ICSID Tribunal: Kyrgyzstan Judiciary’s Decisions Amounted to Expropriation

Al Keme (Pinara) Hotel

The importance of an ICSID award rendered in a case which involved Kyrgyzstan goes beyond the facts of the case and covered topics such as the corruption of state officials, expropriation through judicial action and calculation of the value of expropriated property in the absence of comparable transactions in Central Asia.

In 2005 the Kyrgyz courts invalidated agreements by which a Turkish investor had acquired an interest in the company operating Pinara, a four-star hotel in the centre of Bishkek (the capital of Kyrgyzstan). The arbitral tribunal however held that this decision had deprived Sistem Muhendislik Sanayi Ve Ticaret A.S. (“Sistem), the Turkish investor, of its investment and hence constituted an act of expropriation. Since no compensation was paid it ruled that Kyrgyzstan had violated its obligations under the BIT.

The award was rendered on 30 September 2009, but had until recently remained confidential. It surfaced in the enforcement proceedings currently underway in the US. As noted by Investment Arbitration Reporter the investor had previously unsuccessfully tried to enforce the award in Canada, France and Switzerland.

Facts of the Case

The original investment was made by Sistem in 1992, when it entered into a joint venture agreement with a Kyrgyz company to construct and operate a hotel in Bishkek (later named Pinara). In 1995 construction was completed, but shortly afterwards Sistem was precluded from participation in the management of the hotel. In 1999 the Kyrgyz company operating the hotel went into bankruptcy.  Ultimately under several agreements guaranteed by the governments of Turkey and Kyrgyzstan Sistem acquired from the bankruptcy administrator the Kyrgyz company’s partner interest in Pinara.

The situation changed again in 2005 when as a result of the revolution in Kyrgyzstan president Akaev was replaced by President Bakiyev. Shortly after that the hotel was taken over by a group of armed men and the Turkish employees of the hotel operating company were ordered to leave the premises. A few months later the Kyrgyz courts reversed the earlier decisions declaring the Kyrgyz partner in the hotel bankrupt and invalidated the purchase of its interest in the hotel by Sistem. Later, the Kyrgyz authorities recognised the Kyrgyz company as the sole owner of the hotel.
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Bribery Allegations Dismissed

Kyrgyzstan asked the tribunal to dismiss Sistem’s claims, because in 1995 Sistem had paid for the refurbishment of an official residence of the President of Kyrgyzstan, which was asserted to be a bribe. The tribunal was unimpressed by this argument for several reasons.

First, it noted that the actions of Sistem were to be properly viewed as “corporate sponsorship” or a sign of good will rather than a bribe, with corporate sponsorship being an accepted business practice. This was because the payments were made not for the benefit of the President, but to refurbish his official residence, which was used for official purposes including hosting foreign official visitors.

Second, the tribunal noted that there was no evidence of a link between the payment made in 1995 and the alleged advantage (acquisition of the interest in the hotel) in 1999.
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It relied on the OECD Convention on Combating Bribery of Foreign Officials to conclude that such a link was required for a payment to constitute a bribe. The tribunal however made a caveat noting that, where the payments are systematic, a link between a specific payment and an advantage received may be hard to establish and hence not necessary. However, this exception was inapplicable because Kyrgyzstan was relying on a one-off payment.

Finally, the tribunal noted (without coming to any definitive view) that it would be problematic for a state to rely on the corruption of its own officials to preclude the admissibility of an investor’s claim. As such, the tribunal apparently refused to fully endorse the position taken by the WDF v Kenya tribunal, which found inadmissible a claim based on a contract procured by bribing the president of Kenya.

Expropriation Through Court Decisions

The tribunal’s reasoning in this respect is rather straightforward. It begins by noting that the court’s decisions resulted in Sistem being deprived of its assets. It continues by stating that the actions of the Kyrgyz courts are attributable to Kyrgyzstan and a deprivation by a court decision constitutes expropriation.

However, if the original acquisition by Sistem of its interest in the hotel was indeed void (as the Kyrgyz courts decided) then had it really owned an investment? Previous tribunals have found that where the investment is acquired under a void transaction no claim can be made under the BIT (e.g. Inceysa v El Salvador) and if a contract is lawfully terminated such termination (even if by a court) would not constitute expropriation, unless denial of justice can be shown (Azinian v United Mexican States).

Several factors may have potentially been taken into account by the tribunal.
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The acquisition of the interest in the hotel was guaranteed by the Kyrgyz government. Furthermore, even before the acquisition was invalidated the hotel was taken over by an armed group. The decision of the Kyrgyz authorities to treat the Kyrgyz company as the sole owner of the hotel following the court’s decision (thus ignoring Sistem’s original 50% interest) may have also contributed to the tribunal’s eventual conclusion. Finally, though the tribunal carefully refrained from expressing any opinion on the propriety of the court proceedings in Kyrgyzstan, repeated references to the “circumstances of the case” may hint that the tribunal took them it into account.

Valuation of Investments for the Purpose of Damages Calculation

The tribunal decided that the compensation payable to the claimant should amount to the real value of the investment (as provided for lawful expropriation in the Turkey-Kyrgyz BIT). It then dismissed the application of costs method for the calculation of damages, finding that the “real” value represents the price a willing buyer will pay, and a willing buyer is interested in the current value of the investment rather than the price paid for its development. The tribunal then dismissed valuation based on allegedly comparable transactions. It found that there were no examples of similar hotel properties being sold in Central Asia and that transactions in Europe and the US were not comparable.

In the end the tribunal settled with the value of the investment calculated on the basis of discounted cash flow. However, it then decreased the resulting amount by the price Sistem was required to pay for the acquisition of the interest in the hotel (which had not been paid at the time the agreements were invalidated).

Case reference:  Sistem Muhendislik Sanayi Ve Ticaret A.S. v. Kyrgyz Republic, ICSID Case No. ARB(AF)/06/1, Award of 30 September 2009 available here.

Sergey Usoskin

About the Author:

Sergey Usoskin is an advocate (member of the Russian bar) and a senior associate at Ivanyan&Partners. He has experience advising clients on and representing them in commercial and investment arbitration matters as well as before the Russian court (including the Supreme Commercial Court). He is a graduate of St Petersburg State University, Faculty of Law and University College London Faculty of Laws.

1 Comment on "ICSID Tribunal: Kyrgyzstan Judiciary’s Decisions Amounted to Expropriation"

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  1. Hara Tzimi says:

    Mr. Usoskin, thank you for this enlightening summary of the case. However, I was wondering where it is specifically stated in the Award that it is problematic for a state to rely on the corruption of its own officials to preclude the admissibility of an investor’s claim.
    Thank you in advance.
    Yours sincerely

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