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Turkey prevails in Uzan-related $19 Billion arbitration claim; Dutch national unable to prove legal ownership of disputed telecoms firm
publication date: Jul 19, 2010
By Luke Eric Peterson
In a decision issued on July 14, 2010, arbitrators at the International Centre for Settlement of Investment Disputes (ICSID) have declined jurisdiction over a $19 Billion claim lodged against the Republic of Turkey. The ruling serves to halt a claim brought by a Dutch individual Mr. Saba Fakes, arising out of the expropriation of an alleged majority shareholding in the Turkish telecoms company, Telsim. Indeed, arbitrators deemed the claim a “frivolous” one and ordered the claimant to bear Turkey’s legal and arbitration costs. The dismissal of the ICSID claim marks the latest in a string of victories for Turkey in a large number of arbitral claims filed by persons or companies close to the Uzan business empire in the aftermath of that family’s clash with Turkish authorities. (For background on the arbitrations spawned by this clash, see these articles*). Ultimately, the claim by Mr. Fakes foundered as a result of the tribunal’s determination that a purported transfer of legal ownership of the majority stake in Telsim was a superficial gesture which did not transfer the relevant legal rights – much less constitute an “investment” which warranted protection under the Netherlands-Turkey bilateral investment treaty (BIT). For his part, Mr. Fakes had claimed that Mr. Hakan Uzan arranged for the transfer of legal ownership of the latter’s majority stake in Telsim on the eve of the Turkish government’s move to seize the company as part of a wide-ranging fraud investigation. Mr. Fakes readily conceded that the “beneficial ownership” was to be retained by Mr. Uzan, a Turkish citizen, even as the legal rights were transferred to a Dutch national. However, arbitrators took a more sceptical view of the transaction and rejected the contention that (even the) legal ownership had been transferred to Mr. Fakes. As such, the effort to sue Turkey for breach of the Netherlands-Turkey BIT collapsed due to Mr. Fakes’ inability to demonstrate that he had made an “investment” meeting the three criteria identified by the ICSID tribunal as requisites for any ICSID claim: a contribution, some element of risk, and a certain duration. Tribunal revisits debate on definition of investments in ICSID system In reaching its decision, the three member tribunal** revisited the well-worn debate as to whether there is some autonomous or objective definition of investment under the ICSID arbitration system.*** As chronicled in our past reports, tribunals have differed as to whether assets which meet the (often-broad) definition of investment under an investment protection treaty must still meet a further set of criteria imposed (implicitly) by the ICSID Convention. Some tribunals have held that the ICSID Convention leaves it entirely to the parties – including in their negotiated investment treaties – to define what constitutes an investment eligible for arbitration at the Washington-based Centre. Other arbitrators take the view that the ICSID system imposes its own requirements, even as there is considerable debate as to what these criteria are. For their part, the tribunal in the Saba Fakes v. Turkey case ruled that there are certain autonomous requirements imposed by the ICSID system. However, in so doing, they identify a mere 3 characteristics drawn from the wider constellation of requirements which have been imposed in certain ICSID cases. While stressing that an investment eligible for ICISD arbitration must be characterized by a contribution, an element of risk, and a certain duration in time, the tribunal added that there is no need to demonstrate that an investment contributed to the economic development of the host country, or that it had been made in good faith or in conformity with local law. This autonomous, but minimalist, test will not come as a surprise to close observers of the ICSID system, as tribunal President Emmanuel Gaillard has written several articles focusing on this particular question, in addition to setting forth his views in previous arbitrations.**** In particular, he has inveighed against the suggestion that ICSID-eligible investments must display some contribution – perhaps even a significant one – to the economic development of the host state.***** Arbitrators take narrow view of compliance with local law requirement in BIT Also of interest, the tribunal held that the ICSID Convention is “neutral” on the question of whether transactions must have been made in compliance with the law of the host state in order to qualify as an “investment”. Rather, arbitrators ruled that it is for bilateral investment treaties to impose further “legality” requirements if parties wish to condition consent to arbitration on such a criterion. Notably, the Netherlands-Turkey BIT does impose a legality requirement in order for investments to be protected under the treaty. Under Article 2 (2) of the BIT, protected investments must be “established in accordance with the laws and regulations in force … at the time the investment was made” in the host