• Moral Damages Claim in Investment Arbitration
  • July 15, 2017
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  • Introduction
    Compensation for moral damages in disputes to be resolved before an arbitral tribunal is a substantial topic. This Article covers the issue of moral damages claims in investment arbitration in light of significant arbitral awards ruled on this matter.
    In some cases, it is harder for the decision-makers to rule on compensation for moral damages due to its subjective nature. It is often argued that the distinction between material and moral damages blurs in some circumstances1. Below, the details of moral damages claims in investment arbitration will be examined under two sections according to the claimant of the moral damages which may be either the investor or the host state.
    The Cases in Which the Investor Requests Compensation for Moral Damages
    It is observed that, more often investors request compensation for their moral damages from the host states before arbitral tribunals. However, this request is very rarely accepted.
    Desert Line Projects LLC v. Republic of Yemen
    The Desert Line LLC v. Yemen is a major investment dispute in which the investor requested compensation for its moral damages2. The dispute stemmed from the physical duress, coercion and intimidation exercised by the Yemen forces on the officials of the Omani company Desert Line LLC during asphalt road construction. In 2005, the Claimant Desert Line LLC commenced proceedings before the International Center for Settlement of Investment Disputes ("ICSID") and alleged violation of the fair and equitable treatment provision in the Yemen Republic - Oman Bilateral Investment Treaty ("BIT")3.
    The arbitral tribunal concluded that, the psychological suffering experienced by the Desert Line's officers derived from the threatening and harassment by the Yemen armed forces and these illegal actions have caused loss of credit and reputation for the Claimant4. Hence, the arbitral tribunal granted the moral damages claim, including loss of reputation, which became the first example of an award accepting moral damages claim5.
    Pey Cassado v. Republic of Chile
    Another notable case in which the arbitral tribunal assessed the moral damages claim is Pey Cassado v. Republic of Chile6. The dispute had occurred due to the confiscation of a Chilean newspaper in 1973 by the military junta in which the Claimant Pey Cassado was a shareholder. The Claimant returned to Spain after a military coup and commenced arbitral proceedings before the ICSID in 1997 and alleged violation of the Chile - Spain BIT.
    The arbitral tribunal who granted material damages claim to the Claimant, refused to award any compensation for the moral damages claim by stating that the Claimant failed to provide sufficient proof for evaluation of moral damages7. The arbitral tribunal added that, the ruling on the compensation of material damages against the Rupublic of Chile, has provided sufficient moral satisfaction for the moral damages claimed to be suffered.
    This award clearly reveals the relativity of moral damages concept in the eyes of the tribunals in addition to the possibility of widening the scope of granting material damages in a way to cover the moral sufferings as well.
    Lemire v. Ukraine
    Lemire v. Ukraine is a notable example of investment disputes in which the arbitral tribunal assessed the moral damages claim and set forth several principles to grant so8. The dispute had stemmed from the accusations of an American radio broadcasting investor Claimant Lemire who affirmed that the Ukrainian broadcasting authorities rejected his new radio frequency applications unfairly. Hence, the Claimant commenced arbitral proceedings before the ICSID in 2006, alleged violation of the USA - Ukraine BIT and requested compensation for his material and moral damages.
    In its 2010 dated initial award on jurisdiction, the arbitral tribunal who referred to the Desert Line award had concluded that the investors are eligible to claim moral damages in light of the BITs. However, the tribunal who accepted the material damages claim refused to grant compensation for moral damages claim in its 2011 dated final award9 by reasoning that the material facts of the dispute do not constitute "exceptional circumstances"10. Accordingly, the tribunal ruled that the exceptional circumstances under which an investor may be awarded moral damages are:
    * "the State's actions imply physical threat, illegal detention or other analogous situations in which the ill-treatment contravenes the norms according to which civilized nations are expected to act;
    * the State's actions cause a deterioration of health, stress, anxiety, other mental suffering such as humiliation, shame and degradation, or loss of reputation, credit and social position; and
    * both cause and effect are grave or substantial.11"
    The tribunal concluded that even if the treatment of the Ukrainian authorities may be considered as loss of reputation, it still would not give rise to moral damages since the damage did not meet the three standards required.
