In Lao Holdings NV v The Lao People's Democratic Republic, an ICSID tribunal (constituted to resolve Holdings' bilateral investment treaty (BIT) claim against Laos) recently dismissed an application by Laos to modify a Procedural Measures Order (PMO) that prevented it from taking "any steps that would alter the status quo ante or aggravate the dispute". Laos applied for the amendment because it wanted to recommence criminal investigations into Holdings' allegedly criminal conduct.
While acknowledging Laos' sovereign entitlement to conduct such investigations, the tribunal was not prepared to allow the arbitration process to be derailed by the resumption of a criminal investigation into matters closely related to the arbitration process.
Holdings claimed that Laos had, through confiscatory tax and other measures contrary to its BIT (Netherlands/Laos) obligations, effectively expropriated its investments in a number of casinos in Laos and that it had suffered losses "running to hundreds of millions of dollars". Those allegations were denied, and, in the course of the proceedings, Laos alleged that the investment was tainted by corruption.
Prior to the PMO being issued, in September 2013, Laos indicated that it had stayed criminal proceedings to hold Holdings to account for various tax and money laundering offences in order "to allow the arbitration process to proceed in an environment conducive to timely action by the tribunal". In light of that indication the tribunal had issued a PMO which prohibited either party from taking any "steps that would alter the status quo ante or aggravate the dispute".
In April 2014 and with the final hearing of the arbitration a mere month away, Laos applied to modify that provision of the PMO on the basis that it had "unearthed substantial evidence of violations of Laotian criminal law by the Claimant" and wanted to recommence criminal investigations. That investigation would involve interviewing witnesses who were shortly due to give evidence in the arbitration.
Holdings argued in response to the application that Laos was seeking "improperly to use its criminal law machinery to collect evidence [a month before the] arbitration hearing to advance its defence on the merits on the current arbitral proceeding".
Decision: justifying a departure from the usual rule
The application to modify the PMO was dismissed on the grounds that although Laos claimed that it had "unearthed" substantial additional evidence of criminality, the criminal investigation that had been suspended prior to the PMO had not been a matter of urgency and necessity and there had not been a change of circumstances sufficient to justify the proposed modification of the PMO.
In making its decision, the tribunal reaffirmed that the usual rule was that a state's right to enforce its criminal law should not be fettered by the arbitral process. Neither the ICSID Convention nor the relevant BIT imposes a prohibition on a state that enjoins it from exercising criminal jurisdiction over such matters. As confirmed in Abaclat v The Argentine Republic, an "Arbitral Tribunal can in principle not prohibit a Party from conducting criminal court proceedings before competent state authorities".
However, exceptional circumstances in this case – notably the proximity of the final hearing in the arbitration, the direct relationship between the subject matter of the arbitration and the criminal proceedings, and the intimidatory effect of subjecting witnesses to the arbitration to criminal enquiry – justified a departure from the general rule. The Tribunal noted that were it to modify the PMO as Laos had requested, Laos would "enter the forbidden territory of using the process of the criminal law to obtain an unfair advantage in the arbitration proceedings over the claimant".
Analysis: maintaining the integrity of the dispute resolution process
This case, which illustrates the relationship between an ICSID arbitration and local court proceedings/investigations (be they civil or criminal) is a reminder of the protection that investments are afforded by both BITs and the ICSID arbitral process.
An ICSID tribunal is able to resist the influence of the state and maintain the integrity of the dispute resolution process in a way that is not always the case in investor disputes that have to be brought before the local courts. In this case, there was a clear sense that the application by Laos was an attempt to derail the arbitral process. It should offer considerable reassurance to investors that such a strategy was not allowed to succeed.