Adams v. Slovakia – Investment Arbitration and Denial of Justice- updated

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Introduction

While I was away in Malibu, enjoying the sun and eating an american cheeseburger on daily basis, an interesting press release came from the Slovakian Ministry of Finance soon followed by an article in Global Arbitration Review (“GAR”). Very briefly, the press release stated that Slovakia exercises its right under the Treaty between the United States of America and the Czech and Slovak Federal Republic Concerning the Reciprocal Encouragement and Protection of Investments, signed on 22 October 1991 (“USA/Czechoslovakia BIT”) to deny benefits of the USA/Czechoslovakia BIT to Adams & Co. Inc. (“Adams”). As the press release clarifies, Adams filed a Notice of Dispute on 14 April 2014 alleging that Slovakian domestic legal proceedings lasting more than 15 years constituted denial of justice and therefore violated the USA/Czechoslovakia BIT. Interestingly, the Slovakian Ministry of Finance is acting without an external council at this point (at least to my knowledge) and in states that:

Slovak Republic understands that Adams is not engaged in substantial business activities in the United States and is controlled by a national of a third country. Accordingly, the Slovak Republic yesterday sent a formal letter to Adams exercising its right to deny the benefits of the Treaty to Adams.

And in fact, the USA/Czechoslovakia BIT contains a denial of benefits clause in art. I (2). Now, it can be discussed whether Slovakia really had to exercise this right before the proceedings themselves (see a nice blog on Kluwer) but I guess its better to be safe than sorry. Moreover, according to art. VI (3) of the USA/Czechoslovakia BIT, the cooling-off period is 6 months so it is more or less over by now.

The true facts of the case seem to be blurred because I have not found anything specific in Slovak sources (*correction- there is one article) and therefore I have to rely on what GAR “understands” (could’ve been worse I guess). The 15 year long judicial dispute (started in 1999) is supposedly between Adams, a consulting firm, and VSŽ Oceľ, which is a steel company acquired by US Steel Košice. The merits of this dispute pertain to several breaches of a confidentiality agreement by VSŽ Oceľ and the damages claimed by Adams amount to EUR 9.6 million (supposedly with interest it should today be EUR 36 million). What is very important is that during these 15 years, the following was dealt with by the Slovak courts of the lowest instance: 1- a challenge to the claimant’s standing (it took 3 years to resolve), 2- challenge to the validity of contract (withdrawn after 4 years), 3- a territoriality objection and 4- a complaint to the Constitutional Court of Slovakia for the violation of due process, which was supposedly upheld but the civil court proceedings still did not have a hearing on the merits of the dispute. Unfortunately, I did not manage to obtain (“obtain”= unsuccessful 30 minutes on Google) the decision of the Constitutional Court and I would be happy if any of my Slovak colleagues shared it with me.

Based on these limited facts, I will objectively compare the situation of Adams v. Slovakia to previous cases, where claimants tried to invoke breaches of due process in investment treaty arbitration. Also, the positions of both Slovakia and Adams in these (potential?) proceedings.

Positions on Jurisdiction

Starting with jurisdiction and I will be very short on this because of the limited information I have and because I in fact wanted to focus on the merits of the claim. Thus firstly, whether there is an investment: On the one hand the USA/Czechoslovakia BIT contains a very broad definition of investment including the all-encompassing “claims to money category” and “any right conferred by law or contract“ in its art. I. However, on the other hand, if Adams goes on to characterize its investment as merely a “consultation agreement” and it is in fact going to be ICSID arbitration, Slovakia could make an argument based on the double-barreled jurisdictional test. Slovakia could argue that Adams did not undertake any investment risk or did not contribute to Slovakia’s economic development. Secondly, whether Adams is an investor: hard to say really. Although it is a company registered in the USA, Slovakia already claims that it has no substantial business activity in the USA. Thirdly and finally, whether Adams can establish a prima facie violation of the USA/Czechoslovakia BIT: I will be so bold to say yes. As I write below, if established, violations of due process can arise to violations of fair and equitable treatment (“FET“) under an investment treaty. Once there is more information available, I will probably write a blog on the jurisdiction of this case itself but for now, anything more than I stated would be based on water.

Positions on Merits                            

I will begin this part with quoting prof. Vandevelde from 2010:

Although numerous tribunals have recognized that a denial of justice violates the fair and equitable treatment standard, to date no claimant has been successful in raising a denial of justice claim under a BIT.” (K. Vandevelde, A Unified Theory of Fair and Equitable Treatment, International Law and Politics, Vol. 43:43, p. 89)

This statement is today spoiled only by Teco Guatemala v. Guatemala, which has in fact held that violations of fundamental principles of due process in turn breached the principle of fair and equitable treatment contained in the Dominican Republic-Central America FTA. This case is however factually totally unrelated to Adams v. Slovakia since its crux lied in the process of setting electricity tariffs by Guatemala’s electricity regulator, which was not done pursuant to the existing regulations.

