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International Centre for Settlement of Investment Disputes
Case No. ARB/13/1
Karkey Karadeniz Elektrik Uretim A.S.
Claimant v.
Islamic Republic of Pakistan
Respondent
Request for Annulment of the Award dated August 22, 2017 in the case of Karkey Karadeniz Elektrik Uretim A.S. v. the Islamic Republic of Pakistan
October 27, 2017
Mr. Ahmad I. Aslam Head International Disputes Unit Office of the Attorney General of Pakistan Islamabad - Pakistan
Dr. Ignacio Torterola Dr. Diego Brian Gosis Mr. Quinn Smith GST LLP 1875 I Street N.W. 5th Floor Washington, D.C. 20006
Mr. Shahab Qutub Mr. Sameer Khosa Axis Law Chambers 5-S Gulberg II Lahore 54660 Pakistan
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TABLE OF CONTENTS GLOSSARY OF ABBREVIATED TERMS AND ACRONYMS ...... 3 FORMAL REQUIREMENTS ...... 7 IDENTIFICATION OF THE AWARD ...... 7 DATE OF THE REQUEST FOR ANNULMENT ...... 7 GROUNDS FOR ANNULMENT ...... 7 PAYMENT OF THE REGISTRATION FEE ...... 8 RELEVANT FACTS ...... 8 THE AWARD ...... 15 GROUNDS FOR ANNULMENT UNDER THE ICSID CONVENTION ...... 16 MANIFEST EXCESS OF POWERS ...... 17 SERIOUS DEPARTURE FROM A FUNDAMENTAL RULE OF PROCEDURE ...... 17 FAILURE TO STATE REASONS ...... 18 REASONS FOR ANNULMENT OF THE AWARD ...... 18 IN RELATION TO THE ISSUES OF JURISDICTION ...... 18 1. Manifest Excess of Power ...... 19 2. Failure to State Reasons ...... 21 IN RELATION TO THE ISSUES OF EXPROPRIATION ...... 24 1. Failure to State Reasons ...... 24 2. Serious Departure from a Fundamental Rule of Procedure ...... 25 3. Manifest Excess of Power ...... 26 IN RELATION TO THE ISSUE OF FREE TRANSFER ...... 27 1. Failure to State Reasons ...... 27 2. Manifest Excess of Power ...... 28 IN RELATION TO THE ISSUES OF CORRUPTION ...... 29 1. The Tribunal Prevented Pakistan from Being Heard ...... 29 2. The Tribunal Did Not Provide Equal Treatment to the Parties ...... 30 3. The Tribunal Departed from a Fundamental Rule of Procedure regarding Evidentiary Standards and Burden of Proof ...... 31 IN RELATION TO THE ISSUES OF DAMAGES ...... 33 1. Serious Departure from a Fundamental Rule of Procedure ...... 33 2. Failure to State Reasons ...... 33 3. Manifest Excess of Power ...... 35 STAY OF ENFORCEMENT OF THE AWARD ...... 36 REQUEST ...... 36
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Glossary of Abbreviated Terms and Acronyms
§ Section(s)
¶ Paragraph(s)
2008 RSC Rental Services Contract between Karkey Karadeniz Elektrik Uretim A.S. and Lakhra Power Generation Company Ltd., dated December 5, 2008
Advance Payment Bank guarantee to be provided by Karkey as security for the Down Payment amounting to US $80 million
Alican Bey Karadeniz Powership Alican Bey
Amendment No. 1 Amendment No.1 to the 2009 RSC, dated December 8, 2009
Arbitration Rules Rules of Procedure for Arbitration Proceedings
Award Award rendered on August 22, 2017
Backup Tapes Karkey’s electronic records for the period up to April 2010
BIT or Treaty or Pakistan-Turkey BIT Agreement Between the Islamic Republic of Pakistan and the Republic of Turkey Concerning the Reciprocal Promotion and Protection of Investments, which entered into force on September 3, 1997.
Contract Act 1872 Pakistani Contract Act
Contract or 2009 RSC Rental Services Contract between Karkey Karadeniz Elektrik Uretim A.S. and Lakhra Power Generation Company Ltd., dated April 23, 2009
Counter-Memorial Pakistan’s Counter-Memorial and Objections to Jurisdiction, dated January 23, 2015
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Decision on Provisional Measures Decision on Provisional Measures, dated October 16, 2013
Decision on the Request for Decision on the Respondent’s Request Bifurcation for Bifurcation, dated May 13, 2014
Draft RSC The draft contract appended to the Request for Proposal for Package B
ECC Economic Coordination Committee of the Cabinet of Pakistan
FBR Federal Bureau of Revenue
FPLC Fuel Payment Letter of Credit
Hearing hearing on Jurisdiction and Merits held in London from 29 February to 12 March 2016
Hearing on Provisional Measures Hearing on Provisional Measures held on October 8, 2013
Hr’g Tr. Hearing Transcripts
ICSID International Centre for Settlement of Investment Dispute
ICSID Convention Convention on the Settlement of Investment Disputes between States and Nationals of Other States, dated March 18, 1965
ILC International Law Commission
Iraq and Enis Bey Two support vessels located in Pakistan
Karkey Karkey Karadeniz Elektrik Uretim A.S.
Karpak Karpak (Pvt.) Ltd.
Kaya Bey Karadeniz Powership Kaya Bey
Lakhra Lakhra Power Generation Company Ltd.
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LCIA London Court of International Arbitration
LoA Letter of Award issued to Karkey on November 7, 2008
Memorial Karkey’s Updated Memorial on Jurisdiction and the Merits, dated October 10, 2014
MoWP Ministry of Power and Water of Pakistan
NAB National Accountability Bureau
Pakistan Islamic Republic of Pakistan
PEPCO Pakistan Electric Power Company Limited
PHB Post-Hearing Brief
Powerships The Kaya Bey and The Alican Bey
PPIB Private Power and Infrastructure Board of Pakistan
Rejoinder Pakistan’s Rejoinder on Jurisdiction and the Merits, dated October 29, 2015
Reply Karkey’s Reply on Jurisdiction and the Merits, dated August 5, 2015
Request Request for Annulment
RPP(s) Rental Power Project(s)
Sovereign Guarantee Guarantee of the Islamic Republic of Pakistan, dated as of April 24, 2009
Supreme Court Supreme Court of Pakistan
Supreme Court Judgment Judgment of the Supreme Court of Pakistan in the Rental Power Case, dated March 30, 2012
Sur-Rejoinder Karkey’s Sur-Rejoinder on Counterclaims, dated December 21, 2015
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Target COD Target Commercial Operations Date
Vessels Karkey’s vessels in Pakistan, i.e., the Kaya Bey, the Alican Bey, the Iraq, and the Enis Bey
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Request for Annulment made by the Islamic Republic of Pakistan
1. In accordance with Article 52 of the Convention on the Settlement of Investment Disputes between States and Nationals of other States (“ICSID Convention”) and Arbitration Rule 50 of the Rules of Procedure for Arbitration Proceedings (“Arbitration Rules”), the Islamic Republic of Pakistan (“Pakistan”) respectfully presents this Request for Annulment (“Request”) of the Award issued in the case Karkey Karadeniz Elektrik Uretim A.S. v. the Islamic Republic of Pakistan (ICSID Case No. ARB/13/1) on August 22, 2017.
Formal Requirements
2. Arbitration Rule 50(1) sets forth that an application for annulment of an award shall (a) identify the award to which it relates; (b) indicate the date of the application; (c) state the grounds on which it is based; and (d) be accompanied by the payment of a fee for lodging the application. The following sections shall deal with each of these requirements.
Identification of the Award
3. Pakistan requests the annulment of the Award in the case Karkey Karadeniz Elektrik Uretim A.S. v. the Islamic Republic of Pakistan (ICSID Case No. ARB/13/1), rendered by Mr. Yves Derains, Sir David A.O. Edward, and Dr. Horacio A. Grigera Naon on August 22, 2017 (the “Award”).
Date of the Request for Annulment
4. This Request for Annulment is submitted on October 27, 2017, that is, within 120 days as from the date when the Award was rendered, in accordance with Arbitration Rule 50(3)(b).
Grounds for Annulment
5. The Award should be annulled on the basis of the following grounds, set out in Article 52(1) of the ICSID Convention: (a) the Tribunal has manifestly exceeded its powers; (b) there has been a serious departure from a fundamental rule of procedure; and (c) the Award has failed to state the reasons on which it is based.
