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Case Report by Daniel Brawn, Edited by Ileana M. Smeureanu
In a decision on jurisdiction rendered on 2 September 2011, the Tribunal upheld the Respondent's objections to the tribunal's jurisdiction (taken as a preliminary issue) and dismissed all the Claimant's claims in the arbitration. The Tribunal reached this decision on the basis that the Claimant had not proved that it owned the investments upon which the claim was founded before the relevant date which would have given the Tribunal jurisdiction. However, the Tribunal gave some brief comments on two of the remaining preliminary issues, to help those who confront them in future.
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Libananco v. Turkey (ICSID Case No. ARB/06/8)
Summary by Natalia Charalampidou, citation details below.
Two decisions were rendered in this proceeding: the decision on preliminary issues issued on June 23, 2008; and the final award issued on September 2, 2011. A request for annulment was registered on December 20, 2011 and the decision dismissing the application in its entirety was rendered on May 22, 2013.
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 of the ECT), fair and equal treatment, full protection and security, arbitrary and unreasonable measures, and the umbrella clause (Art. 10(1) of the ECT) (¶ 102(a)-(e) of the final award). 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:
Third persons alleging ownership of same assets initiated simultaneously two other separate arbitration proceedings before ICSID, those being Cementownia and Europe Cement (see below under Nos 12 and 13) and an ad hoc arbitration, as well as proceedings before ECtHR (Uzan v. Turkey, Application No. 18240/03 of May 22, 2003) . The cumulative amount of shares held by the claimants in said ICSID cases amounted to 130% and 125% of shareholding in the two Turkish utility companies. In 2014, one more claimant alleged ownership of same shares and initiated arbitration against Turkey (Uzan v. Turkey, see below under No. 32).
Factual background, including procedural history:
Claimant was Libananco Holdings Co. Ltd ("Libananco"), a limited liability company registered in Cyprus, and respondent was the Republic of Turkey ("Turkey") (¶ 1 of the decision).
In the center of these arbitral proceedings stood ÇEAª and Kepez, two vertically integrated electrical utilities companies founded in the 1950s and operating since then in the southern part of Turkey (¶ 90 of the final award). In early 1993, Rumeli Elektrik Yatirim A.S., a company owned by Cem Uzan and his family, acquired respondent's shares in said entities by way of public privatization tenders. By mid-1990s the Uzan family, after increasing their equity stake in same entities, came to own a majority of the shares in both ÇEAª and Kepez (¶ 91 of the final award). In 1998, these entities signed new concession agreements with the respondent, that gave ÇEAª and Kepez the right to continue to operate the utilities for the next 60 years (¶ 92 of the final award). Following several alleged breaches of the concession agreements, including using a construction project as a vehicle for improper fund transfers, improperly financing other companies, refusing to provide non-discriminatory transmission services, violating the competition laws, failing to provide reliable and uninterrupted electricity supply and failure to comply with key statutory provisions (¶¶ 93, 103.2, 103.3 of the final award), respondent's security forces raided ÇEAª' and Kepez's facilities on June 12, 2003, removed company personnel and seized movable and immovable properties. At the same time the competent authorities served notices of cancellation of the concession agreements (¶ 95 of the final award). Lawsuits filed in the Council of State of Turkey by ÇEAª and Kepez led to a judgment affirming the grounds for the cancellation of the concession agreements. Legal remedies were unsuccessful (¶ 96 of the final award).
The Uzan family alleged that due to the instability of the Turkish economy in the years 2000 and 2001 and Cem Uzan's decision to enter Turkish politics, they decided to acquire or establish an international holding company in a stable and reputable jurisdiction (¶ 98 of the final award). Thus, the Cyprus company Libananco was acquired for and on behalf of Cem Uzan and his immediate family members in April 2002 by Mr Ali Türkkan (¶ 99 of the final award). Libananco purported that it was the owner of the majority of shares in each electricity entity by the end of May 2003 (¶ 101 of the final award), although the precise manner of acquiring ÇEAª' and Kepez's shares was inconsistent in claimant's pleadings (¶¶ 100, 100.1, 100.2 of the final award). Furthermore, respondent informed the tribunal that Mr Kemal Uzan was a fugitive from justice hiding outside of Turkey and subject to an Interpol Red Notice (¶ 64 of the final award).
