Summary

Source: icsid.worldbank.org

TABLE OF CONTENTS

I. INTRODUCTION AND PARTIES
A. The Claimants
B. The Respondent
II. FACTUAL BACKGROUND
A. BD Agro
B. The Privatization of BD Agro
C. The MDH Agreement
D. The Privatization Agreement
E. The Claimants' Beneficial Ownership of BD Agro
F. The Claimants' Indirect Shareholding of BD Agro
G. The Sembi Agreement
H. The Financial condition of BD Agro from 2005 to 2011
I. The 2010 Loan Agreement
J. The Privatization Agency's First Notice of 25 February 2011
K. Subsequent notices and discussions
L. The Payment of Final Instalment of the Purchase Price
M. Mr. Obradovi's requests to release the pledge on the Privatized Shares
N. The Agency's request for instructions from the Ministry of Economy
O. The 2012 Loan Agreement
P. Mr. Obradovi's request for assignment of the Agreement
Q. The Ombudsman's investigation
R. The Ministry of Economy's supervision proceedings
S. The pre-pack reorganization plans
T. The Ministry of Economy's report of 7 April 2015
U. The Ombudsman's recommendation of 23 June 2015
V. The Agency's notice of 24 June 2015
W. The initial approval of the amended pre-pack reorganization plan
X. The renewed request for assignment of the Agreement
Y. The Ombudsman's letters to the Agency and the Ministry of Economy of 18 September 2015
Z. The reversal of the approval of the amended pre-pack reorganization plan and Subsequent Steps
AA. The Agency's Termination of the Agreement
BB. The transfer of the Privatized Shares
CC. BD Agro's Bankruptcy
III. PROCEDURAL HISTORY
A. Initial Steps
B. Written Phase
C. Hearing on Merits, Liability and Quantum
D. Post-Hearing Phase
IV. REQUESTS FOR RELIEF
A. Claimants' Request for Relief
B. Respondent's Request for Relief
V. PRELIMINARY MATTERS
A. Scope of this Award
B. Iura Novit Arbiter
C. Relevance of Previous Decisions and Awards
D. Transparency
VI. JURISDICTION
A. Jurisdiction under the ICSID Convention
1. Investment under the ICSID Convention
a. Interest in the Beneficially Owned Shares
b. Mr. Rand's Indirect Shareholding in BD Agro through MDH Serbia
c. Payments for the benefit of BD Agro
d. Sembi's rights stemming from the Sembi Agreement
e. Conclusion on the existence of an investment under the ICSID Convention
2. Consent
3. Standing under the ICSID Convention
4. Conclusion on jurisdiction under the ICSID Convention
B. Jurisdiction under the Canada-Serbia BIT
1. Legal Framework
2. Investment
a. Interest in the Beneficially Owned Shares
b. Payments for the benefit of BD Agro
c. Conclusion
3. Illegality
a. Respondent's Position
b. Claimants' Position
c. Analysis
d. Conclusion
4. Non-Retroactivity and Time Bar
a. Respondent's Position
b. Claimants' Position
c. Analysis
d. Conclusion
5. Abuse of Process
a. Respondent's Position
b. Claimants' Position
c. Analysis
d. Conclusion on Jurisdiction
LIABILITY
A. Attribution
1. Claimants' Position
2. Respondent's Position
3. Analysis
a. Article 4 of the ILC Articles
b. Article 5 of the ILC Articles
B. Exercise of Sovereign Powers
1. Claimants' Position
2. Respondent's Position
3. Analysis
C. Fair and Equitable Treatment
1. Claimants' Position
a. The Termination of the Privatization Agreement
b. Seizure of the Beneficially Owned Shares
c. Refusal to release the pledge
d. Refusal to allow the assignment of the Privatization Agreement
e. Ombudsman's interventions
f. Other breaches
2. Respondent's Position
a. Termination of the Privatization Agreement
b. Seizure of the Beneficially Owned Shares
c. Refusal to release the pledge
d. Refusal to allow assignment of the Privatization Agreement
e. Ombudsman's interventions
f. Other breaches
3. Analysis
a. Seizure of the Beneficially Owned Shares
b. Expropriation of the Beneficially Owned Shares
D. General Exception
1. Claimants' Position
2. Respondent's Position
3. Analysis
E. Conclusion on Liability
VIII. DAMAGES
A. Claimants' Position
1. Causation
2. Methodology
a. Dr. Hern's valuation
b. Critique of Mr. Cowan's Valuations
3. Size of the Construction Land
4. Price per m2
5. 30% Discount
6. Bankruptcy sale discount
7. Liabilities
8. Distress discount
9. Interest
B. Respondent's position
1. Causation
2. Methodology
a. Mr. Cowan's Valuation
b. Critique of Dr. Hern's valuation
3. Size of the Construction Land
4. Price per m2
5. 30% Discount
6. Bankruptcy sale discount
7. Liabilities
8. Distress discount
9. Interest
C. Analysis
1. Causation
2. Methodology
3. Size of the Construction Land
4. Price per m2
5. 30% Discount
6. Bankruptcy sale discount
7. Liabilities
8. Distress discount
9. Interest
10. Conclusion
IX.
COSTS
A. Claimants' Position
B. Respondent's Position
C. Arbitration Costs
X. D. Analysis
OPERATIVE PART.