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Payment of the Registration Fee
6. Pakistan encloses, with this Request for Annulment, confirmation of its payment of the USD 25,000 lodging fee.
Relevant Facts
7. Pakistan considers that a brief summary of the most important aspects of the dispute resulting in the Award, as well as a very brief explanation of the grounds for annulment invoked, will assist the Committee in appreciating the reasons why the Award should be annulled. 8. Claimant in this case is Karkey Karadeniz Elektrik Uretim A.S. (“Karkey”), a power generation company organized under the laws of Turkey, with its principal place of business in Istanbul.1 9. Between 2006 and 2007 Pakistan faced a major energy crisis, with an electricity shortage in the country resulting in twelve to sixteen hours of load-shedding daily.2 To overcome this crisis Pakistan adopted a policy of power generation through Rental Power Projects (“RPPs”).3 10. Karkey began developing powership fleets for rental projects in 2007-2008.4 11. An invitation for bids by the Private Power and Infrastructure Board of Pakistan (“PPIB”) was published in May 2008.5 On June 4, 2008, Karkey wrote to PPIB expressing its intention to register to participate in one of the packages set out in the invitation for bids.6 On June 12, 2008, the Ministry of Power and Water (“MoWP”) modified the requirements for the package under which Karkey was going to be bidding.7 On July 14, 2008, Karkey submitted its
1 Award, ¶ 2. 2 Id., ¶ 75. 3 Id., ¶ 76. 4 Id., ¶ 77. 5 Id., ¶ 81 (the Award refers to May 2009, however, Exhibit C-136 referred to by the Tribunal must be of May 2008). 6 Id., ¶ 84. 7 Id., ¶ 85.
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bid, representing that commercial operations would be achieved within 180 days from the issuance of the letter awarding the project.8 12. On September 10, 2008, the Economic Coordination Committee of the Cabinet of Pakistan (“ECC”) approved Karkey as qualified to receive a letter of award.9 The Letter of Award (“LoA”) was issued to Karkey on November 7, 2008.10 On December 5, 2008, Karkey signed a contract with Lakhra Power Generation Company Ltd. (“Lakhra”), a State-owned company, for the provision of barge-mounted rental power (“2008 RSC”).11 13. The terms of the 2008 RSC were modified after the issuance of the LoA, amongst other things, in relation to the letter of credit that Lakhra was supposed to secure and the advance payment,12 and these changes were approved ex post facto by the Lakhra Board on February 7, 2009, subject to the approval by the Pakistan Electric Power Company Limited (“PEPCO”).13 On April 23, 2009, Lakhra and Karkey entered into a new contract (“2009 RSC”), replacing the 2008 RSC.14 This agreement set out that commercial operations were to be achieved six months from the LoA, the making of the Advance Payment and the execution of the Sovereign Guarantee.15 14. In July 2009, the Minister for Water and Power (“Minister”) and Chairman of PPIB (Mr. Ashraf) started receiving requests for information regarding the award of the rental projects from the Pakistani chapter of Transparency International, to which he did not respond.16 In September 2009, the Pakistani parliamentarian Mr. Makhdoom Syed Faisal Saleh Hayat wrote an open letter to the Chief Justice of Pakistan regarding allegations of corruption in relation to
8 Id., ¶ 86. 9 Id., ¶ 91. 10 Id., ¶ 93. 11 Id., ¶ 95. 12 Ibid. 13 Id., ¶ 100. 14 Id., ¶ 101. 15 Id., ¶ 102. 16 Id., ¶ 104.
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these projects, and the Chief Justice opened a case in the Supreme Court on this issue the following day.17 15. On November 25, 2009, the Federal Board of Revenue (“FBR”) ordered the Lahore tax office to refund to Karkey a 6% withholding tax, which had been deducted from the Advance Payment.18 On December 8, 2009, Lakhra and Karkey entered into an Amendment No. 1 to the 2009 RSC, which changed the Project Site and extended the target commercial operations date to April 7, 2010.19 Karkey failed to achieve that target date.20 16. On January 2, 2010, Karkey established a wholly-owned Pakistani subsidiary, Karpak (Pvt.) Ltd. (“Karpak”), and assigned to it certain rights and obligations under the 2009 RSC in relation to the operation and maintenance of the powerships and fuel purchase operations.21 17. In January 2010, both the Asian Development Bank and Transparency International issued a report and requests, respectively, with regard to issues of transparency in the RPPs.22 18. On September 23, 2010, the Supreme Court of Pakistan ordered that notices be issued to the CEOs of the RPP sponsors.23 19. In April 2011, after certification tests by a Dutch company, Lakhra granted Karkey the Commercial Operation Achievement Certificate.24 On April 24, 2011 Karkey ceased electricity generation as Lakhra had not furnished the Fuel Payment Letter of Credit (“FPLC”) nor paid overdue Fuel Payment Invoices for January and February 2011.25 On May 6, 2011,
17 Id., ¶ 105. 18 Id., ¶ 109. 19 Id., ¶ 110. 20 Id., ¶ 115. 21 Id., ¶ 111. 22 Id., ¶¶ 112-113. 23 Id., ¶ 116. 24 Id., ¶ 120. 25 Id., ¶¶ 121-122.
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Karkey re-commenced power generation.26 On February 8, 2012, Karkey served Lakhra a Final Notice of Default for failure to establish the FPLC.27 20. On March 30, 2012, Karkey served Lakhra with a Notice of Termination regarding the 2009 RSC, and demanded therein certain payments according to the terms of the agreement.28 On that same date, the Supreme Court rendered its judgment (“Supreme Court Judgment”) concluding that the RPP contracts of 2008 had been procured in breach of the Pakistani Procurement Rules, declaring all these contracts (including the 2009 RSC) void ab initio, directing that they be rescinded, and ordering that an investigation by the National Accountability Bureau (“NAB”) into issues of corruption be commenced regarding the RPP contracts/agreements.29 21. The NAB investigation resulted in a freeze on Karkey’s assets, including its bank accounts, and in certain persons involved in the matter being placed on the Exit Control List.30 Karkey was instructed to cease electricity dispatch and power supply to the vessels was cut off.31 On April 3, 2012 a “caution” was placed on the vessels by NAB, directing that they could not be moved until completion of the NAB inquiry.32 22. On May 19, 2012, Karkey delivered a notice of dispute under the Pakistan-Turkey BIT (the “BIT” or the “Treaty”) to Pakistan, requesting the start of amicable negotiations.33 23. On September 7, 2012, NAB, Lakhra and Karkey entered into a “Deed” providing that Karkey would pay USD 17.2 million, resolving all matters arising from the 2009 RSC, the Supreme Court Judgment and the NAB inquiry, including lifting the freeze on Karkey’s assets
26 Id., ¶ 123. 27 Id., ¶ 124. 28 Id., ¶ 125. 29 Id., ¶ 126. 30 Id., ¶ 128. 31 Id., ¶ 129. 32 Id., ¶ 130. 33 Id., ¶ 135, C-007.
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and vessels.34 This amount was paid in escrow by Karkey and NAB issued a No Objection Certificate to Karkey on October 11, 2012.35 24. In November 2012, Mr. Hayat wrote a letter to the Chief Justice of Pakistan requesting that NAB not be allowed to release the vessels from Pakistan.36 On November 2, 2012, NAB reactivated the caution on Karkey’s vessels.37 The Supreme Court ordered NAB to recalculate the amount recoverable from Karkey. The amount as recalculated by NAB amounted to USD 120 million, which the Supreme Court ordered NAB to recover from Karkey. NAB notified Karpak that, pursuant to the Supreme Court’s orders, Karkey was required to pay USD 120 million to NAB within 7 days.38 Karpak informed NAB that it had no authority to receive notifications on behalf of Karkey, and, on December 3, 2012, NAB notified Karkey of the order that it must pay USD 128 million, and that the vessels had been detained as security for this payment.39 On January 11, 2013, the Supreme Court ordered NAB to pursue criminal liability and arrest persons involved in the RPPs.40 25. On January 16, 2013, Karkey filed its request for arbitration, along with a request for provisional measures. In its request for arbitration, Karkey sought relief on the basis of the Pakistan-Turkey BIT, requesting that the Tribunal declare that Pakistan has breached the BIT by failing to do the following: (a) prevent its investment from being expropriated without prompt, adequate and effective compensation; (b) grant Karkey and its investments treatment no less favorable than that which it accords its own investors or investors of other nations; (c) ensure that Karkey and its investments are treated fairly and equitably and in a non-discriminatory, non- arbitrary, and reasonable manner; (d) accord Karkey’s investments full protection and security; (e) abide by specific commitments made to Karkey; and (f) permit in good faith any and all transfers related to Karkey’s investments. Additionally, Karkey requested damages as appropriate.
