INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES
In the Proceeding Between
JOSEPH CHARLES LEMIRE
(ICSID CASE NO. ARB/06/18)
DECISION ON JURISDICTION AND LIABILITY
Members of the Tribunal:
Professor Juan Fernández-Armesto, President
Mr. Jan Paulsson, Arbitrator
Dr. Jürgen Voss, Arbitrator
Secretary of the Tribunal:
Mr. Ucheora Onwuamaegbu
Dr. Hamid G. Gharavi
Mr. Julien Fouret
Ms. Nada Sader
Derains & Gharavi
Mr. John S. Willems
Mr. Michael A. Polkinghorne
Ms. Olga Mouraviova
White & Case LLP
Mr. Sergii Svyryba
Ms. Marta Khomyak
Ms. Olha Yaniutina
Prof. Juan Fernández-Armesto, President
Mr. Jan Paulsson, Arbitrator
Dr. Jürgen Voss, Arbitrator
Assistant to the Tribunal
Ms. Deva Villanúa Gómez
Attending for Claimant
Mr. Joseph C. Lemire, Claimant’s witness
Mr. Hamid G. Gharavi, Derains Gharavi & Lazareff
Mr. Nabil Lodey, Derains Gharavi & Lazareff
Mr. Julien Fouret, Derains Gharavi & Lazareff
Ms. Nada Sader, Derains Gharavi & Lazareff
Mr. Sergiy Koziakov, Derains Gharavi & Lazareff
Mr. Eric Degand, witness
Mr. Viktor Petrenko, Claimant’s witness
Mr. Paval Shylko, witness
Mr. Piotr Jalowiec, witness
Mr. Sergey Denisenko, witness
Dr. Andre Wiegand, expert
Dr. Klaus Goldhammer, expert
Attending for Respondent
Mr. John S. Willems, White & Case LLP
Mr. Michael Polkinghorne, White & Case LLP
Ms. Olga Mouraviova, White & Case LLP
Mr. Sergii Svyryba, Magisters
Ms. Nathalie Makowski, White & Case LLP
Ms. Olga Boltenko, White & Case LLP
Ms. Olga Glukhovska, Magisters
Ms. Olga Ianiutina, Magisters
Mr. Markiian Kliuchkovskyi, Magisters
Ms. Tuuli Timonen, White & Case LLP
Ms. Renee Bissell, White & Case LLP
Ms. Ludmila Zaporozhets, National Television and Radio Broadcasting Council of Ukraine
Mr. Vitaliy Shevchenko, witness
Mr. Ihor Kurus, witness
Mr. Volodymyr Kirichenko, witness
Mr. Iulian Leliukh, witness
Mr. Viktor Petrenko, Respondent’s witness
Mr. Vladyslav Lyasovskyi, witness
Ms. Olena Volska, expert
31. As decided at the hearing, the parties filed their respective post-hearing briefs on March 4, 2009 and their respective statements of costs on March 20, 2009.
32. Members of the Tribunal deliberated using various means of communication.
II. BASIC FACTS
33. This dispute was submitted to ICSID by Claimant against Respondent under (1) the Treaty between the United States of America and Ukraine Concerning the Encouragement and Reciprocal Protection of Investment, done in Kyiv on October 17, 1996 (the “BIT”) and (2) an agreement between Claimant and Respondent on the settlement of a dispute, dated March 20, 2000 (the “Settlement Agreement”), which was recorded as an award on agreed terms on September 18, 2000 (ICSID No. ARB (AF) 98/1 (the “2000 Award”).
34. Article VI of the BIT entitles any national of a State party to the BIT to submit to ICSID any dispute with the other State party to the BIT relating to either “an investment agreement between that Party and such national” or “an alleged breach of any right conferred or created by this Treaty with respect to an investment”.
35. On November 14, 1997, Claimant filed with ICSID a first arbitration request (the “First Arbitration”) against Respondent, with regard to the same investments that underlie the present arbitration. This First Arbitration eventually led to the Settlement Agreement, which was then recorded in the 2000 Award. Paragraph 31 of the Settlement Agreement provides for the resolution of all disputes arising from or in connection with the Agreement by ICSID Arbitration in accordance with the ICSID Additional Facility Arbitration Rules.
III. THE PARTIES
36. Claimant, Mr. Joseph Charles Lemire, is a national of the United States of America residing at 91 Saksagansko St., Office 8,01032 Kiev, Ukraine. Claimant is a majority shareholder, through CJSC “Mirakom Ukraina” (“Mirakom”) of CJSC “Radiocompany Gala” (“Gala”), a closed joint stock company constituted in 1995 under the laws of Ukraine with its principal office located at the same address as Mr. Lemire’s residence. Gala is a music radio station in Ukraine currently licenced to broadcast on various frequencies in Ukraine.
37. Respondent is the State of Ukraine. With respect to the events giving rise to the present arbitration, Respondent has acted through its President, Prime Minister, Parliament, Ministry of Defence, the National Council for Television and Radio Broadcasting (the “National Council”), the Ukrainian State Centre of Radio Frequencies (the “State Centre”), the State Committee on Communications and Information Technology (the “State Committee”), all of which are organs for which Ukraine is responsible under international law.
IV. RELIEF SOUGHT
38. Claimant seeks relief for alleged breaches of the Settlement Agreement/2000 Award and for alleged breaches of the BIT following the 2000 Award. More specifically, Claimant seeks1:
a) a decision declaring that Respondent has breached the 2000 Award and the BIT;
39. b) a decision ordering Respondent to pay Claimant damages in the amount of 55,173 million USD on account of its breaches of the 2000 Award and the BIT which had the effect of preventing Claimant from developing Gala into a full national network as of January 1, 2001 and from establishing two other national networks (an FM radio network as of January 1, 2002 and an AM network as of July 1, 2004); or
- alternatively ordering Respondent to pay Claimant damages in the amount of 51,277 million USD on account of its breaches of the 2000 Award and the BIT which blocked Claimant from developing Gala into a full national network as of January 1, 2004 and developing a second FM national network as of January 1, 2002; or
- alternatively ordering Respondent to pay Claimant damages in the amount of 34,732 million USD on account of its breaches of the 2000 Award and the BIT which blocked Claimant from developing Gala into a full national network as of January 1, 2001;
c) a decision ordering Respondent to pay Claimant damages in the amount of one million USD for Respondent’s failure to take reasonable measures to correct interference with Gala’s 100 FM frequency, in breach of the Award and the BIT from the year 2000 to August 2008;
d) a decision ordering Respondent to pay Claimant damages in the amount of 958,000 USD representing loss of profits for Respondent’s enactment of the Law on Television and Radio Broadcasting (the “LTR”) and/or application thereof in breach of the BIT;
e) a decision ordering Respondent to pay Claimant moral damages in the amount of three million USD for Respondent’s harassment of Claimant, in breach of the BIT;
f) the costs of this arbitration, including all expenses that Claimant has incurred, legal counsel, experts and consultants, as well as Claimant’s internal costs in pursuing this arbitration, all of the fees and expenses of the arbitrators, fees for use of the facilities of the Centre;
g) compound interest at a rate of LIBOR + 3, compounded semi-annually, to be established on the above amounts as of the date these amounts are determined to have been due to Claimant; and
h) any such other and further relief as the Arbitral Tribunal shall deem appropriate.
b) a decision dismissing Claimant’s claims in their entirety; and
c) a decision awarding to Respondent its fees, costs and expenses in connection with this proceeding.
V . JURISDICTION
41. The Tribunal has decided to join Respondent’s objections on jurisdiction to the merits of the dispute, in accordance with Article 41(2) of the ICSID Convention.
V.1. POSITIONS OF CLAIMANT AND RESPONDENT
42. Claimant’s basic allegations in this arbitration are twofold:
- first, that Respondent’s actions constitute a breach of the Settlement Agreement; and
- second, that Respondent has breached the BIT by subjecting Claimant to unfair, inequitable, arbitrary and discriminatory treatment, harassment and creeping expropriation and by enacting a new law in violation of Article II.6 of the BIT.
43. Respondent raises a number of jurisdictional objections3:
- that the Centre lacks jurisdiction for claims arising out of the Settlement Agreement;
- that there is no investment underlying the claims related to the tenders for additional frequencies;
- that Claimant’s capital invested did not emanate from abroad as required;
- that Claimant has not made out a prima facie case of expropriation.
