September 15, 2015

ICSID Claim Against Austria Puts Bilateral Investment Treaties Under Spotlight

On 30 July 2015, the secretary general of the International Centre for Settlement of Investment Disputes (ICSID) registered a request to begin arbitration proceedings against the Republic of Austria. . The request was submitted by B.V. Belegging-Maatschappij Far East (Far East) and claims that the Austrian government breached its obligations under the Austria-Malta bilateral investment treaty (BIT) when it investigated the activities of Meinl Bank during a share buyback programme of Meinl European Land Ltd. in 2007. Far East, a Malta-registered corporation and the controlling shareholder and principal owner of Meinl Bank, called Austria’s investigations of the bank and its chairman a “witch hunt” that “grievously harmed the bank’s reputation” and “decreased the value” of its investment. It demands compensation of €200 million for the bank’s shareholders and an immediate stop to the investigations. Far East’s claim is the latest example of how shareholders can use their investment to protest against state actions taken towards a company—or a director of that company—and seek awards that could in effect challenge the country’s ability to conduct investigations.

The Basis for the Claim

According to the request for arbitration, Austria breached its obligations under the BIT through its failure to provide fair and equitable treatment to Far East’s investment and through its impairment of Far East’s investment by arbitrary and discriminatory means, including harassment and retaliation. Further, it claims that Austria failed to provide full and constant protection to Far East’s investment through lawful and proportionate treatment. The request goes on to allege that Austrian officials have repeatedly breached Meinl Bank’s rights to due process through various violations, including improper surveillance of Meinl Bank’s officers and repeated, illegal house searches (including that of the bank’s outside counsel). Far East’s request further alleges violations in the form of direct and indirect expropriation of Far East’s investment in Meinl Bank via the progressive dismantling of Meinl Bank’s operations (including Austria’s recent demand for payment from Far East) and a failure to consult or attempt to reach a settlement of the case in good faith (as prescribed in the BIT).

The Implications

It remains to be seen what the claim itself will mean to investors hoping to take advantage of the protections afforded to it in foreign jurisdictions under BITs in general, or the Austria-Malta BIT in particular. But it is clear BITs are likely to become (if they have not already) a tool for investors to use when defending themselves against discriminatory and disproportionate measures taken by a state during criminal investigations. This is an important development in times where many financial institutions face increased scrutiny over their conduct in relation to the financial markets. For international arbitration in general, the claim raises important questions—and may set critical precedents—about the proportionality of compensation afforded for the impairment of investment through government prosecutions (something that could also be seen in the Yukos case). For investors in particular, the case provides a reminder of how important it is to plan and regularly reflect on their corporate ownership structure if they are to be able to take advantage of the protections available under relevant BITs.

(Written with research assistance from Hans-Christian Mehrens, summer intern at Faegre Baker Daniels.)

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