International Arbitration London Client Alert March 2016 Andy Moody, Partner +44 20 7919 1993 firstname.lastname@example.org Richard Allen, Senior Associate +44 20 7919 1984 email@example.com A Road Block to the "March of History"? In a recently leaked ICSID award, concerning the case of Bernhard von Pezold and others v. Zimbabwe (ICSID Case No ARB/10/15), an arbitral tribunal chaired by Yves Fortier QC made some ground-breaking procedural and legal determinations that are likely to have a far-reaching impact on investment protection in Africa, especially in the context of the recent trend for politically inspired "indigenisation" programmes, under which foreign investors are compelled to take on local partners for nominal (or no) compensation. Factual Background The Lancaster House Agreement of 1979 established the principles under which Zimbabwe (then known as Rhodesia) would transition to formal independence from the United Kingdom. A key feature of the agreement was that land reform would be postponed for ten years following independence, and that a fund would be established by the UK and US governments to compensate white landowners on a "willing-buyer, willing-seller" basis. Despite considerable political rhetoric and ambitious targets for redistribution of land to indigenous communities, the Zimbabwean Government made very little progress in pushing forward on land reform until 2000, when it introduced a proposed amendment to the constitution, which would have permitted the Government to acquire land compulsorily, without compensation. The proposed amendment was rejected in a popular referendum, 55% to 45%, following which a series of "invasions" were initiated by veterans of the independence war, to occupy and ultimately acquire land owned by white farmers. In response, the Zimbabwean Government introduced the Fast Track Land Reform Programme ("FTLRP"), which limited compensation to the value of "improvements" made to the land and purportedly shifted the burden of paying any such compensation, to the former colonial power. This was supplemented in 2005, when a new amendment to the constitution ("Amendment 17") automatically transferred title over substantial tracts of land to the State, without compensation or legal redress. The von Pezold Case Several attempts have been made to challenge the actions of the Zimbabwean Government since 20001 , but the von Pezold case is particularly significant for the range of procedural and substantive legal issues considered by the tribunal. Provisional Measures: The tribunal was asked to consider several applications for injunctive relief during the proceedings. Of particular note were the President's directions of 13 June 2012, following an ex parte application to 1 See Mike Campbell (Pvt) Ltd and others v. Zimbabwe ( SADCT 2); Funnekotter and others v. Zimbabwe (ICSID Case No. ARB/05/06) prevent the Zimbabwean authorities from attending the claimants' premises to search for documents that they considered to be discloseable under Zimbabwean Law. Given the urgency of the application, it was not possible to convene the full tribunal or seek the Respondent's observations and so Yves Fortier QC considered it within his powers to make an interim order preserving the status quo, with leave for either party to apply to vary the order. Also noteworthy were the mandatory injunctions issued by the tribunal in March and April 2013, ordering Zimbabwe to take all necessary measures to protect the life and safety of the claimants, following the submission of prima facie evidence that the State's Central Intelligence Organisation planned to assassinate one of the claimants. Amicus Interventions: The tribunal rejected applications by a Human Rights organisation and a group of indigenous tribal leaders to participate in the proceedings as non-disputing parties ("NDPs"). It acknowledged the "latent tension" in ICSID Arbitration Rule 37(2), which requires NDPs to possess a "significant interest" in the proceedings, yet remain independent from the parties. The tribunal held that the Government's role in appointing the tribal leaders and the organisation's past dealings with a prominent ZANU-PF activist gave rise to "legitimate doubts" about their independence. It was also unconvinced by the applicants' assertion that a consideration of International Human Rights Law was within the tribunal's mandate, simply by virtue of the reference in the ICSID Convention and BITs to "such rules of international law as may be applicable". Late Challenges: The tribunal allowed Zimbabwe to introduce new jurisdictional objections and defences in its Rejoinder, notwithstanding the strict time limits imposed by ICSID Arbitration Rule 41. In its view, the fact that Zimbabwe had instructed external counsel at a late date, together with the introduction of new ancillary claims by the claimants and the paradox that would result from allowing the objections and defences in relation to the ancillary claims, but not the primary claims, amounted to "special circumstances" under Rule 26(3). Jurisdiction Personae: The claimants brought two separate claims that were heard together but not formally consolidated; one in the name of the individuals and one in the name of certain family trust-held companies that owned the land directly. This strategy was adopted to circumvent any attempt by the Zimbabwean government to expropriate the companies later (and thereby negate the impact of an award in their favour). The tribunal issued two separate, but largely identical awards, formulated to protect against the claimants' concerns, while preventing double