44. Claimant denies these jurisdictional objections and affirms the Centre’s jurisdiction and the Tribunal’s competence to decide all claims raised.
V.2. DECISION OF THE TRIBUNAL
45. In order for the Centre to have jurisdiction and for the Tribunal to have competence with regard to these claims, four well known conditions must be met, three deriving from Article 25 of the ICSID Convention and a fourth resulting from the general principle of law of non-retroactivity:
- first, a condition ratione personae: the dispute must oppose a Contracting State and a national of another Contracting State;
- second, a condition ratione materiae: the dispute must be a legal dispute arising directly out of an investment;
- third, a condition ratione voluntatis: the Contracting State and the investor must consent in writing that the dispute be settled through ICSID arbitration;
- fourth, a condition ratione temporis: the ICSID Convention must have been applicable at the relevant time.
46. The jurisdictional requirements of Article 25 of the ICSID Convention must be read in conjunction with those of the BIT. The relevant provisions are Article VI.1 and VI.4 of the BIT, which read as follows:
“VI.1. For purposes of this Article, an investment dispute is a dispute between a Party and a national or company of the other Party arising out of or relating to (a) an investment agreement between that Party and such national or company; (b) an investment authorization granted by that Party’s foreign investment authority to such national or company; or (c) an alleged breach of any right conferred or created by this Treaty with respect to an investment.
VI.4. Each Party hereby consents to the submission of any investment dispute for settlement by binding arbitration in accordance with the choice specified in the written consent of the national or company under paragraph 3. Such consent, together with the written consent of the national or company when given under paragraph 3 shall satisfy the requirement for:
(a) written consent of the parties to the dispute for purposes of chapter II of the ICSID Convention (Jurisdiction of the Centre) and for purposes of the Additional Facility Rules; and
(b) an “agreement in writing” for purposes of Article II of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, done at New York, June 10, 1958.”
47. In addition, Article I.1(a) of the BIT defines the term “investment”:
“I.1. For the purposes of this Treaty,
(a) “investment” means every kind of investment in the territory of one Party owned or controlled directly of indirectly by nationals or companies of the other Party, such as equity, debt, and service and investment contracts; ...”
48. Jurisdiction ratione temporis has not been challenged and the Tribunal will not analyze it. It will focus on jurisdiction ratione personae (V.3), materiae (V.4) and voluntatis (V.5).
V.3. JURISDICTION RATIONE PERSONAE
49. Claimant is, and at all relevant times has been, a national of the United States and thus a “national of another Contracting State” under Article 25 of the ICSID Convention as well as a “national of a Party” under the BIT. Ukraine, since July 7, 2000, is a State Party to both the ICSID Convention and to the BIT.
50. The requirements for ICSID jurisdiction ratione personae are hence satisfied.
V.4. JURISDICTION RATIONE MATERIAE
51. Article 25(1) of the ICSID Convention further requires a “legal dispute arising directly out of an investment”. Claimant submits that he has made investments in Gala Radio and that he is Gala’s major shareholder. It is undisputed that the present dispute is a legal dispute and that it arose directly out of these investments.
52. Gala was not founded by Mr. Lemire – in fact, Ukrainian legislation requires that radio broadcasters be founded by Ukrainian nationals4. The law however authorizes foreign investments in the broadcasting sector (Article 12.3 of LTR). Mr. Lemire bought participations in Gala, an existing company, which already had a radio licence, and which had been promoted by a Ukrainian citizen, Mr. Glieb Maliutin5, and founded by a Ukrainian company called Provisen. On June 8, 1995, two Investment Agreements were signed by Mr. Lemire providing (somewhat diffusely) for contributions in cash and in kind amounting to 290,000 USD plus 3,000,000 USD6.
53.The actual amount contributed by Mr. Lemire is disputed. Respondent’s expert acknowledges that at least 141,000 USD were invested by Mr. Lemire7 and Respondent has accepted an investment of 236,000 USD8. Claimant himself states that his investment amounts to well over 5,000,000 USD9. This number seems to include real estate held in Mr. Lemire’s name, and let rent free to Gala, and payments made directly by him on behalf of the company10. No document has actually been produced in this arbitration, giving a precise breakdown of Mr.Lemire’s contributions. It seems, moreover, that for accounting purposes, the expenditures made directly by Mr. Lemire on behalf of Gala are not recorded in Gala’s books11.
54. Summing up the evidence, the Tribunal has no doubt that Mr. Lemire actually made an investment in Ukraine, although the undisputed total amount is only 236,000 USD. Respondent has not challenged that Mr. Lemire is – at least since 2006 – indirect owner of 100% of the share capital of Gala. The evidence shows that Mr. Lemire has made payments with his own moneys on behalf of Gala. But the record of the actual amounts paid has not been produced, and that the total exceeds 5,000,000 USD is nothing more than affirmation12.
55. It is immaterial that Claimant holds his controlling stake in Gala through Mirakom. Article I.1(a) of the BIT accords treaty protection to “every kind of investment in the territory of one Party owned or controlled directly or indirectly by nationals...of the other Party”.
Transfer of funds from abroad
56. Respondent further submits that Claimant has failed to prove the transfer of his invested funds into Ukraine from abroad. However, neither the BIT nor the ICSID Convention includes an origin-of-capital requirement. Nor is such a requirement to be inferred from the purposes of the BIT and/or the ICSID Convention.
57. In setting out the purposes of the BIT, the Preamble emphasises the promotion of investments of nationals of one party in the territory of the other, without any reference to the origin of the funds invested; and Article I.3 of the BIT implies that reinvested earnings qualify as investments under the BIT; these earnings by definition originate within the host country.
58. Moreover, Claimant’s certificate of registration dated September 18, 1995 shows that at least part of his investment capital originates from abroad; this suffices for jurisdictional purposes.
59. Hence, the requirements for ICSID jurisdiction are also satisfied ratione materiae.
V.5. JURISDICTION RATIONE VOLUNTATIS
60. A singular feature of this arbitration is that consent to ICSID arbitration was formalized in two different legal instruments: the Settlement Agreement and the BIT. Each will be analyzed separately.
A) Jurisdiction With Respect to Claims Based on an Alleged Breach of the Settlement Agreement/2000 Award
61.The Settlement Agreement contains the following dispute resolution provision in clause 31 (the “Arbitration Clause”):
“All the disputes arising from or in connection with this Agreement shall be settled by negotiations. In the event no solution is achieved within 60 days from the date of beginning of negotiations, either party may address to the ICSID its application for settlement under the ICSID Additional Facility Arbitration Rules.”
Respondent however objects to the Tribunal’s jurisdiction for alleged claims under the Settlement Agreement on two grounds, namely the fact that (a) the Settlement Agreement was recorded as an award, and (b) the Arbitration Clause refers, for settlement of disputes under the Agreement, to the ICSID Additional Facility Arbitration Rules, rather than the ICSID Arbitration Rules.
62. Respondent however objects to the Tribunal’s jurisdiction for alleged claims under the Settlement Agreement on two grounds, namely the fact that (a) the Settlement Agreement was recorded as an award, and (b) the Arbitration Clause refers, for settlement of disputes under the Agreement, to the ICSID Additional Facility Arbitration Rules, rather than the ICSID Arbitration Rules.
a) Settlement Agreement as an award
63. Respondent argues that the parties voluntarily transformed the Settlement Agreement into an enforceable award, in order to benefit from the jurisdictional effect of such measure. Claimant thus waived his right to the dispute resolution mechanism contained in the original accord13. Awards under the ICSID Additional Facility must be enforced through the New York Convention – there is no scope for enforcement through the arbitration clause inserted in the Settlement Agreement.
64. The Tribunal disagrees with Respondent’s theory. It is not supported by the text of the ICSID Convention or applicable arbitration rules, and it is based on a misunderstanding of the differences between disputes arising out of a contract and enforcement of an award.
65. The Settlement Agreement is first and foremost a contract, product of consent expressed by both parties. Settlement agreements, like all contracts, may give rise to disputes. In the Settlement Agreement Mr. Lemire and Ukraine agreed that disputes arising “from or in connection” with this contract should be settled by arbitration.
