A recent decision by the International Centre for Settlement of Investment disputes (ICSID) has confirmed that while reliance on a Bilateral Investment Treaty (BIT) is useful means for investors to protect their investment in a foreign country, that foreign country cannot always rely on the BIT with the same effectiveness.
A BIT is a treaty concluded between two states in which each state agrees to take certain measures to protect the investments made in that state by investors of the other state.
In the case of Spyridon Roussalis v Romania (ICSID case no. ARB/06/01) the tribunal held that the BIT concluded between Romania and Greece does not allow for a counterclaim by one of the States against an investor from the other. The BIT provided that “disputes between an investor of a contracting party and the other contracting party concerning an obligation of the latter under this Agreement, in relation to an investment of the former, shall, if possible, be settled by the disputing parties in an amicable way”. Failing such amicable resolution “the investor concerned may submit the dispute … to international arbitration”.
Emphasising the importance which the ICSID tribunal places on the agreement between the parties in exercising its jurisdiction to hear disputes, the majority of the arbitrators held that the reference to arbitration contained in the BIT did not encompass a counterclaim by the State. It therefore did not have jurisdiction to hear Romania’s counterclaim against Roussalis.
The matter involved the privatisation of a Romanian state owned entity, Continent SA. Continent SA was 70% owned by a Romanian government agency created to manage the privatisation of state owned enterprises (AVAS). AVAS concluded a privatisation agreement with Continent SRL. In terms of the privatisation agreement, Continent SRL would purchase AVAS’s shareholding in Continent SA and, in addition, was required to make a post-purchase investment in Continent SA of USD1.4 million over two years “from personal sources or sources attracted on its behalf”. As security for this post-purchase investment, Continent SRL pledged the shares it had purchased in Continent SA to AVAS.
Roussalis, as the sole shareholder in Continent SRL, alleged that the post purchase investment had been made and that thereafter Romania had taken a number of actions which amounted to an expropriation or substantial impairment of Continent SRL’s investment in Continent SA.
Roussalis alleged that Continent SRL had made the post purchase investment in kind by undertaking construction, making installations and purchasing fixed assets on behalf of Continent SA. Roussalis had obtained an expert valuation of these in kind contributions which valued them in excess of USD1.4 million. This valuation was approved by Continent SA’s shareholders and as a result Continent SRL was issued with additional shares in Continent SA to the value of this investment.
Romania alleged that the investments purportedly made by Continent SRL had not been made from sources attracted on Continent SRL’s behalf and Romania had sought to enforce the pledge of shares on this basis. Romania also sought to annul the shareholders’ resolution which approved the abovementioned share capital increase and issue of shares in Continent SA.
The ICSID tribunal dismissed all of the claims brought by Roussalis and found that Romania was justified in acting in the way that it did as there was no objective evidence to show that the investment was made by Continent SRL “from personal sources or sources attracted on its behalf”. Roussalis had simply used Continent SA to make the investments.
Romania counterclaimed against Roussalis for the enforcement of the shares pledged, damages arising out of the misappropriation of Continent SA’s funds and for a declaration that the resolution to increase the share capital of Continent SA was groundless. The misappropriation allegedly occurred as a result of Continent SA leasing a warehouse to Continent SRL rent free, converting buildings to a personal residence for Roussalis, Roussalis through his group of companies inflating the invoices for the in kind investments and for the levying of consultancy fees by one of Roussalis’ companies for services which were never provided.
The ICSID tribunal found that it did not have jurisdiction to hear the counterclaim because the BIT did not allow for claims by one State against investors of the other.
Although this decision precludes a counterclaim by a state against an investor in terms of the dispute resolution clause of some BITs, the investor is only shielded from the jurisdiction of ICSID and the state will still be able to enforce its rights through an appropriate court.
Matthew Clark is an associate at Norton Rose SA.
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