Research Report
Ⅰ. Background and Purpose
□ISD has been a hot issue Korea due to the fact that ISD is provided in the Korea-US FTA and that Lone Star Funds, a U.S. Fund, has filed an ICSID Arbitration against ROK.
□The Lone Star case is based on ROK-Belgium BIT, because, though Lone Star Funds is a US Fund, it made the investment in question through Belgian Company. The subject matter is alleged to be unfair treatment of ROK Government against Lone Star Fund.
□This analysis of 4 cases is expected to provide meaningful guideline for the ISD, both in jurisdictional and substantial issues.
Ⅱ. Main Contents
□This paper analyses 4 BIT-based investment arbitration cases - Vladimir case, SCB case, Swisslion case, and Bosh case. While Vladimir case and SCB case were concluded for the lack of jurisdiction of the tribunals, Swisslion case and Bosh case were settled by the awards on merits, the decisive issue of which was the breach of F&E standard.
□The former two cases provide, therefore, useful informations on the jurisdictional issues, while the latter two cases give meaningful guidelines for how for the host country to take measures against foreign investors.
□In Vladimir case, the reasons for the decision of the lack of jurisdiction were as follows.
○First, the status of claimant as shareholder of the company, does not meet the criteria of the narrowly defined investment of the Belgium-Russia BIT. It provides that the term “investment” also means indirect investments made by investors of one of the Contracting party in the territory of the other Contracting party by “intermediary of investor of a third state” (emphasis added). In Vladimir case, the direct victim was Belgian company, through which the claimant made indirect investment as shareholder. Therefore, the investment was made by intermediary investor of claimant’s state, not that of third state. The arbitral tribunal, rejecting the claimant’s argument of interpretation that the clause should be interpreted as including ipso facto the investment through the intermediary of the investor’s nationality, provided that the claimant did not meet the requirement.
○Second, the dispute is not subject to arbitration under the arbitration clause of the Belgium-Russia BIT. The arbitration clause provides that “only disputes concerning the amount or mode of compensation paid under Article 5 (expropriation) may be subjected to arbitration”. The tribunal stated that the clause should not be interpreted to include the present case, which included the (ⅰ) disputes concerning any of the provisions of the BIT other than Article 5, and (ⅱ) disputes concerning whether or not an act of expropriation actually occurred under Article 5.
□The tribunal in Vladimir case also expressed the view that it was the intention of the contracting parties that the most -favoured national treatment of Belgium-Russia BIT might not be applied to encompass arbitration clause.
□ As the basis of the decision on the lack of jurisdiction was the special terms of the BIT, this case may not be deemed a change of the precedents in international investment arbitration cases. It may be inferred from the case, however, that the careful analysis of the terms of the BIT may lead to the decision which is distinguished from the precedents.
□ In SCB case, a new issue on jurisdiction was dealt with. The issue was whether or not the role of the claimant in the course of investment concerned meets the requirement of the “investment of investor” provided in the arbitration clause of the U.K.-Tanzania BIT. The tribunal expressed the view that the preposition “of” required that the role of investor was more that “owning” or “holding”. Based on this view, the tribunal concluded that the claimant did not reach the standard. It may be inferred that a new issue other that the generally raised issue of meaning of investor or investment, may be raised in the future investment arbitration cases in which the role of indirect investor claimant is not active.
□In Swisslion case, the central issue was whether there had been breach of share-purchase agreement. As to the conflicting perspective between the parties, the tribunal stated that due to the ambiguities in the terms of the agreement, the conflicting perspectives of the parties may be considered the result of good faith interpretations. Based on this view, the tribunal expressed that the judgement of the Macedonian court on the breach of the agreement and the acts of Macedonian Government related to the judgement did not offend F&E standard.
□The tribunal stated, however, that the following 3 acts of the Macedonian Government constituted the breach of F&E obligation.
○First, the lack of timely response of the Mecedonian Ministry to successive inquiry by Swisslion DOO of whether its investments does meet the agreement, constitutes a breach of the F&E standard.
○Second, the measures on Swisslion’s share-holding taken by the SEC and related procedural defect are in breach of the F&E clause.
○Third, the act of the Ministry of the Interior Affairs on the criminal investigation against Swisslion DOO does not meet the F&E standard. The Minster of the Interior Affairs published the launching of the criminal investigation, which was widely reported through mass-media, it did not make equivalent open statement. The unfair action caused severe harm to the celebrity and business of the claimant.
□In Bosh case, it was argued by the claimant that the respondent breached the F&E by the act of the Ukrainian court which accepted the fresh proceedings in direct conflict with the previous decision on the lack of jurisdiction by the same court. The claimant’s argument was based on the breach of the res judicata principle. The decision on jurisdiction did not violate the res judicata principle under applicable Ukrainian law, because the Ukrainian Code of Commercial Procedure provides that res judicata does not attach to the dismissal of a statement of claim in a case that did not reach the stage of merits. The claimant argued that the Ukrainian law was not relevant here and international law was applicable. The tribunal accepted that the res judicata principle is a general principle of law and breach of the principle may amount to breach of F&E standard. But, the tribunal stated that in order for the decision to be in breach of F&E, the decision should offend the sense of judicial propriety. The fact that Ukrainian law recognizes res judicata only to the final judgments, rather than all procedural decisions, does not at all offend a sense of judicial propriety. It was also pointed out that Ukrainian law was applied in fair and non-discriminatory manner. For these reasons, the tribunal concluded that decision of the Ukrainian court did not breach F&E.
□The award of the Bosh case also expressed the following rules on international investment arbitration.
○First, even if there is no mention on applicable law in the relevant BIT, the BIT is applicable law, if the claims are based on the reference to the substantive standards of protection in the BIT, and that the defense relied on the same standard.
○Second, in order for the independent institution’s conduct to be attributable to the State, it must be established both: (1) that the institution is empowered to exercise elements of governmental authority; and (2) that the conduct of the institution relates to the exercise of that governmental authority.
○Third, in order to claim that the breach of contract obligation is escalated to the breach of the umbrella clause in BIT, the claimants are required to have their rights and obligations under the contract determined by the applicable dispute settlement forum under the contract.
Ⅲ. Expected Effect
□The SCB case shows that the term “investment of investor” in arbitration clause of BIT can be used as a useful new weapon for jurisdictional objection in case of indirect investment.
□The Swisslion case and Bosh case provide meaningful guidelines of how a host country regulates foreign investor without the breach of F&E treatment clause.