This is an Insight article, written by a selected partner as part of GAR's co-published content. Read more on Insight
It is a widely accepted position that foreign direct investment is a major contributor to the growth and development of any emerging country. With foreign direct investment comes capital, technology and management know-how, eventually leading to long-term benefits for the host country. This is particularly true for emerging countries such as Bangladesh. Since the beginning of the 1990s, Bangladesh has adopted a number of policies to facilitate the growth of the private sector and increase the inflow of foreign investment.
Bangladesh has also concluded a number of bilateral investment treaties (BITs) with different countries in order to promote foreign investments in its territory.At present, Bangladesh has concluded 29 BITs - 24 of which have come into force - and is currently negotiating with nine other countries. Most of the BITs signed by Bangladesh offer protection against expropriation and typically include prompt, adequate and effective compensation provisions for expropriation. It can be seen that although the BITs prohibit unlawful expropriation, no definition of 'indirect' expropriation is provided in these treaties. Although a number of nationalisations took place after the independence of Bangladesh in 1971, so far no cases of direct expropriation have been reported against Bangladesh.
Most BITs also contain provisions on full protection and security and the obligation to grant fair and equitable treatment, which is perhaps one of the most important standards of protection in international investment law. This standard of protection can also be found in Bangladesh's investment protection statute, the Foreign Private Investment (Promotion and Protection) Act 1980 (the Act). Article 4 of the Act explicitly grants 'fair and equitable treatment' to foreign private investments, which shall enjoy full protection and security.
As a step towards its commitment to the protection of foreign private investment, Bangladesh ratified the International Centre for Settlement of Investment Dispute (ICSID) Convention (the ICSID Convention), which came into force on 26 April 1980. The ICSID Convention is a multilateral treaty formulated by the World Bank to create an impartial international forum for the resolution of legal disputes between foreign investors and host countries either through conciliation or arbitration. At present, 159 countries have signed the ICSID Convention.
Since 1980, a number of international arbitration cases have been brought under the ICSID Convention by foreign investors against Bangladesh, all of them in the energy sector. Some of these cases shall now be discussed in turn.
Brief overview of investment treaty cases
Saipem v Bangladesh (ICSID Case No. ARB/05/07)
The case of Saipem concerned a dispute between a Bangladesh state entity, Petrobangla, and the claimant in relation to the installation of a gas pipeline in Bangladesh. The contract provided for disputes to be resolved by arbitration in Dhaka under the ICC Rules. The completion of the project was delayed and a dispute arose between the parties over the compensation for such delay. Failing to reach any amicable settlement, the claimant invoked the arbitration agreement and initiated arbitral proceedings in Bangladesh.1 During the course of the arbitration, and following applications made by Petrobangla, the Bangladesh courts revoked the authority of the arbitral tribunal on the ground that they had committed misconduct by denying certain procedural requests made by Petrobangla.
Notwithstanding the orders of the Bangladesh courts, the arbitral tribunal decided to continue with the arbitration. The arbitral tribunal's decision to continue was on the basis that the Bangladeshi courts did not have the necessary jurisdiction to revoke the authority of the arbitrators, which vested exclusively with the ICC International Court of Arbitration. Thereafter, Petrobangla resorted to the local courts for an injunction against the continuation of the ICC arbitration. The injunction was granted against the continuation of the arbitral proceedings. However, despite the injunction, the arbitral tribunal proceeded to render the award.
Following the arbitral award, Petrobangla filed an application to set aside the arbitral award before the Bangladeshi courts. The Bangladeshi court confirmed that the ICC award had no legal effect since the arbitral tribunal's authority had been revoked earlier by the local courts. As a result of this decision, the ICC award was a nullity for all purposes in Bangladesh.
Failing to receive any justice from the local courts, Saipem resorted to a claim under the ICSID Convention alleging violation of Bangladesh's obligations under the Bangladesh-Italy bilateral investment treaty. Saipem's claim was based on undue interferences by the local courts with its right to arbitration and its rights under the ICC award. In Saipem, the ICSID Tribunal had to consider novel arguments raised by the parties from the perspective of international law. Specifically, the ICSID Tribunal had to consider whether the facts alleged by Saipem could give rise to state liability under public international law.
