Theme Fair and Equitable Treatment [Deutsche Bank v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/09/2, Award, 31 October 2012]

2 TABLE OF CONTENTS PREAMBLE As a result of globalization, states have realized that the attraction of foreign investment into their territories is a decisive element in their economic growth States alone are not capable of generating sufficient economic activity to sustain a steady growth in their economy This is true mainly among developing countries or capitalimporting countries The concern among states as to the method of stimulating these investment flows into their countries led to one of the core concepts of international investment protection that is Fair and Equitable Treatment (FET) In interpreting one of the most contested investment treaty protection standards – fair and equitable treatment, we decided to choose case number 5- Theme Fair and Equitable Treatment [Deutsche Bank v Democratic Socialist Republic of Sri Lanka, ICSID Case No ARB/09/2, Award, 31 October 2012] CONTENTS I Summary of the facts1 Contracting Parties The Claimant: Deutsche Bank AG, a stock corporation incorporated under the law of Germany The Respondent: Democratic Socialist Republic of Sri Lanka Summary of the main facts CPC is a 100% State-owned petroleum company established by an Act of the Sri Lankan Parliament and Deutsche Bank AG is a stock corporation incorporated under the law of Germany On July 2008, Deutsche Bank and CPC entered into the Hedging Agreement in order to protect Sri Lanka against the impact of rising oil prices On 13 November 2008, an official investigation into this transactions was commenced by the Central Bank as they thought that Deutsche Bank had not followed proper procedures in executing the Hedging Agreement After that, on 28 November 2008, The Supreme court issued an interim order directing that “all payments by CPC to Deutsche Bank and other banks be suspended” Therefore, on December 2008, the Deutsche Bank exercise their right to terminate the Hedging Agreement with CPC due to the influence of Interim Order issued by the Supreme Court By letter of 10 December 2008, Deutsche Bank calculated the close-out amount payable by CPC to Deutsche Bank following the early termination as USD 60,368,993 Deutsche Bank AG v Democratic Socialist Republic of Sri Lanka, ICSID Case No ARB/09/2, Award from 31 10 2012 https://www.italaw.com/sites/default/files/case-documents/italaw1272.pdf (Accessed: 02 September 2020) On 16 December 2008, the Monetary Board of the Central Bank sent a letter to Deutsche Bank Colombo and other banks as “Stop-Payment Order” Under cover of a letter of January 2009, the Central Bank forwarded to Deutsche Bank a report which states that the Central Bank’s investigation was based on section 29(1) of the Monetary Law Act, and had been widened in scope, following the Supreme Court Order of 28 November 2008 Also, in this report, the Deutsche Bank has been alleged with a lot of mistakes On 27 January 2009, the Supreme Court made a Final Order (the “Final Order”) vacating all previously issued interim orders However, at the same time, the Central Bank issued a press release confirming that the 16 December 2008 Directions to the banks would remain in force In February 2009, an arbitration proceedings in ICSID have been requested by the Deutsche Bank to act against The Socialist Republic of Sri Lanka because The Deutsche Bank alleged that The Socialist Republic of Sri Lanka contravened of BIT between Germany and Sri Lanka II Legal issues and legal arguments raised by disputing parties Legal issues2 In this case, the legal issue revolves around on which basis to determine fair and equitable treatment It is on the basis of these principles, and taking into consideration all the circumstances of the dispute, that the Arbitral Tribunal must determine whether the conduct of Sri Lanka was consistent with its obligation to ensure fair and equitable treatment of Deutsche Bank’s investment Deutsche Bank AG [Claimant]’s Arguments3 Claimant raises many arguments about fair and equitable treatment in this dispute to protect their rights According to Claimant, Article 2(1) of the Treaty, which provides that “[Each Contracting State] shall in any case accord such investments fair and equitable treatment” establishes an autonomous standard of fair and equitable treatment.4 Unlike other treaties, Article 2(1) of the BIT does not make reference to the customary international law standard […] Further, Claimant invokes various violations of the fair and equitable treatment standard by the Supreme Court and the Central Bank The Supreme Court Deutsche Bank AG v Democratic Socialist Republic of Sri Lanka, ICSID Case No