66. After executing the Settlement Agreement both parties requested, and the Tribunal in the First Arbitration agreed that “the Tribunal shall record the settlement in the form of an award” (as authorized by Article 49(2) of the ICSID Additional Facility Arbitration Rules).
67. The precise text of the 2000 Award is as follows:
“Accordingly the Tribunal orders unanimously that the said agreement between the Parties as set forth below shall be recorded verbatim as an award on agreed terms”.
And then the award copies ad pedem literae the full text of the Settlement Agreement, including the Arbitration Clause.
68. Respondent’s basic argument is that, by accepting that the Settlement Agreement be recorded as an award, Claimant was waiving his right to the Arbitration Clause.
69. The Tribunal disagrees. There is no hint that, by requesting the Tribunal to issue the consent award, Claimant proposed and Respondent accepted neutralisation of the Arbitration Clause.
70. It is very telling that the 2000 Award reproduces the complete text of the Settlement Agreement, including the Arbitration Clause. The parties could have requested that the Arbitration Clause be excluded from the 2000 Award. They did not. What the 2000 Award proves is that as of the date of the request of its issuance, each party reiterated its consent that all disputes arising from or in connection with the Settlement Agreement be solved by arbitration.
71. In fact, the purpose and meaning of the consent award is very transparent. What the parties were seeking when they asked for the 2000 Award was twofold:
- on the one hand, they wished to have the possibility of recognition and enforcement of the Settlement Agreement through the New York Convention; i.e. that a Court recognise the legal force and effect of the award and ensure that it is carried out in accordance with its terms;
- on the other, if any dispute arose from or in connection with the Settlement Agreement, the parties reiterated their agreement that disputes should be resolved by arbitration.
72. With regard to the Settlement Agreement, the relief sought by Claimant in this arbitration is a declaration that Respondent has breached its obligations and an order for payment of damages. The thrust of Claimant’s argument is that during the execution of the Settlement Agreement, Respondent has defaulted. Respondent denies such accusation. Consequently, a dispute regarding the execution of the Settlement Agreement has arisen.
73. This dispute can and must be submitted to arbitration in accordance with Clause 31 of the Settlement Agreement:
- first, because that is what the parties bargained for in the Arbitration Clause; and
- second, because a procedure under the New York Convention before a national Court can only result in the recognition and enforcement of the award, not in resolving a dispute related to the breach of obligations and the determination of damages; if Claimant had submitted the relief sought in this procedure to a national Court, Respondent could have validly raised the defence of Article II.3 of the New York Convention14, and requested that the judge refer the dispute to arbitration.
b) Reference to ICSID Additional Facility Arbitration Rules
74. The Arbitration Clause provides for “settlement under the ICSID Additional Facility Arbitration Rules” of “all the disputes arising from or in connection with this Agreement”.
75. When the Settlement Agreement was signed on March 20, 2000 Ukraine had not ratified the ICSID Convention, and consequently the Centre could only administer arbitrations involving Ukraine under the Additional Facility Rules (Article 2(a)). Things moved quickly thereafter. On July 7, 2000 the ICSID Convention entered into force in Ukraine. With the effectiveness in Ukraine of the ICSID Convention, the Additional Facility became unavailable and was superseded by arbitration under ICSID Rules. Notwithstanding this fact, the
parties requested, and on September 18, 2000 the Tribunal in the First Arbitration issued the 2000 Award, with an unchanged Arbitration Clause.
79. The Arbitration Clause states that “either party may address to the ICSID its application for settlement”, and then adds “under the ICSID Additional Facility Arbitration Rules”. These Rules were available when the Clause was signed, but no longer once the Clause was incorporated into the 2000 Award, and since then they have ceased to be available. They have been superseded by the ICSID Arbitration Rules.
80. Imprecise arbitration clauses are a frequent occurrence in commercial arbitration. They must be interpreted by the arbitrators, in order to restore the true intention of the parties, distorted by the parties’ ignorance of the mechanics of arbitration, error in designating the correct institution or rules, or, as here, supervening legal developments17.
81. In our case, the true intent of the parties is very clear: the Arbitration Clause explicitly says that “either party may address to ICSID its application for the settlement” of the dispute. The very wording of the Arbitration Clause evidences the parties’ wish that disputes arising from the Settlement Agreement be settled through arbitration administered by ICSID, and not through any other dispute settlement mechanism, nor by any national Court.
82. Where the parties were unclear is not in the description of the dispute settlement mechanism which they preferred, but in an ancillary point: the precise rules which the institution entrusted with the administration of the arbitration should apply. The parties correctly referred to the Rules which were applicable at the time the Settlement Agreement was executed – the ICSID Additional Facility Arbitration Rules. And when the Settlement Agreement was recorded as an award a couple of months later, they did not take into account that in the meantime Ukraine had ratified the ICSID Convention, that the applicable arbitration rules now were the ICSID Arbitration Rules, and that the rules which they were referring to– the ICSID Additional Facility Rules – were in fact no longer available.
83. The ambiguity elided by the parties when they recorded the Settlement Agreement as an award is purely technical and ancillary, and cannot distort the real intent: that any dispute arising from or in connection with the Settlement Agreement be settled by arbitration administered by ICSID, and governed by the appropriate rules approved by the Centre: before Ukraine had ratified the ICSID Convention, the ICSID Additional Facility Arbitration Rules; thereafter, the ordinary ICSID Arbitration Rules.
B) Jurisdiction With Respect to Claims Based on an Alleged Violation of the BIT
84. By Article VI.3 of the BIT, Ukraine agreed that investment disputes with American investors be submitted to arbitration administered by the Centre. Claimant accepted the offer by filing this arbitration. Respondent objects to the Centre’s jurisdiction and the Tribunal’s competence, but not with regard to the claims in toto, but only with regard to some specific claims.
85. These claims, and the reasons for objecting to jurisdiction, are explained in the following paragraphs.
a) Claims related to tenders for frequencies and broadcasting licences
86. Respondent objects to the Tribunal’s competence with respect to claims arising out of Claimant’s failure in tenders for additional frequencies on the ground that such tenders precede investments and that pre-investment activities fall outside the ICSID Convention. Respondent, however, seems to concede that such pre-investment activities are within the scope of the BIT18.
87. Claimant disagrees19, arguing that Mr. Lemire established investments in radio networks in Ukraine, and that they were harmed by Respondent’s acts and omissions.
88. The Tribunal sides with Claimant.
89. Mr. Lemire’s claim related to tenders for frequencies and broadcasting licences does not refer to, and cannot be considered as, a pre-investment activity. Pre-investment activities are those which precede the actual investment. Whether pre-investment activities merit treaty protection is debatable. But it is irrelevant for the purpose of adjudicating Claimant’s claims in this arbitration, since the Tribunal has already established that Mr. Lemire has made investments in Gala Radio and is Gala’s sole shareholder, and that these investments qualify for protection under the BIT.
90. If an investor claims that his investment, once made, was subsequently denied frequencies and broadcasting licences in violation of Ukraine’s obligations as assumed in the BIT, this claim constitutes an “investment dispute” for the
purposes of Article VI of the BIT; the Centre has jurisdiction and the Tribunal competence to adjudicate it.
91. This conclusion is confirmed by the text of the BIT. The BIT expressly extends protection to “associated activities” which include “access to ...licences, permits and other approvals....” (see Articles I.1 (e) and II.11 (b) of the BIT). Article II.3 (b) moreover provides that “Neither Party shall in any way impair by arbitrary or discriminatory measures the . . . expansion . . . of investments”. The allocation of frequencies was a condition for Claimant’s ability to expand his investment. Claimant’s allegations related to tenders for frequencies and licences thus fall within the scope of the BIT.
Article 25(1) of the ICSID Convention
92. Respondent submits that disputes related to the allocation of new frequencies, while arguably within the ambit of the BIT, do not arise “directly” out of an investment and therefore fall short of the requirements of Article 25(1) of the ICSID Convention. In Respondent’s view, moreover, the narrower definition in the ICSID Convention prevails over the broader definition in the BIT.
93. The Tribunal sees the force in Respondent’s submission that bilateral treaties cannot extend the scope of the multilateral ICSID Convention. However, where the ICSID Convention is open to interpretation, such interpretation should seek compatibility rather than contradiction.
