IN one of the previous write-ups published on 15 January 2019 in The Daily Star, I have discussed about the rigidity and partisanism in the arbitration law and panels of the Centre for the Settlement of Investment Disputes (ICSID). In this write-up, I intend to exemplify and demonstrate how this pro-investor biasness is blatantly pursued in actual arbitrations to protect corporate interest at the cost of Bangladesh's legitimate interest.
A dispute between an Italian company Saipem and Petrobangla arose from a pipeline construction contract, the completion of which was delayed. Saipem claimed compensation from Petrobangla for the additional time and works required for completion, which was rejected. Saipem resorted to the International Chamber of Commerce (ICC) arbitration, which the High Court Division (HCD) of the Supreme Court of Bangladesh declared void for the lack of jurisdiction and procedural irregularity. Saipem then submitted the dispute to the ICSID under BIT between Bangladesh and Italy 1990, claiming that the non-payment of compensation by Petrobangla constituted an act of indirect expropriation of its FDI under Article 5(2) of the BIT. The ICSID arbitrated on this Saipem's claim. Article 5(2) states that 'Investments of investors of one of the Contracting Parties shall not be directly or indirectly nationalised, expropriated, requisitioned or subjected to any measures having similar effects in the territory of other Contracting Party'. The ICSID tribunal held that the HCD decision revoking the ICC tribunal's authority deprived Saipem of the financial benefit of the ICC award constituted 'measures having similar effects' of indirect expropriation under Article 5(2) [ICSID Case No. ARB/05/7, award on merit of 30 June 2009, paras. 122, 124, 153].
The ICSID tribunal never questioned at the jurisdictional hearing that the Bangladesh HCD lacked jurisdiction and competence to revoke the authority of the ICC tribunal. The HCD decision could at best arguably be regarded as a denial of natural justice. But the ICSID tribunal interpreted the HCD decision as indirect expropriation, not the denial of justice, which cast considerable doubts as to the merits and neutrality of the award. Challenging the jurisdiction of the host State's domestic court would have been outrageously untenable in law. Instead, the ICSID tribunal cunningly resorted to an expansive extrapolation of indirect expropriation, the dubious nature of which is evident from the following legal points.
The FDI law requires an expropriation to have some specific legal elements. The loss or deprivation of ownership, control, and management of a FDI is the central requirement for it to be considered expropriated. Even if it is conceded in fairness that the HCD order inflicted financial loss on Saipem, under no stretch of legal mind that such financial loss alone could have 'similar effects' of indirect expropriation without taking away the ownership, control, and management of the FDI, which remained fully with Saipem. The ICSID tribunal itself knew this indispensable legal requirement of expropriation. In CMS Gas Transmission Co v Argentina, the ICSID tribunal rejected the claim of the existence of expropriation, direct or indirect, because the investor had the full control and ownership of the investment. It held that expropriation could occur only when an investor lost control over the entire FDI and rejected the claim of partial or indirect expropriation [ICSID Case No. ARB/01/8, award of 12 May 2005, paras. 263-64].
Other FDI dispute settlement bodies also developed the identical legal requirements for expropriation. In Tippets, Abbett, McCarthy, Stratton v TAMS-AFFA Consulting Engineering of Iran, the Iran-US Claims Tribunal maintained that 'constructive expropriation' occurs when the owner is deprived of ownership right and that such deprivation is not merely ephemeral [(1985) 6 Iran-US Claims Tribunal Reports 219, 225]. The European Court of Human Rights found the existence of expropriation only where the investor suffered the substantial deprivation of the right of ownership and benefit of the investment [Handyside v UK (1976) 24 ECHR Ser A, 5; Poiss v Austria (1987) 117 ECHR Ser A, 86]. Since the legal effect of both direct and indirect expropriation is the same, the arbitral tribunal in Biloune and Marine Drive Complex Ltd v Ghana Investment Centre and Government of Ghana held that there should be no distinction drawn between direct and creeping expropriation in their constituent elements [(1993) 95 ILR para. 75]. This requirement has been a long held established legal position [OECD Working Paper on Indirect Expropriation of Investment 2004/04, September 2004)].
There is no clarification or rules of statutory interpretation of the term 'measures having similar effects'. Nor is there any definition of measures equivalent to indirect expropriation and statutory clarification of its meaning or scope in the existing law to determine the inductive and deductive elements of indirect expropriation. Certain regulatory measures to protect national and public interests in host States may appear similar to expropriation, but these measures are not expropriation. The host States retain the full controlling authority over corporate taxation and can intervene on the ground of the environment, health, occupational safety, human rights, and industrial relations [High Court of Australia, Murphyores Inc v Commonwealth (1976) 136 CLR 1]. The above authoritative judicial interpretations including the ICSID arbitration itself show that there was no direct or indirect nationalisation, expropriation, or requisition of Saipem's FDI by Bangladesh. The nexus between domestic judicial order and indirect expropriation established by the ICSID tribunal in Saipem case is a far-fetched inference and is contradictory to the established legal requirements of indirect expropriation, which is the finality in the absence of an appeal mechanism to correct or redress such an arbitrary construction of a BIT provision.
Some aspects of the Niko arbitration have already been covered in a piece in The Daily Star on 20 November 2018. The ICSID tribunal's pro-investor bias is highlighted here. Niko's flawed drilling the Chattack gas field caused two blowouts on 7 January and 24 June 2005 inflicting extensive damage to the gas wells, human lives, and the surrounding environment. There was ample tangible evidence of these damages resulting from Niko's operational failure and inappropriate casing design. Niko was responsible to compensate for the damages. But Niko ignored Petrobangla's compensation claim in a Bangladesh Court in 2008 and requested the ICSID in 2010 to arbitrate its claims that Niko had no liability for any damages caused by the blowouts, and that Petrobangla pay its arrear gas bill. The ICSID arbitral award exonerated Niko of any responsibility for the blowouts and damages caused and ordered Petrobangla to pay its arrear gas bill with interest compounded annually. Petrobangla requested the ICSID tribunal in 2015 to decide that 'the outstanding amounts under the Payment Claim Decision will be payable … only after all issues regarding Niko's liability are resolved', which was rejected [ICSID Cases No. ARB/10/11 and No. ARB/10/18, award of 14 September 2015, paras. 43, 167. The ICSID arbitrators totally avoided the evidence presented of Niko's negligence and flawed drilling resulting in two major uncontrollable gas field blasts and damages. Instead, they concentrated solely on the failure of Petrobangla to pay its outstanding gas bills to Niko.
These two ICSID arbitral awards demonstrate that its arbitrators are overly committed to protect corporate interest, which is paramount, regardless of the deprivation of the competing interest of host states, which is peripheral. The ICSID tribunal's interpretation of 'indirect expropriation' in Saipem is legally untenable by its own standard. It covered up Niko's liability of damages for its negligent act in absolute insensitivity to the legitimate interests of Bangladesh and its laws, jurisdiction, environment, and public welfare in the Niko arbitration. The sole objective was to maximise corporate profits. The Saipem and Niko arbitrations are not isolated examples but the operational narratives of the ICSID awards expose their inherent bias in which arbitrators typically adopt an expansive investor-friendly interpretation (Harten Study 2012). It is this relentless pursuit of dogmatic neo-liberalism that lies at the root of worldwide backlash against the ICSID arbitration, falling prey on its own sword.
THE WRITER IS PROFESSOR OF LAW AND DIRECTOR, HIGHER DEGREE RESEARCH (PHD), MACQUARIE LAW SCHOOL, MACQUARIE UNIVERSITY, AUSTRALIA.