So the prospect for Adams is set and seems to be quite dark. But is it? The fact that the concept of FET includes the protection against denial of justice in judicial proceedings and against fundamental breach of due process is nowadays quite clear. Importantly, the new Canada-EU Trade Agreement in its art. 9 (2) clarifies that FET includes:

1. Denial of justice in criminal, civil or administrative proceedings;

2. Fundamental breach of due process, including a fundamental breach of transparency, in judicial and administrative proceedings;

3. Manifest arbitrariness;

4. Targeted discrimination on manifestly wrongful grounds, such as gender, race or religious belief;

5. Abusive treatment of investors, such as coercion, duress and harassment; or

6. A breach of any further elements of the fair and equitable treatment obligation adopted by the Parties in accordance with paragraph 4 of this Article

A nice piece has been written on this topic by Eric van Eyken on the Young ICCA Blog, where he inter alia stated that the list resembles the understanding of FET by NAFTA tribunals. Specifically, with regard to due process, one could look at Azinian v. Mexico where the tribunal pointed out in dicta that

a denial of justice could be pleaded if the relevant courts refused to entertain a suit, if they subject it to undue delay, or if they administer justice in a seriously inadequate way”. (Robert Azinian, Kenneth Davitian, & Ellen Baca v. The United Mexican States, ICSID Case No. ARB/97/2 (NAFTA), Award of 1 November 1999, par. 102)

It could also be helpful to include in this analysis the ELSI’s definition of arbitrariness as “a willful disregard of due process of law, an act which shocks, or at least surprises, a sense of judicial propriety” (United States of America v. Italy, ICJ Case, Judgment of 20 July 1989, par. 126). Or similarly the Waste Management v. Mexico award, which stated that a violation of FET involves

a lack of due process leading to an outcome which offends judicial propriety – as might be the case with a manifest failure of natural justice in judicial proceedings or a complete lack of transparency and candour in an administrative process.” (Waste Management v. Mexico, ICSID Case No. ARB(AF)/00/3, Award of 30 April 2004, para. 98)

Importantly, even art. II (6) of the US/Czechoslovakia BIT states:

Each Party shall provide effective means of asserting claims and enforcing rights with respect to investment, investment agreements, and investment authorizations.

This “effective means” standard has been held to be “distinct and potentially less demanding” when compared to denial of justice under customary international law (Chevron Corp. & Texaco Petroleum Co. v. Ecuador, Partial Award of 30 March, 2010, par. 244), i. e. ELSI’s definition. This would without doubt aid the claim of Adams.

All of these legal standards will surely be, when the right time comes, considered by the Adams v. Slovakia tribunal. However, today, most of the FET claims are related to actions of the executive and/ or the legislative branches of the governments, i. e. not domestic courts (UNCTAD on FET, p. 81). There is thus limited case law on what Adams presumably is going to  claim. From the known facts, the main (perhaps not the only one) wrong invoked in Adams v. Slovakia is going to be the long time, 15 years, in which no hearing on the substance of the dispute was conducted. In that regard, Jan de Nul v. Egypt award is the most relevant. In that case, Jan De Nul claimed a threefold violation of procedural denial of justice: 1- breaches of due process by the domestic courts (e. g. the domestic proceedings disregarded evidence favorable to it, joined of proceedings was done for dilatory purposes or appointed an additional non-independent panel of experts from the Ministry of Justice), 2- duration of the proceedings and 3- conduct of the “second panel” of experts in the domestic court.

With regard to the second – duration related – claim, it took the court of first instance 10 years to render a decision, which was in the end only 15 pages long but the tribunal held that it was “certainly unsatisfactory” but it did notrise to the level of a denial of justice” (Jan de Nul v Egypt, Award, 6 November 2008, par. 204). According to the tribunal, the reason for that was that the dispute itself was highly technical and involved extensive submissions and expert reports (Ibid). I cannot disagree because only the summary of the domestic proceedings and the opinions of the panels of experts on soil mechanics has almost 10 ages in the award. The “first panel” of experts in the domestic court received 14 submissions (!) and had 5 meetings with the parties.

What I conclude from Jan de Nul v. Egypt is that Slovakia could rely on this award by arguing that if 10 years for making a decision is not a violation of due process, 15 years is very similar to that. The problem with such an argument is that 10 years for actually making a decision is not the same as not having a hearing on the substance of the issue on the first instance for 15 years (provided, that these facts stand). Moreover, the Egyptian courts considered a technical issue regarding a dredging contract where damages amounted to USD 130 million. Again, the comparison with breaching confidentiality in the case of Adams v. Slovakia is highly problematic.