The events that took place during the procedure before ICSID and triggered to a great extend the decision on preliminary issues, are the following. After the determination of the schedule for the submission of written pleadings (¶¶ 2, 8 of the decision), claimant requested an extension of time of two months to file its Memorial on Jurisdiction and Merits. In support of this, claimant put forward allegations of surveillance by Turkish security forces, substantiated by publications in the press. By agreement of the parties the required extension was granted (¶ 9 of the decision). On the same day, claimant filed its First Request for the Production of Documents requesting the production of documents related to the alleged surveillance (¶ 10 of the decision). Respondent in its Response advised that according to enquiries made to all competent authorities no surveillance of claimant's counsel, or related to the present arbitration, had been - or was being - carried out (¶ 11 of the decision). Claimant, although having questioned in its Reply respondent's statement, acknowledged that practically, the tribunal could not order the production of documents that did not exist (¶ 12 of the decision).
Later, respondent filed its First Request for the Production of Documents regarding claimant's acquisition of shares, its actions as shareholder and its business activities, a Request for Security of Costs and a letter requesting suspension of the proceeding, production of documents and provisional measures (¶ 15 of the decision). The request for production of share certificates premised on an allegedly doubtful share ownership due to competing claims in other ICSID proceedings adding up to approximately 200% of the shares issued by same companies (¶ 29(a) of the decision). Claimant's primary objection to this request was that such request could not be granted due to respondent not having filed its objection to jurisdiction (¶ 30(a) of the decision). Claimant also purported that this was equally required by fairness (¶ 30(d) of the decision). The request for security for costs rested on claimant's doubtful share ownership, along with it purportedly being a shell company without assets (¶ 32(b)&(c) of the decision), demonstrated by the lack of filing any annual returns (¶ 37 of the decision). Claimant objected to this request on two grounds: such an order was ordinarily not granted in ICSID proceedings (¶ 33(a) of the decision); and same would allegedly entail unfair pre-judgement of the merits (¶ 33(d) of the decision).
Thereafter, claimant submitted an application informing the tribunal that respondent intercepted emails and MSN instant messages sent by and to persons associated with claimant, including approximately 1,000 privileged, private and confidential emails sent by, to and between its counsel in connection with the present arbitration. This allegation was supported by a court order of Turkish courts. Claimant requested the tribunal to determine jurisdiction and to find respondent liable on the merits for its breaches of the ECT, international and Turkish law, along with awarding costs to claimant as a sanction for respondent's bad faith ("summary relief") (¶¶ 19, 42 of the decision). In its Response, respondent acknowledged the authenticity of the relevant court orders but stated that the investigation was targeted to the laundering of USD 16 million lost in a bank fraud and not claimant (¶ 45 of the decision). It also affirmed that no documents related to the present application were provided to counsels of the present arbitration (¶ 46 of the decision). Respondent further asked the tribunal to deny claimant's application and order claimant to deposit the original shares certificates for safekeeping (¶ 21 of the decision). In its reply claimant filed new documents regarding surveillance and disregarded the necessity of the physical deposit of the requested share certificates (¶ 22 of the decision).
A. Decision on preliminary issues dated June 23, 2008
The tribunal first decided on respondent's Security for Costs Application and First Request for Production of Documents and then proceeded with claimant's surveillance allegations (¶ 55).
The tribunal expressed that it was unaware of any established practice regarding security for costs in ICSID arbitrations. Respondent was unable to name any specific authority supporting such a request. Thus, the tribunal took the view that only in the most extreme case should the possibility of granting security for costs be entertained (¶ 57). Still, it was not convinced that the present case was a most extreme one. It noted that usually an ICSID claimant is an investment vehicle created for the purpose of the investment transaction that became the subject of dispute (¶¶ 58-59). Therefore, the application was denied (¶ 60).
Regarding the production of share certificates, the tribunal accepted claimant's eight-point proposal and allowed for claimant to safely offer up for inspection the shares it held, and respondent to inspect them strictly for the purposes of the present arbitration (¶¶ 63, 65). This order was issued mainly due to respondent's assertion that the shareholdings were treated by more than one entity as their own property, commencing two other ICSID arbitrations (¶¶ 67, 68).