34 Award, ¶ 136. 35 Id., ¶¶ 137-138. 36 Id., ¶ 140. 37 Id., ¶ 141. 38 Id., ¶¶ 142-143. 39 Id., ¶ 144. 40 Id., ¶ 145.
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26. In January 2013, the NAB Chairman wrote to the President of Pakistan expressing concerns about the Supreme Court’s actions in relation to the NAB investigation.41 The Supreme Court then issued a Contempt of Court notice against the Chairman of NAB.42 27. On May 23, 2013, Lakhra filed a suit against Karkey in the Sindh High Court seeking the recovery of USD 128 million and requesting an arrest order for Karkey’s vessels. On May 29, 2013, the Sindh High Court granted the arrest order.43 28. On July 25, 2013, the Tribunal, made up of Yves Derains (President), Horacio Grigera Naón and David A.O. Edward, was constituted. 29. On October 16, 2013, the Tribunal issued its Decision on Provisional Measures, ordering Pakistan to take all necessary steps to allow the Karadeniz Powership Kaya Bey vessel to depart from Pakistani waters.44 Lakhra then requested a modification of the arrest order to allow for the departure of the Kaya Bey vessel. NAB opposed this request unless Karkey were to post a bank guarantee.45 On December 23, 2013, the Sindh High Court declined to grant Lakhra’s request. 30. On October 20, 2013, another suit was filed against Karkey before the Sindh High Court by Bulk Shipping & Trading Limited, Karkey’s Pakistani shipping agent, requesting approximately USD 2 million in unpaid fees and damages, and the arrest of Karkey’s four vessels.46 The order for arrest was granted by the Sindh High Court on November 5, 2013.47 On May 15, 2014, the Sindh High Court revoked the arrest of the four detained vessels upon Karkey furnishing a pay order to the Sindh High Court for the amounts allegedly owed to Bulk Shipping & Trading Limited.48
41 Id., ¶ 147. 42 Id., ¶ 148. 43 Id., ¶ 149. 44 Id., ¶ 150, Decision on Provisional Measures (October 16, 2013). 45 Award, ¶¶ 151-152. 46 Id., ¶ 153. 47 Id., ¶ 154. 48 Id., ¶ 158.
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31. On January 31, 2014, Karkey submitted its Memorial, and filed an updated version on October 10, 2014. It made the same claims under the BIT as in its Request for Arbitration, including a claim of more than USD 1.7 billion in damages.49 32. On March 14, 2014, Pakistan submitted its Notice of Jurisdictional Objections and Request for Bifurcation. Pakistan raised four jurisdictional objections: (a) that Karkey had not complied with the local courts clause in Article VII(2) of the BIT; (b) that Karkey’s investment could not be considered a protected investment under the BIT or the ICSID Convention; (c) that the Tribunal had no jurisdiction over contractual breaches; and (d) that the Tribunal had no jurisdiction over claims based on the MFN clause.50 33. On May 7, 2014, the Sindh High Court Division Bench (Appellate Jurisdiction) issued an order permitting the release of the Kaya Bey.51 34. In May 2014, the Kaya Bey was permitted to leave Pakistani waters pursuant to the Arbitral Tribunal’s Decision on Provisional Measures.52 The Alican Bey and its two support vessels (the Iraq and Enis Bey) were not permitted to depart Pakistani waters.53 35. On May 13, 2014, the Tribunal issued its Decision on the Request for Bifurcation, wherein it rejected the request for bifurcation.54 36. On August 1, 2014, the Tribunal issued Procedural Order No. 4, in which it modified its Decision on Provisional Measures, allowing for the Kaya Bey not to be returned to Pakistan.55 37. Pakistan filed its Counter Memorial and Objections to Jurisdiction on January 23, 2015, which included a Counterclaim in its Counter Memorial.56 38. On August 5, 2015, Karkey filed its Reply on Jurisdiction and the Merits.57
49 Memorial on the Merits (January 31, 2014, updated on October 10, 2014). 50 Pakistan’s Notice of Jurisdictional Objections and Request for Bifurcation (March 14, 2014). 51 Award, ¶ 157. 52 Decision on Provisional Measures (October 16, 2013). 53 Award, ¶ 131. 54 Decision on the Request for Bifurcation (May 13, 2014). 55 Procedural Order No. 4 (August 1, 2014). 56 Counter Memorial and Objections to Jurisdiction (January 23, 2015). 57 Reply on Jurisdiction and the Merits (August 5, 2015).
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39. On October 29, 2015, Pakistan filed its Rejoinder and Objections to Jurisdiction.58 40. On December 21, 2015, Karkey filed its Sur-Rejoinder on Counterclaims.59 41. The hearing on jurisdiction and the merits was held from February 29 through March 12, 2016 in London, UK. On April 29, 2016, both parties filed their Post-Hearing Briefs. On May 25, 2016, each party filed its Submission on Costs and on June 8, 2016, the parties commented on the other party’s Submission on Costs. 42. On June 6, 2017, the Tribunal declared the proceedings closed in accordance with Arbitration Rule 38(1), and on August 22, 2017, it rendered the Award.
The Award
43. In the Award, the Tribunal found that it had jurisdiction over Karkey’s claims,60 but it did not have jurisdiction over Pakistan’s counterclaims.61 The Tribunal also found that Karkey does not have standing to assert claims based on the treatment of contracts and assets of a company in which it holds shares (Karpak).62 44. As to the merits, the Tribunal found that Pakistan had expropriated Karkey’s investments, in breach of Article III of the Pakistan-Turkey BIT.63 It found this expropriation to have taken place as follows: “through its Supreme Court … Pakistan deprived Karkey of the use and enjoyment of its contractual rights, including Karkey’s right to terminate the Contact and, as stated below, interfered with the free transfer of Karkey’s investment.”64 There is no analysis by the Tribunal of how this alleged taking was a breach of Article III of the BIT. It also found that Pakistan had breached Karkey’s right to free transfer “of its investment” in breach of Article IV of the BIT.65
58 Rejoinder and Objections to Jurisdiction (October 29, 2015). 59 Sur-Rejoinder on Counterclaims (December 21, 2015). 60 Award, ¶ 640. 61 Id., ¶ 1016. 62 Id., ¶¶ 716, 752, 889. 63 Id., ¶ 649. 64 Id., ¶ 648. 65 Id., ¶ 655.
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45. The Tribunal dismissed all other claims brought by the parties in the arbitration.66 This dismissal necessarily includes all requests of Karkey in relation to fair and equitable treatment including non-discriminatory, non-arbitrary and reasonable treatment, national treatment, most favored nation treatment, full protection and security, and specific commitments. 46. As to damages, the Tribunal ordered that Pakistan pay (a) USD 149,802,431 plus interest of 12% compounded annually as from March 30, 2012, for termination charges; (b) USD 28,923,000 plus interest of 12% compounded annually as from March 30, 2012, for outstanding unpaid invoices; (c) USD 566,000 plus interest of 12% compounded annually as from March 30, 2012, for mobilization and transport charges with respect to the Kaya Bey; (d) USD 10,000,000 plus interest of 7% compounded annually as from May 15, 2014, for repair costs of the Kaya Bey; (e) USD 98,200,000 plus interest of 7% compounded annually as from March 30, 2012, for lost profits stemming from the detention of the Kaya Bey (which relates to the period March 31, 2012 to June 20, 2015); (f) USD 120,000,000 plus interest of 7% compounded annually as from March 30, 2012, for the cost of replacement of the Alican Bey (with the Tribunal also ordering Karkey to transfer its legal title over the Alican Bey to Pakistan); (g) USD 64,800,000 plus interest of 7% compounded annually as from March 30, 2012, for lost profits stemming from the detention of the Alican Bey (which relates to the period March 31, 2012 to March 1, 2018); (h) USD 2,000,000 plus interest of 7% compounded annually as from March 30, 2012, for the replacement cost of the Iraq—with the consequent transfer of title; (i) USD 11,497,965 plus interest of 7% compounded annually as from March 30, 2012, for the delay to the Construction Program; (j) USD 4,599,786 plus interest at 7% compounded annually as from March 30, 2012, for the increase in Karkey’s insurance premium; and (k) legal costs and fees and arbitration costs.67
Grounds for Annulment under the ICSID Convention
47. Under Article 52(1) of the ICSID Convention either party may request the annulment of an award based 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
66 Id., ¶ 1081(xvii). 67 Id., ¶ 1081(iv), (v), (vi), (vii), (viii), (ix), (x), (xi), (xii), (xiii), (xv) and (xvi).
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departure from a fundamental rule of procedure; or (e) that the award has failed to state the reasons on which it is based. Pakistan is requesting the annulment of the Award based on the grounds expressed in Article 52(1)(b), (d), and (e).
