Investment Arbitration Reporter

By Luke Eric Peterson

One of two businessmen who prevailed earlier this year in international arbitration with the Republic of Georgia has been arrested in that country on the eve of hearings in London.

The hearings will see arguments as to whether a panel at the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) should continue to stay the enforcement of a $90 Million (US) arbitral ruling in favour of the two businessmen while Georgia’s request for annulment of the ruling is adjudicated over the next 12-18 months.

The developments come in a pair of arbitrations launched in 2006 and 2007 by Greek businessman Ioannis Kardassopoulos and Israeli businessman Ron Fuchs.

Following the dissolution of the former Soviet Union, the two investors, through their company Tramex, entered into a joint-venture with a Georgian state oil company and obtained valuable rights to develop the East-West Samgori-Batumi pipeline in Georgia, and to build other energy infrastructure.

However, the pair’s interests – including rights held by Tramex and the Georgian state oil company through their joint-venture company GTI Ltd. - were terminated in the mid-1990s when Georgia opted to work in partnership with a consortium of international energy companies on far more ambitious pipeline and infrastructure schemes (including what gave rise to the well-known Baku-Tiblisi-Ceyhan pipeline) which would ultimately transport large volumes of crude from oil fields in the Caspian Sea to Western markets.

After an exceedingly long effort to obtain compensation from Georgia for their losses – and repeated assurances that such compensation would be forthcoming – the pair were informed in 2004 that they would not be paid for their losses. The investors turned to international arbitration thereafter and convinced an arbitral tribunal that their treatment in Georgia had been in breach of that country’s obligations under several international treaties.

Arbitral award is released by claimants, following thwarted settlement

A March 3, 2010 arbitral award rendered in favour of Mr. Fuchs and Mr. Kardassopoulos had remained under wraps until now due to objections by the Republic of Georgia to its release, and a corresponding reluctance on the part of the claimants to jeopardize efforts to persuade Georgia to pay the amount ordered by arbitrators.

However, in July of this year, Georgia signaled that it planned to annul the arbitral award, a limited form of post-arbitration review permitted in ICSID cases. While that annulment process got under way, the parties continued to discuss a possible settlement of the dispute.

In a surprising twist, IAReporter has learned that Mr. Fuchs flew to Georgia this week to sign papers which would have settled the case and netted a partial payment on the arbitral award. However, the Israeli businessman was arrested along with a colleague on charges that he had sought to procure the settlement through means of a bribe. News of that development broke today (October 15th) in the Georgian press.

Following these developments, the claimants have moved to release the March 3, 2010 arbitral award in a bid to make public the findings of the tribunal in the ICSID arbitration.*

Meanwhile, hearings are scheduled for Monday, when a three-member panel will hear arguments as to whether a temporary stay of enforcement should remain in place while the annulment process plays out. The claimants have asked that the stay be lifted, citing an alleged unwillingness on the part of Georgia to make good on its international law obligations. Failing this, the claimants are asking arbitrators to order Georgia to post some financial security in case the award is not annulled and the claimants encounter difficulties in collecting on the award.

Arbitrators ruled that Georgia expropriated rights and acted unfairly

In their March 3, 2010 arbitral award, the tribunal held that Georgia was liable for committing an unlawful** expropriation of Mr. Kardassopolous’ investments in Georgia, contrary to Georgia’s obligations to foreign investors under the Energy Charter Treaty (a multilateral treaty governing trade and investment in the energy sector).

The tribunal also held that Mr. Fuchs’ right to receive “fair and equitable treatment”, pursuant to a bilateral investment protection treaty between Israel and Georgia, had been breached by Georgia. While the mid-1990s expropriation of his investments pre-dated by several months the coming into force of that particular treaty, the arbitrators ruled that Georgia treated Mr. Fuchs unfairly over the ensuring eight years as he and Mr. Kardassopoulos vainly pursued compensation for their losses.

Arbitrators held that Mr. Fuchs had a “legitimate expectation that Georgia would conduct itself vis-à-vis his investment in a manner that was reasonably justifiable and did not manifestly violate basic requirements of consistency, transparency, even-handedness and non-discrimination. This includes, in the view of the Tribunal, implementing a compensation process following the expropriation of GTI’s rights that is both procedurally and substantively fair.”

However, after reviewing all the evidence before it, the tribunal concluded that “… the spirit of settlement appears to have diminished over time as lengthy delays, refusals by various government officials to address the matter, and internal disputes over who carried responsibility for the matter combined to result in an overall obfuscation of the compensation process and disregard for the duty to provide compensation.”

“Over the course of a seven year period following the formal establishment of a compensation process, responsibility for Tramex’s claim was shuffled from one government ministry to another, without any progress. An overview of this process prepared … for President Shevardnadze in 2003 exposes the process for the farce that it had become”

Arbitrators added that “some relief appeared” on the horizon following the intervention of retired diplomat Henry Kissinger in 2003, whose firm was hired by the claimants to make representations to President Shevardnadze. However, arbitrators noted that “the tide turned again as a new government was elected and yet another State commission established to consider the matter of Tramex’s claims. This commission accomplished in one month what each previous commission had found itself incapable of accomplishing – the final disposition of the Tramex matter. This disposition was, however, wholly unacceptable.”

It was following the ultimate denial by Georgia in 2004 of any compensation that the claimants began to prepare to bring their claims to international arbitration under several international investment protection treaties concluded by Georgia.

Each investor awarded 15 Million USD, plus substantial interest of 30 Million USD

In their recent award, arbitrators held that each investor was owed $15.1 Million (US) for his respective losses, as well as an even larger amount of interest, $30 Million each, due to the long passage of time from the events of 1996 until the arbitral ruling in 2010.

Arbitrators also ordered Georgia to compensate the claimants for $7.9 Million spent to bring the arbitration claim (including lawyers’ fees and other expenses).

A full copy of the arbitral award has been made available for download on the website of arbitral materials maintained by Prof. Andrew Newcombe at the University of Victoria.

More in-depth reporting and analysis of the legal holdings in the award will be published by IAReporter in the coming days.

* The award can be downloaded here **  The annulment committee hearing Georgia’s request for annulment is composed of French lawyer Dominique Hascher, Malaysian lawyer Cecil W. M. Abraham, and German law professor Karl-Heinz Boeckstiegel. Arbitrators in the underlying arbitration were the Canadian former diplomat and lawyer L. Yves Fortier, who served as President of the tribunal; Francisco Orrego Vicuna, a Chilean law professor who was nominated by the claimants; and Vaughan Lowe, a law professor at the University of Oxford, nominated by the respondent. For further background on these individuals, search our website at http://www.iareporter.com for our past reporting. Lawyers in the case are the firm of Skadden Arps for the claimants, and DLA Piper for Georgia during the arbitration phase, and Dewey LeBoeuf during the now-pending annulment phase.   *** Although arbitrators termed the expropriation “unlawful” they rejected an argument that a greater level of compensation is warranted where an expropriation is not lawfully done. This and other issues will be discussed in greater detail in subsequent reporting by IAReporter.

Investment Arbitration Reporter is a specialized news publication tracking developments in the area of international investment law and policy.

The publication does not offer legal or financial advice or recommendations of any kind.
 
To offer news-tips or comments, email the Editor, Luke Eric Peterson, at: editor@iareporter.com