I. INTRODUCTION AND PARTIES

1. This case concerns a dispute submitted to the International Centre for Settlement of Investment Disputes ("ICSID" or the "Centre") on the basis of the Agreement between Canada and the Republic of Serbia for the Promotion and Protection of Investments, signed on 1 September 2014 and which entered into force on 27 April 2015 (the "Canada-Serbia BIT"), the Agreement between Serbia and Montenegro and the Republic of Cyprus on Reciprocal Promotion and Protection of Investments, signed on 21 July 2005 and which entered into force on 23 December 2005 (the "Cyprus-Serbia BIT") (together, "the Treaties"), and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which entered into force on October 14, 1966 (the "ICSID Convention").

...

II. FACTUAL BACKGROUND

5. The following summary is meant to give a general overview of the factual background of the dispute as alleged by the Parties. The facts referred to are not necessarily regarded as established; where they are disputed and relevant, they are discussed in the analysis. The summary is limited to the milestones that the Tribunal considers most useful to understand the merits of this dispute. Other facts may be referred to as part of the analysis if and when appropriate.

A. BD Agro

6. BD Agro AD ("BD Agro") is a dairy farm located on the outskirts of Belgrade, Serbia, close to the Belgrade International Airport.

7. In 1989, it was transformed from a state-owned producers' cooperative into a "socially- owned" company under State control.

B. The Privatization of BD Agro

8. In 2005, BD Agro was sought to be privatized with 70% of its shares (the "Privatized Shares") put up for auction by the Privatization Agency (the "Privatization Agency" or the "Agency"). The remaining 30% of BD Agro shares were owned by a large number of small shareholders, mainly BD Agro's employees.

C. The MDH Agreement

9. On 19 September 2005, in view of the impending public auction of BD Agro's shares, Marine Drive Holdings Inc., a company held in majority by Mr. Rand and incorporated in the British Virgin Islands ("MDH") and Mr. Obradovi entered into a written agreement concerning BD Agro (the "MDH Agreement").3 Under the terms of that agreement, Mr. Obradovi would take part in BD Agro's public auction, and, if successful, he would become the owner of the Privatized Shares.4 The Agreement further specified that Mr. Obradovi would hold the shares at the risk of MDH and that MDH would have a call option to purchase the Privatized Shares, as well as any shares in BD Agro subsequently acquired by Mr. Obradovi, for a nominal price of EUR 1,000.

D. The Privatization Agreement

10. On 4 October 2005, following a public auction, Mr. Obradovi, as "Buyer", and the Privatization Agency entered into a Privatization Agreement (the "Privatization Agreement").6 Under the terms of that agreement, Mr. Obradovi purchased 70% of the socially owned capital of BD Agro for EUR 5,548,996.46 to be paid in six annual instalments.7 Mr. Obradovi also committed to invest in BD Agro an additional amount of approximately EUR 2 million within the following year.

