ICSID tribunal declines jurisdiction on basis of lack of evidence of necessary "control" under BIT and requires claimant to pay 80% of costs of the state

In the ICSID decision of Guardian Fiduciary Trust Ltd f/k/a Capital Conservator Savings & Loan Ltd v Former Yugoslav Republic of Macedonia (ICSID Case No. ARB/12/31) issued on 22 September 2015, the Tribunal declined jurisdiction on the basis that the Claimant failed to establish that it qualified as a national of the Netherlands for the purposes of the Netherlands – Macedonia BIT (the BIT).

The BIT provides a wide definition of "national" which extends to "legal persons….controlled, directly or indirectly…." by a national of a contracting party. The Claimant, Guardian Fiduciary Trust Limited (Guardian), a company incorporated in New Zealand, brought the claim under the BIT, arguing that it qualified as a national of the Netherlands as it was ultimately controlled by a Dutch foundation which had a registered office in the Netherlands. Having determined that the issue of control was ultimately a matter of evidence, and not something to be determined solely on the basis of an analysis of New Zealand law, the Tribunal concluded that the Claimant had failed to provide that necessary evidence. It further concluded that the limited evidence before it suggested that the Claimant was in fact indirectly controlled by another entity of a different jurisdiction.

In issuing the decision, the Tribunal considered it appropriate, in the circumstances, to award the State Respondent, the Former Yugoslav Republic of Macedonia (Macedonia), 80% of its costs.

This decision does not so much highlight the complexities of establishing control in a complex ownership structure, as it does the importance of properly establishing and evidencing the basis for a Claimant's assertion of a Tribunal's jurisdiction over the claim. Failure to do so may, as in this instance, leave a Claimant footing the bill for the State Respondent's costs.

Legal and beneficial ownership of Guardian

Article 1(b)(III) of the BIT provides that "nationals" of the Netherlands include legal persons not constituted under Dutch law but controlled, directly or indirectly, by natural persons constituted under Dutch law.    

Guardian was wholly owned by Capital Conservator Trustee Limited (CCT) a trustee company incorporated in New Zealand. CCT was, in turn, a wholly owned subsidiary of IN Asset Management Limited (IN Asset Management), a company incorporated in New Zealand and wholly owned by Stichting Intetrust, a Dutch foundation having its registered office in Velp in the Netherlands.  Guardian argued that this chain of legal ownership fulfilled the requirements of Article 1(b)(iii) of the BIT and entitled it to bring the claim as a "national" of the Netherlands due to its ultimate control by a Dutch foundation.

Macedonia maintained that while the legal ownership structure may be as asserted by Guardian, the beneficial ownership structure was different. The shares in Guardian's immediate holding company, CCT might legally be owned by IN Asset Management, but they were held by it as a nominee byway of a trust deed for and on behalf of a Marshall Islands incorporated company, Capital Conservator Group LLC (CCG).  The Respondent argued that this arrangement was a "bare trust" under which CCG held all the beneficial interest in CCT and IN Asset Management merely the bare legal title.

The need for control

Macedonia therefore asserted that the term "controlled" in Article 1(b)(III) required not only evidence of ownership over the Claimant, but also evidence of exercise of active control over the Claimant's activities. Macedonia maintained that legal ownership is not determinative of control, and that the Tribunal should look into the specific circumstances of the case, including the nature and line of business of IN Asset Management and CCG (both professional asset protection and trustee services).

Guardian meanwhile argued that since IN Asset Management was the legal owner of CCT it held all the voting rights in the company and therefore controlled the ultimate subsidiary, Guardian, within the meaning of the BIT. Stichting Intetrust had the power to change the directors of IN Asset Management, CCT and the Claimant and that this was sufficient to prove the necessary control under the BIT.

Structuring to obtain treaty protection

Macedonia also argued that the ownership of shares in IN Asset Management had been transferred to Stichting Intetrust in 2012 for the sole purposes of establishing ICSID jurisdiction and that "treaty shopping" should not be permitted. Guardian disputed the Respondent's allegation, maintaining that IN Asset Management had been held by Stichting Intetrust at the time of the breach of the BIT and was therefore the entity that ultimately controlled the Claimant at the time the claim arose.