Turning to the request for a "summary judgment" the tribunal noted that it treated the surveillance allegations with utmost seriousness and called upon the respondent to acknowledge or reject the authenticity of the relevant court orders (¶ 74). Respondent acknowledged it and argued that: (a) there had never been any intention to conduct surveillance of claimant's preparations for the present arbitration; (b) respondent, as a sovereign state, had an undeniable entitlement to conduct investigation into crime within its jurisdiction, which could not be affected by the existence of an ICSID arbitration; (c) the previous assurances of the Public Prosecutor, who was interested solely in asset transfers related to fraud, had been given in good faith; and (d) the list of e-mail addresses was that of all considered to have contact with a particular suspect and it did not imply that actual communication from all those e-mails would be read. Privileged documents had been identified and destroyed by the Public Prosecutor (¶¶ 49, 75). Therefore, respondent denied that any prejudice could have been caused to claimant (¶ 76). The tribunal noted that these allegations and counter-allegations affected principles that lie at the very heart of the ICSID arbitral process, including basic procedural fairness, respect for confidentiality and legal privilege, the right of parties to seek advice and to advance their respective cases freely and without interference. It underscored that parties have the obligation to arbitrate fairly and in good faith, whereas it has the authority to ensure that this obligation is complied with (¶ 78). The tribunal accepted the assurances given by the counsels, as well as a sovereign state's right and duty to pursue the commission of serious crime. Yet, said right and duty did not mean that the investigating power may be exercised without regard to other rights and duties, while the respect of privilege and confidentiality is paramount. To this effect, the tribunal set up a specific machinery to ensure that the rule of separation was made good in practice (¶ 79). This machinery mainly included prohibition of interception or record of communications between claimant's legal counsels and representatives, written statement of the Public Prosecutor that all communication related to the present arbitration and intercepted has been or shall be destroyed, prohibition of disclosing the content of such communication to any person having any role in defense of the present arbitration and exclusion of all privileged documents and information from the evidence to be received in the present arbitration (¶ 82, paras 1.1.1 - 1.2).
B. Final award dated September 2, 2011
The tribunal opted for bifurcation of the proceedings. Thus, it addressed the preliminary jurisdictional objections, those being: (a) whether claimant in fact owned ÇEAª and Kepez shares before and/ or at the date of the alleged expropriation (¶¶ 105.1, 127); (b) whether claimant was an investor within the meaning of the ICSID Convention and the ECT (¶ 105.2); (c) whether claimant's claims satisfied express conditions of Turkey's consent to arbitration under Art. 26(3)(b)(i) of the ECT (¶ 105.3); and (d) whether claimant was entitled to the benefits of the ECT under Art. 17 of the ECT (¶ 105.4).
With reference to the burden of proof in relation to the facts and assertions advanced by each of the parties (¶ 114), the tribunal noted that claimant bore such in relation to it timely acquiring the share certificates in question (¶ 121). It further clarified that in view of full evidence and argument on all factual and legal issues relating to said objections having been received and heard (¶ 124), it would not make merely a pro tem assumption of the truth (¶ 121). Especially in relation to allegations of fraud or other serious wrongdoing, it did not agree with claimant's contention of applying a heightened standard of proof (¶ 124). In relation to the other three objections, the tribunal noted that these were not dispositive in the present proceedings and therefore the burden of proof did not arise for consideration (¶ 126).
In examining the first preliminary jurisdictional objection, the tribunal considered Sabet v Iran and Saluka (¶¶ 128-129) as well as Arts. 1(6) and 26 of the ECT and the ICSID Convention (¶ 130). It clarified that claimant must show that it owned the shares in question on or before the date of the alleged expropriation (¶ 131). After setting out the salient parts of the evidence adduced by claimant (¶¶ 133-146.6) and respondent (¶¶ 147-159), which included forensic analysis of documents (¶¶ 349-358), floppy disks (¶¶ 359-372), audio evidence (¶¶ 373-385) and requirements for valid transfer of ownership under Turkish law (¶¶ 385-399), the tribunal explained the following. It started with evaluating Mr Türkkan, who allegedly was selected by the Uzan family in order to acquire and manage an offshore company and transfer investments of several billions of USD. His overall experience, qualifications and abilities as evidenced before the tribunal (¶¶ 404-405) casted some doubt on the plausibility of the claimant's account of acquiring or establishing Libananco and subsequently acquiring shares in ÇEAª and Kepez (¶ 406). Especially about Mr Türkkan's visit to Cyprus in early April 2002, his passport was not offered as evidence (¶ 409). Hence, the tribunal took into consideration various documentation from Hilton International Co., Royal Jordanian, the Rafic Hariri International Airport, the Aliens & Immigration Office of Cyprus and the Queen Ali Airport (¶¶ 411.1-411.8). Still, it was unable to make any finding, as said evidence was conflicting (¶ 413). Yet, on the basis of other submitted evidence the tribunal expressed its doubts as to whether Mr Türkkan travelled to Cyprus on April 1, 2002 to undertake work in connection with Libananco (¶ 413), but it decided to first express its findings with reference to other circumstances surrounding his alleged