, it was caused by the government's failure to act in order to correct the situation. Under the rules of attribution in international law, respondent was considered responsible for Latvenergo's actions (p. 30). The tribunal then addressed claimant's contentions of violation of the ECT. In particular, claimant argued that respondent's actions constituted an "indirect" or "creeping" expropriation, since, by taking away a substantial part of Windau's income from sales, it made the enterprise not economically viable and its investment worthless. The tribunal explained that the decisive factor for a "regulatory taking" to amount to expropriation is the degree of the control over the enterprise. In the present case, it held, that the withholding of payment of double tariffs did not qualify as a direct or indirect expropriation under Art. 13(1) of the ECT (p. 33). Regarding unreasonable or discriminatory measures, the tribunal noted that the burden of proof lies with respondent to prove that no discrimination is taking place. Here, it was not satisfied. Thus, the tribunal found that Windau had been subject to discrimination in violation of Art. 10(1) of the ECT. Due to this finding, it decided that it was no longer necessary to examine the other claims (p. 34) and proceeded with the assessment of losses or damages. It noted that the ECT, although providing principles for compensation for violation of Art. 13, is silent regarding violations of Art. 10. Hence, it sought guidance in customary international law, as authoritatively restated in ILC Articles on State Responsibility (hereinafter "ILC Articles") and especially in Arts. 34 and 35. It decided that in the present case the appropriate approach was not restitution, but compensation for the loss or damages inflicted on claimant's investments (pp. 38, 39). After assessing claimant's loss to one third of the estimated loss in purchase prices according to customary international law of causation, foreseeability and reasonableness of the result, due to the limited documentation submitted by claimant, the tribunal further adjudicated that respondent had to fulfil its obligation under the ECT to protect claimant's investment and ensure payment of double tariff to Windau (pp. 39-41).

Synopsis:

Claimant's contractual rights had been breached by Latvenergo, a joint stock company owned 100% by respondent. Respondent allowed said breach to continue, having failed to act in order to correct the situation. Thus, respondent was held responsible for Latvenergo's actions. The tribunal, after rejecting the assertion of expropriation, as interference with control was not demonstrated, it concluded that claimant had been subject to discriminatory measures, due to respondent not having met its burden of proof that no discrimination was taking place. The limited documentation submitted by claimant drove the tribunal to quantify damages pursuant to customary international law of causation, foreseeability and reasonableness of the result.