94. The Tribunal must therefore determine whether disputes related to the allocation of frequencies and issuance of broadcasting licences may be considered as “arising directly out of an investment” within the meaning of Article 25(1) of the ICSID Convention. For this purpose, Claimant’s case must be distinguished from the scenario where an applicant intends to enter a market for the first time. In such scenario, the application for frequencies and licences indeed is a step towards facilitating a planned investment, because no investment exists at the time of the allocation process.
95. In the present case, Claimant had already invested in Gala Radio; and Gala was a going concern at the time of the tenders. The applications for additional frequencies and licences formed an integral part of Gala’s business operations. They were intended to defend and expand Gala’s market share against growing competition and thus enhance the sustainability and profitability of Claimant’s investment. Disputes affecting these objectives thus are directly related to Claimant’s investment as controlling shareholder of Gala.
96. In accordance with the purposes of the ICSID Convention and consistent with its wording, the Tribunal therefore affirms its jurisdiction for disputes arising out of Gala’s treatment in tender proceedings for additional frequencies and licences.
97. For this conclusion, it is immaterial whether the receipt of additional frequencies had already been envisaged in Claimant’s initial business plan and whether Respondent had made any commitment to support such a business
plan. It suffices that the additional frequencies were sought by Gala as part of its strategy to defend and/or expand its market share.
98. It is furthermore immaterial whether additional frequencies were sought to extend the reach of Gala’s existing program or to access new audiences with newly designed programs. In either case, the applications were part of Gala’s business strategy to maintain and enhance its position in the Ukrainian market. They formed an integral part of Gala’s overall business operation. The Tribunal’s assumption of competence thus extends to applications by Gala for frequencies with a view to creating new networks for young and mature audiences 20.
b) Claimant has failed to establish a prima facie case of expropriation
99. Respondent has raised the issue that there is an initial threshold that must be crossed by any claimant arguing expropriation: that the facts adduced show at least prima facie the legal requirements of expropriation under international law21. And in Ukraine’s opinion, the very facts alleged by Claimant are not capable of constituting expropriation, and consequently the Tribunal should dismiss this claim for lack of jurisdiction – as did the Tribunal in the Telenor v. Hungary case22.
100. Claimant countered Respondent’s objection arguing that for jurisdictional purposes the prima facie test was in fact easily met. As Claimant explained23, he was presenting claims for:
- expropriation of a beauty salon;
- expropriation of the rights to the Energy trademark; and
- creeping expropriation of the Gala Radio network, a process that yet has
to be completed but which, in Claimant’s submission, appears imminent.
101. In the course of the procedure, Claimant has however dropped the claims for expropriation of the beauty salon and of the Energy trademark24, and the creeping expropriation of the Gala Radio network is subsumed in the allegation of harassment and a request for moral damages (see paragraph 500 below).
102. Respondent’s allegation consequently has become moot.
“By April 15, 2000 the Commission of experts, appointed by the Respondent, shall examine the quality of broadcasting within the radio frequencies band of FM 100-108. Based on the conclusions of the Commission, the Respondent will take necessary, reasonable among others, technical measures to remove the obstacles (if any) for radio broadcasting of Gala Radio on FM 100 in Kiev by June 1, 2000”.
- Clause 13(b):
“By May 15, 2000 the Respondent in person of the State Committee on Communications and Information Technology, agrees to use its best possible efforts to consider in a positive way the application of Gala Radio to provide it with the licences for radio frequencies (provided there are free frequencies bands) in the following cities: [...]
The Claimant can apply for the radio channels in the above cities to the National Council for TV and Radio Broadcasting (hereinafter called “the National Council”) in a due course in accordance with the current legislation after the National Council has been fully personally formed under the existing law of Ukraine. The Respondent, within the limits of its powers, will assist for the positive consideration of this issue at the National Council.
The granting of licences for radio frequencies and broadcasting channels will be made in accordance with the requirements of Ukrainian legislation upon payment of the licence fees”.
104. Claimant alleges that Respondent has defaulted on both sets of obligations. Respondent’s position, on the contrary, is that it has fully complied with these obligations.
105. Before analysing the parties’ allegation, it is necessary to establish the law applicable to the Settlement Agreement (VI.1), and the criteria to be applied in its construction (VI.2).
VI.1. APPLICABLE LAW
106. Clause 30 of the Settlement Agreement provides that the applicable law shall be that determined by “Article 55 of the ICSID Additional Facility Arbitration Rules”. The relevant article in the Additional Facility Rules is in fact Article 54. The mistake is an obvious typographical error, and the Tribunal has no doubt that the common intent of the parties was to refer to Article 54. In accordance with this rule the Tribunal shall apply “(a) the law determined by the conflict of laws rules which it considers applicable and (b) such rules of international law as the Tribunal considers applicable”.
107. Should the Tribunal make use of this authorization to apply not only a municipal law, determined through conflict of laws rules, but also the “rules of international law ... the Tribunal considers applicable”?
108. The Settlement Agreement contains an extensive chapter called “Principles of Interpretation and Implementation of the Agreement”, which includes Clauses 20 through 26. These Clauses were reproduced, with very light linguistic adjustments, from the 1994 UNIDROIT Principles25.
109. It is impossible to place the UNIDROIT Principles – a private codification of civil law, approved by an intergovernmental institution – within the traditional sources of law. The UNIDROIT Principles are neither treaty, nor compilation of usages, nor standard terms of contract. They are in fact a manifestation of transnational law.
110. As the Preamble to the Principles states, they “shall be applied when the parties have agreed that their contract be governed by them” and they “may be applied when the parties have agreed that their contract be governed by ‘general principles of law’, the ‘lex mercatoria’ or the like”.
111. When negotiating the Settlement Agreement, the parties evidently gave thought to the issue of applicable law, and were apparently unable to reach an agreement to apply either Ukrainian or US law. In this situation, what the parties did was to incorporate extensive parts of the UNIDROIT Principles into their agreement, and to include a clause which authorises the Tribunal either to select a municipal legal system, or to apply the rules of law the Tribunal considers appropriate. Given the parties’ implied negative choice of any municipal legal system, the Tribunal finds that the most appropriate decision is to submit the Settlement Agreement to the rules of international law, and within these, to have particular regard to the UNIDROIT Principles.
112. The parties have discussed the principles of interpretation to be applied to the Settlement Agreement. This issue is extensively dealt with in Clauses 20 through 26 of the Agreement.
113. Claimant has emphasized Clauses 20 (“good faith and fair dealing in international business”), 22 (“common intent of the Parties “), 23 (especially reference to “preliminary negotiations”) and 26 (non-performance to include “improper performance or late performance”) as well as Articles 1.7 and 4.1 of the 1994 UNIDROIT Principles. Respondent has referred to Clause 27 of the Settlement Agreement, pursuant to which the Settlement Agreement “constitutes the entire agreement between the Parties on the subject matter hereof and supersedes all prior correspondence, negotiations and understandings between them with respect to the matters covered herein”. Ukraine also relies on Article 5.5 of the 1994 UNIDROIT Principles (“the way
in which the obligation is expressed in the contract”) as the primary factor in determining the scope of an obligation.
114. The Tribunal agrees with Claimant that the “common intent” of the parties determines the scope of contractual obligations. However, the analysis of the common intent must start from the wording of the contract; and it must be presumed that the wording, as understood by a reasonable impartial person, properly reflects the common intent. While this presumption may be rebutted, the party doing so bears the burden of proof that the common intent differs from the wording. “Good faith” and “fairness in the market place” arguments are appropriate for interpreting ambiguous wording and filling lacunae in the text, but they can scarcely prevail against the clear wording of a contractual provision.
115. In accordance with Clause 23 of the Settlement Agreement, preliminary negotiations must – among other factors - be taken into account “for interpreting this Agreement”. But Clause 27 provides that the Settlement Agreement “supersedes all prior correspondence, negotiations and understandings”. Read together, these Clauses require that expectations raised during the negotiations of the Settlement Agreement must be reflected in the text of the Agreement. The text of the Settlement Agreement is the only source of obligations. The fact that an undertaking was discussed, or even orally agreed to during the negotiation phase, is not enough. The obligation must have been recorded in the Settlement Agreement. If the Settlement Agreement does include an obligation, then the scope of the undertaking can be construed in accordance with the expectations of the parties during the negotiation. Without support in the text, expectations nurtured by Claimant do not give rise to contractual obligations of Respondent.
