Umbrella Clause Fails to Protect US Investor in Ukraine

Taras Shevchenko National University

On 25 October 2012 an ICSID Tribunal unanimously dismissed all claims submitted by a US company Bosh International and its subsidiary (“Bosh”) against Ukraine.

The claims arose out of the termination of a joint activities agreement (“JVA”) between a subsidiary of the claimant and Taras Shevchenko National University (the “University”) with respect to a conference and hotel complex in Kiev. The arbitration, which commenced in late 2007, was presided over by Gavan Griffith QC, Philippe Sands QC and Donald McRae.

Bosh argued that Ukraine had violated its obligation to accord fair and equitable treatment when the JVA was terminated and also that termination of the contract was in breach of the umbrella clause of the BIT.

However most of these claims collapsed when the tribunal decided that though the University was a state-owned institution its conduct with respect to the contract was not attributable to Ukraine. Yet the tribunal proceeded to provide an illuminating analysis of the umbrella clause’s operation and in particular the interplay between this provision and the exclusive jurisdictional clause in the contract.

The tribunal ultimately adopted the SGS v Philippines / BIVAC v Paraguay approach and stated that if an exclusive jurisdictional clause is included in the contract the investor’s claims must be resolved in the forum provided in the contract.

Facts

In 2003 Bosh and the University entered into the JVA which envisaged that they would engage in the joint development and operation of a hotel and conference complex in Kiev using a building owned by the University. The University contributed the right to use the building and the investor undertook to renovate it. The complex went into operation in 2005.

In 2006 the University was audited by a Ukrainian state organ which determined that the joint venture was operating in serious breach of several areas of Ukrainian law and that further the complex was not in fact being used for the purposes stipulated in the agreement – namely the organisation of educational and scientific events. In its report the authority recommended the University to consider terminating the agreement.

In 2008 the University submitted a claim to a Ukrainian court seeking the termination of the JVA. Bosh opposed the claim arguing that this was an investment dispute falling under the jurisdiction of ICSID. This plea was initially successful and the claim was ruled inadmissible.
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However the University resubmitted the claim and a new first instance judge ruled it admissible and dismissed Bosh’s jurisdictional objection. The Ukrainian courts ultimately granted the University’s claim and terminated the contract.

Attribution of the University’s Conduct to Ukraine

The tribunal agreed with Ukraine that the University being an autonomous legal entity was not a state organ. However, it found that the University exercised some elements of governmental authority and hence the University’s conduct may be attributed to Ukraine to the extent this conduct reflects exercise of governmental authority.

The tribunal concluded that the University had not in fact been exercising elements of governmental authority when it had entered into the JVA and had subsequently terminated it and hence these actions were not attributable to Ukraine. Importantly the tribunal explained that the provision of the US-Ukraine BIT which required a Party to ensure that its state-owned entities comply with BIT obligations did not result in the attribution of the conduct of the respective entities to Ukraine.
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Umbrella Clause

A significant part of Bosh’s case appears to have been based on the alleged breach of the JVA by the University, which Bosh argued constituted a breach of the umbrella clause of the BIT.  The tribunal commenced its analysis of this claim by noting that the umbrella clause extended only to the obligations of a “Party” (meaning the State).

It went on to highlight an apparent distinction drawn by the BIT between a “Party” and a state-owned entity of a Party, with the latter not being included in the scope of the umbrella clause. The tribunal then ruled that the umbrella clause extended only to agreements entered into by an entity whose conduct is attributable to Ukraine, not to any agreement to which a state-owned entity is a party. This was by itself dispositive for Bosh’s claim, since the tribunal had ruled that the University’s conduct was not attributable to Ukraine.

However, the tribunal proceeded to provide supplemental reasoning explaining why Bosh’s claim would not have been successful on the merits. This was because the JVA provided for the exclusive jurisdiction of the Ukrainian courts with respect to any disputes. The tribunal explained that the effects of a jurisdictional clause in an agreement relied on for the purposes of the umbrella clause claim depend on the wording of the jurisdictional clause.
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 Given that in the JVA the clause provided for the exclusive jurisdiction of the Ukrainian courts the tribunal concluded that Bosh could not have relied on it before the case had been resolved by the Ukrainian courts.

Bosh v Ukraine is the latest in a line of cases dealing with investments in hotels in the territory of the CIS. However, unlike Alpha v Ukraine and Sistem v Kyrgyzstan all the claims of the investor were dismissed. Perhaps this distinction illustrates that the state’s willingness to go through all the procedures necessary for lawful termination of the agreement with the investor significantly boosts its position in disputes in international fora.

The award is available here.

Sergey Usoskin