Did Uzbekistan Draw Proper Conclusion from Romak Case in Drafting its BITs: Legal Analysis of 2017 Uzbekistan-Turkey BIT

Mironshoh Murodilloev

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1. Background of the problem

Sometimes drafters make errors making legal treaty to be enormous opening a gate to future disputes between investors and the host state. One of such errors leading to subjective ambiguous interpretation of the provisions contained in a treaty can be seen in Uzbekistan-Switzerland BIT. Although jurisprudence constante (non-binding precedents) helped Uzbekistan to overcome this issue, Uzbekistan must have made a proper conclusion from its past mistakes and do not repeat these in future negotiations.

It is groundless to unite all BITs as each treaty is drafted coming from specific backgrounds and all agreed negotiations by both sides. Therefore, each treaty possesses unique features and the provisions contained in them are in a diverse nature. Take developed countries like the USA or Canada, they tend to impose stricter rules towards foreign investors to support national manufacturers from foreign competitors. Contrastingly, developing states tolerate investment in-flows to gain development with a help of foreign investors. Since Uzbekistan belongs to the latter group, there is a tendency to follow trends of the neo-liberalism era. However, this approach is considered to be extremely dangerous no matter how it seems useful for investors. 

To prove that the above statement is far from biased facts, Romak case is sufficient to exemplify. This investment dispute was based on the provisions contained in Uzbekistan-Switzerland BIT. When the investor company named Romak commenced arbitral proceedings against Uzbekistan, respondent challenged that dispute is not directly out of the investment as required by Article 25 (1) of ICSID Convention because Romaki assets did not fall within the definition of investment under Article 1 of the BIT. In turn, the claimants argued that “any assets” shall be conserved as an investment. However, only jurisprudence constante applied by the Tribunal saved Uzbekistan to pay loans amounting to 10 million USD. In that case, the Tribunal referred to the Salini test which required four cumulative elements for the investment to meet its protection under the treaty. Nonetheless, such an approach is extremely dangerous as Article 31 of VCLT requires interpreting treaty provisions in good faith. The annulment committee for CMS Gas Transmission Company v. The Republic of Argentina clearly stated the BIT should have been read as it stood. It is a trite principle to refrain to create new law according to Yukos Universal Limited (Isle of Man) v. The Russian Federation no matter how they seem to be necessary. As far as jurisprudence constant, set of non-binding precedents, is not guaranteed always, it is best of drafters to add such additional test requirements in the treaty to avoid any abstractions. 

Certainly, it is impossible to reach a solid conclusion to assess the issue by analyzing only one BIT. Therefore, only the BIT signed between Uzbekistan and Turkey in 2021 will be in central point. Then, in the final part other BITs made after the Romak case will listed by dividing into three similar issues.

• Analysis of Uzbek-Turkish BIT (2017)

Notion of investment

Against such background, to determine whether Uzbekistan drew a proper conclusion, it is enough to examine recent BITs. Take Uzbek-Turkish BIT signed in 2017, for example, although Uzbekistan followed an ordinary way of drafting, a clever maneuver was made. Under Article 1 (1) of the BIT “any assets” are considered to be covered investments, as usual, the second paragraph explicitly excludes trade-related activities to regard them as investments and obliges investments to fulfil all elements in the test embodied by Salini tribunal: contribution of money/assets (1), risk (2), certain duration (3) and a contribution to the host State’s economy (4). In other words, Uzbekistan went on slyly way: from one angle, the State seems to be open to any kind of commercial activities;from another angle, the very investment must meet four elements set under Article 1 (1)(3) of the BIT.

Nevertheless, under Article 2 the BIT can be applied only to investments made after the enforcement date of this BIT. To find an answer for the essense of the importance of such method, we should back to the 1992 Uzbek-Turkish BIT, there were no specific requirements for investments to meet. As far as present 2017 BIT does not impose any additional requirements for before-made investments to fall under this treaty, there is a huge possibility of investment disputes as made by Romak. Since ICSID tribunals do not admit any binding precedents, the outcome would be different even substance is alike. Therefore, it is the inefficiency of Uzbekistan to agree not to impose any further requirements even on investments made under the BIT-1992. Another question also may arise: are those assets made before 2017 can be protected by old BIT despite being expired unilaterally? The answer is YES. There is a survival cause (grandfathering clause) in the old investment treaty to protect investments made in accordance with that legal treaty within a ten-year period after the expiry date. It is required to eliminate the very survival clause in 1992 BIT or add new requirement regarding to fulfill cumulative above-stated elements for those investments made before 2017.