116. Claimant argues that Respondent has breached its obligations under the Settlement Agreement to correct interferences (VI.3.) and to award 11 FM frequencies (VI.4). Each allegation will be examined separately.
VI.3. RESPONDENT’S FAILURE TO CORRECT INTERFERENCES
117. Clause 13(a) of the Settlement Agreement sets out Respondent’s undertaking on this matter as follows:
“By April 15, 2000 the Commission of experts, appointed by the Respondent, shall examine the quality of broadcasting within the radio frequencies band of FM 100-108. Based on the conclusions of the Commission, the Respondent will take necessary, reasonable among others, technical measures to remove the obstacles (if any) for radio broadcasting of Gala Radio on FM 100 in Kiev by June 1, 2000”.
118. Claimant argues that Respondent defaulted on its obligations under the above provision by failing to26:
- appoint a Commission of experts;
- examine the quality of broadcasting on FM 100 between March 20, 2000
(execution of the Settlement Agreement) and April 15, 2000; and
- cure interference with Gala’s FM 100 frequency by June 1, 2000.
119. According to Claimant, such interference “has continued unabated from prior to the time of the Settlement Agreement until today27” (August 2008), and “there was ongoing work between UCRF personnel and engineers from Gala Radio to attempt to cure the problem and Claimant had indeed continually complained about the existing interference on Gala’s 100 FM frequency28”.
120. Respondent counters that the function of the “Commission of Experts” was performed by the State Centre, which under Ukrainian law was in charge of detecting interferences with radio frequencies and was adequately equipped for that task. Between January 1999 and March 2000, the State Centre carried out a series of measurements and tests regarding alleged interference with FM 100; and tests on March 9 and 10, 2000 showed that no interference existed at that time with Gala’s FM 100.
121. According to Respondent, there was no interference with FM 100 between March 20 (the date of the execution of the Settlement Agreement) and June 1, 2000 (the final date for remedial measures against any interference under Clause 13(a))29. Only a total of seven complaints about interferences were received from Claimant, the first on January 30, 2002 and the other between July 2004 and June 2007; no complaint was received in 2000 and 2001. The complaints in January 2002 and thereafter related to incidents that had arisen long after June 2000 and were thus outside the scope of the Settlement Agreement. Claimant consistently cooperated with the State Centre on the matter of interference and, before the institution of the present arbitral proceedings, Claimant never insisted on the appointment of an ad hoc-expert commission for examining interferences with Gala’s FM 100.
122. Claimant has presented three specific breaches by Respondent of its obligations under Clause 13(a):
- the State Centre is not the appropriate “Commission of Experts” (A);
- the interferences were not examined as provided for in the Settlement
Agreement (B); and
- insufficient measures were taken to correct interferences (C).
123. These contentions will be analysed in the following sections.
A) The State Centre as the “Commission of Experts”
124. Clause 13(a) of the Settlement Agreement entrusts the duty to examine the interferences to “the Commission of experts, appointed by the Respondent”. It does not require that the commission be constituted ad hoc.
125. Furthermore, Clause 13(a) clearly states that the Commission be appointed exclusively by Respondent, without participation of Claimant in the appointment process. The provision does not include any requirements for the composition of the commission, such as a representation of several agencies, or the inclusion of independent experts. Respondent was therefore free to entrust the tasks under Clause 13(a) to any group of experts with the technical skills to do the job.
126. Respondent chose the State Centre as the “Commission of Experts” with the duty to perform the examinations required under Clause 13(a). Claimant has not pleaded that the State Centre was unfit to examine the alleged interferences. In fact, the State Centre is the public entity which in accordance with Ukrainian legislation supervises interferences in radio frequencies, and it is adequately equipped to perform this task. To the Tribunal, the choice of the State Centre is appropriate, given the wording of the Settlement Agreement, and reasonable, given its experience and scope of activity.
127. There is one further argument: the record shows that Claimant never challenged the State Centre’s role as expert commission before instituting this arbitration, i.e. for some seven years. To the contrary, he has co-operated with the State Centre and addressed his complaints to it. He has thus acquiesced to the role of the State Centre.
128. The Tribunal can hence not find a violation of Clause 13(a) in Respondent’s assignment of the State Centre as expert commission.
B) Examination of Interferences
129. Pursuant to Clause 13(a), the examination of interferences should have taken place by April 15, 2000. In fact, such examinations were carried out between January 1999 and March 10, 2000, i.e. before execution of the Settlement Agreement on March 20, 2000. Claimant argues that these pre-agreement examinations are not sufficient to comply with the undertaking assumed by Ukraine in Clause 13(a) of the Settlement Agreement.
130. In Respondent’s opinion, the March 2000 tests proved the absence of any interference with Gala’s FM 100, so that any further tests were pointless. The Settlement Agreement had been negotiated since November 1999, and during these negotiations, and as a sign of goodwill, Respondent carried out the examinations required by Clause 13(a), even before the Settlement Agreement was signed and came into force. The Settlement Agreement signed on March 20, 2000 provided that the examination of the quality of broadcasting be performed “by April 15, 2000”. In fact, the examination had thus already been performed, before the signing of the Settlement Agreement.
131. Does this pre-agreement examination imply a default of Clause 13(a)?
132. One begins with the literal wording of the Clause, which requires that the examination be performed “by April 15, 2000”. An examination on March 10, 2000 evidently meets that requirement. But a literal interpretation is just a first approach. In accordance with Clauses 20 and 22 of the Agreement, the guiding principles of any interpretation shall be the common intent of the parties and good faith.
133. Did the common intent of the parties require that the examination be carried out after the signature of the Settlement Agreement? There is a very revealing fact: Claimant never requested that a second examination be performed after the signature of the Settlement Agreement. If he had, good faith would have precluded Respondent from refusing the request. But Mr. Lemire never did so. He accepted, at least tacitly, that the pre-agreement examination complied with the requirements of the Settlement Agreement.
134. Article 1.8 of the 2004 UNIDROIT Principles prohibits inconsistent behaviour:
“A party cannot act inconsistently with an understanding it has caused the other party to have and upon which that other party reasonably has acted in reliance to its detriment”.
135. Mr. Lemire did not require a second examination, and Ukraine reasonably understood that Claimant felt satisfied with the first examination, and consequently did not carry out a second one. Mr. Lemire cannot now reversetrack and argue that Respondent defaulted on its contractual obligations.
C) Adoption of Technical Measures To Remove Interferences
136. Clause 13(a) of the Settlement Agreement obliges Respondent to “take ... technical measures to remove the obstacles (if any) for radio broadcasting of Gala Radio on FM 100 ... by June 1, 2000”. This language clearly limits the scope of the obligation to obstacles that existed before June 1, 2000; obstacles that might have arisen after this date fall outside the scope of the Settlement Agreement. (As to Respondent’s alleged duty to cure such obstacles under the BIT, see paragraph 493 below).
137. To find a breach of the Settlement Agreement, it is therefore crucial that interferences with Gala’s FM 100 preexisted June 1, 2000. Claimant has pleaded this by alleging that interference “has continued unabated from prior to the time of the Settlement Agreement until today30”. Respondent, on the other hand, argues that no interference occurred between March 10 and June 1, 2000 and that any interference which occurred long after June 1, 2000 was isolated and cannot be traced back to a cause pre-existing on June 1, 200031.
138. As evidence for his assertion, Claimant presented a DVD of July 30, 200832 and witness statements on interferences of Messrs. Lemire33 and Denisenko34 (a manager of Gala). The witness statements, while confirming several interferences after June 2000, do not prove that the cause of such interferences pre-dated June 2000.
139. Claimant has submitted seven letters to the State Centre or the National Council complaining about interferences with FM 10035. However, these letters date from January 2002 to June 2007; they do not offer any indication, let alone evidence, that the cause pre-dated June 2000. Respondent, on the other hand, has submitted some eighty documents with test results showing that at different times after June 2000, there was no interference with Gala’s FM 10036.
