In an earlier post CIS Arbitration Forum reported that Ukraine was ordered to pay in the region of EUR 3 million to German investors in Inmaris Perestroika Sailing Maritime Services GmbH and others v Ukraine. At that time the final award dated 1 March 2012 had not been published yet. However, recently the excerpts of this award became available. They make clear the tribunal’s position on the merits of the dispute, which includes a number of interesting findings.
This case demonstrates that a governmental telegram instructing not to let the ship, owned by the state-owned educational institution, but operated jointly with a foreign investor, to leave the territorial waters of Ukraine, and the continuation of the travel ban, could be qualified as a breach of the fair and equitable treatment standard (FET), arbitrary action and even expropriation. More so, the State could be held liable for insolvency damages suffered by the foreign investor as a result of such act of the State.
The Factual Background
The dispute concerned the maritime operations of The Khersones, a windjammer sail training ship, owned by a Ukrainian state-owned education institution (the “KMTI”), which entered into a series of contracts with various Inmaris Companies between 1991 and 2006. Under the contracts, the KMTI used The Khersones to train cadets for Ukraine’s national fishery fleet while Inmaris Companies used it to market sailing tours and other onboard events.
The dispute arose in 2006 when the Minister of Agricultural Policy of Ukraine sent a government telegram prohibiting The Khersones “from leaving the borders of the territorial waters of Ukraine until clarification of the matters, as related to its joint operation”. This prevented The Khersones from making a scheduled departure from Kerch on 7 April 2006 for the 2006 summer sailing season. The Inmaris Companies never regained control of The Khersones after that date. The travel ban remained in force for a year. Two of the Inmaris Companies went into insolvency proceedings.
The main claim of the Inmaris Companies concerned damages incurred as a result of the travel ban, including insolvency damages. The Inmaris Companies alleged that Ukraine’s actions denied them fair and equitable treatment under Article 2(1) of the Ukraine-German BIT, amounted to arbitrary and capricious behavior in violation of Article 2(3) of the BIT, expropriated the Claimants’ investment without payment of compensation in violation of Article 4(2) of the BIT and amounted to an impermissible intervention in The Khersones project in violation of paragraph 4 of the Additional Protocol to the BIT.
Ukraine argued that the relevant acts giving rise to this dispute were not attributable to Ukraine.
The Tribunal took a view that the acts preceding the travel ban did not rise to the level of a breach of the BIT, and thus there was no need to analyse whether respective actions of the KMTI were attributable to Ukraine or not.
The Tribunal found that the critical event that gave rise to this dispute was the instruction preventing the ship from leaving the territorial waters of Ukraine and the sustained refusal to allow the ship to leave Ukraine over the course of the following year. That instruction undisputedly came from the Ministry of Agricultural Policy of Ukraine, an organ of the State, and not the KMTI, and thus, was an act of the State. So, the Tribunal held that the travel ban was attributable to the State.
Fair and Equitable Treatment
What is more important, the Tribunal drew the line between appropriate actions of a party to question a contractual arrangement and seek to modify its terms, and impermissible actions to pursue such modification.
It held that in the present case the State was no longer seeking to renegotiate the agreement but was instead unilaterally and forcefully abrogating the arrangement or attempting to coerce a renegotiation. It did not seek reformation through proper legal channels by, e.g., instructing the KMTI to bring a breach of contract claim in local courts. Instead, it used its governmental authority to prevent the ship from sailing, and then followed up the instruction to the KMTI with similar instructions to the port and border authorities.
This travel ban unfairly undermined the investment of the Inmaris Companies, as it prejudiced the entire operation of the project and the exercise of the Claimants’ contractual rights.
In view of the above, this instruction as well as the ban that remained in effect for the ensuing year, was qualified by the Tribunal as a denial of fair and equitable treatment in violation of Article 2(1) of the BIT.
The Tribunal further found that the Ministry’s instruction preventing the ship from leaving the territorial waters of Ukraine was an arbitrary measure that impeded the management, maintenance, use or enjoyment of the Claimants’ investment and, therefore, was a breach of Article 2(3) of the BIT.
The Tribunal held that the above-described act of Ukraine deprived the Inmaris Companies of access to and control over the essential asset of its investment, i.e., the ship, and thus of the Claimants’ contractual rights to use that asset. Title to the ship was, however, never vested in the Inmaris Companies. At a minimum, the travel ban amounted to an indirect expropriation in that it destroyed the value of the Claimants’ contractual rights and such diminution in value (due to the lasting damage to Claimants’ business) was, for all intents and purposes, permanent.
Therefore, the Tribunal concluded that the Respondent’s actions amounted to expropriation or a measure tantamount to expropriation, which was not accompanied by any compensation, in violation of Article 4(2) of the BIT.
Once a measure has been found to be expropriatory, a State must pay compensation, even if the measure is taken for a public purpose. Whether a government act is taken for a public purpose does not change the fact that compensation is owed.
The Tribunal found that the ban was wrongful and should never have been imposed. As it remained in place beyond the start of the 2006 season, the Claimants did what was necessary to cancel the bookings. The ban remained in force for a year, and, at that point, the damage to the Claimants became irreversible. The cancellation of the entire sailing season, which was a direct result of the telegram, led to the Claimants’ insolvency and the other damages.
The position taken by the Tribunal with regard to various categories of damages and their quantification deserves a separate discussion, beyond this post.
Importantly, the Tribunal concluded that Ukraine’s act caused the Claimants’ insolvency, and, therefore, Ukraine was responsible for compensating the Claimants for the resulting harm, including with respect to the payment of insolvency costs.
This case gives states several important lessons to learn. And this concerns not only Ukraine, but other states of the CIS region as well, given historical reasons and cultural similarities. One such lesson is that it is not permissible to use the governmental authority to unilaterally and forcefully abrogate the arrangement between a state entity and foreign investor, as such actions could amount to the breach of a number of the State’s obligations under the BIT.
Olena Perepelynska, MCIArb Counsel at Sayenko Kharenko in Kyiv, Ukraine