Metal-Tech v Uzbekistan: No Jurisdiction Because of Corruption

The tribunal in the recently released award in Metal-Tech Ltd. v Republic of Uzbekistan (ICSID Case No. ARB/10/3) decided not to establish its jurisdiction over an investor claim because of corruption.

The dispute erupted after the termination of a raw material supply contract and cancellation of an exclusive right to export of refined molybdenum oxide.

Uzbekistan won a favourable decision at the jurisdictional stage by persuading the tribunal that the investment did not qualify as a “legal investment”. Among other issues, the tribunal also dealt with Uzbekistan’s counterclaims.

Factual background

At the end of 1990s, Metal-Tech (Claimant) entered several contracts and a JV with two state-owned companies in Uzbekistan: molybdenum mining company AGMK and molybdenum producer and exporter UzKTJM. Outdated technology and equipment of both state-owned companies was the main reason for the forming of the new JV Uzmetal.

According to the contract, the claimant had to contribute with its technology, know-how and access to international markets as well as part of the financing needed for a new plant. JV Uzmetal was exempted from paying customs duties for a period of five years.

A dispute erupted in 2006, by the initiation of criminal proceedings against the claimant on the ground that officials of JV Uzmetal had abused their authority and caused harm to Uzbekistan. A resolution by the cabinet ministers abrogated JV Uzmetal’s rights to purchase raw materials and the claimant lost its exclusive right to export refined molybdenum oxide.

Two Uzbek shareholders then initiated proceedings against the claimant in the domestic economic court and the court accepted bankruptcy, and after a while a liquidation claim also. On 18 November 2009, the Economic Court of the Tashkent Region closed the liquidation proceedings. Eventually, JV Uzmetal was delisted from the state registry of legal entities.

The legality of the investment in relationship to the corrupt misconduct became the central issue of the award.

Legality requirement and MFN

The tribunal also dealt with the issue of the most favoured nation (MFN) treatment. In particular, it considered whether MFN obligation extends to the definition of investment in Article 1(1) of the Israel-Uzbekistan BIT, which requires that investments should be “implemented in accordance with the laws and regulations of the Contracting Party in whose territory the investment is made”. Metal-Tech submitted that the MFN provision in Article 3(2) of the treaty requires that the tribunal incorporate the more favourable definition of “investment” of Article 1(1) of the Greece-Uzbekistan BIT into the Israel-Uzbekistan BIT.

The tribunal rejected application of the MFN provision to the investor’s investment which aimed to avoid the express requirement of compliance with host state law provided in Article 1(1) of the treaty for two reasons.

First, according to the tribunal the investment must fall within the scope of the treaty, which is in particular circumscribed by the definition of investment and investors, in order for it to be entitled to invoke the treaty protections, of which MFN treatment forms part. Second, the Israel-Uzbekistan Investment Treaty also clearly carved out the application of MFN treatment to the definition of investment from the text of Article 7(c). We can see the narrow interpretation of MFN treatment for the benefit of the host state.

Legality of investment

Concerning the legality of the investment, the parties disagreed with the interpretation and scope of the word “implemented” in Article 1(1) of the BIT to which the treaty’s protections apply. Uzbekistan asked the tribunal to interpret it rather broadly to include not only the implementation of investment, but also how it was carried out or legally operated.

The claimant argued that Article 1(1) of the BIT refers only to the establishment of an investment, not its operation. In consideration of the context and related articles of relevant BIT, the tribunal found the defendant’s argument unconvincing. The reason was that the relevant BIT’s other provisions’ references to the word “implementation” provided that the investment must be legal when it is initially established, as opposed to during its operation.

The tribunal then turned to reviewing whether the claimant’s investment in Uzbekistan was made in compliance with the law at the time when it was established. As a matter of fact, at the beginning of the investment activity, the investor entered several consultancy contracts with some Uzbek citizens. The total payments made by the claimant to the consultants exceeded its initial cash contribution to the venture and amounted to nearly 20% of the entire project cost.

The respondent argued that by promising to pay several individuals (“consultants” as the claimants argue) to obtain or influence the Government’s approval of its investment project, the claimant violated Uzbek laws on bribery as well as transnational principles and international public policy prohibiting corruption. The claimant was unable to produce any meaningful documentation establishing that the consultants did provide assistance.

As a result, the tribunal came to the conclusion that the contract between the consultants and the investor cannot be regarded as a genuine agreement and must be deemed a sham designed to conceal the true nature of the relationship among the parties to it. The consultants were primarily or exclusively engaged in what was described as “lobbyist activity”.

Therefore the tribunal decided that the investment had not been “implemented in accordance with the laws and regulations of the Contracting Party in whose territory the investment is made” as required by Article 1(1) of the BIT which is not covered by Uzbekistan’s consent.

Jurisdictional objections to Uzbek Law Claims

The claimant also raised Article 10 of the Law of Guarantees of Uzbekistan to show that Uzbekistan has consented to ICSID arbitration. Article 10 mentioned arbitration as one tool for the settlement of investment disputes. The tribunal stated that Article 10 does not embody Uzbekistan’s consent to submit disputes to ICSID arbitration independently of the BIT. It contains no expression of consent to a particular arbitral mechanism.

More specifically, it embodies no offer by the state to submit to dispute settlement in the ICSID framework; ICSID is not even mentioned. The tribunal continued to state that Article 10 does not entitle the investor to commence arbitral proceedings before ICSID, unless the state has consented to ICSID beyond the general mention of arbitration in Article 10(1). This point is worth noting for Uzbekistan, as the government has several times shown its concern and worry about Article 10’s unnecessarily wide interpretation by investment tribunals.

Counterclaims

The respondent also asserted counterclaims according to Article 46 of ICSID. According to the respondent, as a result of the claimant’s unlawful actions, the respondent suffered damages due to the claimant’s misrepresentations.

However, the tribunal rejected it on the basis of lack of jurisdiction. The reason was that Article 46 of the ICSID Convention, which relates to jurisdiction, including consent, was not met.

Conclusion

The tribunal in its decision reaffirmed the reasoning in the World Duty Free v Kenya award. In the latter case, the investor admitted his own corrupt practices with Kenyan high profile officials. In the above mentioned case, the ICSID tribunal held that corruption is “contrary to international public policy of most, if not all, States or, to use another formula, to transnational public policy” and consequently declared the claims inadmissible. Metal-Tech Tribunal also followed this reasoning in the following passage:

“The idea, however, is not to punish one party at the cost of the other, but rather to ensure the promotion of the rule of law, which entails that a court or tribunal cannot grant assistance to a party that has engaged in a corrupt act.” (paragraph 389)

Therefore, no matter how good the claimant’s case is, if the investment was made or carried out with corrupt practices, jurisdiction ultimately fails.

Interestingly, even if the tribunal denied jurisdiction over the claimant’s claim, it shifted some financial burden to the defendant during the decision on cost allocation. Against the claimant’s modest total cost (around $1.7m, comprising legal fees and expenses and payments to ICSID), the defendant’s cost was much higher (nearly $8m). The ICSID tribunal concluded that, “State also participated in creating the situation that leads to the dismissal of the claims”. Therefore, the parties had to bear their own costs.

The full version of award is available here.

Umirdinov Alisher
Ph.D, University of London