In Saipem, the ICSID Tribunal held that the vested rights of Saipem - namely, the right to arbitration and the right to the proceeds of the ICC award - were capable of being protected under international law.2 In respect of the courts' actions, the ICSID Tribunal, following Allard v Sweden,3was of the view that the actions of local courts could give rise to an international law claim.4 In Saipem, the main focus of the ICSID Tribunal was on the impact and effect of the local courts' decisions, which interfered with the claimant's arbitration with Petrobangla.
After analysing the decisions of the Bangladesh courts, the ICSID Tribunal held that they were in violation of international law, in particular the New York Convention. The ICSID Tribunal was satisfied that the Bangladesh court's decision to revoke the arbitrator's authority amounted to a flagrant violation of article II of the New York Convention since it had the effect of immobilising the arbitral process and frustrated 'the spirit of the Convention'.5 The ICSID Tribunal's decision was reinforced by the fact that several injunctions were issued against the continuation of the ICC arbitration which frustrated the arbitration agreement. The ICSID Tribunal further noted that, although the local courts did have supervisory jurisdiction over the ICC arbitration and particularly in revoking the authority of the arbitrators, the exercise of their supervisory powers was illegal as the standard for revocation used by the Bangladesh courts and the manner in which the judge applied that standard to the facts were sufficient to constitute an abuse of right.6 The ICSID Tribunal's decision seems to suggest that, since the Bangladeshi courts reached an illegal judgement under international law, the seat argument could not be relied upon to justify the interferences by the judiciary.
Chevron v Bangladesh (ICSID Case No. ARB/06/10)
Another interesting arbitration brought against Bangladesh under the ICSID Convention was the case brought by gas company, Chevron.7 Chevron is one of the largest producers of natural gas in Bangladesh. It has been collaborating with Bangladesh to explore its natural gas and oil resources in order to meet the country's energy demands. The full text of this award is not readily available, hence this commentary is based on the limited excerpts that are publicly available.
In the early 2000s, a dispute arose between Bangladesh and Chevron Bangladesh Block Twelve Ltd and Chevron Bangladesh Block Thirteen and Fourteen Ltd, two companies incorporated in Bermuda (collectively, Chevron), over the interpretation of two production sharing contracts (PSCs) and three gas purchase and sale agreements (GPSAs) that related to the exploration, extraction, purchase and sale of natural gas in Bangladesh. The crux of the dispute was whether Petrobangla was entitled to receive a 4 per cent tariff for allowing Chevron to use their pipelines to supply natural gas from a gas field, when Petrobangla itself was the buyer of the said gas. Chevron argued that such a tariff could only be charged by Petrobangla when its pipeline was being used to supply gas to third parties. As a result, Chevron sought to recover around US$240 million from Petrobangla, which was illegitimately deducted from their earnings.8
The negotiations relating to the PSCs and GPSAs reveal that such a tariff was envisioned from the very outset. The PSCs and the GPSAs contained provisions entitling Petrobangla to a tariff when the seller used a pipeline operated by Petrobangla to supply natural gas to Bangladesh's domestic market.9 Following the commencement of gas production in February 1999, it became apparent that there was a dispute between Bangladesh and Chevron over the interpretation of the tariff clause. However, Chevron continued to make the tariff payments until 2003. In and around 2004, while the GPSAs were being negotiated, this point of contention was raised again by the parties and Chevron decided to settle this dispute through arbitration. A request for arbitration was filed at ICSID by Chevron on 17 March 2006. The ICSID Tribunal was constituted on 15 February 2007.
In the ICSID arbitration, Bangladesh initially refused to participate in the jurisdiction phase and obtained an anti-suit injunction from a local court to restrain the foreign arbitral proceedings. In response, the ICSID Tribunal referred to articles 26 and 41 of the ICSID Convention to establish that prior consent to ICSID arbitration excluded other remedies, such as domestic anti-suit injunctions, and that the ICSID Tribunal would itself determine whether it had jurisdiction or not. Bangladesh continued to abstain from the proceedings and a summary Decision on Jurisdiction was delivered on 21 August 2007, where the ICSID Tribunal upheld its own jurisdiction and scheduled a hearing date for the merits. At this juncture, Bangladesh decided to participate in the ICSID arbitration and withdrew the anti-suit injunction in the local court unilaterally.
