Derains & Gharavi will be hosting virtually the 3rd Edition of the Lusophones’ Arbitration Meeting on Thursday 9 July 2020 from 4:30 pm until 6:30 pm (Paris time), during the Paris Arbitration Week (PAW).

This year the participants will discuss “The Future of Investment Treaties: A Lusophone Perspective”, with three Panels about the following subtopics:

Panel I: The European Reform of Investment Treaties: A Portuguese Perspective
Panel II: Joint Treaty Interpretations by the Contracting States Before and During the Dispute
Panel III: Regulatory Autonomy, Standards of Treatment and Investors’ Obligations

This event will be conducted in Portuguese.

The full programme is available here.

For registration, please send an email with your name and affiliation to Dr. Ana Gerdau de Borja Mercereau (agerdaudeborja@derainsgharavi.com). Limited places available.

Published in GAR on 21 February 2020

« Hamid Gharavi of Derains & Gharavi in Paris explains how French arbitration law and courts enable parties instituting arbitrations under the OIC Treaty to avoid a denial of justice« .

« Cocorico! – French approach to the OIC Treaty gives cause to crow » – By Hamid Gharavi 

« Cocorico is both the onomatopoeic term for a rooster’s crow in the French language and slangy shorthand for French national pride. Those instituting arbitration under the OIC Treaty (the Agreement on Promotion, Protection and Guarantee of Investments amongst the Member States of the Organisation of the Islamic Conference) have good cause to crow. This is because French arbitration law permits French courts to serve as appointing authority in cases of this type, thus avoiding injustice to the investor side arising from the failure of the OIC secretary general to fulfill the appointing role conferred on him in the treaty.

With 57 member states across the Muslim world, the Organisation of Islamic Cooperation, as it is now known, is the second largest intergovernmental organisation after the United Nations. The OIC Treaty was adopted in 1981 to promote and protect investment among member states and entered into force in 1988. It was unused in investment disputes for nearly 25 years, until it was invoked for the first time in 2012 in Hesham TM Al Warraq v Republic of Indonesia.

While the respondent states participated in the constitution of the tribunal in the first two publicly reported OIC Treaty cases that gave rise to awards, Hesham v Indonesia and Kontinental Conseil Ingénierie v Gabonese Republic, the trend in recent years has been for states not to play ball.

A serial defaulter is Libya, which has failed to participate in the constitution of the tribunal in a number of OIC cases. This failure seems to be not unintentional but rather a strategic modus operandi of Libya and its counsel as the state does participate in the constitution of tribunals in arbitrations arising out of treaties other than the OIC Treaty. The state relies on the failure of the OIC secretary general to fulfil his role as appointing authority to render the arbitral process inefficient and create a deadlock.

In recent years, specialised press outlets have reported on the existence of at least six cases in which the OIC secretary general has failed to make the appointments required under the OIC Treaty, including Trasta Energy v Libya; DS Construction FZCO v Libya; Omar Bin Sulaiman v Sultanate of Oman; and three arbitrations brought by Saudi businessman Hashem Al Mehdar and other members of his family against Egypt. The awards in these cases have yet to be made public. In all of them, the OIC secretariat simply did not respond to appointment requests.

What a blow to the effectiveness of a multilateral treaty that remains in force in 29 states! Especially as the OIC Treaty is often the only treaty between the state of the investor and the host state and thus the only avenue to effective and neutral resolution of an investment dispute.

The PCA intervenes

To overcome this obstacle, investors have applied to the secretary general of the Permanent Court of Arbitration in The Hague to step in and constitute tribunals using the most-favoured nation clause of the OIC Treaty.

This was done by UAE-based company DS Construction FZCO in its arbitration against Libya, with the investor reportedly arguing that the MFN clause of the treaty allowed it to apply the more favourable 1976 version of the UNCITRAL Arbitration Rules referred to in the Austria-Libya bilateral investment treaty. PCA insiders have confirmed that the investor also raised the risk of denial of justice and the principle of effet utile.

The 1976 UNCITRAL rules provide that the secretary general of the PCA may designate a new appointing authority when the one agreed upon by the parties refuses to act or fails to appoint the arbitrator within 60 days of the receipt of a party’s request. In light of this rule, and the provisions of the OIC Treaty and BIT, the PCA reportedly deemed itself competent to designate an appointing authority and nominated an arbitration expert to select an arbitrator and cure Libya’s default.

In Omar Bin Sulaiman v Oman, it has been reported that the investor likewise invoked the MFN clause of the OIC Treaty to import the dispute resolution mechanism of other treaties entered by Oman, thus curing the state’s failure to appoint an arbitrator.

More recently, in beIN Corporation v Saudi Arabia, it has been reported that the investor applied directly to the PCA to request its secretary general to serve as appointing authority, without first attempting to resort to the secretary general of the OIC.

In its notice of arbitration dated 1 October 2018, the investor pointed out that ‘the OIC Secretary General has on multiple previous occasions failed to exercise his power to make default appointments of arbitrators in investor-state arbitrations under the OIC Agreement, preventing the constitution of the arbitral tribunal.’

A gamble

Yet, asking the PCA to select a new appointing authority is a gamble. This is because such appointments are without prejudice to the tribunal’s right to decline jurisdiction based on a theory of irregular constitution as well as to the right of annulment and enforcement courts to scrutinise jurisdiction once an award is issued.

While some states participating in OIC Treaty arbitrations have forfeited the right to challenge a tribunal constituted in this way, others have reserved their right to make a challenge and ultimately proceeded with one – like Libya in the DS Construction FZCO arbitration. In that case, the tribunal ruled that it had been properly constituted, a decision which Libya is now seeking to annul in the Paris courts.

Libya’s approach is unsurprising, given that it is open to question whether claimants can import dispute resolution mechanisms through MFN clauses, except in specific circumstances such as when it is more or less expressly foreseen by the relevant clause.

Several tribunals have in fact ruled in principle that MFN provisions allow investors to benefit from substantive investment protections contained in other treaties but do not extend to dispute resolution mechanisms – including the tribunals in Salini Costruttori SpA and Italstrade SpA v Jordan; Plama Consortium v Bulgaria; and Daimler Financial Services AG v Argentina.

