Plama v. Bulgaria (ICSID Case No. ARB/03/24)
Summary by Natalia Charalampidou, citation details below.
Two decisions were rendered in this proceeding: the decision on jurisdiction dated February 8, 2005; and the final award issued on August 27, 2008. The revision proceedings launched by claimant on September 27, 2011 were discontinued for lack of payment of the required advances on July 9, 2012.
Invoked instruments, purported breaches & administering institution:
This was an arbitration under the ECT, arising out of an alleged breach of the standards of expropriation (Art. 13(1) of the ECT), the obligation of creating stable, equitable, favorable and transparent conditions, fair and equal treatment, full protection and security, reasonable and non-discriminatory measures (Art. 10(1) of the ECT) and the obligations under Art. 10(12) of the ECT (¶ 73). The dispute was submitted to an ICSID arbitral tribunal according to Art. 26(4)(a)(i) of the ECT.
Any third parties or parallel proceedings:
Concurrently to this arbitration, a litigation proceeding regarding the real owner of Plama's shares was pending before Courts in Switzerland (¶ 93).
Factual background, including procedural history:
Claimant in this procedure was Plama Consortium Limited ("Plama"), a limited liability company incorporated under the laws of Cyprus, and respondent was the Republic of Bulgaria ("Bulgaria") (¶ 1). The main factual matters at issue involved claimant's share purchase in Nova Plama AD ("Nova Plama"), a company incorporated in Bulgaria that owned an oil refinery and a power plant with a capacity for sales of excess electric power to the local grid (¶¶ 19-20).
Nova Plama was first privatized on September 5, 1996. Respondent sold 75% of its shares to EuroEnergy Holding OOD ("EEH") during this first privatization. Following an increase of its share capital, that resulted into EEH having 96.78% shareholding, negotiations for the purchase of Nova Plama shares started. In these negotiations Mr Jean-Christophe Vautrin, a French national, was involved. At that time Mr Vautrin was working at André & Cie ("André"), a Swiss multinational company involved in trading, project and trade financing, energy and transportation. Mr Vautrin, while being contacted by banks expressing their willingness to facilitate financing for the refinery of Nova Plama, as soon as a counter-guarantee from various partners, including a lubricant oil specialist, was received, contacted Mr Harald Svindseth from Norwegian Oil Trading AS ("NOT"). André and NOT (the "Consortium") expressed an interest in acquiring EEH's shares in Nova Plama. Shortly thereafter, claimant purchased from EEH all its shares of Nova Plama. The share purchase agreement was signed on September 18, 1998 and amended on December 18, 1998 subject to the consent of respondent's Privatization Agency (¶¶ 56-60 of the final award). This consent provided for the satisfaction of the following, inter alia, conditions: (a) evidence of financial resources to resume operation of the refinery; (b) an agreement with the trade unions of Nova Plama; (c) an agreement with the main creditors of Nova Plama; and (d) an agreement with the Privatization Agency to "take over any and all purchaser rights" in accordance with the agreement of the first privatization (¶ 61 of the final award).
Nova Plama was first privatized after insolvency proceedings had been initiated. During EEH's ownership production was never resumed. After Plama acquired the shares the refinery re-commenced operations during January 1999 until early April 1999. A recovery plan submitted to the competent court lead to insolvency proceedings to be terminated in July 1999. The following month Nova Plama's operations resumed, but in December 1999 the Refinery was shut down for good and after the re-opening of the insolvency proceedings, Nova Plama was liquidated and its assets were sold (¶¶ 67-71 of the final award). Claimant alleged that respondent deliberately caused grave problems to Nova Plama, in the sense of actions and omissions causing material damage to the operation of the refinery and having had a negative impact on the reputations and market values of the Plama Group companies (¶ 72 of the final award).
A. Decision on jurisdiction dated February 8, 2005
This was a decision following a "classical" objection to jurisdiction under ICSID Arbitration Rule 41(1). The general wording adopted in this rule allowed for parties to raise a broad range of objections, mainly: the existence and the legal nature of the dispute; the existence of a claim arising directly from an investment; the status of a party as a Contracting State; the nationality and the identity of the investor; the consent to jurisdiction; the existence of another remedy; and exhaustion of local remedies. In these proceedings respondent contested: (a) absence of consent in writing; (b) denial of advantages according to Art. 17(1) of the ECT; (c) that the MFN clause of the Cyprus-Bulgaria BIT did not extend to submitting a dispute under same BIT to ICSID arbitration; and (d) registration of the request for arbitration only as to the ECT (¶¶ 29-38). Claimant alleged that jurisdiction was established under the ECT, the Bulgaria-Cyprus BIT and the ICSID Convention (¶ 116).
Regarding the burden of proof, the tribunal adopted the test of Judge Higgins in her separate opinion in the Oil Platform Case, and cited further cases, Methanex v. USA, SGS v. Philippines and Salini v. Jordan, that followed this approach, thus accepting that it would seek to determine whether the facts alleged by claimant in this case, if established, were capable of coming within those provisions of the investment treaty, which have been invoked (¶¶ 118-119). Following this approach, the tribunal found that Plama was an investor under Art. 1(7) of the ECT, whereas it was irrelevant who owned or controlled it at any material time. This was equally irrelevant to the purpose of finding an investment under Art. 1(6) of the ECT (¶ 120). In this respect, respondent submitted at the hearing that the share acquisition was illegal on the grounds of misrepresentation under domestic law. The tribunal decided not to admit this as a jurisdictional challenge (¶¶ 126, 129), but rather to defer it to the phase on the merits, as it was not related to the agreement to arbitrate and the jurisdictional phase (¶ 130). The tribunal further took the view that at this stage of the proceedings it was not necessary for claimant to prove positively actual violations by respondent, as Art. 26 of the ECT prescribed merely allegations of violations (¶ 132). With regard to consent to arbitrate, it concluded that there was a valid exercise by claimant of its right to refer this dispute to ICSID under Art. 26 of the ECT and that it validly made the requisite written request under Art. 25 (1) of the ICSID Convention (¶ 137). It adopted the view that Art. 26 of the ECT contained a standing, open written offer of ICSID arbitration by contracting states to investors of other contracting states (¶¶ 138, 140). Having found that, the tribunal concluded that it had jurisdiction to decide on the merits the dispute, subject to the issue of Art. 17(1) of the ECT raised by respondent (¶ 137).
