UK: Investment Treaty Protections for Charterparty Operations

Inmaris Perestroika Sailing Maritime Services GMBH and Others v Ukraine

Bilateral Investment Treaties (BITs) are treaties between two countries which protect investments made by nationals (including companies) from one country in another country. BITs protect foreign investors from government action which affects the value of their investments. They also establish a framework for the resolution of disputes between a foreign investor and the host country. Disputes are resolved through arbitration, usually administered under the Rules of the International Centre for Settlement of Investment Disputes (ICSID) (which is part of the World Bank) or on an ad hoc basis, pursuant to the United Nationals Commission on International Trade Law (UNCITRAL) Arbitration Rules.

Unlike commercial arbitration, which is pursuant to a contractual relationship between two parties and which includes an agreement to arbitrate, BIT claims are based on rights conferred on the foreign investor by a treaty between the host country and the country of the foreign investor. BITs have been used successfully to protect against egregious forms of government action, such as confiscation and expropriation of private property owned by foreign investors. A recent decision has highlighted the flexibility and scope of BITs in protecting against government action which affects rights under charter agreements.

Background facts

The dispute involved the Khersones, a three-mast fully-rigged windjammer, owned by a Ukrainian state-owned education institution. Pursuant to an agreement in 1996, Inmaris operated the Khersones on behalf of Ukraine. For several weeks a year, the vessel was used for the education of cadets for Ukraine's national fishery fleet. For the remainder of the year, the vessel was operated by Inmaris for recreational tourism and marketing purposes. Inmaris was responsible for all operational costs, and kept the income from the tourism and marketing activities.

In 1999, the Parties agreed that the Khersones should be renovated and repaired and various options for financing the renovations were considered. The Parties eventually agreed that the vessel would be renovated using funds raised by a German ship investment fund. Inmaris made a one-time payment of DM 1,100,000 which was used to pay for the renovations. In return Inmaris received the right to operate the vessel under a bareboat charter contract. Various sub-charter and agency contracts between four Inmaris companies were also entered into for the purposes of operating the vessel. The Khersones continued to provide cadet training, and continued to be operated for tourism and marketing purposes.

After the March 2005 "Orange Revolution", Ukraine demanded additional payments. Inmaris refused and in April 2006 the Khersones was prohibited from leaving the territorial waters of Ukraine.

The various Inmaris companies brought an action against Ukraine under the Germany-Ukraine BIT which requires arbitration under the ICSID Convention. An arbitration tribunal was constituted. In order to avoid arbitration of the BIT claims, Ukraine objected to the Tribunal's jurisdiction. Ukraine's main argument was that there was no "investment" within the meaning of the BIT (The decision is available here).

Operations under a charter agreement may be an "investment"

BITs protect only "investments", which are defined broadly to include land and tangible assets, as well as intellectual property and shareholdings. Under most BITs, including the Germany-Ukraine BIT, contractual rights, such as "claims to money" or "claims to performance having an economic value", may also constitute "investments" which will be afforded BIT-protection.

Ukraine argued that Inmaris had no "claim to performance" because the bareboat charter contract was "fictitious", in the sense that it did not create any legal rights or obligations between the Parties. The Tribunal rejected this argument because although there was no dramatic change in the operation of the vessel after the 1999 bareboat charter contract, the agreement did create legal rights and obligations including Inmaris' payment of the renovation costs and rights as charterer.

Ukraine argued that even if Inmaris had contractual rights under the bareboat charter contract, Inmaris' "claims to performance" were not "investments" but merely ordinary commercial transactions. Whether or not contractual rights can be said to be "investments" depends on the facts of each case. Broadly speaking, "investments" are usually commercial operations involving the risk of profit or loss over a period of time and which are of some significance to the host state's economy.

Ukraine attempted to strengthen its argument by taking the position that the contractual rights of each Inmaris company had to be analysed individually and separately. The Tribunal, however, concluded that a BIT claim can be based on a group of integrated contracts which collectively constitute an "investment". The fact that the arbitration proceedings were brought by the various Inmaris companies jointly was important because it allowed the Tribunal to analyse Inmaris' operations as a whole, rather than looking at the role that each Inmaris company played and whether that limited role could be an "investment". The Tribunal's commonsense approach allows companies to structure their corporate affairs as they wish, in particular, the operation of vessels pursuant to a charterparty, without losing the protections afforded by BITs. It ensures also that BIT protections are matters of substance rather than form, so long as all corporate entities are involved as claimants.

The Tribunal concluded that Inmaris' operation of the vessel constituted an "investment" under the Germany-Ukraine BIT. In this case, the charterparty was for a period of years, for the purpose of carrying on tourism and marketing operations for profit and involved the renovation of a state-owned vessel which provided training to state cadets.

Protection of returns

As a consequence of the operations under the bareboat charter contract being an "investment", the Tribunal considered whether the various rights to payments from one Inmaris company to another Inmaris company (i.e. intra-Inmaris payments) were protected under the BIT. Such payments (which included sub-charter payments, agency fees and shares of revenue from tourism and marketing activities) were disrupted when Ukraine prevented the Khersones from leaving its territorial waters.

The Tribunal noted that a protocol to the Germany-Ukraine BIT protected returns from investment equally as investment themselves. The intra-Inmaris payments, such as sub-charter payments and agency fees, relating to the operation of the vessel under the bareboat charter contract were therefore also protected.

Having concluded that there is an "investment" and that it has jurisdiction, the Tribunal will now proceed to consider Inmaris' BIT claim on the merits, including whether Ukraine breached its obligations under the Germany-Ukraine BIT to Inmaris as a foreign investor.

BIT protection of foreign investor rights

There are close to 3000 BITs in the world today which collectively provide extensive protections to foreign investors against government action. BITs usually protect against foreign governments breaching their contractual obligations to a foreign investor. BITs protect also against government action which adversely affects property rights, private contractual relationships and commercial operations of foreign investors. The possibility of a BIT claim should be considered whenever there is a dispute with a foreign government or where foreign government action disrupts rights to operate a business or assets.

Holman Fenwick Willan has one of the largest international dispute resolution practices of its kind, with strength in court, arbitration and alternative dispute resolution.

We have the expertise and international reach to handle the most complex of disputes

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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