140. If interferences with FM 100 had been observed between March and June 2000, Claimant could at that time have requested the examinations and remedial measures foreseen in Clause 13(a) of the Settlement Agreement. Yet, there is no record of any complaint or other action of Claimant in this respect during the period March 2000 through January 30, 2002.
141. On the basis of the above record and in light of the language of Clause 13(a), the Tribunal concludes that Claimant has failed to prove a violation of the Settlement Agreement in this respect.
VI.4. ALLOCATION OF FREQUENCIES
142. The second allegation presented by Claimant refers to the granting of frequencies to Gala. Under Clause 13(b) of the Settlement Agreement, Respondent assumed several obligations with respect to the allocation of radio frequencies and broadcasting licences to Gala in 11 cities. The Clause reads as follows:
“By May 15, 2000 the Respondent, in the person of the State Committee on Communications and Information Technology, agrees to use its best possible efforts to consider in a positive way the application of Gala Radio to provide it with the licences for radio frequencies (provided there are free frequencies bands) in the following cities: Kharkiv, Lviv, Donetsk, Zaporizhya, Lugansk, Simpheropol, Dniepropetrovsk, Odessa, Vynnitsa, Kryviy Rog, Uzhgorod.
The Claimant can apply for the radio channels in the above cities to the National Council for TV and Radio Broadcasting (hereinafter called “the National Council”) in a due course in accordance with the current
legislation after the National Council has been fully personally formed under the existing law of Ukraine. The Respondent, within the limits of its powers, will assist for the positive consideration of this issue at the National Council.
The granting of licences for radio frequencies and broadcasting channels will be made in accordance with the requirements of Ukrainian legislation upon payment of the licence fees”.
Summary of facts
143. Under Ukrainian law, broadcasting requires both (i) a “radio frequency licence” from the State Committee on Communications and Information Technology and (ii) a “broadcasting licence” from the National Council. The National Council is a regulatory body established directly by law37, independent of the Government and reporting to both the President and the Parliament of Ukraine.
Delivery of the licences required
144. Claimant obtained all the licences mentioned in Clause 13(b) by October 9, 2002, i.e. within a period of some thirty months from the date of the Settlement Agreement.
145. The 11 radio frequency licences from the State Committee were obtained relatively expeditiously – two of them prior to the Settlement Agreement, four on April 14, 2000, another four on June 13, 2000, and the last on September 1, 2000.
146. The broadcasting licences suffered longer delays: two were received prior to the Settlement Agreement, seven on September 18, 2001, one on March 26, 2002, and the last on October 9, 2002.
147. Two broadcasting licences had already been awarded by the National Council prior to the Settlement Agreement. Thereafter, the National Council was temporarily inoperative. It was reconstituted in June 2000. After building the necessary administrative capacities, it resumed issuance of broadcasting licences in January 2001. Under the Ukrainian Law on Television and Radio Broadcasting, such licences were awarded on the basis of competitive tenders.
148. At its first meeting after its reconstitution on January 1, 2001, the National Council focused on issuing broadcasting licences to companies which were broadcasting on frequencies allocated to them by the State Committee during the time when the National Council was inoperative. Claimant was excluded from this tender. Shortly thereafter, on March 22, 2001, the National Council announced a tender, including eight of the nine frequencies still expected by Claimant under Clause 13(b) of the Settlement Agreement. The broadcasting licences for seven of these frequencies were granted to Gala on September 18,
2001. In March and October 2002, Claimant received the last two outstanding broadcasting licences.
149. Four of the 11 frequencies allocated to Claimant under the Settlement Agreement were subsequently contested by the Armed Forces of Ukraine. These challenges were eventually resolved in 2008.
Violations asserted by Claimant
150. Claimant alleges seven violations of Clause 13(b) of the Settlement Agreement:
- late issuance of frequency licences by the State Committee (A);
- late constitution of the National Council (B);
- award of licences to other companies at National Council’s first meeting in January 2001 (C);
- failure of National Council promptly to acknowledge the Settlement Agreement as binding (D);
- late award of broadcasting licences by National Council (E);
- allocation of low powered frequencies (F); and
- allocation of four frequencies which were contested by the Armed Forces of Ukraine (G).
151. Respondent denies all of the alleged violations.
152. Each alleged breach will be analysed seriatim.
A) Issuance of Radio Frequencies by the State Committee
153. Under Clause 13(b), paragraph 1 of the Settlement Agreement, “by May 15, 2000 the Respondent, in the person of the State [Committee] agrees to use its best possible efforts to consider in a positive way the application of Gala Radio to provide it with the licences for  radio frequencies [...]”. In accordance with the express terms of this contractual provision, Respondent undertook only to apply its best efforts, so that the applications from Gala to the State Committee would be granted by May 15, 2000 – not to achieve that result.
154.Article 5.1.4 of the 2004 UNIDROIT Principles defines the duty of best efforts in the following terms:
“[...] To the extent that an obligation of a party involves a duty of best efforts in the performance of an activity, that party is bound to make such efforts as would be made by a reasonable person of the same kind in the same circumstances”.
155. For Claimant to establish a violation of this best efforts obligation, it is not sufficient to prove that by May 15, 2000 the 11 radio frequency licences had not been granted – the required test is that he produce evidence showing that
Ukraine has failed to make such efforts as would be made by a reasonable government in the same circumstances.
156. What is the factual situation?
157. In accordance with the Settlement Agreement Ukraine had to use its best efforts to grant the frequency licences within two months of signature (signature was on March 20, and the deadline was May 15). Of the 11 licences envisaged, six were granted by the State Committee before the May 15, 2000 deadline, another four by June 13, 2000 (i.e. within one month of May 15) and the last one on September 1, 2000 (within 2 1⁄2 months of the deadline).
158. Ukraine’s efforts to induce its State Committee to grant the licences resulted in 11 of the 12 licences being issued within one month of the deadline. One licence was then granted with 2 1⁄2 months delay.
159. In the Tribunal’s opinion, these delays do not amount to a violation of Ukraine’s best efforts obligation. There is often a gap between political decision and bureaucratic compliance. Paragraph 3 of Clause 13(b) explicitly requires that “the granting of licences ... will be made in accordance with the requirements of Ukrainian legislation”. There is no evidence that Ukraine abated its pressure on the State Committee to perform. The State Committee issued the licences within time limits which are not unreasonable in the context of Ukrainian administrative practices.
B) Late Constitution of the National Council
160. It is undisputed that the National Council – which had been founded in 1993 – became inoperative in March 1999, because its members were not appointed. It remained inoperative until it was reconstituted in June 2000.
161. Claimant argues that the time period while the National Council was inoperative was abnormal and could not legitimately be expected38. This constitutes, in Claimant’s opinion, a violation of the Settlement Agreement, and specifically of Respondent’s obligation of good faith and fair dealing (Clause 20 of the Settlement Agreement).
162. The Tribunal is unconvinced.
163. The Settlement Agreement lacks any obligation to reconstitute the National Council, nor even an indication of when this could happen. To the contrary, Clause 13(b), paragraph 2, specifically states that applications for broadcasting licences must be made “after the National Council has been fully personally formed”, without referring to any time frame – an explicit acceptance by Claimant that he was aware that the National Council was not operative at the time, and that the political decision to designate new members had to be implemented before the granting of the licences.
164. The National Council was in fact reconstituted in June 2000, three months after the signature of the Settlement Agreement. Nothing in the Settlement Agreement legitimizes an expectation on the part of Claimant of a faster rehabilitation of the National Council. The absence of any time frame, and the explicit warning in Clause 13(b), paragraph 2, that Gala’s applications will have to wait for the reconstitution of the National Council, point to the contrary.
C) Failure of National Council To Promptly Acknowledge the Settlement Agreement as Binding
165. When the National Council was eventually reconstituted in June 2000, Claimant immediately made numerous attempts to contact its members and to establish the process for obtaining the frequencies. In Claimant’s opinion, the National Council’s lack of reaction violated Ukraine’s duties to act in good faith (Clause 20) and to cooperate (Clause 24)39.