After hearing the submissions of the parties, the ICSID Tribunal made its decision on two main grounds.
First, it considered Chevron's argument that Petrobangla was only allowed to charge a 4 per cent tariff as a wheeling charge when it supplied gas to third parties, not when the buyer was Petrobangla itself.The ICSID Tribunal determined that a literal reading of the PSCs and the GPSAs pointed towards a conclusion that the tariff was owed by Chevron regardless of who the purchaser was. Moreover, it was noted that, at that time, Chevron's only customer for the gas was Petrobangla, which in effect meant that Chevron were seeking not to be charged a tariff on their production at all.
Second, the ICSID Tribunal upheld Bangladesh's submission that Chevron was estopped from disputing the interpretation of the tariff provision as it had complied with the terms of the provision and made tariff payments for a number of years. According to a Petrobangla press release, this decision on tariff payments allows Petrobangla to collect up to US$312 million from Chevron in the next 20 years.10
Although Bangladesh prevailed on the merits of the dispute, heavy costs were awarded against them for their intransigent stance at the jurisdiction phase of the arbitral proceedings. Notably, Chevron was awarded its costs for defending the suit in Bangladesh, its preparation for the hearing on merits that had been initially adjourned and the entirety of its costs from the jurisdictional phase of the arbitration, as Chevron had succeeded on that ground. The parties also had to equally share the fees and expenses of the ICSID Tribunal. While this is not unprecedented, in the opinion of Lindsey Marchessault, consultant of the ICSID, in the instant case, the equal division of costs was largely attributed to the behaviour of the parties during the arbitration, particularly Bangladesh's aforementioned dilatory actions.
Niko Resources (Bangladesh) Ltd v Bangladesh (ICSID Case No. ARB/10/11 and ICSID Case No. ARB/10/18)
A recent arbitration brought under the ICSID Convention against Bangladesh is the case brought by Niko Resources (Bangladesh) Ltd (Niko). Bangladesh was interested in developing its marginal and abandoned gas fields, and to that effect BAPEX, a wholly-owned subsidiary company of Petrobangla, concluded a Framework of Understanding with Niko on 23 August 1999. Pursuant to this Framework, a joint venture agreement (JVA) was entered into between BAPEX and Niko on 16 October 2003 on the terms that Niko and BAPEX would supply the gas and Petrobangla would buy the same. Under the JVA, gas supplies started in November 2004. However, an agreement as to the price of the gas had not been reached with the buyer. Niko requested a price of US$2.75/MCF and the buyer offered US$1.75/MCF.
On 27 December 2006, a GPSA was concluded where the price was fixed at US$1.75/MCF.Both the JVA and the GPSA contained standard arbitration clauses with ICSID provisions. While Petrobangla made a few payments over the years, as of 1 April 2010, it owed Niko and BAPEX US$27.16 million and US$8.55 million respectively.
It is important to mention here that in 2005, two blowouts had occurred in the relevant gas fields being operated by Niko. Subsequent to the blowouts, the Bangladesh Environmental Lawyers' Association (BELA) filed a local case to have the JVA invalidated and for an injunction to be placed on payments to Niko for the said gas. Subsequently, a government committee found Niko responsible for the blowouts and commenced legal action against Niko in the local court seeking compensation. The local court, upon considering BELA's arguments, did not find the JVA to be obtained through a flawed process but issued an interim order restraining payments for the said gas until Niko paid compensation as per the decision of the local court.
Pursuant to several reminders from Niko to Petrobangla over payment for the said gas produced by Niko, Niko served a Notice of Arbitration on Petrobangla on 8 January 2010. Niko decided to refer these two particular disputes for arbitration under the ICSID Convention, registering the 'Compensation Claim' as ICSID Case No. ARB/10/11 and the 'Payment Claim' as ICSID Case No. ARB/10/18. The ICSID Tribunal was constituted and proceedings began on 20 December 2010. During the preliminary procedural stage, it was agreed that the two arbitrations would proceed together and the ICSID Tribunals' decision would be furnished in a single instrument.
