Data

Date:: 28-03-2011
Country:: International Centre for Settlement of Investment Disputes (ICSID)
Number:: ARB/06/18
Court:: International Centre for Settlement of Investment Disputes (ICSID)
Parties:: Joseph Charles Lemire & others v. Ukraine

Keywords

STATE CONTRACTS – SETTLEMENT AGREEMENT - BETWEEN A UNITED STATES NATIONAL AND THE UKRAINIAN GOVERNMENT - ALLEGED BREACH OF SETTLEMENT AGREEMENT - APPLICATION BY ARBITRAL TRIBUNAL OF THE UNIDROIT PRINCIPLES AS "A PRIVATE CODIFICATION OF CIVIL LAW, APPROVED BY AN INTERGOVERNMENTAL INSTITUTION WHICH ARE NEITHER TREATY, NOR COMPILATION OF USAGES, NOR STANDARD TERMS OF CONTRACT BUT IN FACT ARE A MANIFESTATION OF TRANSNATIONAL LAW" - REFERENCE TO UNIDROIT PRINCIPLES TO SUPPLEMENT APPLICABLE LAW (INTERNATIONAL LAW)

DAMAGES FOR LOST PROFITS - TO BE DISTINGUISHED FROM DAMAGES FOR SIMPLE LOSS OF A CHANCE - REFERENCE TO THE EXAMPLE IN COMMENT 2 TO ART. 7.4.3 UNIDROIT PRINCIPLES

INCONSISTENT BEHAVIOUR - REFERENCE TO ARTICLE 1.8 UNIDROIT PRINCIPLES

Abstract

Plaintiff, a national of the United States, and Defendant, the Government of the Ukraine, entered into an investment agreement concerning the establishment by Plaintiff of broadcasting stations in the Ukraine. When a dispute arose as to the proper performance of the agreement, the parties submitted their dispute to the International Centre for Settlement of Investment Disputes (ICSID). After commencement of the arbitral proceedings the parties entered into negotiations with a view to settling their dispute, which they ultimately succeeded in doing, and requested the Arbitral Tribunal to record the settlement agreement in the form of an award (see UNILEX, ICSID Award of 20 March 2000). According to Plaintiff, Defendant had breached a number of its obligations under the Agreement, and consequently Plaintiff commenced arbitral proceedings.

In a First Award (see UNILEX, ICSID Award of 14 January 2010) the Arbitral Tribunal decided to submit the settlement agreement to the rules of international law, having particular regard to the UNIDROIT Principles.

As to the merits of the case, in the same Award, the Arbitral Tribunal partially accepted Plaintiff’s claims, holding that the process of awarding broadcasting frequencies by Ukraine was arbitrary and discriminatory and therefore violated the fair and equitable treatment standard in the USA-Ukraine BIT. However, the Arbitral Tribunal found no breach of the settlement agreement.

The decision on the quantification of damages and as to whether moral damages would be awarded was postponed to a second phase of the proceeding.

In its Second Award, the Arbitral Tribunal awarded Plaintiff USD 8.7 Million for lost profits. In excluding that Plaintiff’s injury could be classified as a simple loss of chance, the Arbitral Tribunal made reference to the example in Comment 2 to Art. 7.4.3 UNIDROIT Principles in order to define the concept of loss of chance. As to the claim for moral damages, the Arbitral Tribunal found that Plaintiff’s treatment did not constitute the type of “exceptional circumstances” that warrant the award of moral damages.

In a dissenting opinion one of the three Arbitrators expressed his disagreement with the other Arbitrators’ conclusions in the First and Second Awards.

As to jurisdiction, the dissenting Arbitrator asserted that the BIT did not grant Plaintiff the right to bring a claim, as a shareholder, based on harm allegedly suffered by its company. In his view, Plaintiff, who first of all had relied on the company’s corporate personality to invest in the Ukrainian radio sector and had then acted in person invoking BIT protection for rights reserved to its company under Ukrainian legislation, had contravened the prohibition of inconsistent behaviour expressed in Art. 1.8 UNIDROIT Principles.

On the merits, the dissenting opinion criticized the majority’s broad application of the “fair and equitable treatment” standard under the BIT. This standard must be interpreted in the light of the common intention of the Parties to the BIT (i.e. United States and Ukraine), which could also be inferred from the positions taken by the Parties after the conclusion of the BIT, and in this context the dissenting Arbitrator cited Arts. 4.1 and 4.3 UNIDROIT Principles. The "fair and equitable treatment” standard must therefore be interpreted restrictively in order to avoid the proliferation of claims against host States.

Moreover, under Art. 1.8 UNIDROIT Principles, Plaintiff could not challenge the procedure for allocation of radio frequencies in the present arbitration since it did not object to the imperfections of Ukrainian radio sector legislation by failing to make any reference to them in the above-mentioned settlement agreement.

Fulltext

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250. The Tribunal?s certainty that Claimant has indeed suffered a loss has another important implication: it excludes the possibility that Mr. Lemire?s injury be classified as a simple loss of chance.
251. Compensation for a lost chance is admissible, and is normally calculated as the hypothetical maximum loss, multiplied by the probability of the chance coming to fruition. To take the example given in the Official Comment to the UNIDROIT Principles (Article 7.4.3(2)):
“[T]he owner of a horse which arrives too late to run in a race as a result of delay in transport cannot recover the whole prize money, even though the horse was the favourite”.
In this example, the owner must be satisfied with compensation proportionate to the probability of the win.
252. But the facts of our case do not fit the example: the Tribunal?s conclusion is not that Gala Radio was relegated in certain specific tenders for frequencies, and was deprived of a chance to win in these procedures; what the Tribunal has found is that the initial cause (Ukraine?s wrongful acts) and the damage (Claimant?s frustration to carry out his plans and create a nationwide FM channel plus an AM informational channel) are linked through a proximate chain of causation. The investor?s loss does not consist in being deprived of some chance to win additional frequencies; what has been proven is that Ukraine?s wrongful acts have resulted, through a foreseeable and proximate chain of events, in the damage suffered by the investor.

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