GEA v. Ukraine: an Arbitral Award is not an Investment

In a recently published award in GEA Group Aktiengesellschaft v. Ukraine, an ICSID Tribunal found that an arbitral award for the recovery of money (due under an agreement treated as an investment) does not in itself constitute an investment (para 162). The Tribunal further held that if failure to enforce an award may constitute expropriation, that would only be where the conduct of national courts was “egregious” or was “deliberate” with the purpose to “thwart … ability to recover” (para 236).

The GEA award also provides an interesting analysis of claims relating to Ukraine’s alleged failure to investigate various wrongdoings against GEA. The Tribunal held that Ukraine may not be held liable for failure to investigate theft of oil products belonging to GEA’s predecessor, because the claimant never filed a criminal complaint requesting an investigation to be conducted (para 247). On another issue, dealing with the shooting of a person related to the business operation constituting the investment, the Tribunal held that Ukraine was not in breach of its obligations because an investigation had been commenced and the victim had been interrogated, even though the persons responsible for the shooting were never identified (paras 254-255).

Facts

In 1995 a contract was concluded between a German company and Oriana, a major Ukrainian state-owned oil refinery. The contract provided for the supply of naphtha fuel to Oriana for processing, with Oriana receiving a tolling fee, while the supply, as well as logistics, were organized by the Germany party.

In late 1997 a representative of the German party responsible for inspecting the Oriana operations was shot in the kneecap. After the incident in 1998 it was discovered that 125,000 tons of naphtha supplied to Oriana were missing.

The parties then sought a negotiated resolution to the dispute, which culminated in a Settlement Agreement (where Oriana agreed to offer payment) followed by a Repayment Agreement (providing for a minimum USD 27.6 million in compensation). Both agreements provided that any disputes should be resolved under ICC Arbitration Rules. Importantly, Oriana and Ukraine later contested the authority of those who signed the Repayment Agreement.

In 2002 the claimant’s predecessor obtained an ICC award against Oriana, which it then sought to enforce in Ukraine. Ukrainian court refused enforcement because the Repayment Agreement (pursuant to which the award was rendered) was not signed by an authorized person.

The courts found that such contract should have been signed by the president of the company, whereas in fact the person signing the agreement was referred to as the president of the company, but in fact was not. GEA’s predecessor then sought to enforce its claim within the framework of Orianta’s bankruptcy proceedings, but the claim was rejected as time-barred.

Commercial arbitration award as investment

The Tribunal held that an award “in and of itself” does not constitute an investment (para 161). The Tribunal reasoned that even if the award determined the rights and obligations arising out of an investment, it remained “analytically distinct.”  Furthermore, a separate analysis of whether the award itself met requirements of the BIT and Article 25 of the ICSID Convention was required (para 162). Finding that the award itself “involves no contribution to, or relevant economic activity within, Ukraine,” the Tribunal concluded that the award was not an investment (Ibid.). This analysis raises two issues.

First, this decision seems to depart from decisions in other investment arbitrations. For example, in Frontier Petroleum Services Ltd. v. Czech Republic a Tribunal concluded that the original investment made by the claimants was their claim against certain Czech parties and that this investment subsequently “transformed into” an arbitral award (para 231) thus accepting that an award may be a form of investment. In earlier cases (Saipem S.p.a. v. People’s Republic of Bangladesh and ATA Construction, Industrial and Trading Company v. The Hashemite Kingdom of Jordan) Tribunals held that an arbitral award constituted part of the “entire operation” forming an investment and thus fell within the definition of investment.

Second, the exact effect of the Tribunal’s conclusion that an award constitutes no investment “in itself” is not completely clear. One may argue that it means that any actions of the State taken with respect to an arbitral award would not be subject to its BIT obligations. However, failure to enforce an award may also be viewed as a failure to protect the rights confirmed or enforced by the award.  If such rights fall under the definition of “investment,” then failure to protect them (by enforcing the award) may still violate the BIT guarantees.  This interpretation seems to give effect to the Tribunal’s holding that the award is not an investment “in itself”.

Failure to enforce an award as expropriation or denial of justice

The Tribunal took a very cautious approach as to whether failure to enforce may constitute expropriation. It first restated its conclusion that an award was not an investment (paragraph 231).

It then recited the reasoning of the Saipem tribunal (without expressly stating that it supports this reasoning) and concluded that expropriation was established in Saipem because of the “egregious nature of the acts of Bangladeshi courts” (para 234). Applying this standard, the Tribunal concluded that GEA failed to establish that the actions of Ukrainian courts “amounted to anything other than the application of Ukrainian law” (para 236), and thus failed to establish expropriation.

GEA further argued that refusal by Ukrainian courts to enforce the award constituted a denial of justice and thus breached the fair and equitable treatment standard. The Tribunal rejected this claim. It held that GEA failed to establish that Ukrainian courts ignored its arguments and further held that on the basis of evidence presented, it had no “justified concerns as to the judicial propriety of the outcome” (para 319).

Other notable conclusions of the Tribunal   

The Tribunal held that a processing contract such as in the particular circumstances of the case constituted an investment. The Tribunal reasoned that the contract was more than just a “service contract” because the German party assisted with delivery and logistics and resolution of customs issues and because it created a “common interest” (para 149). The Tribunal further noted that there was a “complex relationship” where know-how and logistics were contributed together with delivery of materials (para 152).

With respect to GEA’s full protection and security claims, the Tribunal concluded that such claims could not be advanced if GEA had sought no protection (in the form of criminal investigation of the wrongdoing) (paras 247 and 248).  In the instance relied on by GEA, Ukraine complied with its obligations because an investigation was initiated (para 255).

The Tribunal decided to award to Ukraine costs of arbitration, reasoning that “in circumstances where no part of Claimant’s endeavor in commencing these proceedings has been successful,” this was a “fair” solution (para 365). It found USD 1,595,337.47 and UAH 4,300 costs to be reasonable (para 366).

Download the full text of the Award in GEA Aktiengeselllschaft v. Ukraine.