The tribunal in AHG Industry GmbH & Co. Kg v Republic of Iraq, administered by the International Centre for Settlement of Investment Disputes.
Justin Alexander GambinoSenior Associate,Arbitration
Ali Al DabbaghAssociate,Litigation
The tribunal in AHG Industry GmbH & Co. Kg v Republic of Iraq, an arbitration administered by the International Centre for Settlement of Investment Disputes ("ICSID"), recently issued an award dated 30 September 2022 , dismissing a claim by a German investor against the Republic of Iraq (“Iraq”) for manifest lack of jurisdiction under Article 41(5) of ICSID Rules of Procedure for Arbitration Proceedings 2006.
AHG Industry GmbH & Co (the “Claimant”) alleged that it invested in Iraq in 2008 when it successfully tendered together with a Middle Eastern company to rehabilitate and operate a cement plant in Kirkuk under a Rehabilitation and Operation Contract with the Iraqi General Company for Cement. The Respondent, Iraq, denied that it was a party to the Rehabilitation Contract.
According to the Claimant, Iraq terminated the Rehabilitation and Operation Contract in February 2009. Following litigation before the Iraqi courts, an agreement was reached and the Claimant alleges to have resumed its activities in March 2017, but that Iraq failed to provide security and engaged in alleged arbitrary, discriminatory and abusive conduct that culminated in the Claimant’s expulsion from the plant and the outright expropriation of its investment. The Claimant also states to have invested an additional US$ 17 million by building a separate plant in Erbil, for which Iraq also failed to provide security and resulted in its takeover in March 2017.
The Claimant alleged that it incurred losses of approximately US$ 900 million. Although the Claimant claims to have met with the Ministry of Industry and Minerals and the Iraqi General Company for Cement to attempt an amicable settlement, no agreement was reached. Accordingly, on 5 June 2020, the Claimant commenced ICSID arbitration against Iraq seeking damages under a number of international instruments and national laws, as well as the Rehabilitation and Operation Contract. These instruments and laws were as follows:
The Agreement of Encouragement and Reciprocal Protection of Investments and the Protocol Attached Thereto entered into between the Government of the Republic of Iraq and the Government of the Federal Republic of Germany which was signed on 4 December 2010 (the “Iraq-Germany BIT”);
Iraq’s Law No. 60 of 2012 ratifying the Iraq-Germany BIT (“Law No. 60”);
The Partnership and Cooperation Agreement between the European Union (“EU”) and its Member States on the one part, and the Republic of Iraq, on the other part (“PCA”);
Iraq’s Law No. 49 of 2013 ratifying the PCA (“Law No. 49”); The Agreement for Encouragement and Protection of Investment between the Republic of France and the Republic of Iraq (the “Iraq-France BIT”), which entered into force on 24 August 2016;
Iraq’s Law No. 24 of 2012 ratifying the Iraq-France BIT (“Law No. 24”);
Law No. 64 of 2012 - Joinder by the Republic of Iraq of the Convention on The Settlement of Investment Disputes Between States, resolved on 1 October 2012 and published in the Official Gazette of Iraq on 29 July 2013 (“Law No. 64”);
Iraq’s Investment Law No. 13 of 2006 as amended in 2015 (“Investment Law”); and/or
Law of Investment in Kurdistan Region - Iraq, Law No. 4 of 2006 (the “Kurdistan Law No. 4”).
On 6 April 2021, the Respondent requested that the tribunal summarily dismiss the Claimant’s case pursuant to Rule 41(5) of the ICSID Arbitration Rules due to a manifest lack of legal merit. In particular, the tribunal concluded that it lacked jurisdiction to decide the claims.
The Tribunal issued its award on 30 September 2022, in which it dismissed the Claimant’s claims as “being manifestly without legal merit”. In doing so, the Tribunal considered, and rejected, each of the instruments referred to by the Claimant in its endeavour to establish Iraq’s consent to ICSID jurisdiction.
The Tribunal first considered the Iraq-Germany BIT and determined that, although Article 11(4) of the BIT did refer to ICSID arbitration, the BIT was not in force because Germany had yet to ratify it. It therefore could not bind Iraq internationally or establish consent to ICSID arbitration.
The Tribunal then considered and rejected the Claimant’s argument that Law No. 60 constituted Iraq’s offer to arbitrate at ICSID or Iraq’s acceptance of the ICSID procedure when both Germany and Iraq became Contracting States to the ICSID Convention in 2015. It held that Law No. 60 was merely the domestic procedure enabling Iraq to become internationally bound by the Iraq-Germany BIT, subject to the fulfilment of the conditions for the BIT’s entry into force.
The Tribunal further rejected the argument that Iraq’s consent to ICSID arbitration in Article 11(4) of the Iraq-Germany BIT could be deemed as a unilateral act of Iraq on the basis that it was contained in a treaty provision in which both states reciprocally agreed to ICSID arbitration. The Tribunal explained that for such treaty undertakings to produce effect, the BIT had to be in force.
The Tribunal was unpersuaded by the Claimant’s argument that Section II of the PCA included investor-State protection. It clarified that it was limited in Article 23(2) to measures affecting trade in services and establishment in all economic activities, and observed that Annex 4 specifically excluded investor-State protection from the scope of Section II of the PCA (as defined in Article 23(2)).
The Tribunal considered whether Iraq’s consent to ICSID arbitration contained in Article 8 of the Iraq-France BIT could be imported through the Most-Favoured Nation clause of Article 25 of the PCA, taken alone or in combination with Article 27 of the PCA. The majority determined that the argument was “manifestly without legal merit”.
Given the uncertainties in the Respondent’s role in the dispute, the Tribunal assumed for purposes of determining the Respondent’s application that the Respondent could be deemed to be a real party to the Rehabilitation and Operation Contract. However, the Tribunal found that this was not enough to establish the Respondent’s consent to ICSID arbitration under any of the ratification laws of the Iraq-Germany BIT, the PCA or the Iraq-France BIT.
The Tribunal finally considered and rejected the Claimant’s argument that other Iraqi laws contained the Respondent’s consent to ICSID arbitration.
Article 41(5) of the ICSID Rules is a useful procedural mechanism that empowers ICSID tribunals to dismiss claims that manifestly lack merit at the preliminary stage of the proceedings, whether in terms of jurisdiction or on the merits. This mechanism is becoming increasingly common in international arbitration as it is also available under the arbitration rules of other arbitral institutions, including the LCIA and SIAC. However, as explained by the Tribunal in its award, the determination of whether summary dismissal is warranted is not an easy task. Rather, it involves a delicate balancing exercise in which a tribunal must weigh a claimant’s right to due process against a respondent’s right not to have to defend itself against patently unmeritorious claims. Given the ramifications of summary dismissal, a tribunal must be satisfied that a claim is manifestly without merit, after having considered all of the relevant materials available and what other materials the parties could potentially produce at a subsequent stage were the proceedings to move forward.
For further information, please contact Justin Alexander Gambino.
Published in November 2022