Tribunals that have found otherwise include those in Garanti Koza v Turkmenistan and Venezuela US v Venezuela. But the Turkmenistan-UK and Barbados-Venezuela BITs invoked in those two cases, respectively, contain broad language allowing for the application of the MFN clause to all of the treaty’s provisions, including dispute resolution provisions.

 In each BIT it is stated that:

(1) Neither Contracting Party shall in its territory subject investments or returns of nationals or companies of the other Contracting Party to treatment less favourable than that which it accords to investments or returns of its own nationals or companies or to investments or returns of nationals or companies of any third State.

(2) Neither Contracting Party shall in its territory subject nationals or companies of the other Contracting Party, as regards their management, maintenance, use, enjoyment or disposal of their investments, to treatment less favourable than that which it accords to its own nationals or companies or to nationals or companies of any third State.

Both MFN provisions also contain a final paragraph, each similarly worded, describing the scope of the provision. In the UK-Turkmenistan BIT the paragraph states that, ‘For the avoidance of doubt it is confirmed that the treatment provided for in paragraphs (1) and (2) above shall apply to the provisions of Articles 1 to 11 of this Agreement [emphasis added].’ In the Barbados-Venezuela BIT, the paragraph states: ‘The treatment provided for in paragraphs (1) and (2) above shall apply to the provisions of Articles 1 to 11 of this Agreement [emphasis added]’.

In each of the two BITs, the investor-state dispute resolution provision was contained in article 8 and was therefore expressly covered by the MFN clause.

The language of the Turkmenistan-UK BIT and Barbados-Venezuela BIT is thus significantly different from the wording of OIC Treaty article 8, which does not state (or imply) that MFN treatment could apply to dispute resolution mechanisms. So, the risk exists that a tribunal constituted to hear an OIC Treaty case through use of an MFN provision will ultimately decline jurisdiction on the ground that the MFN protection does not apply to procedural rights.

In addition, and independent of this risk, a tribunal that was constituted on this basis and went on to issue an award would need to be held to be validly constituted in proceedings to annul and enforce the award.

The French approach

French arbitration law is to be commended for offering a viable alternative course of action for parties seeking the constitution of a tribunal in an OIC Treaty case. Investors can apply to a French judge acting in support of the arbitration (the juge d’appui) to request the appointment of an arbitrator on behalf of the defaulting state on the ground that there would be a risk of a denial of justice if an application to the secretary general of the OIC proved unsuccessful.

Arguably, investors could even approach the judge directly without having applied first to the OIC secretariat, provided they could demonstrate that it would be futile to apply given the OIC’s track record.

Acting for Trasta, a UAE energy company, in its OIC Treaty dispute with Libya, our firm opted to apply first to the OIC for appointment of a co-arbitrator as anticipated by the treaty before resorting to the French courts. As in other OIC cases, Libya failed to appoint a co-arbitrator and the OIC secretariat likewise took no action, even after a number of requests.

Rather than turning to the PCA secretariat on the basis of the MFN clause of the treaty and the Austria-Libya BIT, our firm at that point filed a request with the president of Paris’s Tribunal de Grande Instance or first-instance court, sitting as juge d’appui, to appoint an arbitrator in place of Libya, pursuant to articles 1452, 1454 and 1505.4° of the French Code of Civil Procedure. This request was made some 93 days after the date by which Libya was required to make the appointment and 75 days from the date when the OIC was first asked to fulfill its role as appointing authority.

The sources of the French judge’s power

The French judge’s power to appoint in such circumstances has its origins in the landmark ruling of the French Cour de cassation or supreme court in National Iranian Oil Company (NIOC) v Israel (1 February, 2005). This held that a judge had jurisdiction to hear NIOC’s application for the appointment of a co-arbitrator on behalf of Israel where the state had refused to appoint, bringing the case to a dead end.

In that case, a pathological arbitration clause in the parties’ contract had provided for ad hoc arbitration but failed to identify a seat of arbitration or provide a way to break the deadlock if one party failed to name an co- arbitrator. The clause stated only that the president of the International Chamber of Commerce should have power to name the presiding arbitrator if the parties didn’t agree.

The Cour de cassation accepted NIOC’s application that it intervene to lift the deadlock, reasoning that ‘the impossibility for a party to be heard by a court, including an arbitral tribunal […] constitutes a denial of justice, which grants extraterritorial jurisdiction [compétence internationale] to the president of the Paris court of first instance to exercise its mission to assist in the constitution of the arbitral tribunal.‘

The court also based its ruling on the fact that there existed a connection, albeit ‘tenuous’, between the arbitration and France, as the arbitration clause provided that possible disagreements between the party- appointed arbitrators, including with respect to the appointment of the president of the tribunal, should be decided by the president of the ICC, a Paris-based body.

Article 1505.4° was added to the French Code of Civil Procedure in 2011 to incorporate and broaden the principles set forth in the Cour de cassation’s decision. The article provides that, unless otherwise stipulated, there will be a French juge d’appui not only for international arbitrations seated in France or submitted to French law or French jurisdiction by agreement of the parties but for any arbitration where ‘one of the parties is submitted to a risk of denial of justice.’

Parties may thus apply to that judge, named as the president of the Paris court of first instance, in support of arbitration proceedings even if they bear no connection to France.

In other words, the French judge is granted universal jurisdiction to prevent parties who have agreed to submit their disputes to arbitration being denied access to an arbitral tribunal.

In the case of Trasta, our firm did not need to go so far. Merely triggering proceedings and the scheduling of a hearing before the French first-instance court proved sufficient to drive Libya to agree to appoint a co-arbitrator just before the scheduled hearing, given strong prospects of success. Thus the tribunal was constituted in an uncontroversial fashion and an effective precedent and avenue established for other investors to avoid a denial of justice.

Alors, cocorico!« 

Marie-Laure Bizeau interviendra lors de la conférence-débat « Regards croisés d’arbitres » organisée par Freshfield Bruckhaus Deringer le 10 mars 2020 à Paris.

