Cementownia "Nowa Huta" v. Turkey (ICSID Case No. ARB(AF)/06/2)
Summary by Natalia Charalampidou, citation details below.
The final award in these proceedings was issued on September 17, 2009.
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), full protection and security and reasonable and non-discriminatory measures (Art. 10(1) of the ECT) (¶ 105(a)). The dispute was submitted to an ICSID Additional Facility arbitral tribunal according to Art. 26(4)(a)(ii) 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 Libananco and Europe Cement (ICSID Case Nos. ARB/06/8 and ARB(AF)/07/2, respectively) 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 the 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, SCC Case No. V 2014/023).
Claimant in this arbitration was Cementownia "Nowa Huta" A.S. ("Cementownia"), a joint stock company incorporated on August 28, 2003 existing and organized under the laws of Poland (¶ 1). Respondent was the Republic of Turkey ("Turkey") (¶ 2).
Two Turkish companies had a central role in this dispute. These were: Çukurova Elektrik A.Ş. ("ÇEAŞ"), a domestic company founded as a vertically integrated electricity utility company for the purpose of construction and operation of power plants and related facilities financed by World Bank loans; and Kepez Elektrik Türk A.S. ("Kepez"), a domestic hydroelectric company also founded as a vertically integrated electricity utility company (¶¶ 3, 5). Both companies' business had been based on concession agreements for the generation, transmission, distribution and marketing of electricity in specific regions in Turkey (¶¶ 5, 9).
As respondent informed the tribunal, under somewhat similar circumstances, other companies alleged having ownership in ÇEAŞ and Kepez in May-June 2003. These companies, which also initiated arbitration proceedings along with an action before the ECtHR against respondent, were Libananco (see above under No. 10), Europe Cement (see below under No. 13) (¶¶ 4, 23, 29, 98). Thus, the factual background regarding ÇEAŞ and Kepez (¶¶ 5-14), which is identical shall not be repeated here. Nevertheless, specific events that did have pivotal importance in this arbitration are set out below. In particular, claimant supported that on May 30, 2003 it acquired from Mr Kemal Uzan 12.32% in ÇEAŞ and 10.74% in Kepez through a transaction, which was carried out during a telephone call, while the share purchase agreements were executed in Istanbul and Krakow. The share certificates allegedly were immediately handed over to claimant in Krakow and Vienna (¶ 15). This share transfer was the cornerstone, as twelve days thereafter armed police forces raided and seized the facilities of ÇEAŞ and Kepez, an incident portrayed by respondent as a repossession of the facilities, which took place due to breaches of the concession agreements and violations of the statutory provisions on transmission (¶ 16). Tellingly, claimant's financial statements for the years 2003 and 2004, did not mention the alleged share purchase (¶¶ 17, 19). It was only mentioned in the financial statements for the year 2005 (¶ 20).
As in Libananco, the issue of intercepted communications by the Public Prosecutor in Turkey also surfaced in the present arbitration. The tribunal took note of the respondent's statement, according to which its counsels had neither received nor used any intercepts or other surveillance results from the Public Prosecutor's Office in conjunction with this arbitration and accepted it. It further imposed the continuing duty to respondent and its counsel to ensure that no use whatsoever shall be made of intercepted communications in the present arbitration (¶¶ 44, 49).
The tribunal ordered the parties to agree on the production of original documents, including share certificates, and the modalities for their forensic examination (¶¶ 50, 53, 56). The tribunal noted that certain documents were not produced by claimant although it had agreed to their production and thus, admitted to their existence (¶ 53). Later, respondent informed the tribunal that arrangements for depository services with JPMorgan Chase Bank in London were made (¶ 57). The tribunal after reviewing and approving the custody agreement, directed the parties to sign it (¶¶ 59-63). Claimant repeatedly failed to do so (¶¶ 57, 67, 68, 69). Claimant's request for discontinuance of the proceedings without prejudice to its rights was not granted (¶¶ 69, 71). Claimant further failed to attend the scheduled hearing, despite its earlier advising that it would do so (¶ 86).
With reference to the other parallel ICSID arbitration proceedings of Libananco and Europe Cement and the application filed with the ECtHR, the tribunal noted that they were legally independent of each other. Yet, it reserved the right to consider declarations made in these other proceedings, if they are adduced as evidence in the present one. Thus, it did consider the award of Europe Cement issued earlier that year (¶ 98).