Manifest Excess of Powers
48. Article 52(1)(b) refers to the ground for annulment on the basis that a tribunal manifestly exceeded its powers. A manifest excess of powers has been considered to exist when a tribunal decides on an issue over which it has no jurisdiction or if it does not deal with an issue over which it has competence.68 There is also a manifest excess of power when a tribunal does not meet its mandate as agreed upon in the arbitration agreement. This includes, for example, cases where the tribunal has not applied the applicable law.69
Serious Departure from a Fundamental Rule of Procedure
49. The prevailing interpretation of Article 52(1)(d) holds that annulment under this ground requires two elements: (a) that the rule of procedure be fundamental; and (b) that the departure from that rule be serious.70 Examples of fundamental rules of procedure identified by ad hoc committees include equitable treatment of the parties, the right to be heard,71 right to an
68 C. SCHREUER ET AL, THE ICSID CONVENTION: A COMMENTARY (2009), Article 52, ¶¶ 155-190. 69 Industria Nacional de Alimentos S.A. & Indalsa Perú S.A. v. Peru, ICSID Case No. ARB/03/4, Decision on Annulment (September 5, 2007), ¶ 98. 70 TECO Guatemala Holdings LLC v. Guatemala, ICSID Case No. ARB/10/23, Decision on Annulment (April 5, 2016), ¶ 81; C. SCHREUER ET AL, THE ICSID CONVENTION: A COMMENTARY (2009), ARTICLE 52, ¶ 280; Maritime International Nominees Establishment v. Guinea, ICSID Case No. ARB/84/4, Decision on Annulment (December 22, 1989), ¶ 5.05. 71 In Maritime International Nominees Establishment v. Guinea, ICSID Case No. ARB/84/4, Decision on Annulment (December 22, 1989), the ad hoc committee held that “The Committee considers that a clear example of such a fundamental rule is to be found in Article 18 of the UNCITRAL Model Law on International Commercial Arbitration which provides: The parties shall be treated with equality and each party shall be given full opportunity of presenting his case.”, ¶ 5.06.
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independent and impartial tribunal, the prohibition against ultra petita,72 and treatment of evidence and burden of proof.73
Failure to State Reasons
50. This ground for annulment is intimately connected with Article 48(3) of the ICSID Convention, which sets out that “[t]he award shall deal with every question submitted to the Tribunal, and shall state the reasons upon which it is based.” This ground for annulment has been interpreted to mean that the award shall not contain contradictory reasons,74 that it shall not have lacunae,75 or that it shall not fail to respond to issues submitted by the parties to the tribunal.76 51. The purpose of requiring that a tribunal state reasons on which the award is based is to guarantee that the parties can follow the reasoning of the tribunal, i.e., the facts and law applied by the tribunal to arrive at its conclusions. Thus, “there must be a reasonable connection between the bases invoked by a tribunal and the conclusions reached by it.”77
Reasons for Annulment of the Award
In Relation to the Issues of Jurisdiction
52. In relation to jurisdiction, the Tribunal manifestly exceeded its powers and failed to state the reasons for its decision. These severe defects are grounds of annulment under Article 52(1)(b) and 52(1)(e) of the ICSID Convention.
72 Continental Casualty Co. v. Argentina, ICSID Case No. ARB/03/9, Decision on Annulment (September 16, 2011), ¶ 268. 73 C. Schreuer, et al., THE ICSID CONVENTION: A COMMENTARY (2009), Article 52, ¶¶ 285-87; Katia Yannaca-Small, ARBITRATION UNDER INTERNATIONAL INVESTMENT AGREEMENTS (2010), p. 618. 74 Maritime International Nominees Establishment v. Guinea, ICSID Case No. ARB/84/4, Decision on Annulment (December 22, 1989), ¶ 5.09. 75 Patrick Mitchell v. Democratic Republic of Congo, ICSID Case No. ARB/99/7, Decision on Annulment (November 1, 2006), ¶¶ 40-41. 76 Maritime International Nominees Establishment v. Guinea, ICSID Case No. ARB/84/4, Decision on Annulment (December 22, 1989), ¶ 5.13. 77 Amco Asia Corp. v. Indonesia, ICSID Case No. ARB/81/1, Decision on Annulment (May 16, 1986), ¶ 43.
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1. Manifest Excess of Power
53. When deciding if Karkey’s alleged investment conformed with Pakistani law, the Tribunal had an obligation to apply Pakistani law on two key grounds: (i) the scope of domestic laws breached for purposes of a finding of illegality; and (ii) the effect of Karkey’s admitted failure to follow Pakistani law. The Tribunal failed to apply the proper (i.e. Pakistani) law to those issues. To compound matters further, the Tribunal created jurisdiction by estoppel—a prototypical case of manifest excess of power. 54. Moving to the first issue, Pakistan argued that Karkey had misrepresented its ability to reach the Target Commercial Operations Date (“Target COD”) during the bid.78 The Tribunal concluded as follows:
[I]t is not possible to conclude that there was fraud as there is no evidence that the Claimant’s statement that it could achieve the Target COD within the time frame indicated in its Project Schedule was made in bad faith and/or that the Claimant was trying to mislead Pakistan with respect to its abilities in order to be awarded the Contract.79 55. This is a test of Karkey’s subjective intent to defraud, i.e. whether Karkey thought it was defrauding Pakistan. But this is not the scope or the end of the inquiry under the appropriate law. The applicable Pakistani law and rules allow for an objective test based in the reasonable belief in the truth of the statement put forth, as explained by Pakistan in its memorials.80 This is especially egregious in light of the Tribunal’s other findings: the Tribunal conceded that Karkey was “overly optimistic” with respect to its capabilities to satisfy the Target COD,81 which in fact amounts to the objective element contemplated by the local legislation.82 Under Pakistani law statements not made in bad faith or with an intent to mislead amount to
78 Pakistan’s Post Hearing Brief, ¶¶ 88-89. 79 Award, ¶ 619. 80 See, Contract Act 1872, Sections 17(1), 17(3), 17(5) and 18(1), Rejoinder, ¶¶ 329-339, and Pakistan’s Post Hearing Brief, ¶ 130. 81 Award, ¶ 620. 82 See, Contract Act 1872, Sections 17(1), 17(3), 17(5) and 18(1), Rejoinder, ¶¶ 329-339, and Pakistan’s Post Hearing Brief, ¶ 130.