    The Desert Line and Pey Cassado awards played vital role in the assessment of the tribunal. The moral damages experienced in this case were not found to be as grave as the one in the Desert Line and the material damages compensation awarded was found to be sufficient enough to cover both moral and material injuries faced with a similar reasoning given in the Pey Cassado award12. This award plays a vital role in order to observe the mentality of the arbitral tribunals related to the moral damages claims.
    The Cases in Which the Host State Requests the Compensation the Moral Damages
    The moral damages claim in the investment disputes may be reviewed from another aspect by the case law in which the Republic of Turkey as the host state requested compensation of its damages.
    The main distinction of these awards is that, the host state grounded its moral damages allegations on the investor's misconduct, namely the "abuse of process" during the arbitration proceedings.
    Europe Cement v. the Republic of Turkey
    Europe Cement v. the Republic of Turkey is a dispute that arose between a Polish company Europe Cement and the Republic of Turkey, in which the Claimant Europe Cement commenced arbitral proceedings before the ICSID by alleging violation of the Energy Charter Treaty13 by the Republic of Turkey14.
    The dispute had occurred due to the damages claim of the Claimant based on the confiscation of the property and annulment of the concession contracts of Cukurova Elektrik A.S. ("CEAS") and Kepez Elektrik Turk A.S.'nin ("Kepez") by the Republic of Turkey. The Claimant who alleged to own shares of CEAS and Kepez commenced arbitral proceedings before ICSID.
    However, the Arbitral Tribunal concluded that the evidence provided by the Claimant are counterfeit, which had shown that the Claimant had never been an investor, hence the arbitral tribunal rejected the dispute due to incapacity. The notable part of the dispute is that, the Republic of Turkey as the Respondent requested compensation of its moral damages due to unlawfully commenced proceedings by the Claimant in bad faith which had harmed its host state reputation. However, the moral damages claims of the Respondent were rejected by the tribunal15.
    The tribunal grounded the rejection of the moral damages claim by stating that leaving the arbitration costs on the Claimant compensates the damage it caused by deceit and abuse of process, that ruling on moral damages in addition to these would be excessive16. Like others, in this award, the tribunal examined the existence of the exceptional circumstances stated in the Lemire award and concluded that they did not exist.
    Cementownia v. the Republic of Turkey
    The dispute between a Polish company Cementownia Nowa Huta SA ("Cementownia") and the Republic of Turkey which was very similar to the Europe Cement v. the Republic of Turkey dispute, had occurred due to the damages claim of the Claimant Cementownia based on the confiscation of the property and annulment of the concession contracts of CEAS and Kepez by the Republic of Turkey. The Claimant who alleged to own shares of CEAS and Kepez commenced arbitral proceedings before the ICSID by claiming that it faced damages due to the illegal actions of the Republic of Turkey17.
    Parallel to the Europe Cement award, the arbitral tribunal concluded that the Claimant abused the process as the evidence provided was counterfeit, which had shown that the Claimant had never been an investor, hence the arbitral tribunal had no capacity to solve the dispute18.
    Although the tribunal explicitly expressed that it is possible to award for the compensation of moral damages under the ICSID Convention, it did not award so by reasoning that the Republic of Turkey did not face exceptional circumstances as the ones faced in the Desert Line dispute and the abuse of process which was stated as the basis of the moral damages claim was too wide to rule for such compensation of moral damages.
    Conclusion
    The compensation of moral damages faced in the investment disputes are claimed by both investors and host states.
    Although the ICSID Convention does not prohibit claiming moral damages, arbitral tribunals rarely award so. The main principles required are the exceptional circumstances clarified in Lemire award which was given in consideration of the Desert Line award.
