Turkey: Investor vs. State Disputes Under ECT & Turkey’s Track-Record

The world's constantly growing energy demand and energy investments, requiring substantial capital and long-term commitments, which can be easily affected by political, legal and environmental changes, inevitably give rise to disputes between investors and the host states of investments. This is almost exactly why the Energy Charter Treaty (the "ECT")1 was signed in the 1990s. The ECT has an important role in international law. Its purpose is to establish an international legal framework, with a view to promote long-term cooperation in the energy field, on the basis of complementarity and mutual benefits, in accordance with the objectives and principles of the European Energy Charter. To date, 51 states, including Turkey,2 have signed the ECT and 47 of them3 have ratified it. With this large number of ratifying states under its umbrella, the ECT has the widest geographical scope in the field of energy investments.

I. Dispute Resolution under the ECT

The ECT stipulates in detail alternative dispute resolution methods for different types of disputes. When the ECT was negotiated, some of the relatively less developed countries did not have sufficiently developed local judicial systems and, for this reason, the more developed countries had concerns about the domestic courts' neutrality, professional competence and efficiency in these less developed countries. By providing alternative means of dispute resolution before international tribunals, the ECT contributes to increased confidence of investors. This is of particular relevance in the energy sector, as disputes may often be very complex and involve extremely large claim amounts.4

Although the ECT sets forth different resolution methods for different dispute types5, there are only two forms of binding dispute resolution:

  1. State vs. State arbitration, for all disputes under the ECT (excluding competition disputes and environmental disputes)
  2. Investor vs. State arbitration for investment disputes

In this article, we will focus on the dispute resolution system for investment disputes between investors and states.

II. Investor vs. State Disputes

Article 26 of the ECT provides the right to file a lawsuit against the host country, if the host country breaches its obligations arising from the ECT's investment promotion and protection related provisions (Part III of the ECT). If a dispute is not related to Part III of the ECT (e.g. a dispute arising from an investment in capital markets), Article 26 will not apply.

(a) Prior Consultations

Disputes between a contracting state (the host country) and an investor from another contracting state regarding the investment will be settled amicably, if at all possible. Both parties have three months for this consultation. If the parties cannot settle the dispute within this period of time, only the investor (not the contracting state) has the right to move on to the next stage.

(b) First Round of Selection

If settlement negotiations between the state and the investor fail, the investor will have three alternatives. The investor may refer the dispute in relation with the state's breach of its obligations regarding the promotion and protection of investment to:6

  1. the state's civil or administrative courts;
  2. any previously agreed dispute resolution procedure; or
  3. international arbitration.

(c) Second Round of Selection

If an investor chooses to refer the dispute to international arbitration, the applicable article is Article 26/4 of the ECT, setting forth three alternative platforms:

  1. The International Center for Settlement of Investment Disputes ("ICSID")7, if the investor's state and the host country are both parties to the Convention on the Settlement of Investment Disputes (the "ICSID Convention"). If only one of them is a party to the ICSID Convention, the investor can apply to ICSID under the rules stipulated in the Additional Facility for the Administration of Proceedings by the Secretariat of the Center.8
  2. Arbitration with a sole arbitrator or an ad hoc arbitral tribunal, established under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL).
  3. Arbitration under the Arbitration Institute of the Stockholm Chamber of Commerce (SCC).

(d) Contracting States' Unconditional Consent for International Arbitration and Exceptions

Under Article 26/3 of the ECT, each contracting state gives its unconditional consent for submission of a dispute to international arbitration. There are two exceptions to this unconditional consent:

  1. The states listed in Annex ID of the ECT do not provide their unconditional consent, where the investor has previously submitted the dispute to another dispute resolution forum under Article 26/2/(a) and Article 26/2/(b).9
  2. The states listed in Annex IA of the ECT do not provide their unconditional consent in relation to disputes arising within the scope of the last sentence of Article 10/1:10
"Each Contracting Party shall observe any obligations it has entered into with an Investor or an Investment of an Investor of any other Contracting Party."