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misrepresentation.83 The Tribunal failed to apply this law, the implications of which are that such a misrepresentation could fall within the purview of a fraudulent practice resulting in mis- procurement.84 The Tribunal therefore altogether failed to apply the applicable standard for fraud and misrepresentation under the relevant (i.e. Pakistani) law. By deciding only on subjective intent, the Tribunal failed to decide on Karkey’s objective intent, despite a finding showing the existence of objective intent to commit fraud. This is a failure to apply Pakistani law. Considering that the Treaty only protects investments that are “in conformity with the hosting Party’s laws and regulations” (Article I(2)), the non-application of Pakistani law constitutes a manifest excess of power by the Tribunal. 56. Second, the Tribunal found that Karkey breached Pakistani law in the contracting process, but it gave no effect to those breaches. Instead, the Tribunal only considered that its conclusion was particularly on point “since breaches attributable to Pakistan contributed to render impossible to test Karkey’s ability to reach the contractual target.”85 This conclusion has two problems. The Tribunal failed to identify these breaches, which makes it impossible to know the basis of the Tribunal’s conclusion. Moreover, even if the Tribunal would have identified the supposed breaches, the fact that Pakistan’s breaches only contributed to Karkey’s failure rather than fully causing it shows that Karkey’s illegal actions continued to exist. The Tribunal’s failure to consider the continuing effects of those breaches by Karkey is a manifest excess of power. 57. Importantly, the Tribunal considered it had jurisdiction based on a non-existent notion of estoppel. Pakistan claimed that the Contract was procured in breach of Pakistani procurement laws due to changes to the draft contract appended to the Request for Proposal (“Draft RSC”) that allegedly shifted the balance of the transaction to the detriment of Pakistan. The Tribunal took note of Pakistan’s allegations,86 but failed to fully consider these allegations under Pakistani law. Instead, the Tribunal concluded that Pakistan was estopped from seeking a finding of illegality in light of Pakistan’s purported agreement to the changes as well as its
83 See, Contract Act 1872, Section 18. 84 See, Pakistan Procurement Rules 2004, Rule 2 (1)(f), Rejoinder and Objections to Jurisdiction, ¶¶ 330, 335-39, and Pakistan’s PHB, ¶ 130. 85 Award, ¶ 619. 86 Id., ¶ 623.
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representations before the Supreme Court that the contract complied with Pakistani procurement laws. This conclusion is untenable. 58. Under international law, a Tribunal cannot assume jurisdiction by estoppel. In this case, Article I(2) of the BIT explicitly requires that the alleged investment be made in accordance with the host State’s laws. The fact that an investment was tainted by illegality should necessarily require a finding in favor of Pakistan. In any case, Pakistan’s conduct cannot, on its own, establish jurisdiction that the Tribunal otherwise lacked. In addition to the failure to apply Pakistani law, this manifest excess of powers requires the complete annulment of the Award under Article 52(1)(b) of the ICSID Convention.
2. Failure to State Reasons
59. In assuming jurisdiction over a contract for rental services, the Tribunal did not state the reasons for its decision, as required by Article 52(1)(e). Pakistan made numerous arguments as to the Tribunal’s lack of jurisdiction under both the Treaty and the ICSID Convention. Pakistan argued that the Kaya Bey and Alican Bey (the “Powerships”) and their supporting vessels were not an investment under the BIT;87 that neither Karkey’s shareholding in its Pakistani subsidiary Karpak88 nor its Pakistani bank accounts constituted an investment under the BIT;89 and that Karkey’s purely contractual claims were outside the Tribunal’s jurisdiction and subject to an LCIA arbitration clause.90 With regards to the requirements set in the ICSID Convention, Pakistan argued that Karkey’s contract was merely a commercial sale or rent-of- goods contract rather than an investment contract,91 and that Karkey’s alleged investment failed to satisfy each of the Salini test elements, which are the objective elements used to establish the existence of an investment under Article 25.92 In the Award, the Tribunal did not address fundamental arguments made by Pakistan, providing no reasons for its decision.
87 Counter-Memorial, ¶¶ 987-993, Rejoinder, ¶ 614. 88 Counter-Memorial ¶¶ 994-995, Rejoinder, ¶¶ 615-616. 89 Counter-Memorial, ¶¶ 996-997, Rejoinder, ¶¶ 617-618. 90 Counter-Memorial, ¶¶ 998-1012. 91 Counter-Memorial, ¶¶ 962-970, Rejoinder, ¶¶ 592-603. See also, Award, ¶ 344. 92 Counter-Memorial, ¶¶ 972-986, Rejoinder, ¶¶ 604-613.
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60. As to the Tribunal’s silence, the Tribunal failed entirely to address Pakistan’s objection to jurisdiction based on the LCIA arbitration clause. In addition, the Tribunal did not address Pakistan’s objection concerning Karkey’s bank accounts (even though it factored these bank accounts into Karkey’s overall compensation).93 Pakistan raised objections on these points, but the Tribunal chose not to address them. 61. The Tribunal’s analysis regarding the existence of an investment did not meet the standards required by the ICSID Convention. For instance, after explicitly endorsing Pakistan’s proposal to apply the Salini test to identify an investment under the ICSID Convention,94 the Tribunal fell short of providing the reasons for why Karkey’s alleged investment satisfied each of those elements, despite Pakistan’s detailed arguments to the contrary. 62. Notably, the Tribunal settled the issue in only one paragraph. And in this single paragraph, despite the dozens of complex legal issues, documentary materials, and legal authorities discussed by the parties, the Tribunal simply asserted, without reasoning, that Karkey made an investment in accordance with each of the elements in the Salini test:
[T]he Tribunal is satisfied that Karkey made an investment in Pakistan within the meaning of Article 25(1) as: (i) it contributed significant capital; (ii) the Contract had a substantial duration of 5 years; (iii) Karkey took a reasonable risk on the transaction; and (iv) it contributed to the economic development of Pakistan by providing electricity.95 63. The only three footnotes that refer to this matter—a footnote for the capital contributions element; a footnote for the risk element; and a footnote for the contribution to economic development element96—show that the Award provides only frivolous reasons or no reasons at all for the Tribunal’s conclusion. 64. Also, the Tribunal gave short shrift to Pakistan’s arguments regarding the fact that no permanent infrastructure remained in Pakistan after the alleged investment. Instead, the Tribunal merely asserted that the 2009 RSC and the Vessels were contemplated as investments in Article I(2) of the BIT, without providing any reasons to dismiss Pakistan’s cogent and specific
93 Award, ¶ 195. 94 Id., ¶ 633. 95 Id., ¶ 636. 96 Id. ¶ 636 and footnotes 710, 711, and 712.
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arguments to the contrary.97 Nevertheless, the analysis under the Treaty does not replace the independent analysis that the Tribunal had to make under the ICSID Convention, i.e. the Salini test. 65. Finally, the Tribunal established its own jurisdiction by reaching the conclusion that the Supreme Court Judgment, which declared the 2009 RSC as being void ab initio, was not binding on it and therefore not dispositive of whether the investment was made in conformity with Pakistani law.98 However, the Tribunal completely failed to consider the applicable law in determining this question–even failing to apply its own stated test. The Tribunal stated that it “must analyze whether the Judgment presents deficiencies which are unacceptable from the view point of international law.”99 The only two authorities that the Tribunal cited in relation to when such a judgment may be unacceptable are Helnan v. Egypt100 and Diallo.101 In Helnan, the portion cited by the Tribunal clearly states that deficiencies of procedure and substance have to be of such a nature so as to render them “unacceptable” from the viewpoint of international law “such as in the case of denial of justice.” Therefore, not every departure from procedure, and not every substantive criticism, would deprive the local courts of the authoritative value of their pronouncement on matters of domestic law. Further, Diallo, as cited by the Tribunal, is even more stringent: it requires that the Tribunal would not be bound in “exceptional circumstances,” that there be a “manifestly incorrect” interpretation of domestic law, and that it be motivated in some manner such as “for the purpose of gaining an advantage in a pending case.”102 66. The Tribunal discusses what it considers to be deficiencies in the Supreme Court Judgment, but does not discuss whether those deficiencies were (a) material to the outcome of the Supreme Court's finding; (b) applied specifically to the way the Supreme Court addressed the case before it; (c) what the applicable standards for arbitrariness and irrationality are under
97 Counter-Memorial, ¶¶ 952-993, Rejoinder, ¶¶ 592-613. 98 Id., ¶ 561. 99 Id., ¶ 550. 100 Id., ¶ 549. 101 Award, ¶ 551; ICJ Case concerning Ahmadou Sadio Diallo, Republic of Guinea v. Democratic Republic of the Congo, Judgment of 30 November 2010, ICJ Reports 2010, p. 639 ¶ 70. 102 Award, ¶ 551.
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international law; and (d) whether they met the high standard and test that the Tribunal itself laid out. In not applying its own stated test, and the standards set out in Helnan and Diallo, the Tribunal failed to state the reasons for its Award. 67. In conclusion, the Award does not allow the parties or any reasonable reader to understand the Tribunal’s reasoning regarding the existence of a protected investment under the BIT and the ICSID Convention. This is a matter that affects the validity of the whole Award. If there was no protected investment, then the Tribunal had no jurisdiction to render any decision concerning this dispute. As such, in accordance with Article 52(1)(e) of the ICSID Convention, the Award should be annulled in full for failure to state the reasons that justify the decision on jurisdiction.
