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Written by Maria Serdari
CEAC Ltd. V. Montenegro (ICSID Case No. ARB/14/08):
Decision on Annulment Request
The decision under comment was issued in May 2018 at the request of the Claimant who is CEAC Holdings Limited for Annulment. The issues to be addressed in this commentary are the nature of the annulment, Article 52 of the ICSID Convention and the important issue of an investor's “seat” in its Home-State.
FACTS
The Claimant is CEAC Holdings Limited, a company registered in Cyprus. On the other hand, the Respondent is the State of Montenegro. The dispute is related to the ownership and management of an aluminium plant located in Montenegro by CEAC Holdings Limited (‘CEAC’). CEAC filed a request for arbitration with the International Centre for Settlement of Investment Disputes (‘ICSID’), alleging that Montenegro failed to provide fair and equitable treatment, full protection and security, and most-favoured nation treatment to CEAC’s investment, as required by the Agreement between the Republic of Cyprus and Serbia and Montenegro on the Reciprocal Promotion and Protection of Investments, entered into force on 23 December 2005 (‘BIT’)[1]. CEAC claimed that Montenegro had breached out its obligations under the BIT, to provide fair and equitable treatment, full protection and most-favored treatment, not to expropriate, to guarantee the free transfer of payments and to encourage stable condition for foreign investors. Montenegro, before the Tribunal stated that CEAC is not an investor as CEAC did not have a “seat” in Cyprus. The Tribunal decided in favor of Montenegro by the majority[2]. Afterwards CEAC asks for the annulment of the abovementioned decision on the grounds that the Tribunal lacked jurisdiction according to the Article 52(1).[3]
The Claimant pointed out eleven reasons that the decision of the Tribunal shall be annulled. The most important ones are that the Tribunal failed to determine the word “seat” in Article 1(3)(b) of the BIT. Also, CEAC argues that the Tribunal considered the facts before the legal test, thereby prejudging the outcome of its legal analysis. Moreover, the claimant says that the Tribunal failed to consider the definition of “registered office” advanced CEAC and finally that it ignored CEAC’s evidence regarding management and control and that the evidence was unnecessarily arbitrary and frivolous.[4] On the other hand, the respondent raised a procedural objection that CEAC had not properly deployed its case either in its Application which was twenty-one pages only or its Memorial which occupied only nine pages but had waited until it filed its Reply which was sixty-seven pages and had then further refined that case at the hearings. Also, Montenegro denied that the Tribunal had committed any of the errors suggested by CEAC and even if the Tribunal had erred it had not committed an annullable error. Moreover, the Tribunal had been entitled to avoid the question of the precise meaning of “seat” in Article 1(3)(b) of the BIT and adopt an approach based on “judicial economy”. Finally, Montenegro claimed that the Tribunal intended to examine the evidence concerning whether CEAC had its seat in Cyprus, but the burden of proof had been on CEAC and if it had failed to bring forward evidence regarding its links with Cyprus, then it had only itself to blame.[5]
LEGAL ANALYSIS
1. Nature of Annulment
The Committee briefly mentioned the nature of annulment by referring to other cases stated that an annulment is not an appeal but a form of review on specified and limited grounds. Annulment is different from an appeal. Appeal may result in the modification of the decision. Annulment results in the legal destruction of the original decision without replacing it. An ad hoc committee acting under the ICSID Convention may not amend or replace the award by its own decision on the merits. After annulment, the dispute may be resubmitted to a new tribunal. Annulment is not only concerned with the basic legitimacy of the process of decision but also with its substantive correctness. Therefore, annulment is based on a very limited number of fundamental standards. In this specific case, the Committee quotes from the Soufraki case[6] that “an ad hoc committee does not have the jurisdiction to review the merits of the original award in any way. The annulment system is designed to safeguard the integrity, not the outcome of ICSID arbitration proceedings”.
Secondly, Article 52 must be read in accordance with the principles of treaty interpretation which insist on interpretation conforming to the object and purpose of the treaty. These principles are mentioned in Articles 31 to 33 of the Vienna Convention on the Law of Treaties, 1969 and the provisions of this Convention on treaty interpretation, are generally regarded as declaratory of customary international law.
