Mihaly International v. Sri Lanka

By: J. Gozali

Mihaly International v. Sri Lanka is a case subjected towards investment. The main argument revolves around the domicile of the Company and later towards the definition of “investment” itself.

FACTS:

The government of Sri Lanka (Respondent) wished for its power station to be constructed and operated by private enterprise on a build own transfer basis. Mihaly (Canada) in this case is interested as an exclusive investor to develop a 300 MW thermal power station with the objective of supplying power to the Ceylon Electricity Board (CEB).

Initially 25 groups were interested in the project, however only 5 were selected to enter into negotiations and Claimant was selected as recipient of the Letter of Intent (LOI). The LOI stated a number of principles and the negotiators were to proceed for the project leading to the signing of a contract by the end of the third quarter of 1993. The LOI explicitly states that it does not bind the parties, however it expressed the government shall use its best efforts to take all things necessary to execute the transactions. Later, a Letter of Agreement (LOA) was issued addressing the Mihaly’s (Canada) satisfaction towards the discussions and negotiations with the Respondent.

On July 29th 1999, the Centre received a request (registration) dated a week prior from Mihaly Corporation, established in the United States of America (Claimant) against the Democratic Socialist Republic of Sri Lanka. The dispute rose from the 20th September 1991 Treaty between the USA and Sri Lanka concerning Encouragement and Reciprocal Protection of Investment (BIT). Both USA and Sri Lanka are Parties to the ICSID Convention.

The initial session was held in London, on July 19th 2000, and then continued in Washington DC from April 30th to May 1st 2001. The Respondent’s objections were towards jurisdiction ratione personae and ratione materiae. Regarding ratione personae, the Respondent finds that the claim by Mihaly (Canada) was true, but since Canada was not a party to the ICSID Convention, therefore the case should be dismissed due to lack of jurisdiction. The lack of jurisdiction is due to non-fulfillment of nationality requirement under Article 25(2) of the ICSID Convention.

In their defense, Claimant argued that Mihaly International Corporation was organized under the laws of California, and since USA is a party to ICSID Convention therefore it fulfills the nationality requirement under article 25(2). Claimant also points out the fact that Mihaly International are regarded as partnership and assignment both in Canada and USA, therefore authorizing Mihaly International (USA) to act on behalf of Mihaly (Canada).

The Respondent rejected both theories of partnership and assignment since the personal nature of the transactions and negotiations happened between Respondent and Mihaly (Canada). There was no precluded assignment to Mihaly (USA) without the consent from Respondent.

To conclude both arguments, the Tribunal finds that the jurisdiction of ICSID is solely based on ICSID Convention and rules of general international law. In conclusion, jurisdiction of the Centre has been fulfilled through registration of both parties to the Centre in accordance with article 36 of the convention.

The Tribunal then evaluates the partnership between Mihaly (USA) and Mihaly (Canada) and finds that it has no separate juridical personality. If there exists a partnership, then it’s the capacity of the Claimant Mihaly (USA) to file a claim against the Respondent. The Claimant however in this case is Mihaly (USA), not Mihaly International or the National Partnership (USA & Canada). The assignment to Mihaly (USA) shall not complete the action in accordance to the convention since it would defeat the purpose of the convention. The Tribunal also concludes that if Mihaly (Canada) filed a claim against the Respondent it was defective before appearing in ICSID, since Canada is not a party to the convention.

The next consideration was the expenditure being considered as “investment” without a contract. Both parties failed to mention the precise definition of “investment” and pre-investment expenditures. The Claimant merely cited an opinion in which defines the expenditures during the development phase typically to 2-4 percent of the total cost. In response, the Respondent does not object the inclusion of development expenditures as investment costs, as long as there is an agreement or consent of the host government (Respondent). Claimant’s effort towards proving Respondent’s consent was through the LOI, LOA and the Letter of Extension (LOE). Through these documents, Claimant argues that consent was given based on the convention.

In reply, the Respondent took great care in the documentation relied by Claimant which points out discussions concerning exclusivity upon obligation for building, ownership and operation of the power station. Exclusivity however never in return created a contract. The operation of the SAEC (South Asia Electric Company as the distribution of the supplies of electricity) was dependent on the contract with Respondent, which is why Respondent would not regard expenditures as investment.

The Tribunal finds that all three letters (LOI, LOA and LOE) has no binding obligation on both parties. The Tribunal also finds that all three documents are not to be treated in any way as means of acceptance by the Host State (Respondent) and that the expenditures are not constituted as an investment within the scope of the convention.

Concerning the definition of “investment” for the purpose of ICSID, the tribunal must examine the current and past practice on the definition executed through USA-Sri Lanka BIT. The Tribunal finds that the definition of investment must be found within the conventional or customary law. In this case, Claimant did not point out any evidence of treaty interpretation or the Practice of States that gives out expenditures deemed as investment. The Tribunal also does not accept the meaning of “investment” in the unilateral or internal characterization of certain expenditures by the Claimant in preparation for a project of investment.

The Claimant made reference towards the BIT in which existing “investment” in must be “fair and equitable treatment” and subjected towards “full protection and security”. The Tribunal however finds that the Claimant has not given enough evidence for the said investment that is qualified for full protection and security.

DECISIONS:

The Tribunal decides in unanimity:

a)      In relation to the preliminary objection ratione personae: the objection must be dismissed.

b)      In relation to the preliminary objection ratione materiae that the objection is sustained in the absence of any proof of admission of an “investment”.

c)      The Tribunal in its powers to entertain the question submitted.

 

The Tribunal in further decides that the

a)      Costs of the proceedings such as fees and expenses of the arbitrators and the secretariat shall be shared by both parties equally.

b)      Each party bears its own costs and expenses towards legal fees for counsels and their respective costs of Legal fees for counsels for the preparation of the written and oral proceedings.

Individual opinions of Mr. David Suratgar:

Since under article 25(4) states could put investor on notice as to the type of disputes that they would be prepared to have submitted to the Centre and also to define the scope of their advance consent to the jurisdiction of ICSID by means of law or by Bilateral investment treaties such as the United States-Sri Lankan BIT.

In this case, Respondent was given an opportunity to adopt or to define the limited scope defining “investment” for the purpose of consent to the jurisdiction of the Centre. It gave a very general definition of investment for the purposes of the treaty.

(Mihaly International v. Sri Lanka taken from ICSID Reports volume 6, Crawford, James & Lee, Karen, 2004, Cambridge University Press, p. 308-326)

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