Potential risks to investors highlighted by two ICSID tribunals declining to recommend provisional protection against criminal investigations

Investors in some states face a real risk of reprisals after commencing investment claims. Reprisals may range from entirely legitimate (albeit unusually forceful) investigation of serious wrongdoing, which is the prerogative of a sovereign state, to the abuse of power to obtain unfair advantage in the arbitration, which is prohibited.

Consistent with the approach taken by previous tribunals, two ICSID decisions published in December 2014 show the difficulty that the investors faced in overcoming the “particularly high threshold" necessary to convince a tribunal to interfere with a criminal investigation being conducted by the host state – anything short of "concrete instances of intimidation or harassment" may not be sufficient (Churchill Mining Plc and Planet Mining Pty Ltd v. Indonesia (ICSID Case No. ARB/12/14 and 12/40; Caratube International Oil Company LLP & Mr. Devincci Salah Hourani v. Kazakhstan ICSID Case No. ARB/13/13). Despite an apparent link between the criminal investigation and arbitration in each application, provisional relief was refused.

These decisions illustrate that vigorous criminal investigations may be a legitimate state-response to an investment claim, and should be anticipated by investors prior to making a claim. The consequences of such investigations may be particularly difficult to mitigate where the investor relies on an ongoing relationship with the state to conduct its business. Investors might not be entitled to protection against such investigations by way of provisional measures, except where there is compelling evidence that the state's conduct amounts to intimidation or harassment, or directly prevents an investor from presenting their case. In practice, as the Churchill Mining and Caratube decisions show, this evidentiary burden may be difficult for an investor to discharge and these risks would be better addressed prior to commencing arbitration. 

When might provisional measures be justified?

ICSID tribunals have historically been reluctant to constrain the exercise by states of their sovereign powers by way of provisional measures. In particular, tribunals recognise that in general it is the prerogative of states to investigate criminal wrongdoing. However a delicate balance must be struck when state conduct interferes with the fair conduct of the arbitration.

It is settled law, however, that provisional measures may be granted to protect the status quo and to avoid aggravation of the dispute. For example, in May 2014 a tribunal (Ian Binnie (President), Bernard Hanotiau and Brigitte Stern) refused Laos' application to amend a prior procedural order whereby Laos had voluntarily undertaken to put on hold criminal investigations of alleged bribery until after the final award (Lao Holdings N.V. v The Lao People's Democratic Republic ICSID Case No. ARB(AF)/12/6). The Lao Holdings tribunal concluded that the public interest in favour of investigating the alleged corruption promptly (i.e. before the final award in the arbitration) did not outweigh "the disruption and distraction to the Claimant and its employees of dealing with a criminal investigation in the midst of final preparation of their case for the arbitration next month."

Second time still not so lucky – but Indonesia must seek leave before relying on seized documents

In Churchill Mining, the Claimant investors made a second application for provisional measures requiring Indonesia to "[r]efrain from threatening or commencing any criminal investigation or prosecution against the Claimants… pending the outcome of this arbitration". We reported the background to the dispute and the previous unsuccessful application for provisional measures here. Indonesia's defence in the arbitration includes the allegation that key mining licenses were forged; the ongoing criminal investigations also relate to the alleged forgery of documents. The first application failed, in part because the risk to the investor's rights was judged to be "speculative and hypothetical" in circumstances where criminal proceedings were yet to be commenced.

The investor's second application was made following a police raid on the Claimants' Jakarta premises, and the seizure of various documents and computer hard drives, including documents allegedly relevant to the arbitration. The investor also claimed that Indonesia intimidated and harassed two employees who were questioned by the Indonesian police. The Claimants alleged that the raid was "strategically timed to take place at the same time the Parties were attending in Singapore the Tribunal-ordered document inspection" and that the police conducted the raid "in order to access the Claimants’ documents outside the agreed document disclosure process in these ICSID proceedings”. Indonesia denied the allegations.