recovery. Restitution: The claimants argued that the primary remedy for any internationally wrongful act by a State is restitution in kind, relying on Article 35 of the ILC Articles on State Responsibility2 . However, the ILC Articles place caveats on the availability of this remedy (namely where it is impossible or disproportionate) and so the claimants also argued that the racial discrimination underlying the expropriation was a breach of a peremptory norm (jus cogens), for which restitution is mandatory, according to Article 41 of the ILC Articles. On the facts, the tribunal held that restitution was neither impossible nor disproportionate and, in a very rare move in the context of ICSID, awarded this remedy to the claimants. It was therefore not necessary to opine on whether racial discrimination should be regarded as a peremptory norm. Moral Damage: In addition to restitution (or compensation in lieu), the claimants 2 International Law Commission Articles on the Responsibility of States for Internationally Wrongful Acts 2001 demanded compensation for "moral damage" suffered by both the family members and the family companies. Acknowledging that financial compensation for moral damage (as opposed to some other form of satisfaction in accordance with ILC Article 37) was only available in exceptional cases, the tribunal drew on the cases of Lemire v. Ukraine (ICSID Case No. ARB/06/18) and Desert Line v. Yemen (ICSID Case No. ARB/5/17) to establish that compensation for moral damage is available for both natural and legal persons. On the facts, the tribunal held that the companies should be entitled to compensation vicariously, for the stress, anxiety and other mental suffering experienced by their staff, who might otherwise have no legal recourse. Necessity: The Zimbabwean Government argued that the demonstrations and "invasions" following the referendum in 2000 constituted a state of emergency, thus justifying its response and preventing it from being held liable under international law. The claimants again argued that the racially discriminatory nature of the expropriations amounted to breach of erga omnes and jus cogens obligations, which (under ILC Articles 25(1)(b) and 26) precluded Zimbabwe from relying on a defence of necessity. The tribunal comprehensively rejected Zimbabwe's defence of necessity, finding that it had failed to satisfy the conditions set out in ILC Article 25(1)(a) (namely, that it was the only way for the State to safeguard an essential interest against a grave and imminent peril) and that it was precluded from relying on the defence in any event, due to the breach of erga omnes obligations. Margin of Appreciation: Zimbabwe sought to invoke Human Rights jurisprudence to argue that it should be given a wide margin of appreciation when determining what is in the "public interest". The tribunal was sceptical of this line of argument and declined to apply the doctrine, noting that the prohibition of expropriation without compensation in the BITs was not qualified. The tribunal also rejected Zimbabwe's attempts to justify its conduct in terms of proportionality, noting that past tribunals had generally adopted this doctrine in the context of State responses to a breach by the investor. Where the State was seeking to justify its own conduct against an innocent party, questions of proportionality are subsumed into the tribunal's analysis of the "necessity" defence. In any event, the tribunal agreed with the claimants' argument that the erga omnes nature of the breaches meant that they could not be justified by either doctrine. Points to Take Away The von Pezold award is currently the subject of annulment proceedings before an Ad Hoc committee. However, there were several issues raised in this case that are likely to have wider relevance for investment protection in Africa: • In the context of unlawful expropriations, the tribunal was clear that restitution is the primary remedy, and it is incumbent on the Respondent State to show why this would be materially impossible or out of all proportion. • The tribunal's comments on the availability of financial compensation for moral damage provides further authority for corporate claimants to claim additional compensation for the stress, anxiety and other mental suffering experienced by their staff. • The tribunal provided some instructive analysis on the conditions for Amicus Curiae briefs to be accepted, which could become increasingly important as Human Rights organisations seek to participate in ©2016 Baker & McKenzie International is a Swiss Verein with member law firms around the world. 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It's also worth noting the tribunal's affirmation that any objection by a party to an NDPs attendance at the hearings is determinative under Rule 32(2). • While the tribunal ultimately allowed Zimbabwe's late jurisdictional challenges and defences to be heard, it did note that the State's limited resources and the mere fact that external counsel was instructed late in the day, were not in themselves sufficient to justify a finding of "special circumstances". • The case provides a further demonstration of the very limited circumstances in which a defence of "necessity" will be accepted by tribunals. • The tribunal did not come to a view on whether racial discrimination is a breach of a peremptory norm (and therefore indefensible), but it did note that certain types of racial discrimination have been accepted by the international community in the past and so affirmative action policies are unlikely to give rise to a treaty claim, in and of themselves.