PSEG GLOBAL V. TURKEY ICSID REVIEW OF JUDGMENT
ABSTRACT
In the 1980s, based on Turkey’s increasing energy demand, the liberalization of the energy sector and the decision to take the initiative in the participation of foreign investors, a number of laws were enacted allowing private companies to establish energy facilities and sell energy to the state. In this context, many incentives were given, including the treasury-guaranteed energy sale and the build-operate-transfer model. In this study, based on these steps taken by Turkey in the liberalization process, the lawsuit filed against the host country Turkey by PSEG Konya Ilgın, which aims to invest in Turkey, will be examined.
I. INTRODUCTION
In the case subject to the decision, claimants are the USA-based PSEG Global, the USAbased North American Coal Corporation and Konya Ilgın Electricity Generation and Commerce Limited Company established by PSEG Global, while respondent is the State of the Republic of Turkey.
Claimant investor started negotiations with the Ministry of Energy and Natural Resources in April 1994 for the construction and operation of Konya Ilgın Power Plant with the build-operate-transfer model (“BOT”). PSEG/ Ilgın Elektrik initiative has prepared a feasibility report regarding to the project. Pursuant to this report, it is anticipated that the average tariff will be 4.98 cents/kWh and the producing power will be 425 MW. The report was approved in November 1995 in accordance with Laws no. 3096 and 3996 in force at that time. In August 1996, an implementation agreement for the Konya Ilgın Power Plant project was reached after negotiations between investors began in December 1995. This agreement contains some technical details about the project and also stipulates some additional agreements such as Energy Sale Agreement, Fund Agreement and Treasury Guarantee should be made in order to carry out the project. Following this process, with the decision of the Constitutional Court dated 26.03.1997 and numbered E. 1996/64, K. 1997/40, the relevant provisions of the law numbered 3996 were annulled since these projects were public services and were subject to administrative law, not private law, therefore these projects had to be approved by the Council of State. Following these developments, the investor applied to the Council of State for the purpose of examining the implementation agreement and received approval as a concession agreement from the Council of State in March 1998. Although the Council of State removed the ICSID arbitration clause from the contract while giving its approval, PSEG Global continued to inform the Ministry that it reserves its right to apply to arbitration. The Council of State also stated that the investor should prepare a revised mine study and the Ministry can only reject the revised tariff with a reasonable justification if the revised work is more costly than the first. The Ministry and the investor could not reach an agreement on the concession agreement and the revised proposal, especially on the Energy Sale Agreement and Fund Agreement, for a long time.
Although the investor applied to the Ministry to be subject to the provisions of private law with the law numbered 4501 enacted on January 22, 2000, the Ministry requested some changes in the contract in order to send this application to the Council of Ministers. These changes could not be agreed upon, and there was no result in the form of approval or rejection by the Ministry.
For the realization of the project, it is necessary to conclude a long-term energy sales agreement with TEAŞ. However, with the law numbered 4628 enacted in March 2001, the project has become impossible since the making of these agreements was limited to a period of one year. In addition, the Electricity Energy Fund was liquidated in accordance with the Law No. 4684 enacted in June 2001, and after all these developments, Claimant initiated the arbitration process in ICSID.
II. ASSESSMENTS OF THE TRIBUNAL AND FAIR AND EQUITABLE TREATMENT
Claimant claims that second article and third paragraph of the Treaty Between the United States of America and The Republic of Turkey Concerning the Reciprocal Encouragement and Protection of Investments (“BIT”) has been violated. According to the article, “Investments shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in a manner consistent with international law.” In line with similar decisions, claimant claims that Turkey violated its obligation with an unfair, arbitrary and harmful attitude and investing in Turkey is like a “Roller Coaster Ride” since the investment conditions are at the zenith one day and at the bottom the next, there is an unstable environment in investment, transactions are not transparent and impartial and the sanctions are made in bad faith. On the other hand, the respondent Turkey states that the BITs should not be made according to the investor, but the investor should comply with these agreements, the obligation to act in a fair and equitable manner can be interpreted differently in each concrete case and it should be applied flexibly.