166. Claimant’s argument is not totally accurate.
167. It is undisputed that on March 20, 2001 the National Council adopted its Resolution No. 36 in which it decided to “recognize priority position of CJSC Radio Company Gala” in the allocation of broadcasting licences for the cities listed in Clause 13(b). It is immaterial whether the National Council’s decision thus acknowledged a legal obligation, or whether it followed political considerations. In any case, it implies an acknowledgement of the Settlement Agreement and it granted Claimant the best position that he could expect.
168. Was this acknowledgement by the National Council unduly late?
169. The National Council had just started in January 2001 the process of organizing tenders for broadcasting licences. Given the complexities surrounding the Gala decision (reconciling “positive consideration” of Claimant’s interests under the Settlement Agreement with the independence of the National Council and competing interests of other applicants), the March 20, 2001 decision cannot be considered as unduly late.
D) Award of Licences to Other Companies at National Council’s First Meeting in January 2001
170. The Settlement Agreement regulates the issuance of broadcasting licences by the National Council in subparagraphs II and III of Clause 13(b) (reproduced above). These provisions create an obligation by Ukraine to “assist [Claimant] for the positive consideration of this issue [the awarding of licences] by the National Council”. This obligation is not absolute, but subject to important caveats:
- first of all, there is no time limit for the awarding of the licences (the May 15, 2000 deadline only works for the licences from the State Committee);
- second, Ukraine’s obligation to assist is qualified with the words “within the limits of [Respondent’s] power” – thus acknowledging that, in accordance with the law, the National Council is an independent public entity;
- third, Claimant could apply “in a due course ... after the National Council has been fully personally formed”;
- fourth, application and granting of the licences were to be “in accordance with the requirements of Ukrainian legislation”; Clause 16 specifically added that “the Agreement shall not be treated as a document granting any rights, benefits or privileges which are different or additional to the ordinary rights and obligations of a foreign investor in Ukraine in accordance with the Ukrainian laws and international treaties to which Ukraine is a party”.
171. The National Council held its first tender in January 2001, i.e. some six months after its reconstitution. This time was used by the National Council to build the logistics and administrative capacities for proper tender procedures. No fault can be found in the fact that the National Council gave first priority to creating the enabling logistics and administrative capacities for such proceedings.
172. In its first tender in January 2001, the National Council did not include any of the frequencies for which Gala had received frequencies from the State Committee. Rather, the National Council focused only on frequencies on which radio stations had been broadcasting without a valid broadcasting licence at that time.
173. Claimant submits that the organization of this first tender, from which Gala was excluded, implied a breach of the Settlement Agreement on two different counts:
- first, the National Council should have taken the opportunity of the first meeting to act on the licences for Gala; and
- second, the very existence of the first tender proves that radio stations existed which were broadcasting only with a licence from the State Committee, but without a licence from the National Council; since Gala already had licences from the State Committee, it should have been authorized to broadcast straight away.
174. The Tribunal disagrees with Claimant’s first argument. Nothing in the Settlement Agreement implies that the National Council was bound to give first priority to Claimant. The National Council decided first to regularize broadcasting outside the law, which had developed during the time when it had been inoperative. This prioritization cannot be challenged under the Settlement Agreement. (As to the claim for violation of the Fair and Equitable Treatment (“FET”) standard defined in the BIT, see paragraph 410 below).
175. The second argument merits a more in-depth analysis. Respondent itself has acknowledged that during the period when the National Council became inoperative, “the State [Committee] became the central authority of the executive power, administering communications and radio frequencies of Ukraine and it developed the practice of granting licences for use of radio frequencies before the tenders for frequencies were announced40”. What happened was illegal: under Ukrainian law, a radio station could not start broadcasting until it had obtained the necessary authorization from the National Council. Notwithstanding the legal requirements, during the 15- month period when the National Council was inoperative, certain Ukrainian companies were de facto awarded frequencies and authorized to broadcast, although they had only received the authorization from the State Committee.
176. Given this factual situation, Claimant argues that it could and should have been awarded frequencies and authorized to broadcast, once it had obtained the authorization from the State Committee in the summer of 2000, without having to wait for the reconstitution of the National Council and its formal tender procedure. And that, by not having done so, Ukraine violated its obligations under the Settlement Agreement.
177. After due consideration and some hesitation, the Tribunal rejects Claimant’s argument. In the Settlement Agreement, Ukraine could not undertake to perform acts contrary to Ukrainian law nor to authorise Claimant to operate new frequencies without the licence from the National Council; this would have violated the LTR. And Clause 13(b) specifically refers to the need for the National Council to be reconstituted and to issue the necessary licences.
178. But while it was agreed between Claimant and Respondent to act as required by Ukrainian law, Ukraine de facto authorized domestic radio companies to start broadcasting without the necessary authorizations. This situation was then cured in the first tender organized by the National Council after its reconstitution. While these actions do not constitute a violation of the Settlement Agreement, their status under the BIT will be analysed as such below at paragraph 410.
E) Late Award of Broadcasting Licences by National Council
179. The facts regarding the issuance of the broadcasting licences by National Council can be summarized as follows.
180. On March 1, 2000 (i.e. before the Settlement Agreement had actually been signed), the Minister of Economy of Ukraine wrote a proposal to the Cabinet of Ministers in order to “entrust the [State Committee] and the [National Council] to allocate to CJSC RC “Gala” the following frequency assignments ...41”. The frequencies referred to were five of those mentioned in the Settlement Agreement. Respondent has not provided any similar proposal for
the remaining six frequencies promised in the Settlement Agreement, nor has Respondent submitted any decision from the Cabinet of Ministers approving the proposal of the Minister of Economy.
181. The record shows no further documents relating to the National Council, before a letter dated February 22, 2001 sent by Mr. Lemire to the Ministry of the Economy42. In the meantime, the State Committee had issued its licences, and the National Council had been reconstituted. Mr. Lemire’s letter starts by stating that “we have practically reached finalization of performance of the terms of the Dispute settlement Agreement”. This recital is important, because it shows that, at that moment, Claimant was convinced that Ukraine had not breached its obligations. Mr. Lemire then goes on, stating that a “serious problem” has arisen with the National Council because “now this authority says that our frequencies are subject to a tender that will begin in some weeks”. He adds “we understand that such situation has arisen due to the fact that the National Council is not properly informed” and asks the Ministry of the Economy to intervene.
182. The record does not show the actions adopted by the Ministry of the Economy, but some advice must have been transmitted from the Ministry of the Economy because it is a fact that three weeks later, on March 20, 2001, the National Council decided to “recognize priority position of CJSC Radio Company Gala” in the allocation of broadcasting licences for the cities listed in Clause 13(b)43.
183. Claimant has argued that in a meeting on March 19, 2001 the Chairman of the National Council, Mr. Kholod, did not consider the Settlement Agreement as binding, stating that the National Council is a “constitutional independent body, not subordinated to the government” and “that the government cannot adopt any act influencing the development of TV/radio broadcasting in Ukraine”. Claimant has produced a transcript of the meeting, which Mr. Lemire prepared at that time44. Mr. Kholod’s statement has not been challenged and the Tribunal is inclined to accept it as true. But what is undeniable is that one day after the meeting, the National Council approved an official decision recognizing Gala’s priority position to receive the frequencies promised in the Settlement Agreement.
184. Not only that, on March 22, 2001, i.e. only two days after this decision in favour of Gala, the National Council announced a new tender for frequencies, which included eight of the 11 frequencies mentioned in Clause 13(b) of the Settlement Agreement. In meetings in June and July 2001, the National Council decided to allocate seven of these frequencies to Gala; and the seven broadcasting licences were issued on September 18, 2001. Two other licences had already been issued on October 9, 1997 (long before the Settlement Agreement)45. Two remained pending – those in Dniepropetrovsk and Lviv - and were eventually issued on March 26 and October 9, 2002, respectively.
185. The frequency in Dniepropetrovsk was put to tender on July 26, 2001, but because of accumulated workload of the National Council, it was not approved until March 2002. As regards Lviv, the frequency under discussion had already been granted to other radio companies, whose rights had first to be cancelled, and this justifies the delay.
186. Summing up, in the end the National Council eventually granted to Gala all 11 broadcasting licences mentioned in Clause 13(b). Two had been issued before the Settlement Agreement, seven were issued in September 2001, one in March 2002 and the final one in October 2002.
