Kardassopoulos v. Georgia (ICSID Case No. ARB/05/18)
Summary by Natalia Charalampidou, citation details below.
Two decisions were rendered in this proceeding: the decision on jurisdiction issued on July 6, 2007; and the final award issued on March 3, 2010. A request for annulment was registered on July 16, 2010 and discontinued on December 12, 2011 pursuant to ICSID Arbitration Rules 53 and 43(1). A request for revision was registered on January 21, 2011 and was also discontinued on December 21, 2011 pursuant to ICSID Arbitration Rules 53 and 43(1).
Invoked instruments, purported breaches & administering institution:
Mr Kardassopoulos' Request for Arbitration, which was submitted on August 2, 2005, invoked the protection offered by the ECT and claimed breach of the standards of expropriation (Art. 13 of the ECT) and fair and equal treatment (Art. 10(1) of the ECT) (¶ 62 of the final award). Mr Kardassopoulos also invoked the Greece-Georgia BIT, claiming breach of the standard of expropriation (Art. 4) and fair and equitable treatment (Art. 2) (¶ 61 of the final award). Mr Fuchs' Request for Arbitration (see next paragraph) invoked the Israel-Georgia BIT and claimed a breach of the fair and equitable treatment (Art. 2) (¶ 63 of the final award). The arbitration was submitted to an ICSID arbitral tribunal according to Art. 26(4)(a)(i) of the ECT, Art. 9 of the Greece-Georgia BIT and Art. 8 of the Georgia-Israel BIT (¶¶ 58-60 of the final award).
Any third parties or parallel proceedings:
On April 20, 2007 Mr Fuchs submitted a Request for Arbitration invoking the Georgia-Israel BIT in respect of claims arising out of the same set of facts as the request filed by Mr Kardassopoulos. On September 12, 2007 Mr Kardassopoulos, Mr Fuchs and Georgia jointly wrote to the Secretary General of the Centre advising that they had agreed on a method for constituting the tribunal in the Fuchs arbitration. They requested that the same tribunal already constituted in the Kardassopoulos arbitration hear and decide the claims presented in the Request for Arbitration of Mr Fuchs (Art. 37 of the ICSID Convention, ICSID Arbitration Rule 2) (¶¶ 8, 11 of the final award).
Claimant in this procedure was Mr Ioannis Kardassopoulos ("Mr Kardassopoulos"), a national of the Hellenic Republic ("Greece") (¶ 1), and respondent was the Republic of Georgia ("Georgia"). Mr Kardassopoulos was claiming breach of respondent's obligations under the ECT and the Greece-Georgia BIT (¶ 2).
In the time following its independence, respondent actively sought to attract foreign investments in order to develop its national energy infrastructure and secure new export markets in order to replace the preferential access it had to the former Soviet Union. In particular, respondent sought investments on the transport of oil and gas from the oil fields of Azerbaijan through Georgia to the Black Sea (the "Western Route") (¶ 14). Mr Ron Fuchs ("Mr Fuchs"), an oil trader of Israeli nationality, after meetings with the President of Georgia, ministers and the General Director of the Georgian state-owned oil company ("SakNavtobi") (¶ 15) signed through his company Tramex (International) Ltd ("Tramex USA"), a U.S. company incorporated in Delaware, a power of attorney on forming an oil consortium with the Georgian Ministry of Industry (¶ 16). The following month, a legislative act of the Georgian Cabinet of Ministers authorized the joint venture between SakNavtobi and "the American firm Tramex" for the purpose of exploiting the Georgian oil fields of Ninotsminda, Manavi and Rustavi (¶ 17). Thereafter SakNavtobi and Tramex USA signed a Letter of Intent, which acknowledged that the rational exploitation and extraction of the local resources was of great importance for establishing an independent market economy. It also detailed the activities of the joint venture in the construction of oil refineries, pipelines and an oil-transferring unit (¶ 18). Said activities became the basis for the rights conferred to the joint venture vehicle under the joint venture agreement and the deed of concession that are discussed below (¶ 19).