By its Procedural Order No 14 dated 22 December 2014, the tribunal (Gabrielle Kaufmann-Kohler (President), Michael Hwang and Albert Jan van den Berg) denied the investor's application to refrain Indonesia from threatening or commencing any criminal investigation against the Claimants pending the outcome of the arbitration. The tribunal concluded that the timing of the raid was "remarkable" but was not proven to be connected to the arbitration. The tribunal noted (i) that the raid was apparently conducted in accordance with Indonesian law; and (ii) Indonesia's representation that neither counsel nor Government officials representing Indonesia in this arbitration were aware of the police raid when it took place. Likewise, with respect to the arrest of the Claimants' employees, the Tribunal concluded that "without any concrete element of intimidation, harassment or otherwise abusive behavior, and failing evidence from any potential witnesses, the present situation does not suffice to justify provisional measures."

However, the tribunal noted the risk that Indonesia might obtain an unfair advantage in the arbitration by relying on documents seized from the investor, and circumventing the normal document production procedure. The tribunal therefore ordered provisional measures of its own initiative, requiring Indonesia to seek leave before relying on any such documents.

Caratube & Hourani v Kazakhstan application rejected despite "troubling circumstances or coincidences"

In Caratube International the Claimants' request for provisional relief focussed on Kazakhstan's alleged "'excessive lobbying' of the Lebanese authorities" to reopen and pursue Lebanese criminal proceedings against Mr Devincci Hourani (one of the Claimant investors) and others. The Lebanese criminal proceedings relate to the alleged torture and murder of Ms. Anastasiya Novikova in Lebanon in 2004. Claimant "question[ed] the Respondent’s motivation, perseverance and timing with respect to the matter of Ms. Novikova’s death" alleging that the criminal investigation had been closed by Lebanese investigation before being reopened shortly before the final hearing in another arbitration between the same parties.

The Claimant also sought provisional relief in relation to harassment allegedly orchestrated by Kazakhstan, specifically in relation to two websites that published material and accusations in relation to the death of Ms Novikova, and a “staged protest." The acts complained of were allegedly causing deterioration in the Mr Hourani's health, credit and social standing, thereby jeopardizing the integrity of the arbitration, with witnesses being unwilling to testify and Mr Hourani being put under pressure by his family to drop the claims.

By a Decision dated 4 December 2014, the tribunal (Laurent Lévy (President), Laurent Aynès and Jacques Salès) rejected all of the Claimant's requests. The tribunal found that the Claimant had not discharged its burden of proof, while at the same time noting "the conspicuous timing of the launching of the Websites and of the Protest, which, as has been pointed out by the Claimants, coincides with developments in this Arbitration".

In respect of the Lebanon criminal proceedings, the tribunal concluded that "doubts remain as to the Respondents' standing and motivations in the criminal proceedings in Lebanon", but was not convinced that Kazakhstan was pursuing the Lebanon proceedings solely with the objective of putting pressure on Mr Hourani in relation to the ICSID arbitration.

Analysis and conclusion

The Churchill Mining and Caratube tribunals showed deference to states in the exercise of their sovereign power to investigate or assist in the investigation of crime, notwithstanding both tribunals noting the apparent link between the criminal investigations and the arbitration proceedings. These decisions illustrate the practical difficulties that investors may face in providing compelling evidence that a state is using its power to pursue criminal investigations with the purpose of gaining an advantage in the arbitration.

The tribunal's innovative approach in Churchill Mining, that Indonesia must seek leave before relying on documents seized by the Indonesian police, is an interesting way of balancing a state's sovereign right to conduct criminal investigations with the need to protect the integrity of the arbitral process. This approach focuses on a specific harm potentially caused to the arbitral process, and provides some protection to the investor.

The question of whether Indonesia (or another respondent-state in similar circumstances) would in the event be entitled to rely on any such documents is likely to be complex, and it is not certain that the documents would be excluded. Much may turn on the specific documents relied upon and whether the tribunal considered, when deciding the leave application, that the respondent-state was seeking to circumvent the normal document disclosure process. Further interesting decisions on these issues might be expected to arise in the context of investment arbitration in due course.

For further information, please contact Tomas Furlong, Associate, or your usual Herbert Smith Freehills contact.