Petrobart Limited v The Kyrgyz Republic

Year of the award: 2005
Forum: Arbitration Institute of the Stockholm Chamber of Commerce
Applicable investment treaty: Energy Charter Treaty (1994)

Arbitrators:
Justice Hans Danelius, President
Prof. Ove Bring
Mr. Jeroen Smets

Executive summary

Petrobart Ltd, registered in Gibraltar, contracted with KGM, the Kyrgyz state gas company, to supply and deliver 200,000 tons of gas condensate. Petrobart made five deliveries but was only paid for the first two as KGM was in severe financial difficulties. Petrobart sued KGM in the domestic Bishkek Court and obtained a debt judgment of the outstanding amount of US$ 1.5 million. Following the request of the Vice Prime Minister of the Kyrgyz Republic, the Bishkek Court stayed the execution of that judgement for three months. During this period, pursuant to a Presidential decree, KGM was restructured, with the majority of its assets being transferred to other state-owned firms. KGM was subsequently declared bankrupt, and Petrobart could not satisfy its debt judgment nor obtain any proceeds from the sale of assets.

Petrobart initiated arbitral proceedings against the Kyrgyz Republic under the Energy Charter Treaty, claiming that the Republic, by means of its interventions in the judicial proceedings and the Presidential decree ordering KGM's reorganization, failed to provide it with stable, equitable, favorable and transparent conditions, as prescribed by Article 10(1) of the Treaty, and breached other articles of the Treaty. The parties agreed to an arbitration procedure on written submissions only.

After dismissing jurisdictional challenges, the Tribunal found that the Kyrgyz Republic was under an obligation to carry out the KGM's reorganization in a way which would "respect" and protect the rights of Petrobart under the Treaty. The Tribunal held that the Vice Prime Minister's request to stay the execution of the judgment against KGM was an attempt to influence a judicial decision to Petrobart's detriment. The Tribunal concluded that the Kyrgyz Republic violated Article 10(1) and Article 10(12) of the Treaty.

The Tribunal concluded that the removal of assets from KGM had substantially affected Petrobart and that there was a "strong likelihood" relationship between the Treaty breach and the damage to the investor. Since the submissions to the Tribunal did not contain information sufficient for an accurate calculation, the Tribunal estimated damages caused by the removal of the assets from KGM at 75% of the value of the original debt judgment (US$ 1.1million) plus simple interest - in accordance with UNIDROIT Principles - from the date of the debt judgement. The Tribunal rejected the claim for lost profits as not sufficiently established, as well as the claim for legal expenses incurred by Petrobart in the course of domestic legal proceedings.