Metal-Tech Ltd. v. Republic of Uzbekistan – ‘Strike Two’ Against Investor Claimants Facing the Corruption Defense

On 4 October 2013, an ICSID tribunal rendered its decision in the investment treaty dispute between the Israeli company Metal-Tech Ltd. and Uzbekistan. In the award, the tribunal found that it lacked jurisdiction to hear the parties’ claims and counterclaims brought under the Israel-Uzbekistan BIT and Uzbek law due to corruption related to Metal-Tech’s investment in Uzbekistan. In particular, the tribunal found that payments of approximately USD4 million made by Metal-Tech to several individuals, including an Uzbek government official and the brother of the then Prime Minister of Uzbekistan, while presented as remuneration for various consultancy services, in fact constituted corruption and were illegal under Uzbek law.

The tribunal based its decision to refuse jurisdiction on Uzbekistan’s lack of consent under the BIT and the ICSID Convention to refer the dispute to ICSID arbitration. Such consent, found in Article 8(1) of the BIT, was limited to disputes “concerning an investment”, which Article 1(1) of the BIT defined as “…any kind of assets, implemented in accordance with the laws and regulations of the Contracting Party in whose territory the investment is made…”. The tribunal interpreted this requirement to mean that the investment must be made “in compliance with the law at the time when it was established” (para. 193). Since it proceeded to find on the facts that corruption took place to an extent sufficient to violate Uzbekistan law in connection with the establishment of Metal-Tech’s investment in Uzbekistan, the investment did not comply with Article 1(1) of the BIT. Therefore, the tribunal concluded that the dispute did not fall within Article 8(1), was not covered by Uzbekistan’s consent, and did not meet the consent requirement set out in Article 25(1) of the ICSID Convention (paras. 372-373).

This decision marks the second time an ICSID case has been dismissed on grounds of investor corruption. In the first case, World Duty Free Co. Ltd. v. Republic of Kenya (ICSID Case No. ARB/00/7, Award, 4 October 2006), the arbitral tribunal found that the claimant had bribed the President of Kenya to obtain a concession agreement and therefore held that the resulting agreement was unenforceable and dismissed the claimant’s claims that Kenya had breached its contractual obligations. While celebrated for vindicating international anti-corruption standards, the World Duty Free decision has also been criticized for accepting the corruption defense invoked by Kenya as a complete defense, while failing to address the more complex underlying causes of corruption in the case. Continue reading

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The Jerusalem Arbitration Center: “Merchants of Peace” in the Middle East

On 18 November 2013, a momentous event in the history of international commercial arbitration took place: a first-of-its-kind arbitration institution designed to resolve commercial disputes between Israeli and Palestinian businesses was launched in East Jerusalem.

The Jerusalem Arbitration Center (“JAC”) is a private initiative supported by the Paris-based International Chamber of Commerce (“ICC”) and its renowned International Court of Arbitration, and led by the Israeli and Palestinian ICC National Committees. It is intended to increase trade and investment across this troubled border and strengthen economic integration in the region by providing neutral, efficient, and effective dispute resolution services to Israeli and Palestinians businesses. (See Catherine Rogers’ prior IntLawGrrls post on the JAC here.)

The JAC has adopted the tried and true ICC arbitration model, adjusting it to local conditions. The JAC Rules resemble the ICC Rules in many respects, including the method for nominating and appointing arbitrators, the use of Terms of References, and the scrutiny of arbitral awards by the JAC Court. The Rules were adapted, however, to reflect regional particularities and the type of disputes the JAC is expected to administer. For instance, the fees and expenses associated with JAC arbitrations were significantly reduced from those of the ICC, and the default seat of arbitration was fixed as a ‘virtual’ Paris seat (i.e., excluding parties’ ability to apply to the French courts to set aside arbitral awards, in accordance with Article 1522 of the French Code of Civil Procedure), unless the parties agree otherwise.

Moreover, in addition to adopting the jurisdictional threshold familiar from ICC practice, which requires that a JAC arbitration agreement exist prima facie, the JAC Court must also confirm three additional jurisdictional requirements under the JAC Rules before a case can be admitted. First, the amount in dispute as stated in the Request for Arbitration must not exceed $7 million; second, the dispute must be a business dispute; and third, the dispute must relate to Israel, the West Bank and the Gaza Strip, including East Jerusalem. In the event that the JAC Court finds that one or more of these conditions is not met, the dispute will be transferred to the ICC Court and be administered in accordance with the latter’s Rules of Arbitration, unless the claimant withdraws its claims or the parties agree otherwise. In special circumstances, the JAC Court may seek the approval of the ICC Court to administer a case even if one of the above conditions is not met.

To ensure neutrality, professionalism, and international presence and support, the JAC Court is comprised of nine arbitration experts, with an international President (Mr. Yves Derains), an international Vice-President (Mr. Eduardo Silva Romero), two Court Members appointed by each of ICC Israel and ICC Palestine, and three international Court Members. The Secretariat is headed by an international Secretary General (Ms. Nadia Darwazeh) and includes an Israeli and a Palestinian Deputy Secretary Generals.

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