purchase of Libananco in April 2002. Specifically, it did not accept that Mr Türkkan selected the specific accountant in Cyprus because his name was on the top of a directory of accountants posted in the internet (¶ 416.1). Equally, it did not accept that the accountant provided his services on credit and on trust and received payment some three years later (¶ 416.2). Further, it did not accept the explanations put forward by the attorney involved in the alleged purchase of Libananco regarding the invoice or receipt for this purchase (¶¶ 416.3, 430, 431). Hence, the tribunal expressed its doubts as to whether Mr Türkkan actually purchased Libananco in April 2002. But, before reaching a conclusion, it wished to consider further evidence (¶ 417). Turning to the allegation that Mr Türkkan acquired Libananco on behalf of the Uzan family and was holding it on trust for them (¶¶ 418, 419), the tribunal was not convinced of a trust arrangement having been in place (¶ 422) due to lack of documentation and failure to list the alleged beneficial owners (¶¶ 420, 421). To the contrary, claimant had failed to prove the existence of any trust in respect of Libananco (¶ 423). With regard to the creation and/ or execution of the instrument of transfer on April 1, 2002, the tribunal took the view that claimant's case was riddled with inconsistencies. Moreover, claimant's witnesses gave conflicting evidence (¶ 425). Taking into account that the presented evidence was unreliable, the tribunal concluded that there was no proof that the instrument of transfer was in fact signed on said date (¶ 432). Further, the tribunal found that claimant did not comply with statutory obligations and duties under Cypriot law regarding the transfer and operation of a company (¶ 433). These obligations and duties related to annual accounts (¶ 434), notification of directors' change (¶ 435) and obtaining permission from the Central Bank for non-residents to acquire shares in a Cypriot company (¶ 436). From the discrepancies, the tribunal reached the conclusion that the individuals allegedly involved in acquiring and running Libananco commenced such work in 2005 or later (¶ 437). For the all the foregoing reasons the tribunal found improbable that Mr Türkkan travelled to Cyprus on April 1, 2002 for the purpose of undertaking work in connection with Libananco and that Mr Türkkan acquired Libananco on April 1, 2002 or early April 2002 (¶ 438). Importantly, the tribunal was convinced by submitted evidence that in the period of May 20, 2003 until June 12, 2003 members of the Uzan family owned the majority of shares in ÇEAª and Kepez. This was irreconcilable with the claimant's alleged ownership in said entities before June 12, 2003 (¶ 456). Regarding the share transfer agreements and their effectiveness to transfer ownership of the shares in the electricity companies to Libananco between October 2002 and May 2003, claimant's arguments about the intention to effect legal transfers of the shares in question were conflicting (¶¶ 468, 473.4, 474.4). Moreover, none of claimant's witnesses were able to give any convincing explanation for the change of position, which was clearly contradictory (¶ 475). In addition, the transfer of shares itself had inconsistences and discrepancies (¶ 479). Thus, the tribunal concluded that said agreements were unlikely to have been created on the date that appeared they bore (¶ 483). The tribunal reached the same conclusion regarding claimant's board and management minutes (¶¶ 484, 491). With reference to the issue of valid transfer of legal ownership of the share certificates to Libananco under Turkish law ("teslim") (¶ 492), the tribunal did not find the evidence submitted by claimant persuasive (¶¶ 498, 505, 507, 513, 516, 518, 523). Rather, the tribunal concluded that the immediate possessor of the share certificates in question did not have the authority and therefore the right to deliver them to claimant (¶ 499). Overall, the tribunal found claimant's case to be highly strained and thus unpersuasive (¶ 530), mainly due to the absence of an adequate written record and lack of legal compliance (¶ 531). Thus, it adjudged that claimant failed to meet his burden of proof regarding the acquisition of shares on said critical date (¶ 536).
Thereafter, the tribunal offered some brief comments on certain general issues raised by the third and fourth jurisdictional objections, although it was not strictly necessary to proceed to a formal decision thereon. Due to the tribunal having stressed that these comments were not to be regarded as having the status of formal decisions (¶¶ 537-538), they shall not be set out here.
This dispute concerned the cancellation of concession agreements between two vertically integrated electricity utilities companies and Turkey, and their seizure by the latter. Libananco, a company incorporated in Cyprus, claimed that it held shares in the Turkish electricity companies. In the decision on preliminary issues the tribunal dealt with claimant's surveillance allegations which were substantiated by the production of the relevant court orders. Respondent acknowledged their authenticity, clarified that surveillance was related to investigations of fraud and assured that privileged documents had not been considered and were destroyed. The tribunal acknowledged a sovereign state's right and duty to pursue the commission of serious crime and ordered separation between the criminal investigations and the present arbitration. Thereafter, the tribunal bifurcated the proceedings. Claimant was unable to persuade the tribunal that it owned the shares in question at the time of the alleged expropriation, as the adduced evidence was both conflicting and unreliable. Moreover, claimant had failed to comply with statutory obligations and to produce an adequate written record of the purported events. Thus, the tribunal found that it had no jurisdiction and dismissed the claim.
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