In Relation to the Issues of Expropriation
68. As regards the issues of expropriation, the grounds for annulment applicable to the succinct (two page) section on this issue set out by the Tribunal are threefold.
1. Failure to State Reasons
69. First, there is a failure to state reasons in terms of Article 52(1)(e). The importance of the Kaya Bey in relation to the supposed assets of Karkey in Pakistan is explicitly set out by the Tribunal in its Decision on Provisional Measures: “the biggest power ship.”103 The importance of this asset to Karkey and its claim was confirmed at the Hearing on Provisional Measures by Mr. Yasin el Suudi, Regional Director for Karkey for the Gulf and Asia.104 He explained, under cross-examination, that the Kaya Bey was Karkey’s real concern in relation to these proceedings, given that it was the most important of the assets of Karkey in Pakistan.105 70. But despite the fact that the Tribunal acknowledged that the Kaya Bey had been released from Pakistan, the Tribunal still inexplicably included it in its analysis of damages, holding that “the arrest of the Kaya Bey was part of the measures of expropriation by Pakistan.”106 Further, the Tribunal stressed that it included the Kaya Bey within the “expropriated
103 Decision on Provisional Measures, ¶ 51. 104 El Suudi, Hr’g Tr. 108:17-20, Hearing on Provisional Measures (October 8, 2013). 105 Id. 133:21-135:1. 106 Award, ¶ 650.
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assets,” by stating that “the Vessels related to its investment were therefore subject to an interference of the host State (through the Judgment which declared the Contract void ab initio and subsequent detention of the Vessels) amounting to expropriation, as it had the effect of depriving Karkey of its investment as a whole.”107 71. Further, and as regards the other “Vessels” referred to by the Tribunal, it again contradicted itself. On the one hand the Tribunal stated that Pakistan had expropriated those Vessels, while simultaneously, in its section on damages, the Tribunal stated that Karkey must transfer legal title of those Vessels to Pakistan upon compensation.108 72. This failure to state reasons is aggravated by Karkey’s own emphasis that it was not pursuing a claim of expropriation as regards the Kaya Bey, as will be developed below. 73. The Tribunal also failed to state the reasons on which its decision is based in its alleged analysis of the Supreme Court Judgment, where its findings are in direct contradiction to the applicable law.109 It compounded this failure by applying these unfounded conclusions in the expropriation section, extending their unfounded nature to that analysis.110 The Tribunal’s alleged reasoning is contradictory and insufficient, and does not allow a reader to follow the rationale of the decision.
2. Serious Departure from a Fundamental Rule of Procedure
74. Second, there is a serious departure from a fundamental rule of procedure, as the Tribunal decided ultra petita. In its Award, the Tribunal went into some detail in describing Karkey’s position as regards the Kaya Bey as not being a claim for expropriation. In fact, it stated that “Karkey submits that its claim in relation to the Kaya Bey is for lost profits, and is not at all an expropriation claim.”111 It also referred to the hearing on jurisdiction and the merits,112 where Mr. Kaczmarek (expert for Karkey) declared that “there is no claim for expropriation for
107 Id., ¶ 649. 108 Id., ¶¶ 879 (Alican Bey), 896 (Iraq). 109 Id., ¶¶ 552-561. 110 Id., ¶ 645. 111 Id., ¶ 226. 112 Id., ¶ 372; Kaczmarek, Hr’g Tr. 1345:8-9, Day 5, Hearing on Jurisdiction and the Merits (March 4, 2016); Hr’g Tr. 1681:3-4, Day 6, Hearing on Jurisdiction and the Merits (March 7, 2016).
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the Kaya Bey” and counsel for Karkey stated that “it’s not actually expropriated, it’s given back.” This is further confirmed in Karkey’s Post Hearing Brief where it specifically stated that “[h]owever Pakistan clearly recognizes, and Mr. Haberman accepted on cross-examination, that the claim in relation the Kaya Bey is for lost profits, and is not at all an expropriation claim.”113 75. However, when the Tribunal decided on the expropriation claim, it explicitly included that “the arrest of the Kaya Bey was part of the measures of expropriation by Pakistan.”114 This is a clear example of an ultra petita decision.
3. Manifest Excess of Power
76. Finally, there is a manifest excess of power as the Tribunal did not apply the applicable law. The Tribunal considered that Pakistan had expropriated Karkey’s investment because its assets were “subject to an interference of the host State (through the Supreme Court Judgment which declared the Contract void ab initio and the subsequent detention of the Vessels) amounting to expropriation, as it had the effect of depriving Karkey of its investment as a whole.” The Tribunal decided that such deprivation cannot be considered as a legitimate regulatory taking as it stems from the arbitrary March 30, 2012 Judgment.115 77. The applicable law in this case, as acknowledged by the Tribunal in its Award,116 includes Article III(1) of the Pakistan-Turkey BIT, which provides that:
Investments shall not be expropriated, nationalized or subject, directly, or indirectly to measures of similar effects except for a public purpose, in a non-discriminatory manner, upon payment of prompt, adequate and effective compensation, and in accordance with due process of law and the general principles of treatment provided for in Article II of this Agreement.117 78. In the entire section on expropriation of the Award (which is limited to two pages), there was no analysis of the elements of what the Tribunal acknowledged was the applicable law to find a breach, of Article III(1). Further, there was no analysis of the elements of
113 Karkey Post-Hearing Brief, ¶ 206. 114 Award, ¶ 650. 115 Id., ¶ 649. 116 Id., ¶ 644. 117 Pakistan-Turkey BIT, Article III(I).
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public purpose, there was no analysis of discrimination, there was no analysis of due process of law, there was no analysis of compensation, and there was not even an analysis of whether the measures at issue were in fact a direct or indirect taking or whether they affected a significant proportion of the alleged investment.118 There was no analysis of the elements of an expropriation, and thus the Tribunal did not apply the applicable law. This is a manifest excess of power in terms of Article 52(1)(b) of the ICSID Convention.
In Relation to the Issue of Free Transfer
79. The Tribunal found that Pakistan breached its obligations under Article IV(1) of the Treaty. The lack of any sort of reasoning in order to reach such a conclusion is shocking, and the Award deserves to be annulled for a complete failure to state reasons pursuant to Article 52(1)(e) of the ICSID Convention. This conclusion is also annullable as a manifest excess of power as will be described below.
1. Failure to State Reasons
80. After referring, in a very general way, to the claim filed by Karkey under Article IV(1) of the Treaty in connection with the detention of Karkey’s Vessels119 and Pakistan’s response,120 the Tribunal merely quoted an excerpt of Article IV(1) of the Treaty,121 and just concluded that “[i]n view of the above, and considering that Lakhra’s initiation of the Sindh High Court proceedings, the Sindh High Court’s arrest of the Vessels and freeze on Karkey’s bank accounts all follow from the Supreme Court’s finding that the 2009 RSC was void ab initio–which is acknowledged by Pakistan—the Tribunal finds that Pakistan has also breached its obligation under Article IV(1) of the Treaty by depriving Karkey of the free disposal of its assets (i.e. Vessels) part of Karkey’s investment under the Contract, including by violating Karkey’s right to transfer assets related to its investment “without unreasonable delay.”122 Such conclusion
118 Further, in its alleged analysis of the Supreme Court Judgment, the Tribunal also fails to apply the applicable law as it does not apply the BIT to its analysis of that judgment. 119 Award, ¶ 651. 120 Id., ¶ 652. 121 Id., ¶¶ 654, 655. 122 Id., ¶ 655.
