There have been thousands of cases handled on international commercial arbitration. However, some have stood out more than others due to the sudden upset or twist in the result. The changes in the decision have, in most cases, come as a surprise to observers due to how the arbitrator representing a particular party could exploit a treaty or contract such that it changes the direction and dimension of the whole case.
In some instances, the tribunal could have caused the upset based on the interpretation of certain statements embedded in the contract.
This article will be considering some of the most unexpected results in international arbitration cases.
5 Unexpected Results of International Commercial
Tomasz Częścik and Robert Aleksandrowicz v. Cyprus
Case type: International Investment Agreement
Case ID: SCC Case No. V 2014/169
Treaty: Cyprus – Poland BIT (1992)
Section: SCC Awards, SCC Arbitration Rules 2010
Outcome: favor of State
Summary of The Case
This particular case is among the top international commercial arbitration cases with unexpected results and is of importance due to its sector being that of Health. The SCC Arbitration Rules of 2010 was the basis for the hearing.
The case involved the claimants, who were Polish nationals and known as Tomasz Częścik and Robert Aleksandrowicz, with investment in an undisclosed health company based in Cyprus. The respondent is the Cyprus State, and both went into a contract with the Cyprus-Poland BIT
(1992) treaty. The only measure for activating an arbitration clause in the SCC on the vent the country sets up policies that hinder the local company profits.
Around March 2013, the Cyprus Central Bank issued a decree that initiated certain legislative measures (Bail-in measures) in its banking system. with possible negative consequences arising from the decree, the Central Bank of Cyprus mandated that all Banks go for a two-day holiday at March 19 and March 20.
Coincidentally, the investors’ company had mandated the Central Bank to make two payments via the company name to purchase shares in a start-up in Poland.
The Bank could not perform the transactions due to the holiday, and by the time it was over, the bail-in measures set up by the Bank were already put in place. This measure led to the funds being frozen and halting the possibility of the company buying the proposed shares due to obstructed payment.
After a series of headlocks between investors and the State, the former activated the Cyprus – Poland BIT (1992), with the SCC being the seat of arbitration. The investors claimed that the State sabotaged its efforts to make profits via some of its legislative decisions. The investors stated that through one of the state organs (the Banking system), transfers made via the undisclosed company were blocked due to the regulatory holiday and implemented bail-in measures. The investors filed in for alleged expropriation of the local company’s business, which is a breach that affects its possibility of making profits.
The investors claimed that it had suffered damages from the regulatory practice that amounted to PLN1.3 million for the lost funds. The damages in dollars were approximately USD 340,000. The investors sought a bigger compensation that summed up to PLN 15 million (USD 4.1 million) as they believed that the company had the potential to make a huge profit in the long run.
TWIST
While the Investors seemed set to have the case in their favor, the State created an upset by citing limitations in the chosen Bilateral Treaty agreed in the contract.
Cyprus objected to the investor claim and requested that the tribunal bifurcate the proceedings as the BIT clause had a limited scope. The state arbitration team argued that the BIT Article 9 provided only for arbitration in case of “disputes concerning the expropriation of an investment.” Furthermore, the State claimed that appropriation was not made on the company situated in its country, and no direct loss was caused to it.
The State also argued that the claimants could not invoke the MFN clause under BIT Article 7 to broaden the tribunal’s jurisdiction to hear the investors’ claims for a breach of the FET standard under BIT Article 3.
The tribunal agreed to Cyprus’s request and bifurcated the proceedings. A partial award was first issued on March 4, 2016, with the tribunal siding with the State that it did not have jurisdiction over the investors’ FET claim on the basis of the MFN clause.
A final award was issued on February 11, 2017, and the SCC tribunal dismissed expropriation claims made by the investors.
Three Majority Shareholders of OAO Yukos Vs. Russia Federation
Case type: International Investment Agreement
Treaty: The Energy Treaty (1994)
Section: UNCITRAL Awards, UNCITRAL Arbitration Rules 1976
Outcome: favor of investors
Summary of The Case
Country: Russia
Claimants: Hulley Enterprises Limited, Yukos Universal Limited, and Veteran Petroleum Limited
Respondents: Russia
IIA breaches Alleged
Direct and Indirect expropriation
Fair and equitable treatment/Minimum standard of treatment, including denial of justice claims
Full protection and security, or similar
Arbitrary, unreasonable and/or discriminatory measures
IIA breaches found
Direct and Indirect expropriation
Fair and equitable treatment/Minimum standard of treatment, including denial of justice claims
Full protection and security, or similar
Arbitrary, unreasonable and/or discriminatory measures
This result in this case turned out to become a landmark case in the history of international commercial arbitration. The amount of damages awarded in this case is, to date, the biggest in arbitration history.