    Among the case law of the investment disputes before the arbitral tribunals, two awards shine out in which the Republic of Turkey requested compensation for the moral damages faced as the host state. These disputes have distinctive character as the moral damages were claimed by the host state rather than the investor and the damages are grounded on the abuse of process faced during the arbitral proceedings rather than an illegal action arose during the investment process.
    1 Patrick Dumberry, "Satisfaction as a Form of Reputation for Moral Damages Suffered by Investors and Respondent States in Investor-State Arbitration Disputes", Journal of International Dispute Settlement, 2012, p.5.
    2 Desert Line Projects LLC v. Republic of Yemen, ICSID Case No. ARB/05/17, Award, February 6th, 2008, available at: https://icsid.worldbank.org/en/Pages/cases/casedetail.aspx?CaseNo=ARB/05/17, ("Desert Line Kararı")
    3 Matthew Parish / Annalise Newlson / Charles Rosenberg, "Awarding Moral Damages to Respondent States in Investment Arbitration", Berkeley Journal of International Law, 225, 2011, p.232.
    4 Desert Line Award, par. 290.
    5 Bernd Ehle / Martin Dawidowicz, "Chapter 10: Moral Damages in Investment Arbitration, Commercial Arbitration and WTO Litigation", Jorhe A. Huerta - Goldman / Antoine Romanetti, WTO Litigation, Investment Arbitration and Commercial Arbitration, Global Trade Law Series, Vol. 43, Kluwer Law International 2013, p.302; Marc Allepuz, "Moral Damages in International Investment Arbitration", Spain Arbitration Review, Vol. 2013, p.7.
    6 Victor Pey Cassado and President Allende Foundation v. Republic of Chile, ICSID Case ARB/98/2, Award May 8th, 2008, available at: https://icsid.worldbank.org/en/Pages/cases/casedetail.aspx?CaseNo=ARB/98/2 ("Pey Cassado Award"). The Salvador Allende Foundation was donated by the 90% of Mr. Pey Cassado's shares, hence was party to the dispute.
    7 Pey Cassado Award, par.243; Dumberry, p.20; Ehle / Dawidowicz, p. s.305.
    8 Joseph C. Lemire v. Ukraine, ICSID Case No. ARB/06/18, Award on Jurisdiction and Liability: January 14th, 2010, available at: https://icsid.worldbank.org/en/Pages/cases/casedetail.aspx?CaseNo=ARB/06/18; Antoine Champagne, "Moral Damages Left in Limbo", McGill Journal of Dispute Resolution, 2015, p.25.
    9 ICSID Case No. ARB(AF)/98/1, Award: March 28th, 2011, available at: https://icsid.worldbank.org/en/Pages/cases/casedetail.aspx?CaseNo=ARB(AF)/98/1;
    10 Dumberry, p.22.
    11 Lemire Award, par. 333.
    12 Lemire Award, par. 339.
    13 Published in the Official Gazette dated July 12th, 2000 numbered 24107.
    14 Europe Cement Investment and Trade S.A. v. Republic of Turkey, ICSID Case No. ARB(AF)/07/2, Award: August 13th, 2009, available at: https://icsid.worldbank.org/en/Pages/cases/casedetail.aspx?CaseNo=ARB(AF)/07/2; Marc Allepuz, p. 9.
    15 Matthew Parish / Annalise Newlson / Charles Rosenberg, "Awarding Moral Damages to Respondent States in Investment Arbitration", Berkeley Journal of International Law, 225, 2011, p.236; Champagne, p.31.
    16 Dumberry, p..27.
    17 Cementownia Nowa Huta S.A. v. the Republic of Turkey, ICSID Case No ARB (AF)/06/2, Award: September 17th, 2009, available at: https://icsid.worldbank.org/en/Pages/cases/casedetail.aspx?CaseNo=ARB(AF)/06/2.
    18 Ehle / Dawidowicz,, s.310.