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was reached without providing any sort of reasoning and not addressing the parties’ arguments at all. 81. During the proceedings, both parties put before the Tribunal several legal and factual arguments on this issue. None of them are even addressed in the Award. For instance, one of the key points of discussion during the written phase was whether Article IV of the Treaty was aimed exclusively at the free transfer of funds or whether it can be extended to assets as well. In that regard, the parties posited different arguments based on the rules of treaty interpretation as reflected in the Vienna Convention on the Law of Treaties. Pakistan also presented a number of arguments in the alternative. For example, it argued that even in the event that the Tribunal found that Article IV of the Treaty does require the free transfer of Karkey’s assets, there has nevertheless been no breach of the Treaty because Pakistan’s obligation is to allow free transfer “without unreasonable delay.” 82. These arguments were not addressed in the Award in any way. No reasoning was provided as to the scope of Article IV of the Treaty, and no reasoning was provided as to the “without unreasonable delay” argument put to the Tribunal by Pakistan. 83. In addition to the legal arguments, the parties presented very fact-specific and distinct arguments in connection with the detention of the Vessels and the freezing of the bank accounts. The Tribunal did not address any of these arguments. In fact, there was no reference to those arguments in the Award. 84. In conclusion, the Award failed to state the reasons on which it is based, and the failure has the consequence that the Award deserves to be annulled under Article 52(1)(e) of the ICSID Convention.
2. Manifest Excess of Power
85. This section of the Award also reveals a manifest excess of power as the Tribunal has failed to apply the applicable law. As the Tribunal acknowledged its intent was to apply Article IV of the BIT.123 Article IV of the BIT refers to “all transfers related to an investment”.124 However, instead of interpreting the phrase “related to an investment,” the Tribunal merely
123 Id., ¶ 653. 124 Pakistan-Turkey BIT, Article IV.
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referred to the definition of investment in the BIT.125 Therefore, the Tribunal failed to apply Article IV of the BIT as it just went to the definition of investment under the BIT, instead of interpreting the relevant language in Article IV, which was what the Tribunal acknowledged its mandate to be. 86. In failing to apply the applicable law, the Tribunal manifestly exceeded its powers in the terms of Article 52(1)(b) of the ICSID Convention, warranting the annulment of the Award.
In Relation to the Issues of Corruption
87. The Tribunal acknowledged the seriousness of the accusations of corruption and its duty to investigate such allegations, stating that it “cannot ignore the Respondent’s allegations that Karkey’s investment was obtained by way of corruption, thus not in conformity with Pakistani law, and not protected by the BIT.”126 Moreover, the Tribunal also acknowledged that “Pakistani corruption laws may also apply to irregularities arising in public procurement.”127 Yet the Tribunal prevented Pakistan from presenting its case in relation to the corruption issues in the procurement process due to a serious departure by the Tribunal of several fundamental rules of procedure, including (i) the right to be heard; (ii) equal treatment of the parties; and (iii) the proper treatment of the evidence and allocation of burden of proof, under Article 52(1)(d) of the ICSID Convention. Each of these departures from the above mentioned fundamental rules was serious, as further elaborated below.
1. The Tribunal Prevented Pakistan from Being Heard
88. The Tribunal prevented Pakistan from being heard on the issues of corruption by denying the introduction of certain fundamental evidence, including the disclosure of 70 backup tapes, which admittedly stored all of Karkey’s electronic records for the period up to April 2010 (“Backup Tapes”).128 The Tribunal simultaneously accepted Karkey’s statement that it had no responsive documents or that the documents did not exist without any proof that a reasonable
125 Award, ¶ 654. 126 Id., ¶ 500. 127 Id., ¶ 503. 128 Id., ¶ 529.
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search had been conducted, while at the same time acknowledging Karkey’s reliance on the existence of the Backup Tapes to resist further disclosures.129 The Tribunal never ordered the production or the review of any of the Backup Tapes, which undeniably exist, to justify its reliance on Claimant’s bare assertion that there were no responsive documents, despite Pakistan’s offer to bear the entire cost of such a review.130 89. Moreover, during the hearing, the Tribunal on the one hand prevented Pakistan from continuing its cross-examination of Mr. Karadeniz on the corruption issue,131 yet it relied on the lack of questioning to rule against Pakistan by stating in the Award that “no question regarding fraud or corruption was ever put to Mr. Karadeniz in cross-examination.”132 This treatment of the available evidence, both in denying Pakistan’s request for the documents as well as its attempts to question Karkey’s witnesses, prevented Pakistan from being heard and seriously violated a fundamental rule of procedure.
2. The Tribunal Did Not Provide Equal Treatment to the Parties
90. As the Tribunal noted, Pakistan raised concerns with the varying standards that were applied to the requests by each of the Parties to introduce new evidence.133 Yet the Tribunal failed to address this point on the merits, other than to claim that they amount to “a thinly veiled accusation of lack of impartiality and of failure in the Tribunal’s ‘clear duty to address the issues of bribery…whenever they arise in the arbitration.’”134 The Tribunal did not deny Pakistan’s allegation in this respect.135 A review of the record shows, for example, that the Tribunal excluded the witness statement and testimony of Mr. Shahid Rafi and certain bank records solely on the basis that they could have been submitted earlier. The Tribunal did not find that this evidence was duplicative or irrelevant. In other words, the Tribunal excluded evidence Pakistan
129 Id., ¶¶ 529-530. 130 Id., ¶ 530-531. 131 Karadeniz, Hr’g Tr., 812:10-814:7, Day 3, Hearing on Jurisdiction and Merits (March 2, 2016). 132 Award, ¶ 515. 133 Id., ¶ 533. 134 Id., ¶ 534. 135 Id., ¶ 533.
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tried to submit in relation to the corruption issues solely on the basis that Pakistan could not show that they could not have been submitted earlier,136 yet simultaneously permitted Karkey to later introduce documents that had been previously available to it without any explanation or justification for their late submission.137 91. Moreover, the Tribunal hesitated to draw adverse inferences against Karkey in relation to the corruption allegations, giving it the benefit of the doubt despite a lack of direct evidence.138 On the other hand, the Tribunal drew inferences in a manner adverse to Pakistan in regards to the corruption allegations by relying on unsubstantiated explanations for conduct that otherwise could indicate corruption as further explained in the following section.139 This double- standard violates the rules governing the parties’ ability to present their case or uphold the applicable rules of procedure.
3. The Tribunal Departed from a Fundamental Rule of Procedure regarding Evidentiary Standards and Burden of Proof
92. The Tribunal stated that “it can shift the burden of proof with respect to corruption and fraud to Karkey should the Tribunal be satisfied that there is unequivocal (or ambiguous) prima facie evidence in this regard.”140 Yet the Tribunal prevented Pakistan from presenting the necessary evidence or drew adverse inferences against Pakistan because it was unable to present the evidence that the Tribunal itself excluded.141 This is a serious departure from a fundamental rule of procedure. 93. For example, the Tribunal made certain adverse inferences to support its finding that there was no prima facie evidence presented on the record by Pakistan to shift the burden to Karkey. In another case, the Tribunal relied on ongoing investigations (i.e. NAB’s investigation)
136 See Procedural Order No. 12, which states in relevant part, that “[t]he documentary and witness evidence, including the witness statement of Mr. Rafi, are admitted subject to the obligation of Pakistan to establish to the satisfaction of the Tribunal that they could not reasonably have been secured and made available in support of Pakistan’s pleading in defense.” 137 Hr’g Tr. Tribunal, Day 2, Hearing on Jurisdiction and the Merits (March 1, 2016), 500:6-8. 138 Award, ¶ 521. 139 Ibid. 140 Id., ¶ 497. 141 See, e.g., id., ¶ 328.
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and court proceedings (e.g., the Civil Review Petition) in determining that the corruption charges are unsubstantiated, despite the fact that these proceedings and investigations had not ultimately concluded.142 In addition, the Tribunal made certain contradictory and unsubstantiated assumptions regarding the new evidence Pakistan sought to introduce. An example of this is the fact that the Tribunal strikingly assumed that the new evidence was dubious because it came from a “Lebanese individual” yet it provided no basis for this doubt.143 Moreover, the Tribunal repeatedly found possible alternate justifications for the conduct of Pakistani’s officials and Mr. Zulqarnain,144 but assumed nefarious and contradictory motivations for the informants regarding the new evidence without reaching a conclusion, stating that they are “persons who may or may not have been identified which were more probably aimed at extorting money from Pakistan or at derailing the arbitration proceedings…”145 This selective application of the benefit of doubt, always to the benefit of Karkey, only establishes the serious departure of the Tribunal from evidentiary standards which must be applied equally to both Parties. Further, the Tribunal chose to disregard the witness statement of Mark Levy where the “persons” are indeed identified, while it cites to Mr. Levy’s witness statement to make a finding that “counsel themselves had serious doubts about the authenticity of the alleged new evidence….”146 Yet, Mr. Levy’s statement or Attendance Notes do not support this finding.147 Again, the Tribunal applies a double standard in drawing adverse inferences solely against Pakistan—selectively accepting and rejecting portions from the same witness statement. 94. The serious departures from fundamental rules of procedure as described above warrant the annulment of this Award.