Claimant underlines that its justified expectation arising from the state guarantee was also ignored. Claimant also argued that the approved feasibility reports, additional contracts, treasury guarantee, energy sale and fund agreement and letters of guarantee constituted a justified expectation for them.
The defendant Turkey, on the other hand, retorted that they had stated that the treasury guarantee or additional contracts were not violated because there was no agreement on them, and that the parties’ agreement did not ensure that these negotiations would be successful; rather, it only ensured that they would be possible.
The arbitral tribunal decided the following regarding the obligation to act fairly and equitably in view of all these allegations and defenses:
Regarding the obligation to act fairly and equitably, its standard is not as precise as desired, as the role played by fair and equitable behavior varies from case to case. Nonetheless, this standard clearly allows justice to be achieved even where there are no traditional violations of international law standards. The role it plays gives the concept of the standard of fair and equitable treatment a distinctive position that is separate and distinct from, but closely related to the positions of all other standards, thus ensuring that the protection afforded to the investment is fully secured.
The arbitral tribunal believed in the good faith of the respondent, but drew attention to many points regarding the negligent behavior of the government during the negotiations with the claimant, and came across to examples of violations of its obligations to act fairly and equitably. The tribunal has also evaluated the continuous changes in the legal status of the project in accordance with the newly enacted laws within the scope of the obligation to act in a fair and equitable manner.
The arbitral tribunal also underlined that although it is normal to make legislative changes in a country, not all of the conditions affecting the investment decision of the investor can be changed against the investor.
III. CLAIMANT’S REQUESTS ACCEPTED BY THE ARBITRAL TRIBUNAL
As explained in detail above, the arbitral tribunal essentially recognised the claimant’s claims on the breach of respondent’s obligation to act fairly and equitably, thus decided accordingly. According to this decision, the arbitral tribunal, based on the expertise report, considering the costs incurred for financing, permits, company structure, preparation of drafts and negotiations, and implementation preparations, awarded US$ 9,061,479.34 compensation. Moreover, the arbitral tribunal awarded respondent to pay annual interest at the rate of LIBOR+2 average of six months and 35% of the arbitration costs are covered by claimant and 65% by respondent Turkey1.
IV. CLAIMANT’S DISMISSED REQUESTS
On the other hand, the arbitral tribunal dismissed claims on full protection and security, arbitrariness and discrimination, indirect expropriation and breach of other obligations related to investment. The full protection and security obligation is based on the third paragraph of the second article of the BIT. Claimant has developed two different arguments in this regard. Firstly, as identified in CME case, would it include the adverse effects of changes in the law or administrative actions on the investment. Secondly, as in the OEPC decision, violating the principle of fair and equitable treatment will automatically lead to a violation of the principle of full protection and security. The arbitral tribunal noted that this obligation has changed over time in the context of the physical safety of people and facilities, and can only be broadly evaluated in exceptional circumstances.
Claimant bases its claim of arbitrariness and discrimination on the third paragraph of the second article of the BIT. Aforementioned article provided for protection against arbitrary and discriminatory measures that impaired the management, operation, maintenance, use, enjoyment, acquisition, expansion or disposal of the investment. According to the claimants, this arose in the present case, especially with the refusal of ministerial approval and contractual rights and the refusal to reinstate such rights following the Constitutional Court’s decision. The arbitral tribunal, on the other hand, decided that this situation was a violation of the obligations to act in a fair and equitable manner and that it was not necessary to open a separate chapter in terms of arbitrariness and discrimination.
The claim of breach of the other obligations regarding the investment is based on the umbrella clause in the BIT. Umbrella clauses in investment agreements usually guarantee the fulfillment of all obligations undertaken by the host state in favor of investors willing to invest in that country. The arbitral tribunal did not find it necessary to decide whether there was a breach of the umbrella clause, as it could not find any evidence of breach of any contractual obligation2.
Tribunal decided that for indirect expropriation to take place, there had to be some form of deprivation of the investor in the control of the investment, the management of day-to day-operations of the company, interfering in the administration, impeding the distribution of dividends, interfering in the appointment of officials and managers, or depriving the company of its property or control in total or in part. However, the arbitral tribunal determined that even though the Turkish Government handled the pertinent issues incorrectly, this did not constitute indirect expropriation.