ARB/09/2, Award from 31 10 2012, para 409 – 491 Deutsche Bank AG v Democratic Socialist Republic of Sri Lanka, ICSID Case No ARB/09/2, Award from 31 10 2012, para 409 – 473 Article 2(1), Treaty between the Federal Republic of Germany and the Democratic Socialist Republic of Sri Lanka concerning the Promotion and Reciprocal Protection of Investments of June 2000 ( the BIT) proceedings and the Supreme Court’s Interim Order caused disadvantage to the Claimant Moreover, according to Claimant, the investigation conducted by the Central Bank is a clear example of the breach of the fair and equitable treatment standard The investigation was improperly motivated, inappropriately implemented, shortage transparency and ultra vires Sri Lanka [Respondent]’s Arguments According to Respondent, the interpretation of the fair and equitable treatment standard must be resolved primarily on the basis of the ordinary meaning of the terms and by reference to the content of that standard recognized in customary international law Furthermore, Sri Lanka points out that the obligation of fair and equitable treatment is in Respondent’s view not breached where regulatory measures serve a legitimate purpose and are based on legal standards, rather than prejudice or personal preference Even if, hypothetically, legislation were objectively imperfect, this does not violate fair and equitable treatment […] III Findings by the Arbitral Tribunal5 The Standard: According to the Arbitral Tribunal, the FET in this case is an autonomous standard, albeit the actual content not materially different from minimum standard of treatment in customary international law Also, the Arbitral Tribunal notes that the standard has been rightly but not exhaustively defined in the Waste Management II case.6 […] Application of the Standard The Arbitral Tribunal considers, on the basis of the evidence, that Sri Lanka has breached the fair and equitable treatment principle through the actions of the Supreme Court and the Central Bank, including its Governor 2.1 The Supreme Court proceedings Concerning on the action of The Supreme Court, The Arbitral Tribunal decides that The Supreme Court issued its Interim Order on 28 November 2008 to suspend or prevent CPC making any payment to the SCB, Deutsche Bank, Citibank, or any other bank or institution involved in the hedging program based on limited evidence and without hearing from the reply of various banks, is unjust […] Eventually, The Tribunal considers that the fact that the Order of the Supreme Court was interim and was discharged two months later, is irrelevant, particularly Deutsche Bank AG v Democratic Socialist Republic of Sri Lanka, ICSID Case No ARB/09/2, Award from 31 10 2012, para 409 – 491 Waste Management, Inc v United Mexican States, (ICSID Case No ARB(AF)/00/3), Award, 30 April 2004, para 98 [hereinafter “Waste Management II”] given that the Tribunal considers it involved a serious due process violation Indeed, looking at the situation as a whole, at the time that the Supreme Court’s Order was discharged, the Monetary Board of the Central Bank had put its own Stop-Payment Order in place, preventing the performance of the Hedging Agreement 2.2 The Central Bank’s investigation and Stop-Payment Order of 16 December 2008 The Arbitral Tribunal decided that by acting as it did in relation to the Supreme Court Interim Order, the Central Bank’s investigation, and the Stop- Payment Order of 16 December 2008, Sri Lanka has breached the fair and equitable treatment standard contained in Article 2(2) of the BIT due to the findings as follows: (i) The investigation was improperly motivated; (ii) The Government acted in bad faith; (iii) Lack of transparency and due process; (iv) The Central Bank acted in excess of its powers.7 IV Comments on the outcome of the case Based on the above contents, the conclusion of the Arbitral Tribunal is that the BIT provides for an autonomous standard By issuing an interim order "without a proper examination and without giving the banks involved an opportunity to respond", the Supreme Court breached the FET standard "in a form of a due process violation" (Award, paragraph 478) The Tribunal also held that the Central Bank's investigation and stoppayment order of 16 December 2008 amounted to a violation of the FET standard because the Sri Lankan Government acted in bad faith, there was a lack of transparency and due process in respect of this investigation and the Central Bank had acted in excess of its powers.8 Besides, there is a dissenting opinion of Makhdoom Ali Khan about the final decision of the Arbitral Tribunal on the issue which we will summarized as follows: – Disagreed that the Supreme Court acted in an improper