Thomas Bevilacqua has joined Derains & Gharavi as senior Counsel . His hiring was reported in a GAR article, dated 8 January 2020, in the following terms:

« Thomas Bevilacqua, a former Foley Hoag partner who helped launch the firm’s Paris office, has joined Derains & Gharavi as senior counsel.

Bevilacqua started at his new firm on 6 January. He left Foley Hoag in 2018 and spent last year on sabbatical in the US, while also completing an LLM in taxation at the University of Miami School of Law.

A dual French-US national, Bevilacqua joined Foley Hoag in 2011 from Winston & Strawn along with fellow disputes practitioner Bruno Leurent. Together they founded Foley Hoag’s Paris office, the firm’s first outside the US.

Foley Hoag’s head of international disputes Paul Reichler says Bevilacqua ‘made an outstanding contribution to the establishment and growth’ of the office and is a ‘very fine lawyer.’ He says that Foley Hoag holds Derains & Gharavi in ‘very high regard’ and expects Bevilacqua to be a success there.

Derains & Gharavi co-founder Hamid Gharavi says Bevilacqua is ‘no stranger to the firm.’ The two worked together at Dentons’ legacy firm Salans in the early 2000s and Bevilacqua has also appeared as counsel in a case arbitrated by the firm’s other founder, Yves Derains.

Gharavi says Bevilacqua brings two decades’ experience in high-profile disputes and will reinforce both the firm’s investor-state and commercial arbitration practices.

At Foley Hoag, Bevilacqua represented Venezuela in several investment treaty disputes and last year helped persuade the Paris Court of Appeal to partially set aside a US$1.3 billion award won by Canadian mining company Rusoro.

He also acted for the state in its attempt to set aside a US$740 million ICSID award won by another Canadian mining company, Gold Reserve, which was ultimately unsuccessful.

In 2014, he helped Venezuela defeat a US$180 million ICSID claim filed by Canada’s Nova Scotia Power on jurisdiction.

Bevilacqua was also part of a team that led India to its first known victory in an investment treaty arbitration, defeating a US$36 million claim by a French investor in a failed joint venture at a port in West Bengal.

He also helped Ecuador defeat the vast majority of an UNCITRAL claim originally worth US$500 million brought by US company Murphy Oil. The tribunal awarded just US$20 million plus costs and interest and later rejected an application for additional damages.

Although his investment treaty work is more well-publicised, around half of Bevilacqua’s disputes practice is commercial. In 2014, he helped Chinese-owned oil producer Addax Petroleum settle a US$1 billion contractual ICC dispute with Gabon.

Bevilacqua spent six years at Winston & Strawn in Paris, including two years as a partner. While there he represented Senegal before the International Court of Justice at the interim measures phase, defeating an attempt by Belgium to compel the extradition of the former president of Chad.

Bevilacqua is admitted in New York and Texas, with his readmission to the Paris bar pending.

He says he is ‘thrilled to be joining a team of individuals of such impeccably high personal and professional calibre.’

‘Few firms can legitimately stake a claim to as active and varied an arbitration docket as that of Derains & Gharavi. I am looking forward to the challenge.’

Nathalie Meyer Fabre, the founder of Parisian boutique Meyer Fabre Avocats, worked with both Bevilacqua and Gharavi at Salans, a time she remembers for its ‘great intellectual density and great fun.’ She later sat on a tribunal that Bevilacqua appeared before.

She says Bevilacqua is hard working with a ‘sharp legal mind’ and that his ‘multicultural background gives him remarkable insight on the most complex issues,’ adding that she is ‘delighted to see him back in the Paris arbitration arena.’

As part of the Paris Arbitration Week, Dr. Hamid Gharavi gave an interview to the Indian law firm Nishith Desai on 4 April 2019 on the subject of judicial expropriation in bilateral investment treaties. Please follow this link to watch the interview on Nishith TV.

Derains & Gharavi secured a US$ 68 million award (KRW 57 billion plus interest and costs) against the Republic of Korea in PCA Case No. 2015-38, Mohammad Reza Dayyani, et al. v. The Republic of Korea (UNCITRAL). This is the first known investment treaty award rendered against the Republic of Korea. The firm’s victory was reported in Global Arbitration Review (GAR), in an article dated 8 June 2018, in the following terms:

« Bruising loss for South Korea at hands of Iranian investors

In what has been reported as the first loss for South Korea in an investment treaty case, the family behind an Iranian consumer electronic group has been awarded US$68 million – 99% of the total sum sought – for South Korea’s termination of a deal for the purchase of the bankrupt Daewoo Group.

In a 187-page UNCITRAL decision which GAR has seen, a tribunal composed of Bernard Hanotiau of Belgium, Philippe Pinsolle of France and Gavan Griffith QC of Australia this week upheld claims brought by the Dayyani family, finding South Korea to have breached its 1998 bilateral investment treaty with Iran.

The tribunal found that through its specialised debt resolution agency, the Korea Asset Management Company or KAMCO – which it characterised as a state organ under Article 4 of the International Law Commission Articles on State Responsibility – Korea had abused its “puissance publique” [public power] and “interfered with the contractual rights of the parties to the share purchase agreement in order to promote its own sovereign interests.”

This represented a breach of the treaty’s fair and equitable treatment guarantee and meant the Dayyanis’ claim was successful, the tribunal said, making it unnecessary for it to rule on further alleged breaches of the treaty.

The tribunal ordered Korea to make restitution of a deposit the Dayyanis had paid for the sale in Korean won (at the time equivalent to US$50 million, now US$54 million) and pay simple interest at a rate of LIBOR + 2% from April 2011 until the date of restitution, which to date amounts to roughly US$12 million.

It also ordered the state to pay nearly US$2 million to cover the Dayyanis’ legal costs and the costs of the arbitration. The family’s attempt to recover a success fee that it had agreed to pay its counsel was denied.

Commenting on the decision, Hamid Gharavi of Derains & Gharavi in Paris, a French-Iranian arbitration specialist who was lead counsel to the Dayyanis with Moshkan Mashkour of Sanglaj International Consultants in Tehran, tells GAR that the tribunal is to be praised for « calling a spade a spade”. It held that Korea’s conduct in terminating the deal fell short of good faith and that the state “cheated in the arbitration by failing to disclose material documents that they were ordered to produce and relying on evasive testimony from witnesses,” he says.

