Tag Archives: Case

Case Summary No. 3

To better explain the principles underlying ISDS, we are introducing a series of case summaries here at the blog.

Our third case is Marion Unglaube v. Republic of Costa Rica and the award was rendered in May 2012. This summary is prepared based on the facts as described in the award.

The investor had several plots of land in the Pacific Coast of Costa Rica. In 1991, Costa Rica announced that it intended to create a national park around the area where the investor’s property was located, for protection of leatherback turtles. To this end, the government informed its intent to expropriate certain private properties.

The investor did not dispute the government’s objectives to protect the environment.

However, when the government finally moved to expropriate the investor’s land in 2003, the investor did not receive any compensation for this action.

From the outset, the Tribunal in the ensuing arbitration asserted that it was not empowered to question the authority of the Costa Rican government to expropriate land – an authority which has long been established and recognized by international law.

The tribunal noted however that while there can be no question concerning the right of the government of Costa Rica to expropriate property for a bona fide public purpose, expropriation must be compensated.

The tribunal went on to say that if compensation had been properly provided for and paid by the government, Costa Rica’s legal position would have been incontestable and this dispute might never have occurred.  Finally, the tribunal ordered Costa Rica to pay compensation to the investor for the expropriation.

Case Summary No. 2

Our second case is World Duty Free Company Limited (“WDF”) v Republic of Kenya and the award was rendered in October 2006. This summary is prepared based on the facts as described in the award.

The dispute arose out of an agreement where between WDF, an Isle of Man company, and the Kenya Airports Authority, acting on behalf of the Government of Kenya for the construction, maintenance and operation of duty-free complexes at Nairobi and Mombasa International Airports (1989 Agreement).

WDF brought a claim to the ICSID, claiming expropriation of its property and a breach of the 1989 Agreement.

WDF submits that from the outset, to be able to do business with the government of Kenya, the CEO and shareholder of WDF was required to make a “personal donation” to the then President of Kenya. This donation amounted to USD 2 million.

WDF further claims that the Government of Kenya instigated to take over the control, shares and assets of WDF. The High Court of Kenya placed it in receivership. The CEO was subsequently arrested, held, and deported to the United Arab Emirates.

The Tribunal ruled that the 1989 Agreement was procured by a bribe, without which no contract would have been concluded between the parties. WDF retained the free choice whether or not to invest in Kenya and whether or not to conclude the Agreement, but WDF chose, freely, to pay the bribe. The bribe is contrary to international public policy of most, if not all, States and also to public policy under English and Kenyan law.

Thus, the Tribunal dismissed the claims on the ground that contracts obtained by corruption cannot be upheld.

 

Case Summary No. 1

In a series of blog posts, we will provide summaries of ISDS cases. The summaries are based on the facts as described in the award.

Our first case is Wena Hotels Ltd v. Arab Republic of Egypt and the final award was rendered in 2000.

The dispute arose out of two long-term agreements between Wena Hotels Limited (“Wena”), a British investor to lease, operate and manage two hotels in Egypt, and the Egyptian Hotels Company (“EHC”). EHC was wholly-owned by the Egyptian government. Shortly after the signing of the agreement, Wena alleged the condition of the hotels to be far below that agreed in the lease. Wena therefore withheld part of the rent under the terms of the lease.

Due to this non-payment, EHC threatened to repossess the hotels through force. Wena informed the Egyptian Minister of Tourism about this situation however there was no solution. One night witnesses reported that more than one hundred EHC personnel stormed the two hotels, threatened and physically attacked the hotels’ employees and guests. They were also reported to having removed a number of belongings of the hotels.

The Chief Prosecutor of Egypt ruled that seizures of the hotels were illegal and that Wena was entitled to repossess the hotels. The hotels were subsequently returned but in a vandalized condition.

Wena brought an ISDS claim against Egypt under the ICSID Convention, claiming violation of investment protection in the UK-Egypt investment treaty.

The tribunal found a breach of the investment treaty since, according to the tribunal, there was substantial evidence that Egyptian authorities were aware of EHC’s intentions to seize the hotels but took no action to prevent the seizures. After the seizures, Egypt took no action to immediately restore Wena’s control over the hotels.

The tribunal also found that an expropriation had taken place since Egypt allowed EHC to seize the hotels, to possess them illegally for nearly a year and to return the hotels stripped much of their furniture and fixtures. In the opinion of the tribunal, Egypt did not provide a fair, prompt and adequate compensation to Wena for the expropriation.

Does ISDS compensate for loss of profit?

In case of expropriation, investment treaties typically provide for compensation in accordance with the “fair market value” of the investment at the time the expropriation takes place.

An assessment of the value of an investment may also include the reasonable and predictable performance of the investment in the future – which will largely be determined by evidence. It is the investor who must be able to convincingly demonstrate  (i) the causal link between the government action and the loss of profit, which in practice can be quite difficult since typically many factors impact the profit of an investment other than a governmental action, and (ii) how much profit the investment in fact had generated, had the measure not taken place.

In practice, government and investor often seek expertise from accountants or other experts in conducting the calculation. It is therefore ultimately a pure question of fact which the tribunal must consider. In some cases, the facts are not very complicated. In others, the issue is very  complex.

It is, however, not very common that investors are fully successful in receiving the full amounts as claimed, even if the investor succeeds on the merits of the case.

For instance, in Metalclad v. Mexico, the tribunal noted that future profit cannot be used in determining the investment value if the investment has not been operating for a sufficiently long period to establish a performance record. In Swembalt v. Latvia, the tribunal rejected investor’s claim for loss of profit due to failure of the investor to provide a basis of its calculation.

To say that ISDS “guarantees compensation for lost profits” is thus disguising the reality. When the investment treaty does not specifically define the calculation of damages, theoretically an investor may receive compensation for loss of profit. But the practical reality is something completely different.