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Bulgaria is increasingly the subject of arbitration claims in Washington

How companies seek compensation under investment treaties of the State

A month ago, the Oman state investment fund filed an arbitration claim against Bulgaria at the International Centre for Settlement of Investment Disputes in Washington (the “ICSID Centre”) to protect its investment in Corporate Commercial Bank (”KTB”). Earlier this year, the Czech Energo-Pro approached the same arbitration institution, because of its losses in the energy sector, following the Austrian EVN, which brought its action against the State in the same sector in 2013. The previous experience of Bulgaria before arbitral tribunals in Washington was in connection with the terminated concession contracts of “Novera” for cleaning in Sofia (i) and against “Plama Consortium Limited”, the former owner of Pleven oil refinery (ii).

The proceedings under the investment claims of the Oman investment fund, Energo-Pro and EVN are confidential, thus, at this stage it is difficult to analyse whether they will be admitted to jurisdiction under ICSID and what would be the outcome on the merits. It is beyond doubt, however, that the claims of these investors indicate the increase of actions or omissions of Bulgaria, which give reason to seek its liability for breach of its obligations under international treaties and which cost to foreign investors millions of losses. Should we expect more arbitration claims against the State and which investors could raise them?

When an international arbitration is possible?

A foreign investor can bring the State before an arbitral tribunal, if the State has expressed its consent to be a party to such proceedings. In most cases, the State agrees to this form of dispute resolution in a bilateral or a multilateral investment treaty (IT). Bulgaria is party to 59 bilateral IT in force, including, among others BITs with the United States, Russia, China, Great Britain, Germany, and to the multilateral IT –the Energy Charter Treaty. Notably, earlier this year, the European Commission asked some EU Member States to terminate the IT between them as incompatible with the EU law. The outcome of the proceedings, initiated by the European Commission, is still unclear, but even if terminated, the ITs normally have sunset provisions which make them applicable long after their termination.

An IT is usually signed because a developing country wishes to attract foreign capital from a developed country. To guarantee protection for the foreign investors in the host state, some of the clauses of the IT provide obligations to comply with international standards (such as fair and equitable treatment of the investors) and dispute settlement before international arbitration. The latter is considered flexible and neutral, as the parties choose themselves independent and highly qualified arbitrators to resolve their dispute, while if the State is sued in the national court by a foreign investor, there might be bias and difficulties in the enforcement.

The arbitration clause often provides options for ad hoc arbitration, institutional arbitration (e.g. International Chamber of Commerce, Stockholm Chamber of Commerce) or ICSID arbitration. The majority of claims of foreign investors against States are brought before the ICSID Centre. The Centre is established by the Convention on the Settlement of Investment Disputes (“ICSID Convention”), prepared by the World Bank and ratified by 152 countries, including Bulgaria. When possible, the ICSID arbitration is preferred by investors, because unlike the other forms of international arbitration, it offers settlement only to investor – state disputes, the proceedings are exclusively under the auspices of the ICSID Centre and the award of the arbitral tribunal is final and binding on the parties and may be annulled only by a committee of arbitrators, but not by a national court. A substantial advantage is that the awards under ICSID are directly enforceable in any State, which has

ratified the ICSID Convention.

Which investors and investments are protected?

Only “foreign investors” from a State, which has signed an IT with Bulgaria, could bring claims before an international arbitration. Under certain conditions as foreign investors are also considered companies that are registered in the host state, but are under foreign control. In practice, it happens investors to structure their business, so as to fall within an IT which is favourable for them (treaty shopping), and thus to engage the liability of the host state when needed. However, in case that the “restructuring” happens in a late stage when the investor had already known that there were grounds to bring a claim against the State, the arbitral tribunal might not accept the jurisdiction on the dispute. Philip Morris restructured its business in Australia to fall within the IT between Hong Kong and Australia when it became aware of the Australian commitment to introduce cigarettes plain packaging. After adoption of the law Philip Morris filed an arbitration claim against Australia by its Hong Kong company (iii). It remains to be seen whether the tribunal in the pending case will accept the objection of Australia for abuse of right by Philip Morris, which restructured its business to secure the special international legal protection only after the dispute was foreseeable.