Gharavi also says the award is “timely” in terms of its discussion of the impact of Korean and international sanctions against Iran, which will be covered later in this article.

 South Korea was represented in the arbitration by a team from Freshfields Bruckhaus Deringer led by the firm’s former head of international arbitration Lucy Reed (now of the National University of Singapore) and partner Nicholas Lingard in Singapore and Tokyo. Both have been approached for comment but have yet to respond.

A “pretextual” termination

Based in the central Iranian city of Isfahan, the Dayyani family are behind the Entekhab Industrial Group, an Iranian holding company that invests in a wide range of industries, including in the manufacture and distribution of middle to high-end home appliances in Iran and the Middle East. Since 2008, it has been selling products manufactured by Daewoo in Iran.

Following the Asian Financial Crisis of 1997, Daewoo went bankrupt and underwent a restructuring overseen by a committee of creditor financial institutions that included many state banks, with the Korean government eventually instructing KAMCO to purchase the group and resell it at a profit.

KAMCO ended up taking a 57% controlling stake in Daewoo and, after three unsuccessful attempts at selling its electronics arm, accepted a bid from the Dayyanis to buy it for US$560 million.

The Dayyanis entered into a share purchase agreement with Daewoo’s creditors, paid the deposit and created a Singaporean special purpose vehicle to carry out the purchase without falling foul of sanctions against Iran. They also submitted letters confirming that the vehicle had funds to make the purchase.

However, the sellers rejected the letters as unsatisfactory and, in December 2010, terminated the contract and forfeited the deposit.

An amended agreement was reached but again terminated by the sellers, in March 2011.

In its findings, the tribunal said that the “pre-emptory and summary” termination of the deal and forfeiture of the deposit was attributed by the sellers to the Dayyani’s failure to provide satisfactory letters.

In fact, the tribunal found this was a mere pretext and the real reason the sellers terminated the deal was a condition precedent in the sale purchase agreement that required them to obtain consent to the sale from leading Daewoo customers such as Bosch and GE. They realised they would not obtain this, putting them in breach of the condition precedent and enabling the Dayyanis’ special purpose vehicle to rescind the agreement and recover the deposit.

By the time the amended share purchase agreement was formed, the tribunal said the sellers had admitted to the Dayyanis that they could not comply with the condition precedent. It held they terminated this agreement rather than agree to an “entirely reasonable” price drop the family had requested as a result of the lack of customer support for the purchase.

The tribunal said all these actions were attributable to Korea, as the extent of its voting rights meant KAMCO “was in a position to indirectly control” any decision taken by Daewoo’s creditors in relation to the sale.

Adverse inferences

The tribunal repeatedly said that it had reached its conclusions in the absence of an alternative explanation for the collapse of the sale from Korea – leading it to draw adverse inferences on some matters.

It said, for example, that it would have “appreciated an opportunity” to examine reports of Korea’s Public Fund Oversight Committee, one of several bodies monitoring the sale, from December 2010 and March 2011 and had ordered the state to produce them.

The tribunal said it was “not convinced” by Korea’s assertion that such reports do not exist and found it “extremely unlikely” given the committee’s close monitoring of events leading up to the sale. Hence it drew the adverse inference, that, had they been produced, the reports would not have supported the state’s case.

Later, the tribunal noted the lack of on-the-record evidence of the sellers’ deliberations before they terminated the deal, commenting that it would have expected to see “an abundance of internal memoranda, meeting minutes and emails evidencing the sellers’ weighing of the different options before them and making a final decision”.

It concluded that either no meetings had taken place or the minutes had been withheld because they were adverse to Korea’s case.

Similarly, the tribunal said it was surprised that those documents it had seen in relation to the sale contained little mention of the supposedly unsatisfactory letters the Dayyani family had provided confirming their ability to pay. Had this been « the significant issue » that the sellers argued, the tribunal said it would surely have been « discussed and analysed at length by the various supervisory authorities that were monitoring the sale.”

The tribunal further noted the “vague”, “contradictory” and “unreliable” testimony provided by some of Korea’s witnesses, including employees of Woori Bank (Daewoo’s principal creditor) and PricewaterhouseCooper.

In light of all of this, the tribunal inferred that the sellers had decided to terminate the first agreement because of the “looming anticipatory breach” on their part, and the amended agreement because it was clear that the Daayanis “would not waive the condition precedent.” It said the behaviour of the parties during the first quarter of 2011 “unequivocally” demonstrated that the first termination “was primarily a negotiating ploy on the part of the sellers”.

The tribunal added that the absence of documentation and “detailed narrative” from South Korea meant no inferences could be made in the state’s favour. Indeed, it suggested that further evidence would have provided additional confirmation of KAMCO’s control of the sellers, which Korea had sought to deny.

The impact of sanctions

As well as the first investment treaty award against South Korea, this is believed to be the first such award in favour of Iranian investors – and raises issues regarding the international sanctions regime to which Iran has for many years been subject owing to its uranium enrichment programme to build nuclear capability.

During the arbitration, the Dayyanis presented a 2010 US Congressional Report to the tribunal indicating that, shortly before it terminated the deal, Korea had succumbed to pressure from US president Barack Obama by imposing sanctions on Iran that went above and beyond those imposed by the United Nations.

The tribunal did not explicitly comment on the report and say whether it regarded Korea’s actions as influenced by a shift in policy on sanctions. However, during its reasoning on the alleged breach of the fair and equitable treatment standard of the BIT, it said it was satisfied that Korea was “fully apprised” that sanctions would complicate the Daewoo deal before any agreement was executed.

The Public Fund Oversight Committee had raised this concern in several reports and even suggested aborting the deal for this reason, the tribunal said. And it was in response to this complication that the Dayyanis had agreed to form a Singapore special vehicle to make the purchase.

Given this attention to the impact of sanctions, the tribunal held that KAMCO and the sellers would have been aware of the risk that some Daewoo clients or their backers would make an issue of the company being sold to an Iranian group. They opted to accept the Dayyanis’ deposit and proceed with the transaction anyway – a finding that presumably influenced the tribunal’s conclusion that Korea had acted in bad faith.

