ICSID Complaint as Alternative to Supplemental Filing

by Zoltán S. Novák, TaylorWessing

We are used to thinking of international investment arbitration as a remedy against unlawful nationalization, expropriation, and other high-profile state acts depriving a foreign investor of his or her investment. It is pretty rare that the unfair treatment the investor complains about is limited to a simple court order requesting supplemental filing in a legal procedure. Yet, this is exactly what gave rise to the ICSID case Dan Cake vs. Hungary, which was filed by the claimant in response to an order on supplemental filing that the claimant found too onerous. What makes the case even more remarkable is that the claimant won, at least as far as the State’s liability is concerned.

The case was based on a bilateral investment agreement concluded between Portugal and Hungary in 1992. In its decision on jurisdiction and liability, the ICSID Tribunal declared Hungary liable for the breach of the investment agreement. The Tribunal will decide on the amount of damages at a later date.

The case revolves around the liquidation of Danesita, Dan Cake’s Hungarian subsidiary, whose business consisted of supplying biscuits and cookies to Eastern Europe, Southern Europe, and Scandinavia. During its course of business Danesita incurred a debt to one of its suppliers. As a result, the supplier submitted a request for liquidation against Danesita in August 2006. Danesita ultimately paid its debt to the supplier, but failed to inform the bankruptcy court about this development. The bankruptcy court ordered Danesita’s liquidation in a final court order in November 2007.

In April 2008, in the midst of Danesita’s liquidation, Dan Cake tried to save its subsidiary by requesting that the bankruptcy court convene a composition hearing where it hoped to reach a settlement with all of Danesita’s creditors. Instead of convening the composition hearing right away, the bankruptcy court asked Dan Cake to submit some additional documents it deemed necessary for the adjudication of the motion. In the same order, the court expressed its view that the motion for a composition hearing did not warrant the stay of the liquidation procedure.

The court’s reaction, which implied that the liquidation of Danesita’s assets continued even if a composition hearing was eventually convened, discouraged Dan Cake from pursuing its plan to reach a settlement with the creditors. Accordingly, it decided not to submit the requested supplementary filing to the bankruptcy court. As a result, the court did not convene the composition hearing and Danesita was liquidated.

Instead of submitting the requested additional documents, Dan Cake filed a request for arbitration with the International Centre for Settlement of Investment Disputes in 2012. In its complaint, Dan Cake argued that the bankruptcy court’s order constituted a breach of Hungary’s obligation under the investment treaty to (1) ensure fair and equitable treatment of investments, and (2) not impair by unfair measures the liquidation of investments. According to the claimant, Dan Cake had a statutory right to a composition hearing. By demanding additional documents – not explicitly prescribed by law – as a condition of convening it while refusing to stay the liquidation, the bankruptcy court frustrated Dan Cake’s efforts to save its investment in an unfair manner.

Hungary denied its liability throughout the procedure. It argued that according to Hungarian law the goal of the liquidation procedure is to protect the interests of the creditors and not to reorganize the debtor company. Therefore, the bankruptcy court’s decision to ask for additional documents – deemed necessary by the judge for the protection of creditors – was in accordance with relevant Hungarian legislation and could not be deemed unfair.

The Tribunal agreed with Dan Cake. According to its decision, the seven additional documents required by the bankruptcy court were either unnecessary or impossible to submit within reasonable time. The Tribunal found even more manifestly unjust that the bankruptcy court explicitly ruled on the unwarrantedness of the stay of the liquidation without being asked to do so. As the bankruptcy court was found to be an agency of Hungary, the Tribunal concluded that, through the bankruptcy court’s order, Hungary breached its duty under the investment agreement to ensure fair and equitable treatment of investments to Dan Cake and to not impair, by unfair measures, the liquidation of its investments.

It is generally accepted that investment arbitration tribunals cannot act as appellate courts. Accordingly, the seemingly erroneous application of domestic law by a domestic court rarely leads an arbitration tribunal to find the State in breach of an investment agreement. Relying on previous precedent, the Dan Cake Tribunal itself set the standard of such a breach as high as “a willful disregard of due process of law, an act which shocks, or at least surprises, a sense of juridical propriety”. It is remarkable that the Tribunal found this standard met by a simple court order for supplementary filing.

Even if the Tribunal’s conclusion is disputable, the facts of the case are far from unique. Foreign investors often face frustrating decisions by domestic courts and authorities, often unable to question effectively their lawfulness before domestic courts. This case demonstrates that foreign investors can use international investment arbitration as a last-resort chance to redemption if they find the decision unfair.

There are of course procedural obstacles that may prevent international investment arbitration from becoming a standard way of challenging such orders. The Hungarian-Portuguese investment agreement, for example, required that cases not arising from expropriation, nationalization and similar measures shall be submitted to the competent domestic courts before an arbitration procedure can be initiated. In the Dan Cake case this procedural obstacle was avoided by Hungary’s decision not to object to the Tribunal’s jurisdiction.

Nonetheless, as there are currently more than fifty investment agreements in force in relation to Hungary – including with countries such as Germany, Austria, France, Belgium, the United Kingdom, the United States, China and Russia – it is worth remembering that international investment arbitration is a viable option not only in the most obvious cases of nationalization and other such blatantly discriminatory acts on behalf of the state. These agreements can provide protection for a business even in such ostensibly mundane situations as a domestic court’s decision to request supplementary filings in a liquidation procedure.

The Tribunal’s decision to declare Hungary liable for the breach of the investment agreement in question shows that foreign investors have more wiggle room than usually assumed when it comes to the presumably final decision of a domestic court or authority, and that international investment arbitration is a tool worth considering when facing such challenges.

 

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