Thirdly, the grounds for annulment under the ICSID Convention are listed exhaustively in Art. 52(1): “Either party may request annulment of the award by an application in writing addressed to the Secretary-General on one or more of the following grounds: (a) that the Tribunal was not properly constituted; (b) that the Tribunal has manifestly exceeded its powers; (c) that there was corruption on the part of a member of the Tribunal; (d) that there has been a serious departure from a fundamental rule of procedure; or (e) that the award has failed to state the reasons on which it is based”. In this case The Committee analyzed the manifest excess of power (Art. 52(1)(b)), the serious departure from fundamental rule of procedure (Art. 52(1)(d)) and the failure to state reasons (Art. 52(1)(e)) before making its final decision.
Lastly, the language of Article 52(3) stating that an ad hoc Committee “shall have the authority to annul” indicates that, even where an ad hoc Committee determines that one of the grounds for annulment is made out, the Committee has a discretion whether to annul the whole award or even a part of it. In MINE v. Guinea, Guinea requested partial annulment of the award, explaining that “Guinea does not seek annulment of the decision on the two counter-claims, ...”.[7] The ad hoc Committee had no doubts concerning the admissibility of this request: Guinea’s request for partial annulment is clearly admissible. It seeks the annulment of the portion of the Award adjudging MINE’s claim. It does not request annulment of the portion of the Award adjudging Guinea’s counter-claim. Nor, for that matter, has annulment of that portion been requested by MINE. That portion of the Award will remain in effect regardless of the annulment in whole or in part of the portion of the Award in respect of which Guinea has formulated its request for annulment.[8]
To summarize, an annulment does not modify the award but removes it and is possible only on the basis of a limited number of serious grounds after the party has requested one. Moreover, only awards or parts of awards are subject to annulment. Finally, more recent practice indicates that there is some discretion in a decision on annulment.[9]
2. Article 52 para. 1 sections b, d, e
Article 52 par. 1b provides that an ad hoc Committee may annul an award on the ground that “the Tribunal has manifestly exceeded its powers”. So, this paragraph lays down two requirements, both of which must be met if an Award is to be annulled on this ground. Firstly, the tribunal must have exceeded its powers and, secondly, that excess of power must be “manifest”. This means “plain”, “clear”, “obvious”, “evident” and easily understood or recognized by the mind. In order to constitute a ground for annulment, any excess of powers must be manifest. Therefore, an excess of power is manifest if it can be discerned with little effort and without deeper analysis.[10]
Article 52 par. 1d provides that an ad hoc Committee may annul an award on the ground that “there has been a serious departure from fundamental rule of procedure”. This provision is designed to safeguard the basic fairness and integrity of the arbitration process. The deviation, in order to constitute a ground for annulment, must be serious and it must affect a fundamental rule. It is clear from this language that not every procedural default can provide grounds for annulment. A party seeking to annul an award under this provision must show a) that the rule of procedure from which the tribunal departed was of fundamental importance and b) that the departure was serious. With regard to the first requirement, the Committee does not consider it necessary to set out a list of those procedural rules which fall into the category of “fundamental” rules of procedure. On the second requirement, the Committee agrees with another Committee’s opinion which said that “In order to constitute a ground for annulment, the departure from “fundamental rule of procedure” must be serious”. To be serious, the departure must be substantial rather than minimal. The departure must have had a material effect on the affected party. It must have deprived that party of the benefit of the rule in question. For instance, if a party is deprived of its rights to be heard, then the departure is not serious, if it is clear from the circumstances that the party never intended to exercise the right. So, there should be established both quantitative and qualitative criteria: the departure must be substantial and must be adequate to deprive a party of benefit or protection which the rule was to provide.[11]
As for the par. 1 e of Article 52 requirement, we must say that this section empowers a Committee to annul an award if there has been a failure to state the reasons on which the award is based; it does not entitle a Committee to annul an award because it finds the reasoning unconvincing.[12] In view of the clear obligation to state reasons, a total absence of reasons is extremely unlikely and has never occurred. In contrary, more likely is the absence of reasons for certain parts of an award.
In this specific case, the Committee wasn’t persuaded neither that CEAC has a “seat” in Cyprus nor from the definition of “registered office” that CEAC provided. Also, nothing in the treatment of the evidence by the tribunal comes close to sustain a finding that there was a manifest excess of power. Moreover, the Committee said that CEAC had the opportunity to challenge the evidence and should have done so. The fact that it did not take the opportunity does not constitute a procedural default by the Tribunal. So, the challenge under Article 52 par. 1 d fails. Finally, par. 1(e) the test here, is simply whether the Tribunal was guilty of failure to state its reasons in such a way that there is a lack of expressed rationale or that the reasoning cannot be followed. That is not the case here. Finally, the Committee dismisses the application to annul the Award under Article 52(1)(e).[13]