Commenting on the tribunal’s approach to sanctions, Gharavi says the ruling shows that sovereign states that “bend” to international pressure and terminate deals on spurious pretexts “will be held liable, with their acts and omissions recorded in international awards that will leave an embarrassing legacy for these countries.”

He adds that the award is “timely” given the pressure that has been applied to other countries by the US and Saudi Arabia to end ties with Iran. These include Bahrain, which he argues in two other cases filed last year came up with pretexts to expropriate the assets of two Iranian banks and an insurance company.

“One of the arbitrators ……”

The case against Korea was filed six months after a notice of dispute in 2015, with Jan Paulsson and Griffith (appointed by the Dayaanis and Korea, respectively) as the original party-appointed arbitrators. In 2016, Paulsson resigned from the tribunal, probably owing to Korea’s instruction of his former firm, Freshfields, as counsel, and was replaced by Pinsolle.

Paulsson is now acting for Bahrain in the two cases mentioned, in which Gharavi argues that the state mistreated Iranian investors because of pressure from the US and Saudi Arabia and expropriated their investments.

Although there is no formal dissent to the award against Korea, it states in relation to several key findings that one tribunal member took another view, without making clear who that arbitrator was and whether it was the same one in all instances.

The initial disagreement comes in the section of the award on jurisdiction, with one arbitrator saying it was not enough to find that the Dayyanis’ special purpose vehicle was an investor with a protected investment, but that they must be seeking to remedy a “personal harm”. The arbitrator nevertheless accepted that the tribunal had jurisdiction over the family’s claim.

Later, the award records some disagreement in relation to what constitutes a breach of the fair and equitable treatment standard of the BIT. One arbitrator held that what had occurred in this case was a « simple breach of contract » by KAMCO in its capacity as a private entity and that “only sovereign conduct, ie conduct that is carried out in the exercise of an element of puissance publique” is capable of constituting a breach.

One arbitrator also held that, though Korea was a party to the share purchase agreement through KAMCO, its obligations in this regard were “of an entirely different nature” from the obligations of the fair and equitable treatment standard. This holds that a sovereign should not “abusively or arbitrarily interfere with rights established under a contract” but need not “ensure that contractual obligations are performed according to their terms, » the arbitrator said.

The arbitrator added that he had seen no evidence that Korea directed KAMCO to vote against returning the contract deposit, giving rise to a breach of the standard.

Finally, the award records that one arbitrator would have awarded the Dayyanis only a portion of its costs, in light of his view that they had not demonstrated they were entitled to the sum claimed.

Successful – but no success fee

Despite their success in the claim, the Dayyanis were unable to convince the tribunal to make an order awarding them a success fee negotiated with Derains & Gharavi and Sanglaj International – giving the firms 5% of all amounts awarded, including interest and costs, in addition to a lump sum payment of €1 million.

The Dayyanis argued that to allow recovery of the fee would be “standard and reasonable” and in line with arbitral jurisprudence, as well as a fair reflection of the time spent by their counsel on the case. However, the tribunal said the notion that the claimants should be able to recover “all or a portion” of a success fee raised “difficult issues” and it was not convinced it could order it without « shifting the risk allocation agreed between [the] claimants and their counsel onto [the] respondent, which is not the purpose of awarding costs.

Three claims… one loss

According to Business Korea, which reported the outcome of the dispute today, Korea has been sued by foreign companies in three investor-state cases, including this one.

The first case relates to a sale in the bank sector and was filed by Lone Star in 2012 under the Belgium- Korea BIT. Administrated by ICSID, it is expected to reach an award this year.

The second case was filed by Hanocal, a Dutch subsidiary of a UAE state-owned investment fund, in 2015 over taxation on its purchase of a 50% stake in Hyundai Heavy Industries. The claim ended in 2016, when Hanocal discontinued its action.

Business Korea also reports the Korean government’s response to its first loss, stating that it will closely analyse the award in favour of the Dayyanis and decide whether to apply for « cancellation of the verdict. »

The award in the case is not yet public. GAR will update this article if comment is received from counsel to Korea.

Mohammad Reza Dayyani, Abbas Dayyani, Mohammad Hossein Dayyani, Ali Dayyani, Fatemeh Dayyani and Kosar Dayyani v Republic of Korea

Tribunal
– Bernard Hanotiau (Belgium) (Chair)
– Philippe Pinsolle (France) (appointed by the Dayyani family)
– Gavan Griffith QC (Australia) (appointed by Korea)

Counsel to Dayyani family
– Derains & Gharavi: partner Hamid Gharavi with associates Julie Spinelli and Stefan Dudas, Paris
– Sanglaj International Consultants: partner Moshkan Mashkour in Tehran

Counsel to South Korea
– Freshfields Bruckhaus Deringer: partner Nicholas Lingard in Singapore and Tokyo, counsel Robert Kirkness, senior associate Lexi Menish and associates Kate Apostolova, Emily Stennett, Monika Hlavkova and Samantha Tan in Singapore
– Lucy Reed of National University of Singapore
– Yulchon: partners Sae Youn Kim and Hyung Keun Lee with associate Jae Hyong Woo in Seoul

Expert witnesses
– Professor Sang Gon Han
– Professor Lee Won Woo
– Associate Professor Kim Yon Mi« 

Hamid Gharavi has been nominated as arbitrator in the TAS-CAS arbitration matter of 39 Russian athletes vs the IOC related to the 2014 Sochi Winter Olympic Games. The case is reported in A GAR article published on 18 January 2018 which reads as follows:

“Russia doping scandal appeals to be heard en masse by CAS

Russia enters the 2010 Olympic Winter Games Opening Ceremony, wikicommons/s.yume

Two Court of Arbitration for Sport tribunals will next week simultaneously hear 39 of the 42 appeals lodged by Russian athletes in a conference centre in Geneva, as they look to overturn their lifetime bans following the state-sponsored doping scandal at the 2014 Sochi Winter Olympics.

The Lausanne-based court announced yesterday that although a CAS procedure was opened for each individual athlete, their appeals against the International Olympic Committee’s blanket ban will be heard collectively in three batches.