11. The Privatization Agreement was coupled with a Share Pledge Agreement concluded on the same day between Mr. Obradovi and the Agency. Under the terms of the Share Pledge Agreement, Mr. Obradovi pledged the Privatized Shares to the Privatization Agency for a five-year period within which he agreed to pay the full purchase price.

12. On 9 January 2006, the Privatization Agreement was amended with the amount of additional investment in BD Agro required under Article 5.2.1 being increased to EUR 1,998,554. Deadlines for making the investments were extended.

13. On 15 March 2006, the Privatization Agreement was amended again, requiring the submission to the Privatization Agency of four consecutive bank guarantees: two for EUR 501,153 and another two for EUR 493,123.

14. On 29 August 2006, BD Agro's General Assembly resolved to increase its capital by issuing an additional 171,974 shares at a nominal value of 1,000 RSD per share, all of which were issued to Mr. Obradovi (the "New Shares").13 On 25 October 2006, the Serbian Business Register Agency registered this capital increase.14 Accordingly, Mr. Obradovi's shareholding in BD Agro increased from 70% to 75.87%.

15. On 6 January 2012, the Privatization Agency confirmed that "the buyer, as of April 8, 2011, has settled his obligations in respect of the 1st, 2nd, 3rd, 4th, 5th and 6th installment and thus paid the entire sale and purchase price."15

E. The Claimants' Beneficial Ownership of BD Agro

16. The Claimants contend that the combined effect of the MDH Agreement and the Privatization Agreement was that Mr. Rand became the beneficial owner of 75.87% of BD Agro's shares (the "Beneficially Owned Shares", consisting of the "Privatized Shares" and the "New Shares").

F. The Claimants' Indirect Shareholding of BD Agro

17. Mr. Rand is the indirect owner of an additional 3.9% shareholding in BD Agro (the "Indirect Shareholding") that he holds through his 100% owned Serbian company, Marine Drive Holding d.o.o. ("MDH Serbia").

G. The Sembi Agreement

18. Mr. Rand allegedly arranged funds for the purchase and subsequent investments in BD Agro from Mr. Rand's long-time business partners, the Lundin family from Geneva, Switzerland (the "Lundin Family" or the "Lundins") and their investment bank, 1875 Finance S.A.17 At the end of 2007, the Lundin family decided to exit the project and requested repayment of the funds lent to Mr. Obradovi.18 Mr. Rand decided to replace the Lundins' funds with his own.

19. Mr. Rand also decided to change the holding structure of the Beneficially Owned Shares, to include his three children, Ms. Kathleen Rand, Ms. Allison Rand and Mr. Robert Rand.

20. Mr. Rand thus purchased a Cypriot shelf company called Sembi Investment ("Sembi") to serve as the new holding company of the Beneficially Owned Shares.21 Sembi is a limited liability company organized under the laws of Cyprus. All of the preferred shares issued by Sembi were owned by Rand Investments.22 All of the ordinary shares issued by Sembi were owned by The Ahola Family Trust, a trust domiciled in Guernsey whose beneficiaries are, and have always been, Mr. Rand's three children.23 The Claimants allege that Sembi is, and was at all relevant times, controlled by Mr. Rand.

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X. OPERATIVE PART

717. For the reasons set forth above, the Tribunal:

a. DECLARES that it has jurisdiction over Mr. Rand's claims under the Canada-Serbia BIT in respect of his interest in the Beneficially Owned Shares and that these claims are admissible;

b. DENIES jurisdiction over all other claims under the Canada-Serbia BIT and the Cyprus-Serbia BIT;

c. DECLARES that the Respondent has breached Article 6(1) of the Canada-Serbia BIT;

d. ORDERS the Respondent to pay EUR 14,572,730 to Mr. William Rand, together with interest at the average EURIBOR for 6 months deposits plus 2% per annum, compounded semi-annually, until the date of payment;

e. ORDERS the Parties to each bear 50% of the Tribunal's fees and expenses and ICSID's fees as notified by ICSID;

f. ORDERS the Parties to bear their own legal fees and other costs;

g. DISMISSES all remaining claims and requests for relief.

