Data

Date:: 19-01-2007
Country:: International Centre for Settlement of Investment Disputes (ICSID)
Number:: ARB/02/5
Court:: International Centre for Settlement of Investment Disputes (ICSID)
Parties:: PSEG Global & others v. Republic of Turkey

Keywords

STATE CONTRACTS - LONG-TERM CONTRACTS - CONCESSION CONTRACT - BETWEEN A UNITED STATES-TURKISH CONSORTIUM AND THE TURKISH GOVERNMENT - REFERENCE TO UNIDROIT PRINCIPLES TO INTERPRET APPLICABLE LAW (INTERNATIONAL LAW)

CONCESSION CONTRACT CONCLUDED WITH TERMS LEFT OPEN - ONE PARTY ARGUED THAT NEVERTHELESS CONTRACT HAD BEEN VALIDLY CONCLUDED INVOKING ARTICLE 2.1.14 UNIDROIT PRINCIPLES IN SUPPORT THEREOF - ARBITRAL TRIBUNAL BASICALLY CONFIRMS

ONE PARTY ARGUED THAT DUTY TO NEGOTIATE IN GOOD FAITH DOES NOT ENTAIL OBLIGATION TO REACH AGREEMENT INVOKING ARTICLE 2.1.15 UNIDROIT PRINCIPLES - ARBITRAL TRIBUNAL BASICALLY CONFIRMS

Abstract

In 1994 Claimants, a United States company and its wholly-owned Turkish subsidiary, started negotiations with Respondent, the Government of Turkey, to develop the energy sector in Turkey. In 1998 Claimants were awarded a Concession Contract by Respondent to build a coal mine and a power plant. However, the subsequent negotiations were delayed by repeated changes in Turkey’s legal framework for the energy sector that culminated in the termination of the investment project in 2001. Although no mining operations were undertaken nor was construction commenced, Claimants expended millions of dollars in the late 1990s on an initial feasibility study, follow-up studies and several rounds of negotiations with government agencies.

Claimants commenced arbitral proceedings at the International Centre for Settlement of Investment Disputes (ICSID) alleging that Respondent violated several protections of the U.S.-Turkey BIT, including the obligation to provide fair and equitable treatment. As a consequence of Respondent’s breach, Claimants claimed damages, calculated as either the fair market value of the investment, or lost future profits, or, as an alternative, at least the actual investments they had made.

While Respondent challenged the jurisdiction of the ICSID Tribunal on the grounds that, in the absence of an agreement on the essential commercial terms, the Concession Contract did not constitute an "investment", Claimants invoked Art. 2.1.14 UNIDROIT Principles in support of their view that it is not always necessary to reach an agreement on all the essential terms of a contract as long as the parties have the intention of forming a contract and the obligation to proceed to negotiate the pending terms in good faith.

The Arbitral Tribunal, basically following Claimants' reasoning with respect to the valid conclusion of the Concession Contract notwithstanding the open terms, confirmed its jurisdiction on the basis of the Concession Contract.

As to the merits, Respondent denied that it had breached its obligations under the U.S.-Turkey BIT and counterclaimed that, absent evidence to the contrary, negotiations must be presumed to have been carried out in good faith and in the light of Art. 2.1.15 UNIDROIT Principles, there was no obligation to reach an agreement or liability for failure to do so.

Nevertheless, the Arbitral Tribunal found that Respondent’s continuous changes in the legislative environment breached the fair and equitable standard under the U.S.-Turkey BIT, which mandates host States to provide a stable and predictable business environment for foreign investors. However, the Arbitral Tribunal decided to award compensation only for Claimants’ actual expenses related to the investment (costs of legal advice, technical studies, acquiring permits, etc.), rejecting the claims for the market value of the project and loss of profits mainly because such heads of damages are inappropriate where the claim relates to a project in its "pre-investment" or "pre-construction" phase.

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