3. When does an investor have a “seat” in its Home-State?
CEAC submitted that it had established a seat in Cyprus within the meaning of Article 1(3)(b) and was therefore an “investor” under the BIT.[14] According to CEAC,the meaning of “seat” under Article 1(3)(b) of the BIT must be determined by a renvoi to the municipal law of Cyprus.[15] CEAC submitted through its expert witness, the former Attorney-General of Cyprus, that under Cypriot law, a corporate seat requires only a registered office and not a “real seat”.[16] At all relevant times, CEAC has maintained its registered office in Cyprus, as evidenced by several certificates of registered office issued by the competent authorities.[17] CEAC therefore argued that it satisfied the ‘seat’ requirement in the BIT.[18]
Montenegro countered that the Tribunal should interpret the term “seat” autonomously in light of international law.[19] Because the interpretative rules of the Vienna Convention do not contain any reference to national law, the term “seat” must be interpreted autonomously under the BIT, without a renvoi to municipal law.[20] Montenegro submitted that the term “seat” requires something more than incorporation and a “registered office” under both international law and Cypriot law.[21] The term “seat” is best interpreted as the place where the investor is “effectively managed and financially controlled and where it carries out its business activities”.[22]
The majority of the Tribunal did not consider it necessary to determine the precise meaning of the term “seat”, as employed in the BIT, because the evidence in the record purportedly did not support a finding (i) that CEAC had a registered office in Cyprus at the relevant time, nor (ii) that it was managed and controlled from Cyprus.[23] Therefore, even on CEAC’s interpretation, CEAC did not have a “seat” in Cyprus within the meaning of the BIT. Consequently, CEAC was not an “investor” within the meaning of the BIT, and the Tribunal lacked jurisdiction to hear the case.[24] In reaching this conclusion, the majority of the Tribunal addressed CEAC’s submission that the existence of its registered office in Cyprus was “conclusively” proven by the certificates of registered office in the record. The majority then stated that under international law, certificates of registration issued by a domestic authority only constitute prima facie evidence of the facts they attest to.[25]
Although, in this specific case there was a separate opinion. Park signed the Award subject to a Separate Opinion that dissented on the central issue of the “seat”.[26] Park was critical of the majority having concluded that CEAC had no seat in Cyprus in circumstances where the majority had declined to determine the meaning of the term “seat”.[27] Park also disagreed with the majority’s finding that a “seat” requires more than a “registered office”.[28] He stressed that CEAC’s local law expert had been serving for eight years as the Attorney General of Cyprus and was a particularly-experienced expert in Cypriot company law; no reason therefore existed to discredit his expert testimony.[29] CEAC’s local law expert had not endorsed the more elaborate test that was advanced by Montenegro’s local law expert and embraced by the majority of the Tribunal.[30] According to Park, international law “as it currently stands provides no uniformly accepted ‘ordinary meaning’ of corporate seat”, which remains “essentially a municipal law concept derived from Continental systems, whereas Claimant’s incorporation occurred in a common law country lacking such notions”.[31] Although the notion of “seat” is alien to the English legal tradition from which Cyprus derives its company law, “analogues can be found in the [Brussels] Regulation, providing that for Cyprus a statutory seat means, alternatively, registered office, place of incorporation or the place under the law of which the company formation took place”.[32]
CONCLUSION
In the author’s opinion, this decision is sufficiently reasoned and the arguments set out are clearly acknowledged. In CEAC v. Montenegro, flaws in the reasoning of the majority will make the Award less useful as a precedent for further instances. It is sad that the Tribunal's majority did not see it important to ascertain the precise definition of the term "seat" as used in Article 1(3)(b) of the BIT. [33] It is a well-established principle that the issue of whether jurisdiction based on consent exists must be decided by an arbitral tribunal proprio motu, including if required by considering the jurisdictional criteria sua sponte.[34] Without initially ruling on the relevant legal standard for evaluating the presence of a "seat" within CEAC, the majority was unable to make a definitive legal determination about the location of CEAC's "seat." That being said, according to the author, the ad hoc Committee rightfully rejected the annulment of the Award.