As Turkey is one of the states listed in Annex ID, investors that previously presented their claim before Turkish courts, arbitral tribunals or any applicable previously agreed dispute resolution method cannot refer their disputes to international arbitration.

(e) Applicable Law – Finality of Awards – Enforcement of Awards

A tribunal, established under Article 26/4, will resolve the dispute in accordance with the ECT's provisions, applicable rules and the principles of international law.11 Arbitral awards, which may also include decisions on interest, are final and binding.12 Under Article 26/5/(b), any arbitration under Article 26 will, at any party's request, be held in a state that is a party to the Convention on Recognition and Enforcement of Foreign Arbitral Awards of 1958 (New York Convention).

III. Exemplary Cases

The Energy Charter Conference Secretariat currently has record of over 30 investor vs. state cases brought to international arbitration.13 The first case under the ECT's dispute resolution methods was filed in April 2001. AES Summit Generation Limited brought a dispute against the Republic of Hungarybefore ICSID, due to an alleged breach of Article 13 of the ECT. The dispute arose from an electricity sale agreement and the claimant sought USD 300 million.

In an ICSID case between Plama Consortium Limited and the Republic of Bulgaria that arose from an oil refinery investment, the arbitral tribunal decided that Article 17/1 of the ECT14 provides the right for states to deny the advantages of the ECT for investors, which, despite having the nationality of another contracting state, does not conduct substantial business activities in its home country (so-called mailbox companies) and which are in fact owned or controlled by nationals of non-contracting states. The controversial conclusion in the Plama decision was that, in order for Article 17/1 to apply, a contracting state must exercise its "right to deny" in advance of a mailbox company making an investment in its territory and, if it does not, it may not be able to deny it later.

In an SCC case between Nykomb Synergetics Technology Holding AB and the Republic of Latvia, which arose from an electricity sale agreement, the Swedish investor in a Latvian generation plant claimed that Latvia had unlawfully discriminated against it, by creating a tariff difference between Latvian generators and itself. The tribunal decided that Latvia could not explain the reason for this difference and had therefore breached the ECT's non-discrimination provisions. As a result, Latvia was ordered to pay compensation and the invertor's costs incurred in connection with the arbitration.

In another ICSID case between Azpetrol International Holdings B.V., Azpetrol Group B.V., Azpetrol Oil Services Group B.V. and the Republic of Azerbaijan in connection with oil and gas distribution, trade storage and transportation enterprises, the Dutch holding companies claimed over USD 300 million under the ECT. This case involved issues concerning:

  1. whether local investors are allowed to sue their own state in international proceedings through an offshore holding company; and
  2. how corruption allegations affect an investor's right to bring ECT claims.

The tribunal concluded that the parties had reached a binding settlement, that there was no legal dispute between the claimants and the respondent and that, consequently, it had no jurisdiction to hear the claim.

Filing an international arbitration claim is the last resort for investors. However, the existence of this alternative forces contracting states to satisfy their obligations under the ECT and encourages investors to make more new investment.

IV. Turkey's Track-Record

There have been four ICSID cases initiated by investors against Turkey, under the ECT. Three of them have been concluded. The three concluded cases are closely related and borne out of one action, i.e. expropriation of investors' assets by Turkey.

(a) Libananco Holdings Co. Limited ("Libananco")

In the ICSID case15 with a claim amount of USD 10 billion, the Greek Cypriot company Libananco filed expropriation claims under the ECT. This claim was related to the seizure of shares of Çukurova Elektrik A.Ş. (ÇEAŞ) and Kepez Elektrik Türk A.Ş. (Kepez), the majority shares of which were allegedly ultimately owned by Libananco. According to Libananco, Turkey seized these companies' shares for political reasons, while, according to Turkey, these shares were seized for legal reasons. Turkey denied Libananco's "investor" status. In August 2011, the tribunal decided that it had no jurisdiction over the dispute, since Libananco did not prove that it owned the shares in ÇEAŞ and Kepez.16

(b) Cementownia "Nowa Huta" S.A.