Portfolio investments

The next dangerous point is the non-preclusion of portfolio investments to regard them as covered investments. Portfolio investment is normally represented by a movement of money for the purpose of buying shares in a company formed or functioning in another country. Indeed, customary international law does not protect portfolio investments. Such investment was attended by ordinary commercial risks which the investor ought to have been aware of. But, customary international law protected the physical property of the foreign investor and other assets directly invested through principles of diplomatic protection and state responsibility.

There will be continued uncertainty attached to the question whether portfolio investment is protected in the same manner as foreign direct investment in international law. The better view is that portfolio investment is not protected unless specifically included in the definition of foreign investment in the relevant treaty. 

Why preclusion of portfolio investments is seemed important? The Asian crisis in 1997 might be a shining example, here. When crisis was in place, to prevent inflation and increase the credibility of national currencies the Eastern and South-Eastern Asian countries nationalized all portfolio investment assets without any remedy. No claim had arisen as the very states explicitly denied to protect portfolios leaving no room for implicit interpretation.

In the present Uzbek-Turkish BIT, state parties avoided to include portfolio investments within the definition of investment. Therefore, one may argue that there is no room is left to fear. However, lacunae principle should not be underestimated, as well. If the primary sources are silent on one issue, additional sources will be applied. This might be the Law of the Republic of Uzbekistan “On Investment and Investment Activities” in which portfolio investment is considered as a type of investment performance. Under Article 6 (1) any investor can engage in investment activities by means of acquiring shares of a company no matter it is an investment vehicle or not. Therefore, any holder of portfolio investor in the case of dispute can bring a claim before arbitration to protect their investment assets. 

Most favored nation treatment

Another lame point of the BIT can be detected in the MFN clause. Most favored nation treatment provision is very flexible to be applied if there are other more favored ways given to the third state investors even if they were done deliberately and are not discriminatory in nature. A trite principle is that if MFN clause is not qualified, this provision can be applied in dispute settlement mechanisms and compensation-backed issues. Take Emiliano Maffenzini claims against the Kingdom of Spain, MFN clause was a justification for the claimant not to pass pre-arbitration stages. Another detrimental side might be seen in the case of the calculation of damages. 

Under Article 5 of the BIT, any compensation for payable lawful expropriations shall be calculated in Market Value principle in a “prompt and adequate way”. The preclusion of Fair Market Value method is extremely beneficial because the former method allows reducing the amount of claimed compensation due to contributory fault, risky involvements, dire economic situation and other relevant reasons. However, the Fair Market Value principle does not allow to do so regardless of subsequent facts may amount to reduce the total amount as stated by Santa Elena tribunal. Therefore, Uzbekistan should leave an escaping room in case it acts as respondent in future investment disputes not to reduce amount of the compensation for expropriations.

Nevertheless, the analogic use of MFN clause relying on the same situations as in Maffezini case would allow investors to apply Fair Market Value if Uzbekistan granted such right for other investors who are nationals of another third state. Although this is paradoxical in nature, one crucial fact should not be underestimated that the investment recipient state is Uzbekistan, but not Turkey.

Another dangerous point of MFN is the possibility of the broadening the scope of the definition to more favorable options. Since states vary depending on the expectations from various states, it would be unfair for the host states if the essence of the investment and investor is unified due to MFN clause. The most striking point was the exclusion of legality requirement (ratione legis) protecting an investment gained through bribery. In the case Metal-Tech LTD vs. Uzbekistan, the Claimants allegations were not to require the investment to be per law of the host state as Uzbekistan-Greece BITwas silent on this requirement which is absent in Uzbekistan-Israel BIT. However, the Tribunal held that MFN was applicable in treating the investment but not in the definition. Nonetheless, the conclusion by the arbitration is not more than tribunal opinion – opinion iuris. Therefore, it is highly advisable to set exclusions in MFN in the BIT itself. Otherwise, it is also possible to conclude differently. 

Chart: Current situation of above 3 issues in existing BITs signed after the dispute Romak vs. Uzbekistan (2009)

As can be seen, only three BITs signed between 2017 and 2019 set certain requirements for the investment and preclusions from broadening the MFN scope while remaining 51 BITs lack to do so. 

• Conclusion

By way of conclusion, it is better to analyze all the above-stated arguments in a single point. Firstly, Uzbekistan drew insufficient conclusions from Romak case although it avoided overgeneralized definitions. Imposing of new requirements should have been extended to pre-BIT investments. Secondly, certain types of investment, such as portfolio investments should be explicitly excluded to reduce the scope of the state responsibility. Finally, MFN clause should be qualified adding new exclusions in terms of application of this treatment in arbitral proceedings.

Cite as:   Mironshoh Murodilloev, “Did Uzbekistan Draw Proper Conclusion from Romak Case in Drafting its BITs: Legal Analysis of 2017 Uzbekistan-Turkey BIT”, Uzbekistan Law Blog, 14.10.2022.