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Groundbreaking ICSID Arbitration Decision

Kessler Topaz Meltzer & Check, LLP Wins Groundbreaking ICSID Arbitration Decision, Allowing the Claims of Nearly One Thousand Greek Investors To Move Forward Against The Republic of Cyprus
February 12, 2020

By Emily N. Christiansen and Geoffrey C. Jarvis

On Friday, February 7, 2020 a three member Tribunal of the International Centre for the Settlement of Investment Disputes (“ICSID”) issued a 2-1 “Decision on Jurisdiction,” upholding the Tribunal’s jurisdiction over investment treaty claims brought against the Republic of Cyprus (“Cyprus”) by 951 individuals and seven companies who suffered substantial losses following the adoption by Cyprus of certain bank resolution measures in connection with its March 2013 financial crisis.

The claimants were Greek and Luxembourg nationals who were all creditors (either depositors or bond holders) of either the Cyprus Popular Bank (also known as Marfin Popular Bank or Laiki Bank) or the Bank of Cyprus. The claimants suffered substantial losses when their deposits/bonds were “bailed-in” (i.e. confiscated) as part of Cyprus’ response (known as “Plan B”) to the Cypriot financial crisis. Claimants’ bonds were rendered worthless and the value of their deposits above €100,000 decreased substantially when the Cyprus government merged Laiki Bank with the Bank of Cyprus.

The claims against Cyprus arise under nearly identical provisions of two bilateral investment treaties (“BITs”): one between Cyprus and Greece (the “Cyprus-Greece BIT”) and the other between Cyprus and the Belgo-Luxembourg Economic Union (the “Cyprus-BLEU BIT”). Claimants allege that Cyprus adopted its Plan B response to the economic crisis because it disproportionately impacted foreign (non-Cypriot) investors and that in doing so Cyprus violated its obligations under the Cyprus-Greece BIT and the Cyprus-BLEU BIT, including its obligations not to discriminate, not to expropriate, and to afford foreign investments fair and equitable treatment and full protection and security.

In response to the Claimants’ Statement of Claim, Cyprus objected to the jurisdiction of an ICSID Tribunal to hear the dispute. Cyprus’ primary objections were: 1) that both the Cyprus-Greece BIT and the Cyprus-BLEU BIT were superseded by European Union law and became inoperative when Cyprus joined the European Union in 2004; 2) that Cyprus had not consented to the arbitration of mass claims ( i.e., claims by 958 persons/corporations) in either of the two BITs and the ICSID convention did not authorize such claims; and 3) even if the Tribunal determined that mass claims were permissible, the claims brought by the Claimants were not compatible with ICSID because the claimants claims were not homogenous in that they were brought under two separate BITs and involved claimants with a variety of assets that were at two different banks. Cyprus also made additional objections to jurisdiction with respect to some categories of Claimants claiming, for example, that the Claimants investments did not qualify as investments under the BITs.

Attorneys for both Cyprus and the claimants submitted opposing briefs and presented oral arguments at a hearing before the arbitrators in May 2019. After months of deliberations, the Tribunal issued its decision.

International Law v. European Union Law

With respect to Cyprus’ first objection, that the BITs were superseded by EU law, the Tribunal Majority held that “the Tribunal cannot accept that EU law must necessarily override other principles of international law applicable between the parties.” While the Court of Justice of the European Union (CJEU”) was free to determine that the BITs were superseded with respect to EU law, the Tribunal confirmed that jurisdiction for this case should be on the basis of international law and not EU law and that the Tribunal was therefore not subject to the same interpretations as the CJEU. Furthermore, the Tribunal found that the dispute at hand is ultimately a question of a conflict of treaties and that there was no true conflict between the BITs and EU Treaties. The Tribunal went on to explain that,

“[T]he Tribunal has difficulty in seeing the BITs and the EU Treaties as being of the same subject-matter. The existence of a procedure allowing the nationals of one state to bring a claim against another state under a BIT does not prevent the EU Treaties from operating. The fact that both have provisions relating to obligations on states in respect of foreign investors does not mean that the functioning of one prevents the functioning of the other. They can both operate side by side.”

Indeed, the Tribunal confirmed that the relevant provisions of EU law, were not applicable to this case because the provisions relied upon by Cyprus were concerned with interpretation and application of EU treaties and that was not at issue in this case. The Tribunal would ultimately be tasked with determining whether Cyprus’ actions violated provisions of the BIT and not whether Cyprus’ actions violated its obligations under EU law. Additionally, the Tribunal found no evidence that suggested that there was an intention by Cyprus or EU states generally, at the time of the negotiation of EU Treaties, to terminate or replace existing BITs and that, similarly, no subsequent actions by Cyprus or other EU states had resulted in termination of the BITs.

The dissenting arbitrator, Marcelo G. Kohen, focused most of his dissenting opinion on the incompatibility of the BITs with EU law and, contrary to the majority, concluded that “the possibility to set up arbitration as emerging from the two invoked BITs is incompatible with the later conventional engagements adopted by the same parties to these BITs at the time of the accession of Cyprus to the European Union on 1 May 2004.”

Mass Arbitration Claims and Homogeneity

The Tribunal Majority next turned its attention to Cyprus’ arguments that the Tribunal lacked jurisdiction to hear mass claims and that, even if mass claims were permissible under ICSID or the BITs, the mass claims were insufficiently homogenous. The Tribunal, relying on Alemanni, one of three mass ICSID arbitration cases known collectively as the “Argentina Bondholder Cases”, determine that whether it had jurisdiction over mass claims would be resolved not only by determining whether there was jurisdiction over the individual claims but also by determining “whether those individual claims can be put together as a single ‘mass claim’.” Ultimately the Tribunal Majority found that “there is ‘substantial unity’ or similarity in the claims that are being made and the breaches alleged.” The Tribunal Majority also found that “[t]he alleged liability of [Cyprus] in this case does not differ in respect of individual claimants…the claims in this case fall into four categories and the actions giving rise to liability are identical within each category although there are some differences between categories.” The Tribunal Majority continued, “[i]t is not a claim about some of the Claimants; it was about the treatment of foreigners and all Claimants fall into that class.” Additionally the Tribunal Majority determined that asserting jurisdiction over all claims would best serve the interests of justice and efficiency.

It was the Tribunal Majority’s decision on mass claims and homogeneity that is groundbreaking. As the Tribunal Majority noted, although there is some precedent for mass claims, including detailed discussions in the Argentine Bondholder Cases, this case was unique in that the number of claimants included was well in excess of the number of claimants included in two out of three of the Argentine Bondholder Cases.