Maria Serdari
[1]Agreement between Serbia and Montenegro and the Republic of Cyprus on Reciprocal Promotion and Protection of Investments (signed on 21 July 2005, entered into force on 23 December 2005) [hereinafter the BIT]. [2]CEAC Holdings Limited v Montenegro, ICSID Case No ARB/14/8, Award, 26 July 2016. The Tribunal comprised Bernard Hanotiau (President), William W. Park (Claimant’s nominee) and Brigitte Stern (Respondent’s nominee). CEAC was represented by King & Spalding; Montenegro was represented by Schonherr Rechtsanwalte. CEAC has filed an ICSID annulment proceeding that was registered in November 2016. [3]CEAC Holdings Limited v Montenegro, ICSID Case No ARB/14/8, Decision on Annulment, 1 May 2018 [hereinafter CEAC v Montenegro]. The ad hoc Committee comprised Sir Christopher Greenwood as President, Professor Joongi Kim and Ms Tinuade Oyekunle as Members. [4]Ibid CEAC v Montenegro par. 60-72. [5]Ibid CEAC v Montenegro par. 73-76. [6]Award, para. 20, citing Hussein Nuaman Soufraki v. United Arab Emirates (ICSID Case No. ARB/02/07), Decision on Annulment, 5 June 2007 (“Soufraki”). [7]MINE v. Guinea, Decision on Annulment, 22 December 1989, 4 ICSID Reports para. 82. [8]Ibid par. 85. [9]CEAC v Montenegro par. 77-85. [10]Ibid CEAC v Montenegro par. 86-89. [11]Ibid CEAC v Montenegro par. 90-93. [12]Ibid CEAC v Montenegro par. 94-98. [13]Ibid CEAC v Montenegro paras 99-141. [14]CEAC Holdings Limited v Montenegro, ICSID Case No ARB/14/8, Award, 26 July 2016, at par. 50. [15]Ibid at par. 51–70 (submitting that ‘where no accepted definition of a term exists under international law or is given in an investment treaty, international law requires that tribunals refer to municipal law to obtain the precise meaning of a legal concept’). [16]Ibid at par. 71–88. [17]Ibid at par. 89 (submitting certificates for the years 2005–2008 and 2010–2013). [18]Ibid at par. 89. [19]Ibid at par. 99–109. [20]Ibid at par. 98. [21]Ibid at par. 110–18, 120 (submitting that the term ‘seat’ is ‘a practical concept, which requires a subject and an activity’ and cannot ‘represent something which is an inseparable consequence of incorporation’). [22]Ibid at par. 119–29. [23]Ibid at par. 148. [24]Ibid. [25]Ibid at par. 155. See also par. 156–57. [26]CEAC v Montenegro (n 1), Separate Opinion of William W Park. [27]Ibid at par. 1. [28]Ibid at par. 9. [29]Ibid at par. 8. [30]Ibid at par. 9–10. [31]Ibid at par. 18. See also ibid at par. 12 (citing International Law Commission, ‘Draft Articles on Diplomatic Protection with commentaries’ UN Doc A/61/10, ILC YB, vol II/2, art. 9, cmt 3: ‘international law has no rules of its own for the creation, management and dissolution of a corporation or for the rights of shareholders and their relationship with the corporation, and must consequently turn to municipal law for guidance on this subject’). See also Tenaris SA and Talta - Trading e Marketing Sociedade Unipessoal Lda v Bolivarian Republic of Venezuela, ICSID Case No ARB/11/26, Award, 29 January 2016, par. 144 (finding that international law and practice do not contain a consistent definition of ‘seat’ for the purposes of determining jurisdiction ratione personae). [32]Ibid at par. 14 (citing Dicey, Morris and Collins, Conflicts of Law (15th edn, Sweet & Maxwell 2012), par. 11-079: ‘a company has a seat in the UK if either (i) incorporated under UK law with registered office or some other official UK address or (ii) possessing central management and control exercised in the UK’). [33]CEAC v Montenegro (n 1) at par. 148. [34]See eg Duke Energy Electroquil Partners and Electroquil SA v Republic of Ecuador, ICSID Case No ARB/04/19, Award (18 August 2008) par. 163; Mihaly International Corporation v Democratic Socialist Republic of Sri Lanka, ICSID Case No ARB/00/2, Award (15 March 2002) par. 56; Ioan Micula, Viorel Micula and others v Romania, ICSID Case No ARB/ 05/20, Decision on Jurisdiction and Admissibility (24 September 2008) par. 65. The International Court of Justice has also observed that it must always examine proprio motu the question of its own jurisdiction, even where one of the parties does not appear or fails to adequately plead its case: see Aegean Sea Continental Shelf (Greece v. Turkey (Judgment) [1978] ICJ Rep 3, par. 15, page 116.