Not every foreign transaction is within ICSID jurisdiction. There must be an “investment” in the host state. This concept is interpreted broadly by the tribunals – concessions, power generation enterprises, services in the field of transport, hotel, banking, construction and intellectual property are beyond doubt accepted as investments, and in some cases, loans and financial instruments qualify as investments, too. The bonds issued by Corporate Commercial Bank would probably be considered investments.

To assess whether there is an investment, it is important to interpret the particular IT, on which the claim is based. Although there were minor differences in the provisions of the relevant ITs, two arbitral tribunals came to opposite decisions on whether government bonds were investment (Abaclat against Argentina (iv) and Ambiente against Argentina (v) unlike Postova Banka against Greece (vi).  There is no precedent in international arbitration, thus, the tribunals are free to assess in each particular case whether or not there is an investment, especially when the latter is “at the edge” of the concept.

What are the breaches by the State?

The ITs provide investment standards that the host state is obliged to observe towards the foreign investors. In the vast number of cases the obligations for fair and equitable treatment and expropriation are breached. The first is applicable in the cases of denial of justice, lack of transparency in an administrative process and failure to meet the investor’s legitimate expectations grounded on representations by the State on which he has relied in making the investment. The examples include withdrawal of licence or introduction/changes to legal framework, which caused losses to the investor. Lately, in Bulgaria there have been indications of breach of the standard of fair and equitable treatment towards the investments in renewable energy sources. Arbitrary decisions of the Energy and Water Regulatory Commission, constantly changing legislation which negatively affects the investors in renewables, and controversial practice of the civil courts in clear-cut cases outline obvious grounds for an investment claim against the State.

Direct expropriation (nationalization) is a taking by the State of investor’s property. The expropriation is considered legitimate when it is based on laws in the interest of society and the State has compensated the investor for the full amount of the investment. In case that these conditions are not met, the expropriation is unlawful. Subject to arbitration claims is usually the indirect expropriation in which the investor has not physically lost his property, but he has been substantially deprived of the economic value, use or enjoyment of its investment (CMS v Argentina (vii)).

Other standard obligations of the State under ITs are full protection and security and national treatment and most favoured nation treatment, i.e. that the foreign investors should be treated at least as favourably as the locals and the investors from other states with which Bulgaria has an IT.
Enforcement of arbitral awards

The proceedings under ICSID usually take from 3 to 5 years. The arbitral award is binding on the parties and if any of them does not comply with its terms, the other party may seek its enforcement in each Member – State of the ICSID Convention, which will be obliged to treat the award as if it were a final judgement of its national courts. Practically this means that if the investor succeeds in a claim against Bulgaria before the arbitration in Washington, he may seek enforcement against assets of the State in Switzerland.

(i) Accession Eastern Europe Capital AB and Mezzanine Management Sweden AB v. Republic of Bulgaria (ICSID Case No. ARB/11/3); Novera AD, Novera Properties B.V. and Novera Properties N.V. v. Republic of Bulgaria (ICSID Case No. ARB/12/16)

(ii) Plama Consortium Limited v. Republic of Bulgaria (ICSID Case No. ARB/03/24)

(iii) Philip Morris Asia Limited v. Commonwealth of Australia (PCA Case No. 2012-12)
(iv) Abaclat and Others v. Argentine Republic (ICSID Case No. ARB/07/5)
(v) Ambiente Ufficio S.P.A. and Others v. Argentine Republic (ICSID Case No. ARB/08/9)
(vi) Poštová banka, a.s. and ISTROKAPITAL SE v. Hellenic Republic (ICSID Case No. ARB/13/8)
(vii) CMS Gas Transmission Company v. Argentine Republic (ICSID Case No ARB/01/8)

The article is published in Bulgarian, in Capital Daily