Bangladesh objected to the jurisdiction of the ICSID Tribunal over these two claims. It contended, inter alia, that Niko was a facade and not the real claimants in the arbitration,11 and that a 'real connection' is required between a corporation and the home state beyond the mere fact of incorporation.12 With regard to the subject matter of the case, Bangladesh denied that the dispute directly arose out of an investment and argued that neither the sale of gas or potential expenditures related thereto may be considered as an investment. Moreover, it argued that as Niko had committed acts of corruption, it could not benefit from the JVA and GPSA and the arbitration clauses in particular. To support this, they referred to two ICSID awards - the Phoenix Action award13 and the Hamester award14 - and sought to establish that as the claimants had not referred the dispute to arbitration with clean hands and they had committed bribery, the ICSID Tribunal should not accept jurisdiction over these two claims. Bangladesh argued that ICSID arbitration should only be open to those who make good faith investments, as otherwise the integrity of the ICSID system would be jeopardised and the doctrine of clean hands would be undermined. Bangladesh further argued that the ICSID Tribunal should not have jurisdiction over the Compensation Claim as the blowouts fell outside of the scope of the JVA, especially as the subject matter involved tort, criminal and environmental liabilities beyond the scope of the JVA.
On 19 August 2013, the ICSID Tribunal rendered its Decision on Jurisdiction on a few key points.
First, with regard to Niko's identity and nationality, it concluded that distinct corporate identities possess a legitimate function in mobilising investments and thus Niko did not act illegally in being incorporated abroad. More precisely, as the corporate structure of the company was known to Bangladesh, Niko could be considered as a legitimate claimant, with its nationality apparent from its registration in Barbados.15
Second, the ICSID Tribunal further found that though the government of Bangladesh played 'a central role in the elaboration of the project and the negotiations of the two contracts',16 and that Petrobangla and BAPEX are agencies of the government in the sense of article 25 of the ICSID Convention, they were deemed to have separate legal identities capable of entering into agreements under the laws of Bangladesh.17 This is most apparent from the terms of the GPSA and JVA, where it was stated that 'the responsibilities and obligations of Petrobangla and the Government [...] has been assign [sic] to BAPEX'. By delegating authority, Bangladesh clearly consented not to participate in the Agreements as a party.18 In other words, the ICSID Tribunal was not persuaded by Niko's arguments that the acts of Petrobangla and BAPEX could be attributed to Bangladesh. This is a significant departure from the position taken by the ICSID Tribunals in the Saipem and Chevron cases, where Petrobangla was considered to be part of the state, despite its separate legal identity, and its actions were attributable to Bangladesh. The distinguishing feature between the aforementioned cases and the instant case was that Bangladesh had not signed any agreement with the investor and has not on its own behalf agreed to ICSID arbitration.19 The ICSID Tribunal therefore decided not to rely on 'attribution' in considering whether Niko's veil should be lifted, as argued by Bangladesh, or when seeking to hold Bangladesh as being bound to arbitrate, as submitted by Niko.
Third, the ICSID Tribunal considered the requirement for 'designation' by a state and, in particular, whether the designation of authority has to be validly communicated to ICSID through a formal notification. The ICSID Tribunal distinguished the instant proceedings from the Cambodia Power case,20 where it was held that 'communication is inherent in the very notion of designation' and that communication has to be the sole preserve of the state itself. However, the ICSID Tribunal took the view that, while designation may be the sole preserve of the state, ad hoc designation - as in the instant proceedings - can be communicated through means other than a formal notification. Thus, if a state's written approval of an ICSID arbitration agreement, concluded by one of its agencies, is brought to the attention of ICSID with a request for arbitration by an investor, as has been done in the instant case, it may suffice as adequate notification.21 As the designation was found to be valid and as notification was considered to have taken place, the ICSID Tribunal found BAPEX and Petrobangla to be bound by the arbitration clauses in the Agreements.22
Fourth, while the Tribunal conceded that an investment must be a 'coherent unit',23they found no justification for distinguishing between 'investments where the entire project is subject to a single instrument and those where different aspects of the project are regulated by separate contracts', as had been argued by the respondents. Thus, the expenditure and the legal instrument through which Niko's investment was implemented in Bangladesh (ie, the GPSA) formed a 'constituent part of the investment operation'.24 This expenditure also met the Salini criteria for determining whether an investment had taken place since there was a substantial contribution, a certain duration of operation, a risk undertaken and contribution to Bangladesh's operation through the implementation of the JVA.