Art. 17 of the ECT, a denial of benefits clause, addresses the issue of "mail-box" companies qualifying as protected investors under the ECT and provides Contracting Parties the right to deny such entities ECT's benefits. In the present case, Respondent had sent two letters addressed to the Centre in this regard, and thus had exercised its right under Art. 17(1) of the ECT. In view of this, the tribunal had to decide, whether this provision could deprive it of all jurisdiction. The tribunal after interpreting the wording of this provision under Art. 31(1) of the VCLT, it found that the denial referred solely to Part III of the ECT (¶¶ 144, 146, 147). Unlike most modern investment treaties, it does not operate as a denial of all benefits to a covered investor (¶ 149). Therefore, respondent's case on Art. 17(1) of the ECT could not support a complaint against the jurisdiction of the tribunal (¶ 151). After affirming its jurisdiction and following both parties' request, the tribunal considered said provision as an issue on the merits. It found that, for the benefits to be denied, this right had to be exercised. Importantly, the effect that it would then unfold would be prospective and therefore benefits of Part III of the ECT are denied from the moment of its exercise. A retrospective effect would not be in line with the ECT's object and scope (¶¶ 158, 161, 165). Further issues related to this provision were reserved for a later stage of the proceedings (¶ 178).
The tribunal's findings regarding its jurisdiction on the basis of the BIT (¶¶ 183-227) are not discussed here.
B. Final award dated August 27, 2008
Before examining claimant's allegations of respondent having breached its obligations under the ECT, the tribunal addressed the issues left unresolved in its Decision on Jurisdiction (¶ 75). Firstly, it considered the denial of benefits clause (Art. 17(1) of the ECT). Due to Plama acknowledging that it had no significant business activities in Cyprus, the tribunal focused on the matters of ownership and control, while noting that claimant had the burden of proof. Although the evidence put forward in the first stage was inconsistent and contradictory, in view of further testifying and witness statements establishing that Mr Vautrin had intimate knowledge of the structure and affairs of the companies concerned, the tribunal accepted that he was the ultimate owner of the shares of Plama (¶¶ 81, 90, 92). Hence, Plama was owned and controlled by a person of a Contracting Party to the ECT and respondent could not rely on Art. 17(1) of the ECT to deny Plama benefits (¶ 95).
Thereafter, the tribunal considered the objection of misrepresentation. In particular, respondent contented that during negotiations for the acquisition of Nova Plama claimant consistently represented that it was a consortium owned by two large commercial entities, André and NOT, and not by Mr Vautrin (¶ 100). The tribunal first accepted that the approval of the Privatization Agency of Bulgaria was indeed necessary (¶ 113). It equally accepted respondent's factual allegation as to the occurrence of misrepresentation (¶ 116). The facts that it considered in order to reach this conclusion were: the Privatization Agency informing that it shall consent to transfer of shares to the Consortium; auditors indicating that André assigned to them the conduct of due diligence of Nova Plama; the draft agreement explicitly making mention to the Consortium; the Memorandum of Agreement also mentioning the Consortium; power of attorneys to act on behalf of the Consortium presented to the Privatization Agency; the business plan presented to Nova Plama's creditors mentioning the Consortium; the Ministry of Bulgaria addressing letters to the representative of the Consortium and having meetings with him in said capacity without ever been corrected; in meetings the Ambassador of Switzerland vouched for the good standing of André. The tribunal found that respondent clearly understood the Consortium to be the investor and that Plama was merely a special purpose vehicle for the Nova Plama acquisition (¶¶ 117-128). It also understood that Mr Vautin did nothing to remove this understanding. In truth, he deliberately misrepresented to respondent the true identity of the investors in Nova Plama (¶ 129). The tribunal found that the investment in Nova Plama was the result of a deliberate concealment amounting to fraud, a behavior contrary to domestic and international law that precludes the application of the protections of the ECT (¶ 135). Although the ECT includes no provision requiring legality of the investment, the tribunal continued, the conclusion should not be drawn that the protections provided for by this treaty cover all kinds of investments, including those contrary to domestic or international law. Moreover, the ECT should be interpreted in a manner consistent with the aim of encouraging respect for the rule of law. Thus, the tribunal adjudicated that substantive provisions of the ECT could not apply to investments that are in disregard of the law (¶¶ 138, 139). Finally, the tribunal proceeded with identifying the applicable rules and principles of international law, as stated in Art. 26(6) of the ECT and discussed the principles of good faith and nemo auditor propriam turpitudinem allegans (Inceysa v. El Salvador) and the notion of international public policy (World Duty Free v. Kenya) (¶¶ 141-142).
The denial of benefits provision (Art. 17 of the ECT) refers solely to Part III of the ECT and necessitates exercise of this right. Thereafter same right unfolds solely prospective effect. Respondent was successful in proving that claimant during the negotiations for acquiring the energy company in Bulgaria had misrepresented its identity and did not correct the created impression of it being a special purpose vehicle owned by two large commercial entities. The tribunal found that this (in)activity amounted to fraud, which precludes the application of the protections of the ECT. The absence of a provision requiring investment's legality in the ECT does not mean that illegal investments are covered investments.
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