manner; – Central Bank investigation did not cause any loss.9 Deutsche Bank AG v Democratic Socialist Republic of Sri Lanka, ICSID Case No ARB/09/2, Award from 31 10 2012, para 474 – 491 Alejandro I Garcia (2013), ICSID tribunal considers Salini criteria,https://uk.practicallaw.thomsonreuters.com/9525-4681?transitionType=Default&contextData=(sc.Default)&firstPage=true (Accessed: 05 September 2020) 7 From our standpoint, after finding out information about the case, we deliver a few points that we deem to be remarked on Firstly, on the matter of the dispute, we found that the issues raised were based on the impairment of the rights of Deutsch Bank AG, namely the standards of fair and equitable treatment due to actions of the Supreme Court, the Central Bank and the Monetary Board of Sri Lanka Secondly, we acknowledge that the facts and arguments of the parties in the case have been considered satisfactorily and thoroughly On that basis, together with the reasonable grounds based on the relevant rules and case laws, the Arbitration Council has reached the reasonable and consistent conclusion in this case We also want to raise our own opinions on the Arbitral Tribunal's conclusion in this case, namely: (i) Respondent has violated the standard of fair and equitable treatment under international investment law in view of the fact that Respondent's actions have failed to satisfy the following criteria: Stability and the protection of investor's legitimate expectations; Transparency; Procedural propriety and due process and Good faith; (ii) Along with that, Claimant's right to obtain a legitimate benefit in performing its act is not guaranteed Therefore, even though an act may not cause actual loss (for example, the Central Bank investigation), or directly impact Deutsch Bank, must also consider the violation of FET standard Therefore, regarding Arbitral conclusion, based on our own opinion, we grant our consent with this as a whole Last but not least, the FET standard to be considered in this case has a detailed and comprehensive set of aspects needed to be considered; accordingly, this seems to be a typical example of FET standard in international investment dispute settlement practice However, this standard needs to be considered comprehensively based on the diverse facts of each case, the Arbitral tribunal's judgmental perspectives and other diverse and constantly changing factors in practice CONCLUSION In short, the existing awards describe fair and equitable treatment in accordance with a broad understanding of the rule of law—an understanding that demands reasonableness, consistency, nondiscrimination, transparency, and due process The results in the awards, however, can be explained more parsimoniously by a narrower understanding of the rule of law which demands open, principled conduct and states acting with integrity./ Deutsche Bank AG v Sri Lanka, ICSID Case No ARB/09/02, Dissenting Opinion of Makhdoom Ali Khan, https://jusmundi.com/fr/document/opinion/en-deutsche-bank-ag-v-democratic-socialist-republic-of-sri-lankadissenting-opinion-of-makhdoom-ali-khan-award-tuesday-23rd-october-2012 (Accessed: 05 September 2020) REFERENCES Treaty between the Federal Republic of Germany and the Democratic Socialist Republic of Sri Lanka concerning the Promotion and Reciprocal Protection of Investments of June 2000; Deutsche Bank AG v Democratic Socialist Republic of Sri Lanka, ICSID Case No ARB/09/2, Award from 31 10 2012 https://www.italaw.com/sites/default/files/casedocuments/italaw1272.pdf; Deutsche Bank AG v Sri Lanka, ICSID Case No ARB/09/02, Dissenting Opinion of Makhdoom Ali Khan, https://jusmundi.com/fr/document/opinion/en-deutsche-bank-ag-vdemocratic-socialist-republic-of-sri-lanka-dissenting-opinion-of-makhdoom-ali-khanaward-tuesday-23rd-october-2012; Waste Management, Inc v United Mexican States, (ICSID Case No ARB(AF)/00/3), Award, 30 April 2004; Alejandro I Garcia (2013), ICSID tribunal considers Salini criteria, https://uk.pract icallaw.thomsonreuters.com/9-525-4681?transitionTyp e=Default&contextData =(sc Default)&firstPage=true  ... interpreting one of the most contested investment treaty protection standards – fair and equitable treatment, we decided to choose case number 5- Theme Fair and Equitable Treatment [Deutsche Bank v Democratic. .. Court and the Central Bank The Supreme Court Deutsche Bank AG v Democratic Socialist Republic of Sri Lanka, ICSID Case No ARB/09/2, Award from 31 10 2012, para 409 – 491 Deutsche Bank AG v Democratic. .. Democratic Socialist Republic of Sri Lanka, ICSID Case No ARB/09/2, Award from 31 10 2012, para 409 – 473 Article 2(1), Treaty between the Federal Republic of Germany and the Democratic Socialist Republic