state. Turkey contended that this provision meant that any violation of any of the host state’s laws would render an investment “illegal”, and unprotected. However, the tribunal construed the treaty clause to pertain only to those domestic laws governing “admission” of foreign investments. Thus, arbitrators rejected arguments by Turkey that the claimant’s failure to comply with aspects of Turkish telecommunications or competition law could lead to the alleged investment being denied protection under the treaty. Instead, arbitrators ruled that they would look only at the purported investment’s compliance with Turkey’s laws for the encouragement of foreign investment. Despite this reading of the treaty, the tribunal did not need to ascertain whether Mr. Fakes’ putative investment had been made in compliance with Turkey’s laws on the admission of foreign investment. Rather, as noted earlier, the claim was short-circuited by a more preliminary matter: the failure to show that an investment with the 3 earlier-mentioned characteristics had been made. Also of note, the tribunal did not need to grapple squarely with objections by Turkey that the claimants had engaged in abusive treaty-shopping by dint of the last-minute nature of the alleged share transfer. (For recent IAReporter coverage of allegations of abusive treaty-shopping, see our report on the Mobil v. Venezuela case******). Tribunal does not make finding of fraud During the ICSID proceedings Turkey had raised questions as to the authenticity of certain documents undergirding the alleged share transfer from Mr. Uzan to Mr. Fakes. Furthermore, the government adverted to arbitral rulings in other parallel claims against Turkey, where arbitrators found that certain claims had been brought based on “inauthentic” or “fraudulent” evidence. However, arbitrators noted that Turkey did not go so far as to allege forgery, and there was no question in the arbitrator’s minds that insufficient evidence had been presented to substantiate such any such charges. Indeed, the tribunal opined that “the burden of proof of any allegations of impropriety is particularly heavy”. The tribunal’s treatment of this issue will doubtless be compared with the approach taken to such questions in the Europe Cement and Cementownia claims against Turkey at ICSID. Notably, one arbitrator in the Saba Fakes case, Mr. Laurent Levy, also sat as arbitrator in the European Cement v. Turkey case at ICSID. (Indeed, Mr. Levy, lawyers for Mr. Fakes sought to disqualify Mr. Levy on account of these dual appointments.*******) While the tribunal in the Saba Fakes case held that there was no proof of fraud in the case, they did express some scepticism as to whether the claimant revealed the full details of its arrangement with Mr. Uzan. For example, the tribunal noted that it was not convinced by Mr. Fakes’ contention that he paid for the legal rights to Mr. Uzan’s shares with a cash payment of 3,800(US) of which there was no receipt or record. No need for dual-national claimant to prove that Dutch was his “effective” nationality Turkey had objected to Mr. Fakes claim on the basis that he was a Jordanian-Dutch national and that his ties to the Netherlands were arguably quite tenuous. Arbitrators in the case countered that there was no need to use a test of “effective” nationality to determine whether Mr. Fakes’ ties were sufficient to justify recourse to ICSID. While acknowledging that in rare instances such a test might be appropriate, the tribunal noted that there were no indications of Mr Fakes having acquired his Dutch nationality at the eleventh-hour as part of a “nationality of convenience” scheme. As such, there was no need for the tribunal to scrutinize the strength of his ties to the Netherlands, even as the tribunal indicated that all signs pointed to his having “effective” ties with that country. Claimant ordered to bear Turkey’s costs In common with several other dismissed claims against Turkey by Uzan family associates, the Saba Fakes award also orders the claimant to bear Turkey’s legal and arbitration costs. The former amounted to 1,496,248.49 Million (USD), while the latter amounted to some 365,000 (USD). At an earlier stage of the proceeding, Turkey had urged the tribunal to oblige the claimant to post certain funds with ICSID in case an award of costs should be ordered in Turkey’s favour at the conclusion of the proceeding. However, as has become commonplace in such cases, arbitrators declined to make such an order. Counsel for Turkey, Hamid Gharavi, in comments to IAReporter welcomed the costs order. However, Mr. Gharavi noted that collection of such sums can be difficult – particularly where tribunals refrain from ordering claimants to post funds during the life-span of the arbitration. Mr. Gharavi also noted that “frivolous” claims against states, including those at ICSID, can enjoy extended life due to the lack of any serious evidentiary burden on the claimants during the early stages of such claims to prove ownership or control of the relevant assets. Mr. Gharavi’s Paris-based boutique firm Derains Gharavi represented Turkey, while Dutch firm Houthoff Buruma acted for the claimant.
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