V. APPRECIATIONS
One of the important aspects of the case is that it is the first investment arbitration decision to which Turkey is a party3. The evaluations of the arbitral tribunal also have striking aspects. Namely;
Mihaly v. Sri Lanka case, the arbitral tribunal decided that the expenses incurred by the investor could not be claimed from the state, since the exchange of letters between the parties at the pre-contractual stage before the investment contract, in which the investment contract to be concluded in the future was discussed does not mean that the investment contract has been concluded. According to the arbitral tribunal, the negotiations ended without the conclusion of a binding contract and there is no obligation between the parties as no contract has been signed4. It is for this reason that respondent Turkey referred to this decision. The most striking part of the arbitral tribunal in PSEG v. Turkey case is that the ICSID arbitral tribunal concluded that the conditions in the PSEG Konya Ilgın case were different from the Mihaly case. It has been argued by claimant that the concession agreement concluded between PSEG Global and the Ministry of Energy for the establishment of a power plant in Konya, which passed the examination of the Council of State, should be accepted as an investment in accordance with the BIT concluded between Turkey and the USA. The Ministry of Energy, on the other hand, argued that there was no investment on the grounds that the project was not carried out. Unlike the Mihaly case, the arbitral tribunal in the PSEG case decided that since the concession agreement was approved by the Council of State and signed by the parties, the parties were bound by the contract, and therefore the research and development expenses incurred after the contract was signed were within the scope of the investment.
VI. CONCLUSION
Considering the different decisions made by ICSID, the interpretation of the obligation to act in a fair and equitable manner is applied by considering the fairness in each case. The interpretation and characterization of the legal relationship between the parties has vital importance in terms of the conclusions and the decisions taken by the arbitral tribunal. So much so, as noted in an example given above, in Mihaly v. Sri Lanka case, the exchange of letters did not constitute an investment contract, whereas in the PSEG Global v. Turkey case although there was essentially no concrete investment, claimant had only prepared a feasibility report and the investment opportunity had been eliminated in accordance with the changing laws, the arbitral tribunal ruled for compensation due to the host state’s failure to fulfill some of its obligations.
From my point of view, the decision of the ICSID arbitral tribunal regarding the violation of the obligation to act in a fair and equitable manner was appropriate when the material facts in the concrete dispute were taken into account.
BIBLIOGRAPHY
İLYAS GÖLCÜKLÜ, ‘‘Umbrella Clauses in the ICSID Arbitration’’, Public and Private International Law Bulletin, C. 37, S. 2, 2017. FOOTNOTE SÜLEYMAN DOST, ‘‘Adil ve Hakkaniyetli Davranış Yükümlülüğü Bağlamında PSEG/Konya Ilgın Elektrik-Türkiye Tahkim Kararı (ICSID)’’, İstanbul Barosu Dergisi, C. 81, S. 3, 2007. ALİ OSMAN KARAOĞLU, Yabancı Yatırımların Korunmasında Uluslararası Hukukun Rolü, 1.Baskı, İstanbul 2019. H. ERCÜMENT ERDEM, Milletlerarası Ticaret Hukuku ile İlgili Makaleler (2007-2016), 1. Baskı, İstanbul 2017.
FOOTNOTE
1 H. Ercüment Erdem, Milletlerarası Ticaret Hukuku ile İlgili Makaleler (2007-2016), İstanbul 2017, s.17.
2 İlyas Gölcüklü, ‘‘Umbrella Clauses in the ICSID Arbitration’’, Public and Private International Law Bulletin, Cilt: 37, Sayı: 2, s. 356.
3 Süleyman Dost, ‘‘Adil ve Hakkaniyetli Davranış Yükümlülüğü Bağlamında PSEG/Konya Ilgın Elektrik-Türkiye Tahkim Kararı (ICSID)’’, İstanbul Barosu Dergisi, Cilt 81, Sayı 3, s. 1072.
4 Ali Osman Karaoğlu, Yabancı Yatırımların Korunmasında Uluslararası Hukukun Rolü, İstanbul 2019, s. 101.