For the purpose of carrying out the joint venture in Georgia, Mr Kardassopoulos and Mr Fuchs acquired equal shares in Tramex International Inc. ("Tramex Panama"), a company incorporated in Panama. They were also acting as co-CEOs of Tramex Panama (¶ 20). On March 3, 1992, SakNavtobi and Tramex (whether this was Tramex Panama or Tramex USA was a disputed matter) executed the JVA, which created GTI Ltd ("GTI"). GTI was a joint venture vehicle owned in equal shares by SakNavtobi and Tramex (¶ 21) and was registered by the Ministry of Finance on March 9, 1992 (¶ 22). Importantly, the Cabinet of Ministers authorized GTI by decree to commence construction of the main Gachiani-Samgori-Batumi pipeline for the transportation of crude oil to the Black Sea coast, the reconstruction of the Gachiani railway pier and the construction of an oil terminal in the Supsa River area (¶ 23 & ¶ 93 of the final award). Later that year, Transneft, the entity that held the rights over respondent's pipelines, was "united in the department SakNavtobi". Due to this reconstruction the parties to the JVA decided to obtain a formal deed of concession from Transneft for the purpose of confirming the rights that GTI had obtained under the JVA (¶ 24). On April 28, 1993, a Deed of Concession (the "Concession") was executed granting thirty-year concession of the pipelines to GTI. The Concession that contained an explicit no-expropriation clause, was witnessed by SakNavtobi and ratified by the Minister of Fuel and Energy (¶¶ 25, 26). Tramex undertook a number of steps related to the pipelines and also entered into Heads of Agreement with Brown & Root Ltd ("Brown & Root"), a company incorporated in the U.K., for the purpose of the latter acquiring 50% of Tramex's interest in GTI and thus increasing its value. Yet, no final agreement was ever concluded (¶ 28).
By 1995, a consortium of major oil corporations called Azerbaijan International Operation Company ("AIOC"), among other major oil companies, became interested in Georgia and wished to secure the Western Route for the transportation of their oil (¶ 29). On November 11, 1995, the Georgian International Oil Corporation ("GIOC"), a state-owned company, was established by presidential decree with the aim to rehabilitate oil pipelines and other transportation facilities within the territory of Georgia (¶ 30). Later, according to the relevant presidential decree, which explicitly provided for cancellation of all rights contradicting it (¶ 34), GIOC represented respondent in a contract with AIOC for the construction and exploitation of the Samgori-Batumi pipeline (¶¶ 32, 33). Numerous committees and commissions were created to review Tramex's expenses in Georgia and estimate its reimbursement, along with an independent audit from Deloitte Israel estimating its losses at USD 106.3 million (¶¶ 37, 38). Yet, the last commission concluded on November 15, 2004, that there were no legal grounds for holding respondent liable for the claim, as it had not been a party to any of the agreements concluded by Tramex in Georgia (¶ 40). Ten months later, Mr Kardassopoulos filed his Request for Arbitration (¶ 41).
A. Decision on Jurisdiction dated July 6, 2007
Respondent challenged the tribunal's jurisdiction ratione materiae, purporting that Mr Kardassopoulos had no interest in the joint venture vehicle in question and that the joint venture agreement ("JVA") and the concession agreement ("Concession") were void ab initio under Georgian law (¶ 43). In particular, respondent maintained that Tramex USA, a company wholly owned by Mr Fuchs, had an interest in GTI and not Tramex Panama (¶ 44). Further, respondent argued that under Art. 12 of the Greece-Georgia BIT investments inconsistent with domestic legislation were not protected (¶ 49). Hence, as SakNavtobi and Transneft acted ultra vires, both JVA and the Concession were void ab initio under Art. 48 of the Georgian Civil Code (¶ 50). Further, respondent challenged the tribunal's jurisdiction ratione temporis maintaining that the acts that caused Mr Kardassopoulos' claimed loss, occurred prior to the ECT and the Greece-Georgia BIT entering into force (¶ 70). In this regard, respondent argued that the acts alleged to have deprived Mr Kardassopoulos of his investment, occurred before the ECT entered into force. Due to both Greek and Georgian law prohibiting provisional application of said treaty, the tribunal lacked jurisdiction, respondent maintained (¶ 71). With reference to Greece-Georgia BIT, it contended that same acts took place before its entry into force on August 3, 1996. Therefore, the tribunal lacked jurisdiction also under the BIT, respondent purported (¶ 85).
At the outset, the tribunal made some preliminary observations on the context, in which Mr Kardassopoulos made his investment in Georgia, quoting Genin v. Estonia, and on the standard applicable to jurisdictional challenges, citing Siemens (¶¶ 99-103). The tribunal rejected respondent's objections and found that it had jurisdiction both ratione materiae and ratione temporis, save for the objection related to jurisdiction ratione temporis under the Greece-Georgia BIT. The latter issue was decided to be joined to the phase of the merits (¶ 107), as it was closely related to the facts to be examined at the merits, citing Saluka (Decision on Jurisdiction), World Duty Free, Generation Ukraine v. Ukraine and Tradex Hellas v. Albania (¶ 260).