142 See, e.g., id., ¶¶ 538-542. 143 Id., ¶ 536. 144 Id., ¶ 521 145 Id., ¶ 543 146 Id., ¶ 536 147 The Attendance Note in ¶ 11 simply states that “A&O would need to see a more specific list of the documents that C1 would provide.” See Award, footnote 616. This, in and of itself, does not support that counsel had doubts over the authenticity, but merely shows that counsel wanted to make sure that the informant itself had the documents that might support allegations of corruption. In any case, counsel’s subsequent conduct undermines the Tribunal’s determination on this point, as they made several applications to the Tribunal to try to introduce this evidence.
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In Relation to the Issues of Damages
95. Under the heading of damages, there are several grounds for annulment of the Award.
1. Serious Departure from a Fundamental Rule of Procedure
96. In regard to issues of evidence in its analysis of damages, the Tribunal breached a fundamental rule of procedure in relation to the burden of proof and sufficiency of evidence. The Tribunal first relaxed Karkey’s burden of proof with regard to causation when analyzing the base line to determine any damages that the Kaya Bey may have suffered during its detention.148 Then it later noted that it could not apply the same (relaxed) standard as far as repairs and their costs are concerned,149 only to finally, the Tribunal determined damages on the basis of the same spreadsheet that it had previously stated was not sufficient evidence to determine repairs and their costs.150 This shifting of the burden of proof and inconsistency with regard to the sufficiency of evidence is a serious breach of a fundamental rule of procedure that merits the annulment of the Award.
2. Failure to State Reasons
97. Aside from being a serious departure from a fundamental rule of procedure on the issues of evidence mentioned above, the Tribunal’s reasoning is also contradictory, amounting to a failure to state reasons under Article 52(1)(e). 98. As to the actual determination of damages, the Tribunal’s alleged reasoning is again so contradictory as to be non-existent. On the one hand, the Tribunal stated that it would calculate damages on the basis of: “the expropriation of [Karkey’s] contract rights (including its right to terminate the Contract) and for the cash flows it was prevented from earning under new contracts after such termination had they not been detained in Pakistan.”151 Disregarding the double counting that such a methodology implies, and the speculative and indirect nature of the alleged cash flows Karkey “was prevented from earning under new [hypothetical] contracts,”
148 Award, ¶ 777. 149 Id., ¶ 786. 150 Id., ¶ 788. 151 Id., ¶ 674.
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this method was also not actually applied by the Tribunal. It first calculated contractual damages falsely attributing them to the breaches of the BIT,152 but then, without any explanation, added damages related to the Kaya Bey,153 the Alican Bey,154 the Iraq,155 delays of the Construction Program,156 and the increase in Karkey’s insurance premium.157 99. Turning to the specific heads of damages, the Tribunal also ends up making a series of serious contradictions, some of which are detailed below. For example, in relation to mobilization charges, it first rejects Karkey’s claim for mobilization charges with respect to the Alican Bey because those were never incurred,158 but then goes on to find departing, as explained above, from a fundamental rule of procedure damages with regard to the Kaya Bey.159 Similarly, despite the fact that the actual mobilization of the Kaya Bey occurred in May 2014, the Tribunal grants 12% interest on those damages compounded annually from March 30, 2012, without giving any reasons for awarding interest from a period that pre-dates the actual occurrence of the event by over two years.160 Further, the Tribunal admits that the only document Karkey provides with respect to mobilization charges for the Kaya Bey is a spreadsheet, which is not accompanied by supporting invoices, but still holds that the “amount seems reasonable”161, without stating any reasons for why such amount is reasonable, despite its lack of substantiation. 100. Another example is that in determining the compensation for the Alican Bey, the Tribunal on the one hand grants Karkey the replacement value of that vessel,162 and on the other hand also grants Karkey “lost profits in the period up to the time when the Alican Bey can be
152 Id., § V(H)(2). 153 Id., § V(H)(3). 154 Id., § V(H)(4). 155 Id., § V(H)(5). 156 Id., § V(H)(6). 157 Id., § V(H)(7). 158 Id., ¶ 760. 159 Id., ¶ 762. 160 Id., ¶ 996. 161 Id., ¶ 761. 162 Id., ¶ 878.
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replaced”163 (i.e. March 2018164). The Tribunal, however, then proceeds to calculate interest on both counts from March 30, 2012,165 amounting to another occurrence of double counting by the Tribunal—contrary to its own premises—as it is calculating interest on both the replacement value of the vessel and the lost profits it would have generated for the same period of time, giving once again no reasons for this in the Award. 101. Additionally, the Tribunal accepted that Karkey obtained insurance payments for an amount of USD 55.5 million.166 Despite the fact that the BIT foresees subrogation in cases of insurance payments,167 the Tribunal did not explain why it did not deduct that amount from the compensation, thus leaving Pakistan exposed to double counting, in contradiction of its own acknowledgment that there should be no double counting.168
3. Manifest Excess of Power
102. On the issue of damages, the Tribunal also manifestly exceeded its power in that it proceeds to calculate damages on the basis of a contractual breach, despite acknowledging that the applicable law for the calculation of damages of a breach of the Treaty was based on elements of customary international law.169 The Tribunal expressly found that “it is not requested to deal with contract claims and to condemn Pakistan or even less Lakhra to pay damages for a breach of contractual obligations, but to assess the value of contract rights that have allegedly been expropriated.”170 Yet the Tribunal proceeds to calculate such damages precisely as would result from a contractual breach.171
163 Id., ¶ 881. 164 Id., ¶ 884. 165 Id., ¶ 1002. 166 Id., ¶ 809. 167 Pakistan-Turkey BIT, Article V. 168 Award, ¶ 811. 169 Id., ¶¶ 658-664. 170 Id., ¶ 678. 171 Id., § V(H)(2).
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103. The Tribunal goes so far in applying the contract instead of the applicable law that it in fact proceeds to apply the interest rate indicated in the contract,172 event though it recognizes that it must first look to “the BIT [and] the ILC Articles on State Responsibility.”173 As a result, it ignores the text of the latter, which states that “[i]nterest … shall be payable when necessary in order to ensure full reparation. The interest rate and mode of calculation shall be set so as to achieve that result.”174 Instead, the Tribunal states that neither of these “provide specific rules regarding how interest should be determined.”175 This is, again, a clear example of a failure to apply the applicable law.
Stay of Enforcement of the Award
104. In accordance with Article 52(5) of the ICSID Convention, if a party “requests the stay of enforcement in his application, enforcement shall be stayed provisionally until the Committee rules on such request.” Further, Arbitration Rule 54(2) states that: “If an application for the revision or annulment of an award contains a request for a stay of its enforcement, the Secretary-General shall, together with the notice of registration, inform both parties of the provisional stay of the award.” 105. Pakistan respectfully requests that the enforcement of the Award be stayed until the ad hoc Committee decides on this request for annulment. Pakistan reserves its right to present arguments before the ad hoc Committee with regard to its request that the enforcement of the Award be stayed, including the reasons why such stay of enforcement should be maintained until the Committee decides on the request for annulment, in the procedural calendar that the Committee establishes if it considers necessary.
Request
106. In light of the above the Islamic Republic of Pakistan respectfully requests that the ad hoc Committee:
172 Id., ¶ 996. 173 Id., ¶ 992. 174 ILC Articles on State Responsibility, Article 38. 175 Award, ¶ 992.
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(a) annul the Award in its entirety and/or partially as appropriate, in accordance with the grounds for annulment referred to in Articles 52(1)(b), (d), and (e) of the ICSID Convention; (b) that the stay of enforcement of the Award be granted until the ad hoc Committee issue its decision on this request for annulment, in accordance with Article 52 of the ICSID Convention and Arbitration Rule 54; (c) that a procedural calendar be set up for the presentation of the ensuing briefs with regard to this request for annulment; and (d) that Karkey be ordered to pay for all costs and fees of the proceeding.
______Ignacio Torterola Diego Gosis Quinn Smith For: GST LLP Counsel to the Islamic Republic of Pakistan
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