Source: https://www.cpradr.org/news-publications/articles/2011-05-05-comments-on-the-icsid-award-saipem-v-bangladesh-would-its-rationale-be-applicable-in-future-cases-2011-writing-contest-winner
Timestamp: 2019-04-23 00:50:22+00:00

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Although many arbitration awards are voluntarily complied, enforcement of arbitration awards is a current challenge in international arbitration. Saipem S.p.A. v. The People’s Republic of Bangladesh1 (“Saipem v. Bangladesh”) apparently creates a new tier of protection when foreign investors are affected by the actions of a host country’s judiciary system. This might be an interesting trend, especially for those foreign investors that have investments in countries where the interference of the national court systems in arbitration proceedings is commonplace. In Saipem v. Bangladesh the illegal interference by national courts in an international commercial arbitration lead to a claim for expropriation for which the state was held liable. Due to the very unique circumstances of this case and the departure from previous ICSID case law, the legal rule established in Saipem v. Bangladesh most likely will not be applied in future cases.
1. Background and the ICC Arbitration.
Saipem S.p.A., an Italian oil & gas company, and Petrobangla (Bangladesh Oil, Gas & Mineral Corporation), a Bangladeshi public entity, entered into an agreement on February 14, 1990, to build a natural gas pipeline in Bangladesh. This contract was governed by the laws of Bangladesh and set forth an arbitration clause. Such clause referred any dispute between the parties to the Rules of Conciliation and Arbitration of the International Chamber of Commerce (ICC) and established Dhaka, Bangladesh as the venue of the arbitration.
The whole project was significantly delayed because of strong opposition by the local population. Although the parties agreed on extending the completion date, they could not reach an agreement regarding compensation and additional costs as a consequence of such delay. Also, a controversy arose in relation to a warranty bond and retention monies. In accordance with the original contract’s arbitration clause, Saipem initiated an ICC arbitration tribunal seeking outstanding payments owed under both the original contract and the subsequent extension agreement.
During the ICC arbitration, Petrobangla brought before the ICC tribunal various procedural requests.2 Since the ICC tribunal denied such requests, Petrobangla brought an action before the First Court of the Subordinate Judge of Dhaka seeking the revocation of the ICC Tribunal’s authority. The grounds of this action were an alleged misconduct of the arbitrators and a breach of the parties’ procedural rights when deciding the above-mentioned procedural requests made by Petrobangla.
Despite the decision revoking the authority of the ICC tribunal rendered by the Bangladeshi courts, the ICC tribunal decided to resume proceedings. Subsequently, Petrobangla secured various injunctions from the High Court Division of the Supreme Court of Bangladesh restraining the continuance of the ICC arbitration tribunal.4 Nevertheless, on May 9, 2003, the ICC arbitration tribunal issued a final arbitration award holding inter alia that Petrobangla had breached its contractual obligation to compensate Saipem for the time extension and additional works.
In order to set aside the arbitration award, Petrobangla filed an action before the High Court Division of the Supreme Court of Bangladesh under Sections 42(2) and 43 of the Bangladeshi Arbitration Act 2001. This court denied the petition on April 21, 2004 stating that it was “misconceived and incompetent inasmuch as there is no Award in the eye of the law, which can be set aside…A non-existent award can neither be set aside nor can it be enforced.”5 According to this decision, the ICC award was rendered non-existent and was unenforceable in Bangladesh. Nonetheless, Saipem did not appeal this decision.
Saipem, on October 5, 2004, filed a request for arbitration with the International Centre for Settlement of Investment Disputes (ICSID). The parties in the ICSID arbitration were Saipem and the Government of Bangladesh and the claims were based on the breach of the Bilateral Investment Treaty (BIT) between Italy and Bangladesh.6 The basis of Saipem’s claims was the undue intervention of the Bangladeshi courts in the ICC arbitration, which precluded the enforcement of the ICC award in Bangladesh or elsewhere. According to Saipem, those acts constituted an expropriation and deprived Saipem of any compensation. Thus, Saipem in its request for arbitration sought inter alia a declaration that Bangladesh expropriated Saipem of its investments without compensation and that Bangladesh breached its obligations under the BIT.