It is thought to be the first time the court has consolidated so many individual appeals, as it seeks to dispose of all the cases ahead of the 2018 Winter Olympics in Pyeongchang, South Korea, next month.

Tribunals have already been formed for the first two groups of appeals, both chaired by German arbitrator and University of Augsburg professor Christoph Vedder and including Dirk-Reiner Martens of Martens Lawyers in Munich. For the first group, the final tribunal member will be French-Iranian arbitrator Hamid Gharavi of Derains & Gharavi in Paris. For the second, it will be Austrian arbitrator and academic Michael Geistlinger.

Group 1 comprises 28 athletes including Sochi 2014 gold medallists Alexander Legkov (cross country skiing), Aleks Tretiakov (skeleton) and bobsleigh trio Aleksei Negodailo, Dmitry Trunenkov and Aleksandr Zubkov. Group 2 is made up primarily of women ice hockey players.

Group 3’s appeals have been suspended and are not being heard next week. This is the smallest group, comprised of three “biathletes” who compete in an event comprising rifle shooting and cross country skiing.

The proceedings in groups 1 and 2 will be conducted jointly – with a combined hearing taking place from 22 to 27 January. Due to its huge size, it will be held at Geneva’s International Conference Centre, although it will not be open to the public.

The IOC will be represented by a team from Kellerhalls Carrard in Lausanne led by partners Jean-Pierre Morand and David Casserly. Casserly, a former legal counsel at CAS, joined the firm in December.

Counsel to the Russian athletes is unknown but they have previously relied on sports practitioner Mike Morgan in London.

Among those expected to testify is Canadian professor and arbitrator Richard McLaren – author of a two-part report which found that more than 1,000 Russian competitors in various sports (including summer, winter, and Paralympic sports) had benefitted from a state-sponsored doping regime.

Also appearing by video link will be Grigory Rodchenkov, the former director of Moscow’s Anti-Doping Centre who is currently under witness protection in the United States after he admitted to working alongside Russian intelligence services to systematically interfere with hundreds of urine samples during the Sochi Games.

Rodchenkov and McLaren are both interviewed in Netflix documentary Icarus, in which US cyclist and filmmaker Bryan Fogle uncovers the extent of the state’s doping activities.

The International Olympic Committee banned 43 Russian athletes from competing at the Winter Olympics on the basis of McLaren’s report. The only banned athlete not to have appealed is Maxim Belugin, who was part of the two-man and four-man bobsleigh teams that finished fourth at Sochi.

If cleared, the athletes will be allowed to compete at the approaching games in Pyeongchang as “neutrals”, unaffiliated to any country.

McLaren’s report also led to the blanket ban of Russian athletes competing at the 2016 Summer Olympic and Paralympic Games in Rio de Janeiro. Both bans were upheld following appeals to CAS.

GAR understands that CAS has recently made its selection of arbitrators who will form an ad hoc division to arbitrate disputes arising during the games in Pyeongchang. The list has yet to be publicised.

39 Russian athletes v the International Olympic Committee

Tribunal in Group 1 proceeding

Christoph Vedder (Germany) (president)
Hamid Gharavi (France)
Dirk-Reiner Martens (Germany)
Tribunal in Group 2 proceeding

Christoph Vedder (Germany) (president)
Michael Geistlinger (Austria)
Dirk-Reiner Martens (Germany)
Counsel to IOC

Kellerhals Carrard
Partners Jean-Pierre Morand and David Casserly in Lausanne

Counsel to ROC

Morgan Sports Law

Partner Mike Morgan in London”

Hamid Gharavi interviendra lors de la table-ronde « Arbitrage international : la célérité à tout prix? » organisée par le Magazine LJA (La Lettre des Juristes d’Affairies) le 7 février 2018 à Paris.

Hamid Gharavi and Melanie van Leeuwen secured a US$22.7 million damages award (US$30 million with interest and costs) against Kazakhstan in an ICSID case Aktau Petrol Ticaret A.Ş. v. Republic of Kazakhstan, case number ARB/15/8. This is a third consecutive win in ICSID treaty claims against Kazakhstan for Hamid Gharavi, following the awards in Rumeli and Caratube II, issued in 2008 and in September this year respectively. This victory was reported in Global Arbitration Review (GAR), in two different articles, in the following terms:

« Kazakhstan ordered to pay for actions of court Bailiffs

An ICSID tribunal has ordered Kazakhstan to pay nearly US$25 million for the seizure of investments at the port of Aktau on the Caspian Sea through the “executive action” of court bailiffs that went uncorrected by the courts – but rejected allegations of judicial corruption.

The 125-page award of Ian Binnie QC, Bernard Hanotiau and Sir Daniel Bethlehem in favour of Turkish investor Aktau Petrol Ticaret was dispatched to the parties yesterday. It is the third successive time Hamid Gharavi of Derains & Gharavi has won damages for a client in ICSID treaty claims against Kazakhstan, following the awards in Rumeli and Caratube II, issued in 2008 and in September this year.

The tribunal upheld jurisdiction and held Kazakhstan to be in breach of the protections against uncompensated expropriation in the Energy Charter Treaty and Turkey-Kazakhstan bilateral investment treaty. It also held that the state had violated the fair and equitable treatment provision of the Switzerland-Kazakhstan BIT, imported into the Turkey-Kazakhstan BIT by virtue of a most-favoured nation clause.

The tribunal stressed at several points of the award that this was a case about expropriation “by executive action » – namely the action of court bailiffs. It said Kazakh courts had not initiated or approved the action but had failed to correct it despite « every reasonable opportunity » to do so.

In this respect, it said there had been “systemic” failure by the courts – however it did not accept allegations by Aktau that they were “puppets, tools” of prominent Kazakh businessmen.

In fact, it said there was “no evidence of judicial corruption” in this case and declined to order that Kazakhstan pay Aktau’s legal costs on the usual « loser pays » principle on the basis that this allegation had failed.

Of US$80 million claimed at the hearing earlier this year, the tribunal awarded US$22.7 million damages plus the costs of the arbitration, taking the value of the award to US$24.5 million. It also ordered the payment of pre and post judgment interest at a rate of LIBOR plus 2 per cent.

