An ICSID Arbitral Tribunal composed of Veijo Heiskanen, Philippe Sands and Carolyn Lamm has refused to correct alleged arithmetic errors in a Final Award dated 8 March 2016 in the case İçkale İnşaat Limited Şirketi v. Turkmenistan, ICSID Case No. ARB/10/24.
The primary issue that was the subject of İçkale İnşaat Limited Şirketi’s Request for Rectification of 29 March 2016 was whether the majority (Veijo Heiskanen and Philippe Sands) had made clerical, arithmetical or similar errors under Article 49(2) of the ICSID Convention in the Award by ruling that the confiscation of USD 13.9 million in machinery and equipment in order to collect approximately USD 3 million in delay penalties was not “excessive and as such expropriatory” (para. 375 of the Final Award). Veijo Heiskanen and Philippe Sands reached this decision after making a number of adjustments to the starting value of the confiscated machinery and equipment, in order to find that the difference between the “real value” of the Claimant’s machinery and equipment and the delay penalties was only USD 1,564,214 (paragraph 375 of the Final Award).
During the proceedings, Claimant had provided the initial purchase orders of all equipment, except for a few items of equipment that were over 10 years old and for which receipts were not required to be kept under Turkish law. Claimant’s expert had also provided a table setting forth the the original purchase price of the machinery and equipment, their import date into Turkmenistan, the original purchase date, and references to the exhibits showing the purchase price for each piece of equipment. In total, the purchase orders and the report showed that Claimant had spent approximately USD 13.9 million to purchase the confiscated materials and equipment, which were confiscated on the basis of a Turkmenistan Supreme Court Directive seeking the payment of approximately USD 3 million in Delay Penalties for construction projects, a difference of approximately USD 10 million. The amount of the Delay Penalties that were imposed was not in dispute, although there was a debate concerning whether it was just to impose delay penalties on a number of grounds (for instance imposing delay penalties prior to the completion date of construction projects), and Respondent argued that depreciation should be taken into account for the machinery and equipment rather than using replacement value, as Claimant’s expert had argued, although Claimant’s expert had also provided figures for depreciation at the final hearing.
In its Final Award, the Arbitral Tribunal split on the question of whether the Supreme Court of Turkmenistan’s Directive to confiscate USD 13.9 million of machinery and equipment for USD 3 million in Delay Penalties was “excessive and as such expropriatory“. In a Partially Dissenting Opinion of Carolyn Lamm, she ruled that the majority, composed of Veijo Heiskanen and Philippe Sands, had first disregarded the record with respect to Delay Penalties, which showed “that Claimant provided sufficient evidence detailing the amount of the inflation of the penalties (USD 1,650,825), and that should be taken into account to reduce them to USD 1,161,961” (paragraph 18 of Dissenting Opinion). She also found that Veijo Heiskanen and Philippe Sands had reversed the burden of proof concerning such issues as insurance payments, for which Respondent had produced no evidence in support of its argument, and that Veijo Heiskanen and Philippe Sands had “assessed the evidence without balanced consideration of both sides” (paragraph 22 of Dissenting Opinion). She also found that Veijo Heiskanen and Philippe Sands had erred in reaching their ruling that the confiscation of USD 13.9 million in machinery and equipment for approximately USD 3 million in Delay Penalties was not excessive.
The Request for Rectification filed by Claimant claimed that the Arbitral Tribunal had made basic math errors in comparing USD 13.9 million of machinery and equipment to USD 3 million in Delay Penalties, in addition to those noted by Carolyn Lamm. In particular, the Arbitral Tribunal, when comparing the two values, had incorrectly deducted USD 1.8 million on the basis of “inter-company transfers” by confusing positive and negative numbers, misunderstanding that Respondent had argued that such a deduction should be made (paragraphs 29-37) when this was not the case. Claimant also argued that the majority, Veijo Heiskanen and Philippe Sands, had incorrectly deducted USD 2.6 million on the basis of fictitious insurance payments, although no evidence had been submitted by Respondent showing that any insurance payments had been made and, in any event, no hypothetical insurance would reimburse 100% of assets confiscated by a State (paragraphs 38-51) on the basis of their initial purchase price without deductions. Claimant also noted that the Arbitral Tribunal had not accepted the depreciation calculations that had been offered by Claimant’s witness at the final hearing and that it had made obvious calculation errors concerning depreciation itself in order to find that the difference between USD 13.9 million of machinery and equipment and approximately USD 3 million in Delay Penalties was not excessive.
Respondent did not take issue with Claimant’s allegations that the Arbitral Tribunal calculations were incorrect in its Observations on Claimant’s Request for Rectitication of 12 May 2016, but instead argued that the Arbitral Tribunal had not been supplied with sufficient evidence and that the relief that Claimant was seeking in the Request for Rectification went beyond the scope of Article 49(2) of the Convention, since a successful application would result in a reversal of the Arbitral Tribunal’s Final Award.