Background of the dispute
While Russia has always had a reputation to deliberately harm investors and show hostility towards them, the destruction of Yukos company, the biggest oil company in the country, forced the country to pay unprecedented damages to three of the bankrupt company investors.
In 1993, Yukos was among the first private joint-stock oil company allowed to provide oil commercially in Russia following a presidential decree. The company position subsequently drew hundreds of investors from within and outside the country.
In 2003, Yukos had become the biggest oil company in Russia and one of the largest in the country. The company sold a million barrels of oil daily and was set to become the fourth largest company globally after BP, Exxon Mobil Corp, and Shell at the time when a proposed merger with another Russian oil company was agreed.
However, trouble started at the same time when the Vladimir Putin Administration based on Political motivation, set out to destroy the company because of its CEO, Mikhail Khodorkovsky, a popular political rival. The Russia Government arrested Khodorkovsky and on October 25, 2003, and quickly followed suit with the arrest of other major shareholders, including Platon Lebedev, the director of two companies that were also two of the three majority shareholders that filed the arbitration action.
The State Government fabricated Tax frauds convictions, embezzlements, and forgery. Both convicted shareholders were sentenced to 10 years in prison. Russia also went on to intimidate and harass Yukos lawyers and accountants and ensured absentee sentences for other fleeing shareholders perceived as threats.
Russia finally liquidated Yukos company in 2007 through a rigged auction and transferred most of the state assets to State-owned oil companies.
Arbitration
Following the release of the two shareholders, the duo under their respective companies Hulley Enterprises Limited, Yukos Universal Limited, and Veteran Petroleum Limited, filed an arbitration action against the Russia Federation in 2013 via the Energy Charter Treaty clause with the 1976 UNCITRAL Arbitration Rules being the basis for judgment.
While each case was initially brought separated to the tribunal against Russia, the three shareholding companies selected the same arbitrators for their respective tribunal. The tribunal decided to hear the cases at a go and formed the Tribunals.
On July 18, 2014, the tribunal ruled in favor of the claimants against Russia. While the results were expected, the total amount of damages was a shocker as it totaled a record-setting $50,000,000,000 (Fifty Billion US dollars).
Apart from the damages ordered, Russia would pay the Claimants arbitration clause, which totaled €4.2 million representation cost of over US$ 60 million.
The result and decision reached by the Tribunals is not only record-breaking and unexpected but is expected to trigger a surge of investors of the liquidated Yukos to seek damages compensations through arbitration. There are over 5000 shareholders invested in Yukos.
AES Summit Generation Ltd. v. Hungary
Case type: International Investment Agreement
Case No: ICSID ARB/01/4
Treaty: The Energy Charter Treaty (1994)
Section: ICSID Awards, ICSID Rules
Outcome: favor of State
Summary of The Case
Country: Russian Federation, Germany
Claimant: AES Summit Generation Ltd
Respondent: Hungary
IIA breaches alleged
Indirect expropriation
Fair and equitable treatment/Minimum standard of treatment, including denial of justice claims
Full protection and security, or similar
National treatment
Most-favored nation treatment
Arbitrary, unreasonable and/or discriminatory measures
IIA breaches found
AES Summit Generation Limited or AES Summit, and its Hungary branch AES-TiszaErömü Kft , after purchasing the majority of the latter’s shares, reached a Sales Purchasing Agreement (SPA) with two State-owned energy companies on July 4, 1996. The agreement reached with the two State-owned companies and the investment in AES-Tisza obliged Hungary to change and extend Tisza’s purchasing power, which was different from the agreement first reached when AES summit had bought the company Majority shares.
A new Purchasing Power Agreement was reached, and AES Summit, the claimant, performed certain purchases and built a new power plant under the name of Tisza at Borsod. AES Summit spent 98 million euros on fulfilling its agreement.
In 2000, AES Summit filed two arbitrations against Hungary, but a settlement agreement was reached in 2001. The agreement brought certain changes to the contract that terminated AES Summit and AES Corporations, the parent company of AES Summit and AES-TiszaErömü Kft, from all Hungary-based investments. Hence the agreement ensured that AES-Tisza was its private firm.
AES Corporations demanded that the State-owned entities be considered private entities to remove their sovereign immunity. In addition, the State and AES Summit reached an agreement on certain requirements set out in the 2001 Settlement Agreement, including a written contract to change the former agreed prices on the first contract, which was replaced with a new one.