With interest so far, the award is worth US$30 million. In the early days, the claim had been reported as US$150 million but this sum was not mentioned in the award.

Transhipment investments

Aktau Petrol is part of the ASB Group, owned by Turkish citizen Sitki Ayan. Between 2006 and 2014, it and other companies in the group invested in oil transhipment and storage facilities at the port of Aktau in western Kazakhstan, including a private railway connecting the state railway system to the port, an oil terminal and 695 railway tank cars.

The dispute began in 2007 when Ayan struck up a commercial relationship with Askar Kulibayev, a prominent Kazakh businessman and former government official, in the hope it would make it easier for ASB Group to overcome bureaucratic obstacles and to operate and thrive in Kazakhstan. Although it was not mentioned in the award, GAR has previously reported that Kulibayev is related to Kazakhstan’s president Nursultan Nazarbayev by marriage.

According to Aktau Petrol, the commercial relationship was abused and exploited by Kulibayev, who orchestrated multiple court proceedings that led to the expropriation of its investments in breach of the ECT and BIT.

Kazakhstan for its part argued that Aktau lacked any investment in the railway, having acquired its shares by transfer from other corporate entities in the ASB Group, and that its title to the railway cars had been assigned away by the time of the alleged expropriation.

It said the company had invested only a small amount in the oil terminal and that any losses it suffered were inflicted by Kulibayev and Ayan’s own Azerbaijani representative in Kazakhstan, for whom the state bears no responsibility.

Overzealous bailiffs

An interesting discussion at the outset of the award – covered by GAR separately here – concerns the relevance of “similar fact evidence”, in light of Aktau’s arguments that Kazakhstan’s conduct followed a familiar “modus operandi” seen in the Rumeli case and elsewhere. The tribunal said it would not be swayed by such « propensity evidence ».

This was followed by the tribunal’s finding that it had jurisdiction over all Aktau’s claims, including ones relating to the private railway line. The line had been acquired for a nominal share value as part of a corporate reorganisation of ASB Group’s investments in Kazakhstan, the tribunal said.

Turning to the merits, the tribunal observed that Aktau had “cast its net of accusations and opprobrium broadly over Kazakh officials and judges.”

It said that in its view, the company’s problems were caused mainly by the conduct of bailiffs employed by Kazakhstan to implement court decisions, rather than by the courts themselves. It said Aktau had made “reasonable efforts” to get the Kazakh courts to correct the illegalities but the courts were “uninterested” – and thus “crystallised the expropriation” of the investments.

For example, the tribunal described how following a US$870,000 court judgment against a Swiss-incorporated company in the ABS Group, a Kazakh court bailiff took Aktau Petrol’s entire shareholding in the railway line in satisfaction of the debt – despite the fact that they were separate entities.

It held that this was in breach of Kazakh law – which, according to experts for both sides of the arbitration, prohibits the state from « taking the property of corporation A to satisfy the debt of corporation B”.

It also noted that the bailiff had seized goods quicker than permitted by the law and failed to carry out a legally-required valuation of the shares – to determine whether Aktau was entitled to any money back through a public sale.

The tribunal found there had been similar misconduct by court bailiffs in relation to Aktau’s other losses, set out in detail in the award.

Apart from a single first instance court decision in relation to the railway shares, the Kazakh courts had avoided delving into Aktau’s complaints or reviewing the legality of the bailiffs’ conduct, it said. Further litigation by Aktau would not have been constructive “because the appellate courts demonstrably lacked any will to intervene”.

The tribunal said that what had occurred in this case was not judicial expropriation, as contemplated in the NAFTA case of Eli Lilley v Canada, but “judicial apathy” in discharging the responsibility to hold the executive to account.

It took the hypothetical view that Kazakhstan could also have been found liable for a denial of justice since in two separate sets of proceedings, there had been “the same failure of proper judicial supervision of executive action” at the appellate level, not just “isolated maverick decisions by first instance judges.”

Unconsummated agreements

The tribunal said quantum in the case posed “considerable difficulty” as there had been three accepted but “unconsummated” agreements to buy Aktau’s investment in the oil terminal in the late 2000s. The last of these was with Kulibayev’s company AKA Oil Trading and named a sale price of US$70 million.

Aktau considered these agreements “reliable indicators” of the value of its investments that supported its US$80 million claim. However, the tribunal said that “extrapolating an accurate assessment of quantum” from any of them was problematic, even with the assistance of experts from KPMG and BDO (for Aktau) and Navigant Consulting (for Kazakhstan).

For one thing, the tribunal noted the evidence of Sitki Ayan, the owner of Atkau, that the reality of business in Kazakhstan meant he could only sell to Kulibayev – who had successfully chased away rivals and had the company “in the grip” of litigation.

“The evidence shows that there was no ‘fair market’ […] in which ‘fair market value’ could meaningfully be ascertained,” the tribunal said. It also raised doubts over the “bona fide” nature of Kulibayev’s own offer to buy the terminal in light of Aktau’s portrayal of him as “a manipulative, unprincipled and deceitful businessman”.

In the end, the tribunal said none of these offers could be taken “at face value” and favoured a much earlier, 2003 valuation of the oil terminal as worth US$11.4 million. It explained that it had added sums for the railway track and cars and proceeded on the basis that Aktau’s expropriated investments were « a package, » the value of which had increased briefly then declined because of their poor financial performance.

It also took into account fluctuations in the economy and the price of oil that had “knock-on” effects on the value of oil-related service industries.

The final damages award reflected Aktau’s sunk costs, with some inflation to reflect repairs and improvements it had made to the terminal.

While normally ICSID tribunals observe “the losers pays” principle in relation to costs, the tribunal said in this case it would not because of the “broad allegations of corruption” Aktau had made against the Kazakh judiciary, with “no probative evidence.”

It also noted that most of the “voluminous” court documents on which Aktau had relied had been collected by, Kazakhstan’s lawyers, who naturally had “greater clout” in dealing with Kazakh court officials.

It declined to award a “success fee” of 5% of the damages, interest and costs requested by Derains & Gharavi.