After finding on its own initiative (Fedax) that it had jurisdiction ratione personae under the ICSID Convention, the ECT and the Greece-Georgia BIT (¶¶ 108 - 112), the tribunal proceeded to examine, whether it had jurisdiction ratione materiae once more on its own initiative (Fedax, Salini) (¶ 113). It found that the Salini test, which is applicable under the ICSID Convention (¶ 116), was satisfied (¶ 117) and thus it had jurisdiction thereunder (¶ 119). In examining Mr Kardassopoulos' interest in the GTI, the tribunal noted that the Greece-Georgia BIT was silent on whether an investor is required to directly own shares in a company investing in Georgia in order to qualify as an "investment" under the treaty (¶ 123). It agreed with the reasoning in Siemens and adopted the view that indirect ownership of shares by Mr Kardassopoulos constituted an "investment" under both the ECT and the Greece-Georgia BIT (¶ 124). Then, the tribunal analyzed respondent's challenge regarding Mr Kardassopoulos' interest in GTI in three issues; first, whether Tramex Panama existed before the JVA was executed. In view of submitted documentary evidence, the tribunal was satisfied in this regard (¶ 129). Secondly, the issue to be decided was, whether the JVA was entered into by Tramex Panama. The tribunal noted the inconsistency of post-JVA documents, as some referred to Tramex as a U.S. company and other as a Panamanian one (¶ 131). It accepted the unchallenged witness testimony submitted by claimant, according to which some documents referred to Tramex as a U.S. company because Georgians liked the idea of being able to say that an American company was investing in their country (¶ 132). It also noted a recent letter of the Georgian Deputy Minister of the Ministry of Justice that made explicit mention to Tramex being a company incorporated and registered in Panama (¶ 136). Thus, it was satisfied that Tramex Panama entered the JVA (¶ 135). Thirdly, the issue was whether Mr Kardassopoulos had an interest in Tramex Panama when the JVA was executed. Ample evidence adduced by Mr Kardassopoulos in this regard established that this was true (¶¶ 138, 141). Turning to the challenge of the JVA and the Concession being void ab initio, the tribunal clarified that it shall consider Georgian law as a matter of fact (¶ 146) after noting that it shall decide the dispute only in accordance with the applicable rules and principles of international law (¶ 144). Having expressed the view that a Georgian Court could well reach the conclusion that the JVA was void ab initio (¶ 157), it dismissed respondent's argument that GTI, as an investment in violation of the host state's laws, was not protected under Art. 12 of the Greece-Georgia BIT (¶ 184). Having regard to the object and purpose of the Greece-Georgia BIT pursuant to Art. 31(2) of the VCLT (¶¶ 178-181), the tribunal acknowledged that host states retain a degree of control over foreign investments by denying BIT protection to the ones that violate their laws. Yet, it stressed that this control relates to the investor's actions and not the state's. Hence, a host state cannot avoid jurisdiction under the BIT by invoking its own failure to comply with domestic law (¶ 182). In addition, the tribunal observed that in the years following the execution of the JVA and the Concession respondent neither protested nor claimed their illegality under domestic law. Therefore, it found that Georgia created a legitimate expectation for claimant that his investment was lawful and entitled to treaty protection, in the event of breach (¶ 192), citing Southern Pacific Properties v. Egypt (¶ 193). Even if the JVA and the Concession were in violation of domestic law, they were "cloaked with the mantle of Governmental authority". Thus, respondent was estopped from objecting to the tribunal's jurisdiction on such grounds (¶ 194).