Fifth, while considering Bangladesh's arguments regarding Niko's illegal acts of corruption, the ICSID Tribunal noted that Bangladesh did not seek for the JVA or GPSA to be rescinded. In the absence of any clear declaration from Bangladesh invalidating the Agreements, the ICSID Tribunal decided not to consider the Agreements as being void.25 The ICSID Tribunal concluded that Niko had committed the said acts of corruption sanctioned in the Canadian case but, after scrutinising the evidence, they did not find further evidence of corruption nor did they believe that corruption had influenced the JVA/GPSA.26 The prohibition of bribery is part of international public policy and arbitrators are not supposed to give effect to contracts in conflict with such policy. However, in the instant case, corruption was not the 'object' of the contract, as it was in Mr X, Buenos Aires v Company A,27 where bribing Argentinean civil servants was the object of the contract. The ICSID Tribunal reviewed the World Duty Free28 case and article 50 of the Vienna Convention on the Law ofTreaties regarding the bribery of foreign public officials to find that an agreement may be voided by a state which is subject to corruption. However, the state may choose not to do so in the interest of preserving existing commercial arrangements - as Bangladesh had chosen to do so in the current case. In the absence of any clear declaration from Bangladesh, the ICSID Tribunal decided not to consider the Agreements as being void.29 Moreover, questions regarding whether an investment was made in good faith reaffirms, rather than derogates from, the need for a tribunal to accept jurisdiction and consider the merits of the dispute.30 That is why the ICSID Tribunal held that resolving the dispute, instead of avoiding it, preserved the integrity of the system.31
Sixth, with regards to the Compensation Claim, the ICSID Tribunal upheld their jurisdiction to determine whether Niko has any liability for the blowouts under the JVA.32 The scope of the arbitration clause in the JVA referred to the origin of the dispute 'arising in connection with performance/interpretation of the JVA', and the ICSID Tribunal accepted that as Niko had a wide range of obligations under the JVA, disputes 'in connection with the performance of the JVA' had to be construed broadly and may require the ICSID Tribunal to make findings concerning liability on grounds other than the JVA at the merit stage of the proceedings.33 Similarly, the question of whether BAPEX, as a party to the JVA, owes a duty under the Agreement to cooperate with Niko is evidently a dispute arising in connection with the JVA and thereby gives the ICSID Tribunal jurisdiction to determine that particular question. Furthermore, with respect to jurisdiction ratione personae, the ICSID Tribunal differed from Niko in finding that it does not have jurisdiction over Petrobangla with respect to claims based on the JVA, as only BAPEX was the signatory to the Agreement and is a separate legal entity.34 However, under the GPSA, it was apparent that Petrobangla had agreed to arbitrate with Niko over the GPSA disputes. The ICSID Tribunal also agreed with Bangladesh that its jurisdiction is limited to determining the rights and duties of Niko and BAPEX in connection with the performance of the JVA, and did not extend to the state of Bangladesh and private third parties.
Thus, by way of conclusion, the ICSID Tribunal held that they did have jurisdiction over the dispute between Niko and BAPEX under the terms of the JVA over the Compensation Claim as well as over the dispute with Petrobangla over the payment under the GPSA. The ICSID Tribunal found that it did not have jurisdiction over the state of Bangladesh, which was neither a party to the JVA nor the GPSA.