The Tribunal's decision on jurisdiction

The Tribunal considered both parties' submissions on what constitutes "control" for the purposes of Article 1(b)(III) of the BIT and concluded that ownership generally implies the legal right or the capacity to exercise control. However, the analysis was clearly complicated by the fact that the ownership of the Claimant's immediate parent was divided between two entities, one of which fell outside the corporate chain of which the Dutch foundation forms part.

The Tribunal considered the legal expert opinion submitted by the Respondent which analysed the legal position on control under the laws of the places of incorporation of the relevant companies and the trust deed between IN Asset Management and CCG. However, the Tribunal ultimately concluded that the issue of control was ultimately a matter of evidence and could not be determined solely as a legal question.

The Tribunal looked at the sole piece of evidence that may have qualified as evidence that the Claimant was controlled, indirectly, by Stichting Intetrust. This was a sworn statement by Mr Francken, the founder and director of Stichting Intetrust. The statement contained no detail or explanation as to how shareholder control, including voting rights were in fact exercised, if at all. In addition, when the Tribunal contemplated calling Mr Francken for questioning at the hearing, the Claimant had confirmed that the sworn statement was just an exhibit and not a witness statement and that Mr Francken would not have been presented as a witness. In light of that, the Tribunal found that there was no evidence on record regarding the actual control, direct or indirect, by Stichting Intetrust, IN Asset Management or CCT over the Claimant at any time during the relevant period.

The Tribunal concluded that the Claimant had failed to prove that it was controlled by Stichting Intetrust and therefore did not qualify as a national within the meaning of Article 1(b)(III) of the BIT. Indeed, the limited evidence before the Tribunal would suggest that CCT and the Claimant were in fact controlled by CCG, the Marshall Islands company.

The Tribunal's decision on costs

Macedonia submitted that the traditional practice whereby the parties were required to bear their own costs had changed and that ICSID Tribunals increasingly ordered the losing party to pay some or all of the costs of the prevailing party (otherwise known as the "costs follow the event" approach). In particular, this should be the case in circumstances where the unsuccessful party has engaged in some form of misconduct which has caused the prevailing party to incur unnecessary costs. The Respondent argued that this should apply to this case on the basis that (1) the Claimant presented its claim in a disorganised and confused manner; (2) the Claimant initially presented the jurisdictional basis of its claim and its ownership structure in a misleading manner; and (3) the Claimant abused the arbitral process with various transfer of shares made solely to establish ICSID jurisdiction.

The Tribunal noted the divergent practice and the considerable degree of discretion that ICSID Tribunals enjoyed in making costs awards. The Tribunal decided that in the circumstances of the present case, it was appropriate to apply the "costs follow the event" approach and award the costs of the prevailing party. However, the Tribunal did not consider that the conduct of either party in the course of the proceedings should form an additional basis for awarding costs.

The Tribunal ordered Guardian to reimburse 80 per cent of Macedonia's costs. In reaching this decision, the Tribunal took into account the outcome of the case and the substantially disparate amounts spent by the parties in the proceedings (EUR79,500 and USD101,565 for the Claimant and USD1,515,885 and GBP40,999.50 for the Respondent).

Comment

At first glance, this decision might be expected to raise interesting questions regarding the complexities of establishing the necessary "control" under a BIT, particularly in circumstances where the legal and beneficial ownership of a corporate in the ownership chain are split. However, the Tribunal's award focused not on a detailed legal analysis of the necessary elements of control, but rather on the Claimant's evidentiary burden. The Tribunal considered that Guardian had not submitted enough factual evidence to prove control or to rebut the allegations made by Macedonia. Without that evidence, the Claimant could not properly establish the basis for the Tribunal's jurisdiction over the claim and jurisdiction must, therefore, be declined.

The Tribunal did not go into any detail as to which "circumstances" in this case prompted it to order that Guardian reimburse 80% of Macedonia's costs. However, the way in which the case was presented by the Claimant must have played its part and the vast disparity in the parties' legal costs is likely to have been a factor in that presentation. Having now been left footing the bill for the State's far more substantial costs, Guardian may be regretting its cost conscious approach to prosecuting its claim.

For further information, please contact Iain Maxwell, Of Counsel, Vanesssa Naish, Professional Support Consultant, Anees Naim, Associate or your usual Herbert Smith Freehills contact.