With reference to jurisdiction ratione temporis under the ECT, the tribunal made reference to Art. 26(1) of the ECT and found that its jurisdiction depended upon Mr Kardassopoulos having an investment in Georgia and the existence of an obligation under Part III of the ECT allegedly breached (¶¶ 196, 197). Critical for the first issue was the meaning of the term "Effective Date" in Art. 1(6) of the ECT. In the present case, this meant the later of the dates of entry into force of the ECT for Georgia and for Greece (¶ 200). Therefore, the issue of provisional operation of the ECT under Art. 45(1) was discussed (¶ 203). The tribunal, while interpreting this provision under Art. 31 of the VCLT (¶¶ 206-208), found that provisional application of the ECT is a matter of legal obligation (¶¶ 209, 250) and that the ECT would be applied on the same basis as would in due course result from the ECT's (definite) entry into force, and as if it had already done so (¶ 210). Hence, each signatory state had to apply the whole ECT as if it had already done so, even before the ECT had formally entered into force (¶ 211). The tribunal found that there is no general rule of customary international law allowing for provisional application apart from the express agreement of the states concerned, as provided in Art. 25 of the VCLT (¶¶ 215-216). It further decided that there is a sufficient well-established practice of provisional application of treaties to generate a generally accepted understanding of what is meant by this; it imports the application of all of the treaty's provisions as if they were already in force, even though the treaty's proper or definite entry into force has not yet occurred (¶ 219). It also found that an interpretation excluding "matters affecting ... Investments" before the date of entry into force from the scope of the ECT, would strike at the heart of the clearly intended provisional application regime (¶ 222). Therefore, the tribunal concluded that the term "entry into force" meant the date on which the ECT became provisionally applicable for Georgia and Greece (¶ 223). With reference to the domestic law exception under Art. 45(1) of the ECT (¶ 224), the tribunal found that respondent, who had the burden of proof to make good on its assertion that the required inconsistency existed in relation to both the law of Georgia and Greece (¶ 229), failed to demonstrate it (¶¶ 237, 246). Thus, "Effective Date" stood for December 17, 1994, when both states signed the ECT (¶ 247).
B. Final Award dated March 3, 2010
The tribunal identified the issues to be determined in this phase of the proceedings, those being jurisdiction and equitable prescription, liability, causation, quantum, interest and costs, each comprising of specific questions (¶ 211), while noting that the claim regarding the umbrella clauses of the ECT and the Greece-Georgia BIT (Arts. 10(1) and 2(4) respectively) had been abandoned (¶ 212).
The tribunal affirmed its jurisdiction ratione temporis under the Georgia-Israel BIT, as Mr Fuchs' fair and equitable treatment claim solely related to the compensation process and not to the expropriation of the investment per se (¶¶ 248-249). Further, it was not persuaded by respondent claiming time-bar for equitable prescription that relied on Wena Hotels v. Egypt (¶¶ 250-251). The tribunal accepted that the passage of a 10-year period resulted into fading of memories and loss of documentary evidence (¶ 259), but it was both reasonable and justified in the circumstances (¶ 261). It also noted that respondent had not suffered any harm, which could justify the imposition of equitable prescription, citing Wena Hotels (¶ 264). Further, it maintained that the principle of repose was not applicable due to claimants continuously and persistently having pursued compensation for the loss of their investment (¶¶ 266-267).
Then the tribunal addressed the issue of liability. It affirmed that acts and omissions of SakNavtobi and Transneft were attributed to respondent under both Arts. 7, 4, 5 and 11 of the ILC Articles (¶ 274) and the structural and functional tests developed in arbitral jurisprudence (¶ 280). It determined that the scope of GTI's rights, as documented in the JVA and most importantly in the Concession, due to respondent directly granting rights therethrough (¶¶ 319, 320, 331), was the following: GTI had the exclusive rights to possess, use and operate the early oil pipeline and related facilities to GTI, including associated export rights; and to give a right to make proposals regarding future projects. It clarified that GTI did not have immediate rights in future oil and gas pipelines in Georgia (¶¶ 339, 349). Contractual defenses raised by respondent were rejected, as they were unsupported by oral and written evidence (¶ 340). The tribunal then considered Mr Kardassopoulos' expropriation claim and found that it presented "a classic case of direct expropriation" (¶ 387), which was unlawful, as respondent failed to meet the due process of law criterium (¶ 390), citing ADC and stressing the importance of basic legal instruments (¶¶ 395-396). No compensation was paid, let alone a "prompt, adequate and effective" one. The argument of non-payment being justified due to Mr Kardassopoulos' failure to provide proper evidence regarding the value of its investment, was not convincing (¶ 405). Thus, the tribunal found that respondent had breached Art. 13(1) of the ECT (¶ 408). Due to this finding, the tribunal refrained from addressing the matter of jurisdiction ratione temporis under Georgia-Greece BIT. Yet, for the sake of clarity, it did note that it was clearly bereft of jurisdiction under said treaty (¶¶ 241, 242). Thereafter, the tribunal considered the fair and equitable claim of Mr Fuchs under Art. 2(2) of the Georgia-Israel BIT according to Art. 31(1) of the VCLT and in the context of the specific treaty (¶¶ 429, 431, 432), while noting that the legitimate expectations element formed the gravamen of his claim (¶ 434). It adopted the approach of Saluka, Tecmed v. Mexico andSempra v. Argentina. It was not convinced by respondent's interpretation, according to which expectations must be based on conditions offered by or prevailing in the host state at the time the original investment was made, as it appeared to presuppose limitations that were not established as a matter of law and were inconsistent with the context of the Georgia-Israel BIT (¶ ¶ 438-440). Based on the totality of the evidence, the tribunal found that respondent failed to afford Mr Fuchs fair and equitable treatment under the Georgia-Israel BIT (¶ 451). Due to the overlap in the factual and treaty matrices and the shared essential ingredients, the tribunal reached same conclusion for Mr Kardassopoulos under both the ECT and the Georgia-Greece BIT (¶ 452).