The ICSID Tribunal concluded that the revocation of the arbitrators’ authority by the Bangladeshi courts was contrary to international law, specifically to the principle of abuse of rights and the New York Convention and, therefore, such revocation constituted an expropriation within the meaning of Article 5 of the BIT.
The ICSID Tribunal concluded that courts of Bangladesh abused their rights when exercising supervisory jurisdiction over the ICC arbitration process. Although national courts have discretion to revoke an arbitrator´s authority in cases of misconduct, they cannot use this discretion to revoke the authority of arbitrators based on reasons wholly unrelated to such misconduct. As the ICSID Tribunal mentioned: “taken together, the standard for revocation used by the Bangladesh courts and the manner in which the judge applied that standard for the facts indeed constituted an abuse of rights.”13 In other words, the Bangladeshi courts exercised their supervisory jurisdiction for an end different from which it was instituted and, therefore, violated the principle of abuse of rights.
In addition, the ICSID Tribunal determined that the actions of the courts of Bangladesh were against the New York Convention, specifically Article II (1), which imposes on Contracting States the obligation of honoring arbitration agreements. Even though the Bangladeshi courts did not target the arbitration agreement itself, the revocation of the arbitrators’ authority can amount to a violation of Article II (1) “whenever it de facto prevents or immobilizes the arbitration that seeks to implement that arbitration agreement.”14 In fact, this was the situation before the ICSID Tribunal, since different Bangladeshi courts de facto frustrated the arbitration agreement, by issuing several injunctions against the continuation of the ICC Arbitration.
Furthermore, the ICSID Tribunal deemed that “the expropriation of the right to arbitrate the dispute in Bangladesh ... corresponds to the value of the award rendered without the undue intervention of the court of Bangladesh.”15 Thus, the ICSID Tribunal established that Saipem was entitled for relief, which was equivalent to the amount awarded in the ICC award plus interest.
Saipem v. Bangladesh is most likely the first ICSID Award that holds a state responsible for expropriation based on the illegal interference by its judiciary in arbitration proceedings.16 Although some commentators foresee that the theory behind Saipem v. Bangladesh will be a mechanism for countering to some degree the interference by national courts with international arbitration,17 this article will show why the application of the legal rule established in Saipem v. Bangladesh is rather remote.18 The very unique circumstances of the case as well as the departure from previous ICSID awards would make the rationale of Saipem v. Bangladesh most likely inapplicable in other cases.
From the facts of the case, it is clear that the intervention of the Bangladeshi courts by not allowing the continuation of the ICC Tribunal was abusive. Even though the courts from Bangladesh abused their supervisory jurisdiction over the ICC Arbitration process, it should not allow the ICSID Tribunal to broaden the scope of the BIT beyond what was agreed upon the States. The BIT between Italy and Bangladesh protects investments in those situations specifically agreed by both States, that is, nationalization and expropriation. Hence, arbitrators should be bound to protect investments only under these two circumstances established in the BIT.
Moreover, the investor did not exhaust local remedies –as already mentioned, Saipem decided not to appeal the decisions of the Bangladeshi courts that revoked the authority of the arbitrators and the one that declared the ICC Award a nullity, which is normally a substantive condition to initiating an ICSID arbitration based on acts of the judiciary, particularly in cases related to denial of justice.22 The main rationale is that “the prohibition of denial of justice presupposes a duty of the host state to provide a fair and effective system of justice. Therefore, until the whole system has been tried and failed, no claim of denial of justice can arise in international law.”23 This explanation “rests on the special nature of the administration of justice as a system” and leads to the conclusion that “any international wrong committed in the process of administering justice is actionable only after the whole system has been unsuccessfully tried.”24 Nevertheless, the ICSID Tribunal determined that, as opposed to denial of justice, exhaustion of local remedies is not a substantive requirement of a finding of expropriation by acts of the judiciary.25 The ICSID Tribunal did not elaborate on the reasons why the exhaustion of local remedies applies to cases of denial of justice, but not to those of expropriation by the judiciary. In this regard, commentators have stated that “[if] the special application of the local remedies rule to denial of justice claims is rationalised by reference to the special nature of the judicial system, it would seem logical that the same considerations be applied to all forms of judicial misconduct, including expropriation by courts.”26 Thus, exhaustion of local remedies should also be a substantive condition to trigger the investor’s right to initiate arbitration based on expropriation by the judiciary.