In passing, the tribunal revealed details of another arbitration brought by one of the potential buyers of the oil terminal, Hawkinson Capital Incorporated, against Ayan’s company SOM Petrol Ticaret, for failing to transfer the promised shares. This case went to LCIA arbitration and ended with a US$20 million award in Hawkinson’s favour delivered by sole arbitrator W Laurence Craig in 2009.

Aktau’s counsel reacts

Speaking to GAR today, Gharavi said that arguing against Kazakhstan is always a challenge “because of the legal spin it gives to its expropriations and the quality of lawyers it hires to defend it” – and this case was “no exception”.

He adds that it was refreshing for him and his co-counsel Ziya Akinci to see “a tribunal of such experienced arbitrators render an award so promptly” [less than six months after the hearing]. It is also hard to find a “sharper, more prepared and humbler arbitrator than Ian Binnie QC, who was tribunal president, » he said.

Gharavi won US$125 million plus interest for Turkish investor Rumeli against Kazakhstan in 2008 and has recently won US$39 million for oil company Caratube after the claim was rejected on jurisdictional grounds the first time round. He is currently fighting a further claim against the state brought by investors in a pharmaceutical business.

In the Aktau case, Kazakhstan was represented by a team from Reed Smith in London led by partner Belinda Paisley and by barrister Christopher Harris of 3 Verulam Buildings, who both have a long track record of acting for the state. Harris declined to comment on the award, which has yet to be published by ICSID.

The case saw an early challenge to Hanotiau by Kazakhstan on the basis of his involvement in the Rumeli case, which the state said involved similar issues of facts of law. The challenge was rejected by his co-arbitrators in 2015, with the case proceeding to a week-long hearing in Paris in March and April this year« .

« Aktau tribunal considers « similar fact evidence » »

« The tribunal in the Aktau award refused to be swayed by “similar fact evidence” alleged to show a propensity by Kazakhstan to expropriate foreign investments through its courts.

An early discussion in the ICSID award dispatched to the parties yesterday concerns the relevance of such evidence. This was in light of the claimant Aktau Petrol’s submissions that the expropriation of its investments followed (in the tribunal’s words) “a well worn pattern of mistreatment of foreign investors who initiate and grow businesses in Kazakhstan, only to be deprived of their investments by unscrupulous Kazakh businessmen connected to the president, Nursultan Nazarbayev.”

According to Aktau a “signature element” of these deprivations was the “use of the machinery of a compliant, complicit and corrupt judiciary. »

The tribunal cited Hamid Gharavi of Derains & Gharavi, counsel to Aktau, who said in his opening submissions that his case concerned the « modus operandi » of Kazakhstan and « its oligarchs and elite ».

They control « everything » including commercial matters, Gharavi alleged – and « use the judiciary as their puppets, tools.”

To establish Kazakhstan’s liability for the expropriation of its investments, Aktau drew parallels with the ICSID case of Rumeli Telekom v Kazakhstan, in which the state was held responsible for depriving a Turkish telecoms investor (also represented by Gharavi) of a major financial investment and ordered to pay US$125 million compensation. That award came out in 2008.

Aktau also filed background, information, reports and international commentary which it said further showed that Kazakhstan regularly expropriates foreign investors in this way.

However, the tribunal including Ian Binnie QC, Bernard Hanotiau and Daniel Bethlehem QC was not swayed. “Similar fact evidence presupposes that entities or personas alleged to be guilty of misconduct on one or more occasions are likely to have misconducted themselves in the case under consideration. It is ‘propensity’ evidence,” it said.

“The danger is that the prejudice created by ‘propensity’ evidence generally outweighs any probative value. People ought not to be assumed to be guilty of a particular offence simply because they have been convicted of other offences. Similar fact evidence that amounts to little more than an allegation of pre-disposition to a certain type of bad conduct does not prove that an individual misconducted himself or herself on the present occasion.”

Such evidence is all the more problematic when it relates to “the numerous individuals who individually and collectively act on behalf of a state,” the tribunal said.

The tribunal added that it could not “infer » that Kazakhstan was liable for misconduct based on the tribunal’s decision in Rumeli or the Aktau’s « generic allegations of misconduct by Kazakh officials in even less comparable situations involving different investors.”

It distinguished Rumeli on the basis that the Kazakh state actor found to be primarily at fault in that case was a state organ called the investment committee – which was accused of impropriety but exonerated by the courts. In Aktau, in contrast, the courts were alleged to be to blame for the expropriation.

This distinction had already been made in response to proceedings brought by Kazakhstan to disqualify Belgian arbitrator Bernard Hanotiau early on in the case, it noted.

The tribunal went on to offer the view that Aktau’s evidence regarding Kazakhstan’s alleged propensity to expropriate was in fact not “similar fact evidence” at all as the factual situations it raised were quite different even though the outcomes (the seizure of foreign investments) were the same.

Gharavi had acknowledged this when he told the tribunal, « Every time they do it differently. The fact pattern of each case is different ».

To the tribunal, this defeated the evidence’s value. « The essence of similar fact evidence, as the name implies, is similarity of facts not outcomes, » it said.

Similar fact evidence is occasionally raised in criminal court trials in the UK and other jurisdictions, when it is alleged that a defendant had a propensity to commit a certain type of offence in a certain way, raising the likelihood of guilt in the case before the court. However, there is normally vehement debate as to whether the probative value of the evidence is outweighed by its prejudicial effect.

Speaking to GAR, Gharavi explained there are some actions by states that can only be proved by « circumstantial evidence » and that referring to the findings of other investment tribunals can be helpful, especially where the « same players » are involved [in Rumeli, the expropriation supposedly benefitted Timur Kulibayev, the son-in-law of president Nursultan Nazarbayev; while in Aktau the beneficiary was his father, Askar Kulibayev].

« In this case, the tribunal did not believe such evidence to be probative or that it needed it to make findings that Kazakhstan illegally expropriated Aktau’s investments and denied it fair and equitable treatment, » Gharavi says.

Kazakhstan was represented in the case by a team from Reed Smith in London led by partner Belinda Paisley and by Christopher Harris of 3 Verulam Buildings. Harris declined to comment ».