In an Award on jurisdiction and liability published on 25 October 2012, an ICSID Tribunal dismissed the claims brought by US investors Bosh International, Inc and B&P Ltd Foreign Investments Enterprise (“Bosh International“) for breach of the US-Ukraine BIT (the “BIT“). The claims against Ukraine were based on the Taras Shevchenko National University of Kiev (the “University“)’s decision to terminate a contract for the redevelopment and operation of a property belonging to the University (the “Science-Hotel Complex“).  Bosh attempted to claim under the BIT for breach of contract using the umbrella clause in the BIT which elevated contractual breaches to the level of breaches of treaty. The Tribunal dismissed the claims relating to the conduct of the University on the basis that the the University, not Ukraine, was party to the contract and the conduct of the University was not attributable to Ukraine under the law of State responsibility.

The University was not a “State organ” within the meaning of Article 4 of the Articles on State Responsibility of the International Law Commission (“ILC Articles“), nor was its conduct attributable to Ukraine under Article 5 of the ILC Articles.

The Tribunal’s analysis of the ILC Articles confirms that an investor very often has more than just the jurisdiction and admissibility hurdles to overcome before the Tribunal will address its claims on the merits. In order to establish liability, the investor must show that the conduct complained of is attributable to the State. The Tribunal’s ruling also confirms the two limbs of Article 5 of the ILC Articles: the investor has to show both that the entity in question is empowered to exercise governmental authority, and that the entity actually exercised such authority vis-a-vis the investor.  

Background

The University terminated the parties’ contract following an internal audit and an audit by the General Control and Revision Office of the Ukraine Ministry of Finance (“CRO“) which had concluded that the building was used mainly for commercial purposes rather than educational purposes as foreseen by the contract. The audits also discovered certain financial irregularities. When Bosh International refused to agree to a termination of the contract, the University started proceedings in the Ukrainian courts.

Bosh International objected to the jurisdiction of the Ukrainian courts on the basis that the dispute was an investment dispute within the meaning of the BIT and the ICSID Convention and therefore within the jurisdiction of ICSID. The Ukrainian courts rejected Bosh International’s arguments, confirmed the termination of the contract and ordered the eviction of Bosh International from the Science-Hotel Complex. Bosh International then commenced ICSID arbitration proceedings, claiming that Ukraine had breached its obligations under the BIT, in particular the principle of fair and equitable treatment, the provisions on expropriation and the umbrella clause, as a result of its conduct in relation to the audit by the CRO, the termination of the contract and the Ukrainian court proceedings. It argued that the conduct of the CRO, the Ukrainian Courts, the Ministry of Justice and the University was attributable to Ukraine either under Article 4 or 5 of the ILC Articles. Article 4 provides that the conduct of a State organ is attributable to the State. Article 5 relates to how the conduct of persons or entities exercising elements of governmental authority is also to be considered an act of the State.

Decision

The Tribunal agreed that the CRO, the Ukrainian Courts and the Ministry of Justice were organs of the State and that their conduct was therefore attributable to Ukraine.

However, the Tribunal rejected Bosh International’s argument that the conduct of the University was attributable to the State. It found that the University was a separate legal entity which could not be considered a “State organ”. As regards the question of whether it exercised governmental authority, the Tribunal found that in order for the University’s conduct to be attributable to Ukraine, Bosh International would have to establish that:

  1. the University was empowered by the law of Ukraine to exercise elements of governmental authority; and
  2. the conduct of the University related to the exercise of that governmental authority.

The first limb was made out as, even though the University was a separate and autonomous legal entity, it was still empowered to exercise elements of governmental authority in relation to the provision of higher education services and the management of State-owned property. However, in the Tribunal’s view, the requirement under the second limb was not met as the University’s decision to enter into and subsequently terminate the contract with Bosh International was a private or commercial activity aimed at securing commercial benefits for both parties.

Bosh International’s allegations in relation to the conduct of the University therefore failed at the attribution stage. The allegations against the CRO, the Ukrainian Courts and the Ministry of Justice managed to overcome this hurdle. However, the Tribunal rejected Bosh International’s argument that the conduct of these State organs amounted to breaches of the BIT.

Comment

The Tribunal’s analysis of the ILC Articles confirms that an investor very often has more than just the jurisdiction and admissibility hurdles to overcome before the Tribunal will address its claims on the merits. In order to establish liability, the investor must show that the conduct complained of is attributable to the State. The Tribunal’s decision also confirms the two limbs of Article 5 of the ILC Articles: the investor must show both that the entity in question is empowered to exercise governmental authority, and that the entity actually excised such authority vis-a-vis the investor. Even an entity with a considerable degree of autonomy such as a university can be empowered to exercise governmental authority. However, this is not sufficient to qualify any conduct of the university as an exercise of governmental authority and therefore attributable to the State. As quoted by the Tribunal, James Crawford (in his commentary on the ILC Articles) illustrates this as follows: “… the conduct of a railway company to which certain police powers have been granted will be regarded as an act of the State under international law if it concerns the exercise of those powers, but not if it concerns other activities (e.g. the sale of tickets or the purchase of rolling stock)“.

ICSID Case No ARB/08/11: Bosh International, Inc. and B&P Ltd Foreign Investments Enterprise v Ukraine

This article is produced from material supplied by Herbert Smith Freehills LLP for publication by the Practical Law Company.