Subsequently, the tribunal examined the issue of causation. It found that the failure to provide adequate compensation following adoption of the legislative act that caused directly and deliberately the loss of claimant's entire investment in Georgia was a clear violation of respondent's duties. It did not identify any question of remoteness or foreseeability (¶ 469).
Thereafter, the tribunal addressed the issue of quantum. To this end, it considered that claimants' claims were treaty based and that host states and investors have the ability to contractually limit the compensation for expropriation, where a treaty is also in play (¶¶ 480-481). It then took the view that, under the circumstances of this case and the specific expropriated investment, the stabilization clauses neither "capped" damages for the purposes of valuing claimants' rights nor did they establish a ceiling of compensation, beyond which claimants could not have legitimately expected to recover in the event of expropriation (¶¶ 483-485). It then examined the applicable standard of compensation for unlawful expropriation under the ECT. After considering the approach of ADC, Chorzów Factory, Siemens and Vivendi v. Argentina, it found that the appropriate standard of compensation was the fair market value of the early oil rights, including export rights, as of the day before the legislative act expropriating the investment was passed. The aim was to ensure full reparation and to avoid any diminution of value attributable to the state's conduct leading up to the expropriation (¶¶ 509-513, 517). Then, the tribunal examined the applicable standard of compensation for breach of the fair and equitable standard in the Georgia-Israel BIT, which is silent thereon. After considering Art. 36 of the ILC Articles and Vivendi, MTD, Enron v. Argentina, Metalclad v. Mexico and Myers v. Canada, the tribunal found no basis to differentiate between the damage caused between Mr Kardassopoulos and Mr Fuchs, as their investment was irretrievably and entirely lost (¶¶ 532-534). Hence, it decided that said standard for Mr Fuchs' fair and equitable claim was the same measure as applied in respect of Mr Kardassopoulos' expropriation claim (¶ 537). With reference to the methodology for valuing claimants' claims, the tribunal noted that its duty was to make the best estimate that it could, of the amount of the loss, on the basis of the available evidence, even when no absolute documentary proof of the precise amount lost is available (¶ 594). It took into consideration claimants' assertion that a completed or seriously contemplated transaction offers the best evidence of an asset's fair market value (¶ 595) and agreed with their suggestion that only what the hypothetical buyer is willing to pay for the investment, matters (¶ 598). After noting that an offer or transaction which is close to completion has greater credence than an offer or transaction that has yet to mature, the tribunal chose to rely on the three comparables, weighted as proposed by claimants (¶¶ 600, 603, 645, 646).
Finally, the tribunal addressed the issue of pre-award and post-award interest. Regarding pre-award interest, after taking into consideration the provision of Art. 13(1) of the ECT, the silence of the Georgia-Israel BIT and the unlawful character of the respondent's conduct, it considered that interest for damages may be awarded with the tribunal's necessary discretion in order to ensure full reparation under Art. 38 of the ILC Articles (¶¶ 658-659). Thus, it decided to award pre-award interest at the rate of LIBOR +4% (¶ 661). It reached the same decision regarding post-award interest, as it saw no reason to depart from its previous conclusion (¶¶ 677-678).
The Georgian state-owned company and Tramex established a joint venture vehicle that was authorized to construct pipelines and was granted a thirty-years concession thereof. Later, another joint venture vehicle was granted rights of construction of the same pipelines. Respondent did not reimburse claimants, who were shareholders of Tramex, purporting that Georgia had not been party to any of the agreements concluded by Tramex. Regarding respondent's objection of the joint venture being unlawful, the tribunal stressed that a state could not invoke its own unlawfulness in order to avoid jurisdiction, especially, when it had created a legitimate expectation of the investment being lawful. The facts described a classic case of direct expropriation, which was unlawful due to breach of due process and lack of compensation. At the same time the legitimate expectations that respondent created, provided for breach of the fair and equitable treatment standard. Quantum was based on the fair market value evidenced by a completed or seriously contemplated transaction.
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