The aforementioned cases demonstrate Bangladesh's positive attitude towards engaging with the ICSID process and its growing desire to comply with the spirit of the ICSID Convention. Even in the Saipem and Chevron cases, where the Bangladeshi courts interfered with the arbitral process, Bangladesh ultimately participated and accepted the decision on merits delivered by the ICSID Tribunals, even when such decisions may have involved substantial monetary awards against Bangladesh. This growing compliance with the terms of BITs and the ICSID Convention should be encouraging to foreign investors as it is indicative of a more robust investor protection regime in Bangladesh. These developments will be particularly important for those interested in investing in Bangladesh's energy sector, an area with great potential as Bangladesh possesses 10 trillion cubic feet of natural gas reserves.35 At the same time, the decisions of the ICSID Tribunals reveal the areas in which Bangladesh can build greater investor confidence. It is hoped that lessons from these cases will help Bangladesh bolster its investment framework, in turn increasing the inward flow of foreign direct investment in Bangladesh.
The author would like to thank Morshed Mannan, a research assistant at Sattar&Co, for his assistance with this chapter.
- ICC Case No. 7934/CK, published in (2000) 18(4) ASA BULL. at 821-829.
- Saipem v Bangladesh, ICSID Case No. ARB/05/07, Decision on Jurisdiction and Recommendation on Provisional Measures dated 21 March 2007, para. 130.
- Allard v Sweden, No. 35179/97 (section 4) (bil.), ECHR 2003-VII - (24 June 2003).
- Saipem, supra note 2, para. 132.
- Saipem v Bangladesh, ICSID Case No. ARB/05/07, Award dated 30 June 2009, para. 167.
- Saipem, supra note 5, para 159.
- Chevron Bangladesh Block Twelve, Ltd. and Chevron Bangladesh Blocks Thirteen and Fourteen, Ltd v People's Republic of Bangladesh, ICSID Case No. ARB/06/10, Award of 17 May 2010, ICSID Review (2011), pp. 256-294.
- UNB Dhaka, 'Chevron accepts int'l court ruling' The Daily Star, 20 May 2010 (Available online at: http://archive.thedailystar.net/newDesign/news-details.php?nid=139251) accessed on 14 May 2014.
- Lindsey Marchessault, 'Chevron Bangladesh Block Twelve, Ltd and Chevron Bangladesh Blocks Thirteen and Fourteen, Ltd v People's Republic of Bangladesh (ICSID Case No. ARB/06/10): Introductory Note' ICSID Review (2011) 26 (1): 256-264, p. 257.
- Star Report, 'Int'l Court rejects Chevron Claim' The Daily Star, 19 May 2010 (Available online at: http://archive.thedailystar.net/newDesign/news-details.php?nid=139124) accessed on 14 May 2014.
- Niko Resources (Bangladesh) Ltd v People's Republic of Bangladesh, Bangladesh Petroleum Exploration & Production Company Limited (BAPEX) and Bangladesh Oil Gas and Mineral Corporation (Petrobangla), ICSID Case No. ARB/10/11 and ICSID Case No. ARB/10/18, Decision on Jurisdiction dated 19 August 2013, para 173.
- Ibid, para 198.
- Phoenix Action Ltd v Czech Republic, ICSID Case No. ARB/06/05, Award dated 15 April 2009.
- Gustav F W Hamester GmbH Co KG v Republic of Ghana, ICSID Case No. ARB/07/24, Award dated 18 June 2010.
- Niko, supra note 11, para 182 - 203.
- Ibid, para 219.
- Ibid, para 235.
- Ibid, para 251.
- Ibid, para 248.
- Cambodia Power Company v Kingdom of Cambodia, ICSID Case No. ARB/09/18, Decision on Jurisdiction dated 22 March 2011.
- Niko, supra note 11, para 328.
- Ibid, para 348.
- Niko, supra note 11, para 364.
- Ibid, para 372.
- Ibid, para 464.
- Ibid, para 423-429.
- Mr X, Buenos Aires v Company A, 10 Arbitration International 1994 at 282.
- World Duty Free Company Limited v the Republic of Kenya, ICSID Case No. ARB/00/7, Award dated 31 August 2006.
- Niko, supra note 11, para 464.
- Ibid, paras 470-471.
- Ibid, para 474.
- Ibid, para 497.
- Niko, supra note 11, paras 505-506.
- Ibid, para 515.
- UNCTAD, 'An Investment Guide to Bangladesh' (Available online at: http://unctad.org/en/pages/PublicationArchive.aspx?publicationid=464) accessed on 10 June 2014.