Following a recent ruling in the English courts, it looks increasingly likely that the government of Lithuania will need to make good on a $12.5m obligation to Swedish energy firm Svenska Petroleum. Svenska mounted an international arbitration against Lithuania in 2000 after a dispute arose in relation to a contract with a Lithuanian state energy company. Svenska argued that it was short-changed on oil exploration and development rights in Lithuania and launched an arbitration against the state-owned company and the Lithuanian state.
Although Svenska prevailed in arbitration, the Lithuanian government dug in its heels, insisting that it was not a party to the contract in question and, as such, had never consented to arbitration. When Svenska turned to an English court to enforce its arbitration victory, Lithuania pleaded state immunity and refused to pay the award.
However, in a ruling issued in mid-November, the Court of Appeal held in favour of Svenska, affirming that although Lithuania may not have been a direct party to the contract, it had signed the contract and expressly agreed to take on certain legal obligations (including to submit disputes to binding arbitration).
Having found that the Lithuanian government had accepted obligations under a commercial contract, the Court of Appeal ruled that it was unable to invoke state immunity in an effort to avoid arbitration under that contract.
Two arbitrations launched by foreign investors against Hungary have resulted in different outcomes in recent months: the government prevailed in a dispute with Norwegian telecoms company Telenor, but lost a $75m arbitration related to the expropriation of investments in a new terminal at Budapest Airport.
In the Telenor case, the firm had objected to new regulations affecting its investments in Pannon, a leading mobile telephone company in Hungary. Telenor took issue with Hungary’s approach to implementing an EU directive that mandated that minimum telecommunications service be provided to all citizens.
Under the Hungarian scheme, Telenor was obliged to share a small portion of its revenues with fixed-line telephone operators that provide service to customers in rural or poor areas.
Ultimately, Telenor was unsuccessful in dressing up its claims as a breach of the Norway-Hungary investment protection treaty. A tribunal at the Washington-based International Centre for Settlement of Investment Disputes (ICSID) ruled that the regulations hardly amounted to an “expropriation” of Telenor’s investments, and that claims for other alleged breaches of the treaty were barred because the dispute settlement clause in that treaty provided only for arbitration in case of alleged expropriation.
Hungary was less successful in an arbitration brought by a pair of Cyprus investment companies owned by Canadian interests. The Cypriot-Canadians had been contracted to build a new terminal at Budapest Airport and to collect revenues from various businesses operating at that terminal.
However, in early 2002, the contracts were abruptly voided and the Cypriot-Canadians sought to invoke the protections of the Cyprus-Hungary investment protection treaty. Ultimately, a tribunal at the ICSID facility ruled against Hungary, finding that the government had committed an expropriation and was obliged by the treaty to pay full market-value compensation. Shortly after the tribunal’s award was issued on October 2, Hungary agreed to make full payment to the affected investors.
US-based mining company Newmont has turned to international arbitration against the government of Uzbekistan in a dispute over back-taxes that has ballooned into a larger struggle for control of a gold mining joint venture.
In a November 1 call with analysts, Newmont CEO Wayne Murdy accused the Uzbek government of “stealing” the company’s share of the Zarafshan-Newmont joint venture. Newmont’s local subsidiary was declared bankrupt by local courts and its assets were auctioned off to settle an assessment of back-taxes.
Although Newmont has had little luck in local courts, it insists that Uzbekistan has consented to international arbitration of disputes with foreign investors. In an ominous sign for the mining giant, the Uzbek Constitutional Court issued a ruling in late November that reportedly denies that Uzbekistan has consented to arbitrate such disputes outside the country.
However, a source close to Newmont says that Uzbekistan’s consent to arbitrate such disputes is found in binding contracts and foreign investment statutes concluded by the government, and that statements of the Uzbek court will not hobble the international lawsuits.
Luke Peterson is a journalist and research consultant based in Ottawa, Ontario. He publishes an investigative news service, Investment Treaty News, for a Canadian think tank.