This clarification, on one hand, confirms the very unique circumstances of the case and, on the other, illustrates the limited application of the analysis made by the ICSID Tribunal to future cases. That is because not any illegality by the judiciary can lead to a claim for expropriation. The notion of “illegality” should be also restricted to avoid that ICSID arbitrators’ jurisdiction being improperly broadened. This is because judicial errors are a kind of illegality. For instance, if a judge resolves a case by applying an improper law, or if the judge applies the right law but interprets it incorrectly, in both events the adopted decision would be illegal. Nevertheless, such illegality should not give rise to a claim for expropriation; otherwise, the ICSID tribunal would end up exercising a control of legality over local courts, which are vested with supervisory jurisdiction over commercial arbitration awards. This indeed would largely exceed the jurisdiction of any ICSID tribunal. Therefore, the notion of illegality for a claim for expropriation cannot encompass these kinds of judicial mistakes. In sum, the legality test of Saipem v. Bangladesh might only be applied in future cases with extreme circumstances like the ones where national courts, in abuse of their supervisory jurisdiction over arbitration awards, unlawfully impede the issuance of the award or deny its existence without even analyzing its grounds.
In sum, the circumstances of this case were unique and it is very unlikely that they will happen again. According to previous ICSID awards, an investor should exhaust local remedies in order to initiate investment arbitration based on acts of the judiciary. The ICSID Tribunal in this case found that this condition is not applicable in the case of expropriation, with no further explanation. Additionally, prior ICSID awards have used only the “sole effects” doctrine to determine whether the disputed actions amount to indirect expropriation, but the ICSID Tribunal here also applied a legality test. This test should be limited to those extraordinary cases where national courts, in abuse of their supervisory jurisdiction over arbitration awards, unlawfully impede the issuance of the award or deny its existence without even analyzing its grounds. Therefore, the ICSID Tribunal’s holding in Saipem v. Bangladesh seems to be restricted in such a way that most likely will not be applied in future cases.
1 Saipem v Bangladesh (ICSID Case No.ARB/05/7) Unreported award June 20, 2009.
2 “In particular (i) a request to strike from the record the witness statement of Mr. Clark [a key witness on behalf of Saipem], (ii) a request that all witnesses be allowed to be present in the hearing room during the entire hearing, (iii) a request that a letter from Petrobangla which was not on record be filed during cross-examination of a witness, (iv) a request to strike from the record a “draft aide-mémoire” of the World Bank and certain cost calculations prepared by Saipem, and (v) a request that transcripts be made of the tape recordings of the hearing.” Saipem v Bangladesh Unreported June 20, 2009, at 31.
3 “Because of the hostile climate in Bangladesh and because we were firmly convinced that the revocation of the authority of the Arbitral Tribunal was completely illegal by all standards, we knew that we had no alternative but to proceed with the arbitration. Our Indian counsel advised us that an appeal against the injunction against the continuation of the arbitration was possible in theory, but unsustainable in substance. It was clear that we would not be in a position to defend ourselves before the local courts and that the climate was incompatible with a fair trial. As is confirmed by the witness statement of Mr. Nassauto, our witnesses, including the members of the arbitral tribunal, would have risked being in physical danger had they come to testify in Dhaka. Clearly the members of the ICC Tribunal would have been key witnesses in those proceedings. The testimony of the Arbitrators would have been crucial, since the only reason for the revocation of the authority of the ICC tribunal was the alleged misconduct of the proceedings imputed to the Arbitrators. They could have demonstrated that no misconduct had ever been committed by them and that they had properly conducted the arbitration proceedings pursuant to the ICC Rules and even to the provisions of the Bangladeshi Arbitration Act.” Saipem v Bangladesh Unreported June 20, 2009, at 43.
4 Petrobangla filed an action in the First Court of the Subordinate Judge of Dhaka in order to set aside the ICC tribunal’s decision to resume the proceedings. In addition, Petrobangla filed a request seeking a declaration that the ICC Arbitration Tribunal was unlawful based on the decision of the Dhaka Subordinate Judge that revoked the authority of the ICC Tribunal. Also, Petrobangla asked for an interim and a permanent injunction against the continuance of the ICC Arbitration Tribunal, which was refused the same day. On May 27, 2001, Petrobangla appealed this decision before the High Court Division of the Supreme Court. Within the same day, the High Court Division issued an injunction restraining Saipem from pursuing the ICC Tribunal. Thereafter, this injunction was confirmed by several decisions of the High Court Division of the Supreme Court.
