ICSID Award Favours Turkmenistan and Spurs Controversy

On 8 March 2016, an ICSID Tribunal dismissed the claim of a Turkish investor against Turkmenistan finding that the alleged violation of the Turkey-Turkmenistan Bilateral treaty (“BIT”) was “entirely without merit.” The arbitral award appeared to be controversial and resulted in two dissenting opinions.

İçkale İnşaat Limited Şirketi v. Turkmenistan (ICSID Case No. ARB/I0/24) is the first case among several others brought by Turkish investors against Turkmenistan relating to the alleged destruction, impairment and unlawful expropriation of the claimants’ construction projects in Turkmenistan, under the same BIT, that have been now resolved.

Overview of the Case

In 2010 a Turkish construction company filed a US $570 million ICSID claim, which arose out of a series of thirteen construction contracts concluded by the company with various Turkmen State entities. In its claim the company alleged that the Turkmen Government had interfered with the performance of the contracts by increasing the size of the projects, abolishing a state fund to finance the works, changing financial terms of the contracts and blocking bank accounts.

The investor also alleged that the Turkmen State had unlawfully and excessively expropriated machinery and equipment that belonged to the company. Even though such action was ordered by the Turkmen Supreme Court to cover contested penalties for delays in performance, Içkale alleged that such expropriation was a direct violation of the BIT because it was far excessive of what the Government could in fact impose as delay penalties.

The Turkmen State, on the other side, took the position that the failure to perform under the contracts was solely the claimant’s fault.

Specifically, the Turkmen State alleged that the Turkish investors did not have the managerial, technical, human and financial resources to execute the significant works it had undertaken pursuant to the thirteen contracts and failed to execute its Projects despite receiving significant advance payments, as well as considerable amounts in progress payments.

The Tribunal, presided by Dr. Veijo Heiskanen with co-panelists Carolyn Lamm (appointed by the investor) and Philippe Sands QC (appointed by Turkmenistan), held in favor of the Turkmen State with two partially dissenting opinions.

The Tribunal’s View

There were several issues addressed by the Tribunal but two of them seemed to create some trouble for the Tribunal to agree upon. The first deals with a mandatory domestic court litigation requirement provided by Article 7(2) of the BIT. The majority of the Tribunal ruled that the investor had failed to satisfy the requirement and the case was both admissible and within its jurisdiction since the Turkmen contractors had already initiated claims in local courts. However, arbitrator Sands disagreed in his dissent and concluded that that the claimant’s failure to comply with the requirement meant the tribunal lacked jurisdiction.

The second issue relates to the claim of expropriation. Arbitrators Heiskanen and Sands rejected Içkale’s claims of expropriation “in their entirety;” however, arbitrator Carolyn Lamm dissented on the allegation of expropriation and concluded that Turkmenistan went “beyond to recover the delay penalties to which the contracting parties were entitled”, considering evidence where value of the machinery seized “far exceeded any reasonable delay penalty” that could have been imposed.

Mandatory Domestic Court Litigation in the BITs: Jurisdiction or Admissibility?

In investor-state arbitration state parties are free to impose a mandatory domestic court litigation as a precondition to international arbitration. Article 7(2) of the Turkey-Turkmenistan BIT provides a mandatory recourse to national courts prior to commencing arbitration proceedings. However, the controversial issue is whether such requirement is a jurisdiction requirement or whether it goes to the question of admissibility of a claim.

From a practical perspective, there is a difference between conditioning its consent to ICSID jurisdiction to the fulfilment of a pre-condition (mandatory domestic litigation) — a matter of admissibility, and conditioning the effective implementation of such consent, ie the possibility to resort to ICSID arbitration, to the fulfilment of such pre-condition — a matter of jurisdiction. Therefore, non-compliance with such requirement leads to lack of jurisdiction.

The Tribunal concluded that the domestic litigation requirement was a “condition for implementation of Turkmenistan’s consent to ICSID jurisdiction and arbitration” – a matter of admissibility – and did not concern “the fundamental question of whether the Turkmen State consented to ICSID jurisdiction and arbitration.”

Interestingly, a similar issue was recently addressed in another ICSID proceeding – the Kılıç v. Turkmenistan case – where the Tribunal took the approach that the domestic litigation requirement constitutes a condition precedent to the State parties’ consent to arbitrate and is therefore an issue of jurisdiction (ICSID Case No. ARB/10/1).

Unlike in Kılıç, the Tribunal in İçkale, took a different position. It ruled in its award that the mandatory requirement to exhaust all local judicial and administrative remedies is an admissibility issue because it merely “sets out the procedure, or the step to be taken, in the event the dispute cannot be settled. In addition, the majority concluded that such condition was met when local court proceedings had already been conducted in the context of the present dispute and that “essential aspects of the dispute have in fact been submitted to and litigated before the Turkmen courts”, with the result that seven out of the thirteen contracts were terminated.

In his partial dissent, Professor Philippe Sands disagreed. He concluded that the claimant’s failure to comply with the requirement meant the tribunal lacked jurisdiction. Notably, Professor Sands had also previously appeared on the tribunal in the Kiliç v Turkmenistan case that ruled by majority that the same BIT’s local courts requirement was a jurisdictional requirement. In his dissent for İçkale he emphasised that though local proceedings were conducted they were never initiated by the claimant but the Turkmen authorities and it was “unclear” why the Claimant failed to participate effectively in the proceedings; therefore, the jurisdiction requirement was not met and the Tribunal lacks jurisdiction to adjudicate the case.

Expropriation Claims

With regards to expropriation claims, the Turkish investor also argued that the Supreme Court’s directive ordering confiscation of machinery and equipment as to the amount of penalties for nonperformance under the Contracts was excessive and expropriatory.

Arbitrators Heiskanen and Sands went on to reject Içkale’s claims of expropriation and discriminatory treatment “in their entirety,” reasoning that insurance arrangements should have been considered as the evidence. The Tribunal considered that the Claimant must be assumed to have recovered the value of these assets from insurance.

However, arbitrator Carolyn Lamm, on the other side, disagreed with the majority opinion and concluded that such order was far excessive of what the Turkmen State could recover for nonperformance.

In her view, such evidence could be inferred but should have been supported by direct evidence that the Turkish investor was in fact reimbursed through insurance policies. Such evidence was never provided by Turkmenistan.

Conclusion

Içkale’s award rejecting the investor’s claims will likely have a potential future impact on the ability of Turkish construction contractors to get redress under international investment treaties in accordance with the Turkey-Turkmenistan BIT. This decision with two partially dissenting opinions demonstrates that ICSID tribunals cannot yet agree on whether or not nonfulfillment of the mandatory domestic litigation requirement in the BIT results in the Tribunal’s lack of jurisdiction to adjudicate the case.