Hungary did not effect the new prices in 2001 but stuck with the old prices until up to 2004 as agreed with AES Summit and its Hungary Branch. The 2001 pricing system would ensure more profits for AES-Tisza. The new pricing set in 2001 was used as model payment to AES-Tisza while it supplies services to the State-owned companies (now considered private entities based on the 2001 agreement)
However, on November 6, 2006, and January 26, 2007, the Hungary Government introduced the national pricing system abolished in 2004, leading to losses for AES-Tisza.
AES Summit filed an arbitration clause against the State based on the contract entered in 1996, activating the Energy Charter Treaty (1994). AES Summit claimed for the payment of 230 million US dollars
The tribunal ruled in favor of the State as it lacked the jurisdiction to hear some of the alleged breaches stated and the power of Hungary to set certain laws that protect its interest. Accordingly, the claimant’s claim was rejected, and a final award was issued on September 23, 2010.
Exem Energy BV v Sociedade Nacional de Combustíveis de Angola (Sonangol)
Case type: International Investment Agreement
Engagement: Contract
Section: NAI Awards, NAI Arbitration Rules 2015
Outcome: favor of respondent
Summary of The Case
Country: Netherlands, Angola
Claimant: Exem Energy BV
Respondent: Sonangol
In 2018, Netherland-based energy firm Exem Energy BV filed an Arbitration action against Angola firm Sociedade Nacional de Combustíveis de Angola (Sonangol) for breach of the contract both firms entered as private entities. The claimant had invested in the firm to extract crude petroleum and natural gas in another Angola firm Esperaza to buy for a lower price. Sonangol held 100% of the shares to Esperaza. A Selling Purchasing Agreement was reached (SPA), and a deed of transfer was established between the claimant and the deed of transfer.
The claimant, however, filed an arbitral action arguing that the respondent had not kept its part of the agreement. The Hague was the seat of arbitration. The case lasted for three years, with both parties setting up claims and counterclaims on the deed agreed and how much power the contract gave the tribunal to decide the case.
In 2021, the tribunal concluded that after going through the contracts of both parties, all the relief sought by the claimant was rejected. Therefore, the tribunal declared the SPA and Deed of Transfer also null and void as the contracts never stated that Esperaza, a separate entity from Sonangol, was obligated to the SPA agreement.
The tribunal mandated the claimant to pay for all costs incurred.
Tokios tokelés v. Ukraine
Case type: International Investment Agreement
Case No: ICSID ARB/02/18
Treaty: Lithuania – Ukraine BIT (1994)
Section: ICSID Awards, ICSID Arbitration Rules 1976
Outcome: favor of investors
Summary of The Case
Country: Lithuania, Ukraine
Claimant: Tokios tokeles
Respondent: Ukraine
IIA breaches Alleged
Indirect expropriation
Full protection and security, or similar
Most-favored nation treatment
IIA breaches found
None – dismissed at the merit stage
For the Tokios Tokelse arbitration case against Ukraine, the claimant had everything in its favor after Ukraine had allegedly set up tax measures that put its investment in unfavorable positions and hence breaching the BIT between both parties.
The claimant, which is a business established under Lithuanian laws, owned a publishing company in Ukraine. The Publishing company then at some point published a book that favorably presented an opposing politician to the state government. In reaction, the state government set up taxes and unjustified measures that directly affected the publishing company and hindered its business.
Tokios Tokles filed an arbitration in 2002 and alleged that the State had caused its investment damages, breaching the treaty entered.
Ukraine, however, countered that the BIT was only enforceable by the tribunal if the company was a foreign company. It stated that Ukrainians majorly owned the publishing company as they held 99% of the shares.
The tribunal ruled in favor of the State, concluding that the publishing company was a Ukrainian company and, as such, the BIT could not be enforced.
Conclusion
In this article, some of the most unexpected results in international commercial arbitration were considered to give you an idea of how easily a contract that seems to be in favor of a party can easily turn on its head.
Therefore, if you are about going into an arbitration resolution for a dispute of international nature with commercial obligations agreed in the contract, then getting a top firm is a no-brainer.
There are many firms with some of the best arbitrators, and these institutions should be your focus in a dispute.
Rattsakuten is one of these firms globally recognized as having some of the best arbitrators for international disputes. The institution represents clients on Commercial Arbitration in Sweden and abroad and ensures that they stand a chance to conclude a dispute in their favor. The firm arbitrators are well-grounded, skillful, and know-how to exploit and interpret international contracts and treaties for clients’ favor. Interested parties can call the firm for more inquiries.
About Rattsakuten
Rattsakuten is a leading law firm focused on Commercial Arbitration and Dispute Resolution. Based in Sweden, Rattsakuten handles dispute resolution and Arbitration matters before the SCC (Swedish Chamber of Commerce), ICC, HKIAC, and several other Arbitration tribunals.