5 Saipem v Bangladesh Unreported June 20, 2009, at 50.
6 Agreement of 20 March 1990 between Government of the Republic of Italy and Government of the People's Republic of Banglaesh on the Promotion and Protection of Investments. The treaty entered into force on 20 September 1994.
7 Saipem v Bangladesh Unreported June 20, 2009, at 128.
8 Article 5 defines expropriation as follows: “(1) The investments to which this Agreement relates shall not be subject to any measure which might limit permanently or temporarily their joined rights of ownership, possession, control or enjoyment, save where specifically provided by law and by judgments or orders issued by Courts or Tribunals having jurisdiction. (2) Investments of investors of one of the Contracting Parties shall not be directly or indirectly nationalized, expropriated, requisitioned or subjected to any measures having similar effects in the territory of the other Contracting Party, except for public purposes, or national interest, against immediate full and effective compensation, and on condition that these measures are taken on a non-discriminatory basis and in conformity with all legal provisions and procedures.” Agreement of 20 March 1990 between Government of the Republic of Italy and Government of the People's Republic of Banglaesh on the Promotion and Protection of Investments. The treaty entered into force on 20 September 1994.
9 Saipem v Bangladesh Unreported June 20, 2009, at 129.
11 Saipem v Bangladesh Unreported June 20, 2009, at 133.
12 At this point the Tribunal mentioned that “[for] the sake of clarity the Tribunal emphasizes that the following analysis should not be understood as departure from the “sole effects doctrine” [In which there is an expropriation if the deprivation is substantial. See Compañia del Desarrollo de Santa Elena, S.A. v. Republic of Costa Rica ICSID Case No. ARB/96/1, Award of 17 February 2000, 5 ICSID Reports 153, at 77-78]. It is due to the particular circumstances of the dispute and to the manner in which the parties have pleaded their case, both being in agreement that the unlawful character of the actions was a necessary condition”. Saipem v Bangladesh Unreported June 20, 2009, at 135.
13 Saipem v Bangladesh Unreported June 20, 2009, at 159.
14 Saipem v Bangladesh Unreported June 20, 2009, at 167.
15 Saipem v Bangladesh Unreported June 20, 2009, at 204.
16 See S. Sattar, National Courts and International Arbitration: A Double-edged Sword? Journal of International Arbitration 27 (1): 51-73, 2010. p, 72.
17 See L. Radicati di Brozolo, “Interference by National Courts with International Arbitration: the Situation after Saipem v. Bangladesh. in C. Müller and A. Rigozzi (eds), New Developments in International Commercial Arbitration 2009 (Schulthess Éditions Romandes, 2009), pp 1-28.
19 Saipem v Bangladesh Unreported June 20, 2009, at 121.
25 Saipem v Bangladesh Unreported June 20, 2009, at 181.
28 See Compañía del Desarrollo de Santa Elena S.A. v. Republic of Costa Rica ICSID Case No. ARB/96/1, Award of February 17, 2000, 5 ICSID Reports 153, at 77-78. In Saipem v Bangladesh Unreported June 20, 2009, at 133.
29 Saipem v Bangladesh Unreported June 20, 2009, at 134.
30 Accord “The interference of the Bangladesh courts in finding that the ICC award was “no award in the eye of the law” is the point at which, according to Saipem ICSID tribunal, a new dispute was triggered, one between Saipem and the Government of Bangladesh, concerning Bangladesh’s responsibility under general principles of international law, under a BIT, and under the New York Convention”. R. Teitelbaum. “Case Report on Saipem v. Bangladesh”. Arbitration International, Volume 26, Issue 2 (2010), at 321.
31 “The extent to which contract claims and treaty claims overlap, intersect or take entirely separate paths is a highly fact-specific matter that will continue to be fought in investment arbitration on a case-by-case basis”. R. Teitelbaum. “Case Report on Saipem v. Bangladesh”. Arbitration International, Volume 26, Issue 2 (2010), at 320.

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