In examining the jurisdictional objections, the tribunal noted the unusual situation of both parties requesting the dismissal of the claim. Albeit, the reasons put forward differed sharply. Claimant based its request on its inability to produce the share certificates. Respondent on the other hand requested the tribunal to issue an award scrutinizing all aspects of the issue of the claimant's standing to sue and to dismiss the claim with prejudice and an award of damages and costs in its favor. Nevertheless, the tribunal clarified that it was not bound by these submissions. On the basis of Waste Management v. Mexico (II), Arts. 50 and 52(2)(1)(i) of the ICSID Arbitration (Additional Facility) Rules and the extensive evidence and submissions of respondent, the tribunal decided to examine the issue of claimant's standing, at least as far as it was necessary in order to decide respondent's application (¶¶ 109, 114). It then noted that claimant had the burden of proving that it qualified as an investor at the relevant time (¶ 112). Therefore, claimant had to prove two conditions: (a) that it had effectively and validly acquired the share certificates of the Turkish utility companies; and (b) that it had acquired them prior to the alleged expropriation (¶ 114). Regarding the purported share transfer, the tribunal observed that prior thereto the matters involved Turkey and Turkish nationals. Hence, if the share transfer had not actually occurred, shareholders would not had been able to bring an international clam against their country of nationality (¶ 116). The motives of ÇEAŞ and Kepez's shareholder, which consisted of fear that the state shall take his rights of the companies and of protecting his interests, was found to be unabashedly treaty shopping. The share transfers were viewed as attempts to fabricate international jurisdiction, where none should exist (¶ 117). Then facts and considerations that influenced the decision of the tribunal were set out (¶ 118). Claimant had repeatedly failed to produce the original share certificates, as already explained above. Yet, even if it had been successful in this, the tribunal noted, that it would not have constituted undisputed evidence of acquisition on the purported date, that being May 30, 2003. In view of the adduced evidence and the repeated extensions of time and notice, the tribunal decided that it was not precluded from making its own judgment as to whether the claimed transactions took place on the alleged date (¶¶ 119-121). Having reviewed filings with the ECtHR and the Council of State of Turkey, the tribunal noted several inconsistences regarding the date of the transaction (¶ 124). Turning to the claimed share purchase agreement executed after the transaction was carried on over the telephone, the tribunal, aside the requirements under domestic law, found strange that such an agreement could be reduced to a single page. It also characterized it as being extraordinary rudimentary and raising more questions than it answers (¶¶ 125-126). However, the most damning evidence was the lack of documentation of this transaction in the claimant's financial statements for the years 2003 and 2004 (¶ 129). These were seen by the tribunal as evidence that the transaction never occurred (¶ 130).
The tribunal then underscored the duty to conduct in good faith that parties to an arbitration as well as tribunals have, citing Methanex (¶ 153). It noted that a party making an investment to the sole purpose of gaining access to international jurisdiction, does not engage in a bona fide transaction. Citing Phoenix Action, it noted that this does not constitute a protected investment (¶ 154). After taking note of Barcelona Traction and Tokios Tokéles, the tribunal found that claimant's conduct was not even close to proper one. Moreover, it raised the question whether it was "a transfer of the national economic interests to a foreign company in an attempt to seek protections under a BIT" (¶¶ 155-156). The tribunal decided that claimant's conduct failed to meet the requisite standard of good faith conduct (¶ 157) and explained that the sanction in case of an abuse of rights is awarding costs, citing Benvenuti, MINE, American Manufacturing and LETCO. After listing the procedural incidents, for which claimant was responsible, it agreed with respondent that Cementownia was by then an empty shell with the sole aim of pursuing the present arbitral proceeding without any exposure to an award of costs (¶ 158). It concluded that claimant intentionally and in bad faith abused the arbitration. Moreover, it decided to go beyond the general sanction and declared that claimant had brought a fraudulent claim against Turkey (¶¶ 159, 163, 172). Finally, regarding the monetary compensation or moral damage requested by respondent, the tribunal after considering Benvenuti and Desert Line, expressed the opinion that nothing in ICSID Convention, Arbitration Rules and Additional Facility prevents a tribunal from granting moral damages (¶¶ 167-169). Yet, it doubted that the general principle of abuse of process sufficed as a legal basis for moral damages. Consequently, it dismissed this claim of respondent (¶¶ 170-172).
This dispute concerned the cancellation of the concession agreements that are already explained in Libananco and are also disputed in Europe Cement. Claimant in the present arbitration purported that the one-page share purchase agreement was concluded over a phone call on May 30, 2003. Still, this transaction was first mentioned in claimant's financial statements of the year 2005. Claimant failed to sign the agreement for the purpose of producing the original share certificates for forensic examination. It also failed to attend the scheduled hearing. The tribunal affirmed that the present proceeding, Libananco and Europe Cement were legally independent of each other. It further noted that it was not bound by parties' requests to dismiss the claim and examined claimant's standing to sue. The tribunal found that the shareholder of the Turkish companies was treaty shopping and attempted to fabricate international jurisdiction. The purported share purchase was not a bona fides transaction and therefore did not qualify as a protected investment. The tribunal declared that claimant had brought a fraudulent claim against Turkey. Still, it found that the established abuse of process did not suffice as a legal basis for moral damages.
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