Therefore, if I was sitting on the actual tribunal, Jan de Nul v. Egypt is not a good analogy. The tribunal would have to apply the standard of “a willful disregard of due process of law, an act which shocks, or at least surprises, a sense of judicial propriety” from ELSI or perhaps more relevantly and similarly to Chevron, apply a lesser standard of “effective means” directly from the USA/Czechoslovakia BIT to the relevant facts. The latter standard should be given precedence in my opinion because it is a lex specialis. Why should a tribunal look to customary international law if the standard is clearly set forth in the particular investment treaty? And I do think that Adams could make a an argument that not having a substantive hearing for 15 years on a simple breach of confidentiality does not amount to “effective means” of judicial protection in light of art. II (6) of the USA/Czechoslovakia BIT.

An additional criterion, which has to be considered when invoking denial of justice in this context is the exhaustion of local remedies. If these are still effectively available, an internationally wrongful act cannot be invoked in investment treaty arbitration (Pantechniki v. Albania, ICSID Case No. ARB/07/21, Award, 30 July 2009, paras. 96-97; Jan de Nul v Egypt, Award, 6 November 2008, paras. 255–259). As my knowledge goes, a claimant in Slovak proceedings has the Constitutional Court to turn to in case of an undue delay in proceedings. That is the only remedy, which was (according to GAR) exhausted by Adams in 2009. I have not seen the decision of the Constitutional Court and thus I cannot independently state whether Adams’s situation was remedied sufficiently (that is- whether it was awarded sufficient damages). If not, one could still look to the European Court of Human Rights or file another complaint to the Slovak Constitutional Court if the delay is still ongoing. In any case, the domestic remedies seem to be exhausted and they should not bar Adams from exercising its rights under the USA/Czechoslovakia BIT.

Lastly, I have two more considerations that I wanted to include in this long blog post. First, what is the actual compensation that is asked for by Adams in these proceedings? The tribunal will not decide on the breaches of confidentiality that are the subject of domestic proceedings. Can the tribunal award damages for undue delay in proceedings? If yes, in what monetary value? Second, there has to be something else that is invoked by Adams in this case, it cannot only be an undue delay. The reason for this thought is the ongoing dispute between Eurogas and Slovakia, which was at first a dispute for the revocation of license  for talc mining. It however turned out to be a dispute about corruption, where a certain Slovak politician sold this licence to a firm “closely connected” to him.

Conclusion

It remains to be seen how Adams v. Slovakia plays out and a lot depends already on the nomination of each arbitrator. From my very brief analysis I can generally conclude that Slovakia can (if some facts provide to be true) have a good chance of bringing this case to its end in the jurisdictional phase. A bifurcation of the proceedings would thus be beneficial and cost effective. If however, it goes to merits, there is definitely a posssible claim to be made by Adams.

Slovakia will without doubt argue that a tribunal constituted of three private arbitrators is not a court of appeal for Slovakian courts. Alternatively, that Adams cannot just use arbitration as an additional remedy for the undue delay in domestic proceedings. However, arbitrations based on BITs are not merely opportunities for investors to resolve their disputes, they are also a “structure of global governance” whereby arbitrators are able to set certain benchmarks for states’ conduct (B. Kingsbury, S. Schill, Investor-State Arbitration as Governance: Fair and Equitable Treatment, Proportionality and the Emerging Global Administrative Law, NYU, Public Law & Legal Theory Research Paper Series Working Paper No. 09-46, p. 1). Pursuant to these bilateral investment treaties, international tribunals sit in judgment on domestic judicial misconduct (R. P. Alford, Ancillary Discovery to Prove Denial of Justice, Virginia Journal of International Law Digest Vol. 53, p. 128). Whether they like it or not, the sovereign states subjected themselves to this system. Especially those like Slovakia and USA by signing an investment treaty providing for art. II (6).

*Update on the Constitutional Court proceedings

Shortly after the publication of this post, I was sent the decision of the Constitutional Court rendered on 11 June 2009 under IV. ÚS 67/09-30 (Adams_ConCourt). The Constitutional Court decided that an undue delay of proceedings happened, due process under the Slovak Constitution and ECHR was violated and the complainant (Adams) is awarded EUR 2500 in damages and the costs of legal representation (Adams initially claimed a whopping EUR 300 000).

Since it is the best source of information, I will briefly summarise it. The prolonged proceeding has been caused by the following procedural motions and objections: territorial jurisdiction, impartiality of the judge, provisional measures, another impartiality objection, petition to change the claim, joinder on the respondent’s side, counterclaim (invalidity of the contract between the parties), objection to the standing of claimant and a petition to pay provisional costs of the proceedings. In all of these a decision was made, then appealed (twice, in some instances) and only then was there a final decision on these motions/objections.

Importantly, the Constitutional Court found that the dispute is not legally nor factually complex enough to justify the prolonged proceedings. It stated that the civil court was being “unfocused” and “ineffective” in resolving this dispute. Most notably, the final and binging decision on the provisional measure took 3 (!) years. And although the civil court was not legally restricted from deliberating on the substance of the case even during those 3 years, it did not do so.

written by Peter Plachy

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