Mr. Baiju S. Vasani
Prof. Marcelo G. Kohen
Prof. Gabrielle Kaufmann-Kohler
...
(subject to the attached dissenting opinion)

DISSENTING OPINION OF PROFESSOR MARCELO G. KOHEN

1. While agreeing with some parts of the analysis in the Award, I disagree with others that I consider of fundamental importance. Hence my need to append this dissenting opinion. My major disagreement concerns some legal issues, and also the manner to approach some factual elements of the case.

A. Everything that is not explicitly prohibited in a treaty is not necessarily permitted

2. From a legal perspective, i.e. looking at the means to interpret the applicable law (the BIT Canada/Serbia, the ICSID Convention and relevant general international law, as well as Serbian Law, no matter whether it is considered a normative "fact" or applicable law on its own), the principal points of divergence with the majority are the questions of how to address conduct by investors not in accordance with the law, the identification of the "real" investor, and the origin of the capital invested. As to these three issues, the Award considers that, since there are no specific requirements contained in the ICSID Convention and in the BIT, then the issues of the legality of the investment in accordance with domestic law, and of the origin of the investment to determine who the investor is, are irrelevant. I strongly disagree.

3. It is not possible to justify a given conduct just because it is not expressly regulated in the relevant instrument. In the case at issue, one could also invoke the opposite: that the ICSID Convention and the BIT do not offer protection to illegal investments. The question indeed is one of treaty interpretation. If their text does not explicitly address the issue either way, but the treaties clearly relate to the question at issue, a good faith interpretation requires considering the object and purpose of the instruments concerned. I can hardly imagine the parties to a BIT or to the ICSID Convention having accepted the protection of investments made in disregard of their domestic legislations. Ex injuria jus non oritur. If there is a presumption, it is rather in favour of the requirement of legality, not of the acceptance of illegality. Whether the domestic legislation is in accordance with international law is another question. Nothing precludes the Tribunal from taking the domestic requirements into account at the time of its decision if they do not contradict international law. The promotion of foreign investment cannot be pursued at any cost.

4. The fact that other BITs expressly include the requirement that the investment be made in accordance with domestic law and that the Canada/Serbia BIT does not, is not an argument to admit a contrario transactions disregarding the domestic law, as the Award does. The reason for the explicit inclusion of this requirement in some treaties is rather simple. Due to some unfortunate decisions by arbitral tribunals, the parties to investment treaties have been increasingly obliged to explicitly include rules or conditions going against those wrong arbitral decisions, or incorporating such rules ex abundante cautela, to prevent arbitrators from taking the liberty to make original and extensive interpretations, often against the will of the contracting parties.

B. An investment made in disregard of legal requirements is not protected
C. Is the investment made by a foreign or a national investor?
D. Mr. Rand did not prove his alleged ownership or control of BD Agro
E. The origin of the funds is relevant
F. The "Sembi Agreement" could not have created interest in BD Agro in favour of Mr. Rand and opposable to Serbia
G. Mr. Rand's concealment does not allow BIT protection
H. The Termination of the Privatization Agreement

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I. Conclusion

BO Agra's employees. It must be recalled that one third of the shares were owned by the employees of BO Agro. The record shows the Ministry disagreeing with the Privatization Agency, and the Ombudsman criticizing both in relation to the privatization of BO Agro.27 The record also shows that the Privatization Agency warned Mr. Obradovic about noncompliance with the Privatization Agreement many times and that the owner did not challenge this alleged noncompliance. It also shows that Mr. Obradovic was granted many deadlines to overcome his noncompliance.

29. For all these reasons, I cannot subscribe to the decision rendered in the Award to which this dissenting opinion is appended.

[signed]
Professor Marcelo G. Kohen

Footnotes omitted