In its Reply, Claimant noted that, taking a step back, the majority’s comparison finding no significant difference in value between USD 13.9 million in confiscated machinery and equipment and USD 3 million in Delay Penalties ran counter to common sense and was “puzzling.” It responded to Respondent’s arguments and again showed that the Arbitral Tribunal’s subtraction of USD 1.8 million for “inter-company transfers” was based on a confusion of positive and negative numbers by the Arbitral Tribunal and made no sense. It argued that Respondent’s observations did not justify the deduction of USD 2.6 million for fictitious and unproven insurance payments, that the Arbitral Tribunal had calculated depreciation incorrectly, performing mathematically incorrect calculations whereby it deducted undepreciated values from already depreciated values, resulting in deductions that assumed the machinery and equipment had a negative value, and it argued that the Arbitral Tribunal must be given a chance to correct its obvious arithmetic errors.
In its Rejoinder, Respondent did not argue that any of the Arbitral Tribunal’s calculations in comparing the value of USD 13.9 million in machinery and equipment with USD 3 million in Delay Penalties were mathematically correct, but argued that Article 49(2) of the ICSID Convention was narrow and claimed that Claimant was seeking a substantive review of the Final Award.
The Arbitral Tribunal of Veijo Heiskanen, Philippe Sands and Carolyn Lamm issued their Decision on Claimant’s Request for Supplementary Decision and Rectification of the Award on 4 October 2016. The Decision, which agrees that the Arbitral Tribunal erred in using the words “lower” for “higher” with respect to the USD 1.8 million in inter-company transfers (paragraph 135), refused to reconsider this deduction on the basis that different prices for inter-company transfers made the Claimant’s evidence inherently unreliable, although it agreed to correct its textual error reversing the words “higher” and “lower“. The Arbitral Tribunal also refused to reconsider its deduction of USD 2.6 million for hypothetical insurance payments and did not respond to Claimant’s point that 100% of the initial purchase price would not have been repaid by any hypothetical insurance to exist. The Arbitral Tribunal otherwise refused to analyze its arithmetic errors, which had not been contested by Respondent.
The Arbitral Tribunal sidestepped the issue of its faulty arithmetic by claiming in paragraph 121 that the “the Claimant’s confiscation claim was dismissed because the Tribunal found, by majority, that the Claimant had ‘failed to prove that the Supreme Court’s Directive was excessive and as such expropriatory.’ Accordingly, the Tribunal’s decision on the Claimant’s confiscation claim turned on the question of whether the evidence before the Tribunal established that the Supreme Court Directive had an expropriatory effect, that is, whether an expropriation had taken place. This is a qualitative determination as to the application of the law to the facts; it is not a decision on quantification of compensation for expropriation that the Tribunal has determined to have taken place. Consequently, as the purpose of the calculations in paragraphs 364-76 of the Award was to enable the Tribunal to determine whether the evidence before it established that the Supreme Court Directive could be characterized as being excessive and, as such, as having an expropriatory effect, the calculations were necessarily only indicative, or approximations, and were not intended to provide a precise quantification for the purposes of formal valuation of either the value of the assets or any of the adjustments accepted or not accepted by the Tribunal.” In other words, the Arbitral Tribunal claimed that its comparison of USD 13.9 million in confiscated material and equipment and USD 3 million in Delay Penalties was a “qualitative” decision, rather than one that strictly compared the values of USD 13.9 million in material and equipment and USD 3 million in Delay Penalties.
How, then, did the Arbitral Tribunal arrive at its “qualitative” determination that the Supreme Court’s Directive confiscating approximately USD 13.9 million in equipment for the payment approximately USD 3 million in Delay Penalties was not excessive? We will never know, since the Arbitral Tribunal does not explain how it could make such a “qualitative” determination without actually comparing the two values.
“I have no faith in the ICSID process following the awards of Veijo Heiskanen, Philippe Sands and Carolyn Lamm,” said a represenative of Claimant. “The Arbitral Tribunal did not care about justice and was not trying to find a fair result. Ickale could have received a fairer decision by using the Courts of Turkmenistan rather than wasting years in ICSID proceedings and hundreds of thousands of dollars only to receive an award by Veijo Heiskanen and Philippe Sands that makes a mockery of justice.”
According to William Kirtley of Aceris Law, “I was not involved during the written phase of the arbitration when the expert reports were prepared, and the experts’ findings could have been presented more succinctly and in a less confusing manner. The experts were also presenting their findings in English, which was not their native language. Nevertheless, a decision by any arbitral tribunal that confiscating approximately USD 13.9 million in machinery and equipment, for which uncontested purchase orders had been provided, in order to pay highly dubious delay penalties of only USD 3 million, and a finding that this is not ‘excessive,’ suggests that that the majority of the Arbitral Tribunal, at least, did not make any real effort to rule fairly in the arbitration. This is not the only aspect of the final award that can be severely criticized, and I hope that the younger generation of arbitration lawyers and arbitrators will make a far more sincere effort to arrive at a result that comports with justice and that Ickale will seek annulment of the Final Award.”