In the ICSID case17 with a claim amount of USD 4.6 billion, the Polish company Cementownia initiated arbitration due to the seizure of ÇEAŞ's and Kepez's assets and the termination of two long-term electricity concession agreements of these companies. Turkey denied Cementownia's "investor" status as it did in the Libananco case, while Cementownia claimed that it acquired the shares prior to Turkey's action. In the award of September 2009, the tribunal dismissed the case in its entirety on the ground that Cementownia failed to prove that it owned or controlled an investment, in accordance with the ECT and that Cementownia's claim was fraudulent and was brought in bad faith. Cementownia was ordered to pay Turkey's legal fees, expenses and arbitral costs.18

(c) Europe Cement Investment and Trade S.A.

This ICSID case19 with a claim amount of USD 3.8 billion was very similar to Cementownia case. Turkey challenged the tribunal's jurisdiction, denying Europe Cement's investor status and Europe Cement could not prove its ownership over the shares. In the award of August 2009, the tribunal dismissed the case in its entirety due to lack of jurisdiction.20

(d) Alaplı Elektrik B.V.

In this ICSID case21 with a claim amount over USD 100 million, the Dutch company Alaplı had claims arising from an electricity generation concession agreement against Turkey under the ECT and the Bilateral Investment Treaty between the Netherlands and Turkey. The power plant, subject to the concession agreement, was never constructed. The tribunal rendered an award in July 2012. After the award, Alaplı applied for an annulment of the award. The annulment proceeding is still pending.

V. Concluding Remarks

As Turkey is a developing country and a natural bridge between energy-rich eastern countries and energy-demanding western countries, there will be many more energy investments in Turkey. Although the parties mostly conclude agreement(s) (i.e. bilateral investment treaties, intergovernmental agreements, and host-government agreements) for each energy project, issues that are not stipulated under these agreements will be governed by the ECT, as the ECT is part of Turkish legislation.

The ECT was signed on 17 December 1994 in Lisbon and entered into force on 16 April 1998.

2 Turkey signed the ECT on 17 December 1994 and ratified it on 6 February 2000.

3 Australia, Belarus, Iceland and Norway have not yet ratified the ECT.

4http://www.encharter.org/fileadmin/user_upload/Publications/ECT_Guide_ENG.pdf: The Energy Charter Treaty: A Reader's Guide, p. 51.

5 e.g. trade disputes, transit disputes, competition disputes, environmental disputes and investment disputes.

6 Article 26/2 of the ECT.

7 ICSID, established under the ICSID Convention signed at Washington on 18 March 1965 is an autonomous international institution, which has close relations with the World Bank.

8https://icsid.worldbank.org/ICSID/StaticFiles/facility/partA-article.htm : Rules Governing the Additional Facility for the Administration of Proceedings by the Secretariat of the International Centre for Settlement of Investment Disputes(Additional Facility Rules).

9 There are 26 states (including Turkey) listed in Annex ID of the ECT.

10 There are four states listed in Annex IA of the ECT.

11 Article 26/6 of the ECT.

12 Article 26/8 of the ECT.

13 http://www.encharter.org/index.php?id=269 : Energy Charter, Dispute Resolution.

14 "Each Contracting Party reserves the right to deny the advantages of this Part to: [...] a legal entity if citizens or nationals of a third state own or control such entity and if that entity has no substantial business activities in the Area of the Contracting Party in which it is organized; [...]"

15 ICSID Case No. ARB/06/8, registered on 19 April 2006.

16 http://www.encharter.org/fileadmin/user_upload/Investor-State_Disputes/Award_-_Libananco_vs_Turkey.pdf : ICSID, Washington D.C., ICSID Case No. ICSID Case NO. ARB/06/8, AWARD.

© Kolcuoğlu Demirkan Attorneys at Law, 2014

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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