187. Claimant alleges that this late performance of the Settlement Agreement is tantamount to non-performance, and asks the Tribunal to declare that Ukraine has breached the terms of the Settlement Agreement.
Ukraine’s alleged breach
188. The Tribunal acknowledges that there were delays in the issuance of the broadcasting licences by the National Council. But this is not really the point under discussion. What is relevant is whether Ukraine has breached the terms of the Settlement Agreement and for this, it is paramount to look at the actual text of what was agreed.
189. As noted above, Clause 13(b) of the Settlement Agreement does not establish obligations of the National Council, nor does it create a deadline for the National Council to issue its decisions. It simply states Ukraine’s commitment to “assist for the positive consideration of this issue at the National Council”.
190. The difference between Clause 13(a) and Clause 13(b) is striking. The first Clause creates a best efforts obligation to issue the State Committee’s authorization within an agreed time frame. It proves that when the parties wanted to establish obligations and time limits, they were perfectly capable of doing so in clear and unambiguous terms. Clause 13(b), however, lacks any specific time frame, and only refers to Ukraine’s commitment to “assist” Mr. Lemire in his endeavours vis-à-vis the National Council.
191. Did Ukraine comply with its part of the bargain, assisting Claimant “within the limits of its power” and “in accordance with the requirements of Ukrainian legislation” in the obtaining of the licences?
192. The record suggests that the Ministry of the Economy’s assistance was helpful indeed. Mr. Lemire wrote for the first time complaining on February 22, 2001. The National Council’s initial attitude had been rather negative, as proven by the meeting with its Chairman. This was overcome, undoubtedly because of advice from the Government. On March 19, 2001 – one month after Mr. Lemire’s first complaint – the National Council reversed its opinion and acknowledged Claimant’s rights to the licences. Two days later, the first
tender was launched and nine of the 11 frequencies were duly awarded by September 2001 – not bad a record for an agency which had been recently reconstituted. The two other licences were delayed – one just because of bureaucratic delays, the other because of underlying problems with the entitlement to the frequency.
193. The facts proven in this arbitration do not substantiate Claimant’s claim that Ukraine failed to assist Claimant in his endeavour to obtain the broadcasting licences required from the National Council. In hindsight, it is unfortunate for Claimant that he only bargained for such a weak commitment from the counterparty. But the terms agreed are lex contractus, and it is those terms which the Tribunal must apply.
F) Allocation of Low-Powered Frequencies
194. The power of frequencies allocated to Gala ranged from 0.1 to 4kW with an average of 1,17 kW. On all its frequencies combined, Gala reaches some 22% of the population of Ukraine.
195. Claimant complains that the power of the frequencies allocated to Gala under the Settlement Agreement was far below his legitimate expectations and failed to meet his business purposes46. He alleges that in the negotiations of the Settlement Agreement as well as in pre-settlement communications with the National Council and other agencies of Respondent, much higher powers had been envisaged. In this respect, Claimant refers to correspondence between the National Council and State Inspection of Electric Communication of July 18 and October 18, 1995 which suggested the availability of much higher powered frequencies for Claimant47.
196. The Settlement Agreement, in any case, is silent on the power of frequencies sought by Claimant. Nor does it include any reference to Claimant’s business purposes – e.g. his desire to cover the whole territory of Ukraine - from which a minimum power could be inferred. While the preliminary negotiations between the parties and the purpose of the Settlement Agreement are to be taken into account in determining the common intent of the parties (per Clauses 23(a) and (d) of the Settlement Agreement), Clause 27 provides that the Settlement Agreement “constitutes the entire agreement between the Parties on the subject matter hereof and supersedes all prior correspondence, negotiations and understandings...”. This disqualifies prior correspondence and negotiations as a basis of obligations deliberately not mentioned in the Settlement Agreement. Claimant can therefore not derive a claim from pre- Settlement Agreement correspondence and negotiations.
197. Furthermore, the power of the frequencies awarded to Claimant was not abnormally low. Claimant has acknowledged that the average power of the frequencies allocated to him matched that of frequencies allocated to major competitors48. If Mr. Lemire felt that he was entitled to higher powered
frequencies than his competitors, he would have had to include such entitlement in the Settlement Agreement. That has not happened.
198. Finally, Claimant learned the actual power of the frequencies allocated to him by September 1, 2000, when Gala received the licences from the State Committee. He thus knew the power of the frequencies on September 20, 2000 when the Settlement Agreement was recorded as the 2000 Award. Claimant did not seek any amendment of the Settlement Agreement, nor did he reserve his position.
199. The power of the frequencies was specified in the announcement of the tenders by the National Council. Claimant applied for these frequencies without complaining about the power. Thus, even if Claimant had been entitled to higher powered frequencies (which in the Tribunal’s opinion does not derive from the Settlement Agreement), he acquiesced with the power of the allocated frequencies. To claim now that this lack of power gives rise to a breach of the Settlement Agreement denotes inconsistent behaviour, contrary to Article 1.8 of the 2004 UNIDROIT Principles.
G) Allocation of Four Frequencies Which Were Contested by the Armed Forces of Ukraine
200. Claimant finally complains that four of the frequencies allocated to him were contested by the Armed Forces of Ukraine49. In Claimant’s opinion, Ukraine failed to de-conflict with the Army the frequencies awarded to Gala.
201. Respondent counters that the contests were prompted by Gala itself, which decided to change the location of its radio transmitters in three cities, by a distance of between 4.6 and 1.87 km, and increased the height of its antenna from 55 to 70 m in another50. These changes require the approval of the State Centre, which issues such authorization only with the approval by the General Headquarters of the Armed Forces. What happened in these four cases is that the General Headquarters of the Armed Forces refused to approve the changes. Refusal however did not mean that the frequencies became contested – Gala Radio in fact continued to broadcast on them. Gala was required only to change the locations and/or parameters of the transmitters following the recommendations of the State Centre, and obtained all required permits in 2008.
202. In the Tribunal’s opinion, the difficulties incurred by Claimant with regard to these four frequencies do not constitute a breach of Respondent’s obligations under the Settlement Agreement.
203. Under Clause 13(b) paragraph 2 Ukraine is bound to “assist” Claimant “within the limits of its powers” to obtain the authorization of the National Council. There is no express reference to the Armed Forces. But in an interpretation based on good faith, and bearing in mind that Clause 24 creates an obligation for each party to cooperate with the other, the Tribunal is prepared to admit
that the obligation to assist should be extended to encompass not only the National Council, but also any other institution controlled by Ukraine. Consequently, in accordance with the Settlement Agreement, Respondent was under an obligation to assist Mr. Lemire in obtaining or maintaining the necessary authorizations from the Armed Forces.
204. Did Respondent fail to do so?
205. Claimant has argued that a senior manager of the State Centre admitted that Ukraine failed to de-conflict the four frequencies and apologized for the mistake by stating that “unfortunately we failed to coordinate with military department51”. An analysis of the evidence submitted by Claimant to prove this allegation does not support the conclusion. Claimant has presented a summary, prepared by his own officers, of a meeting on February 21, 2005 with Mr. Zhebrodski, a senior manager of the State Centre52. The exact exchange of words which, in accordance with that summary, took place between the officer of Gala and Mr. Zhebrodski is the following:
“[...] Dima: Also, we have had interferences for the past few months and we have uncertain situation with Donetsk...
Zhebrodski: I am going to call military department in Donetsk, what happened is back in 2000 we had a straight order to give you licence in Donetsk (107,2 fm) and unfortunately we failed to coordinate it with military dpt. Are they complaining?
Dima: No complaints so far, we have been working there for quite awhile.
Zhebrodski: Good. I am sure we can sort it out at least I am gonna try [...]”.
206. The exchange of words between the officer of Gala and the senior manager of the Centre does not prove a breach by Ukraine of its obligation to assist Claimant. Quite to the contrary. What it shows is that, up to that moment (2005), the Army had not complained about the changes in Donetsk, that Gala was broadcasting there and that the State Centre was offering its help if a problem with the Army eventually arises. The problem afterwards materialized, and it was then, it appears, satisfactorily settled by 2008.
207. Summing up, the Tribunal is of the opinion that the problems which Gala encountered with the Army regarding four frequencies, which were eventually solved, do not amount to a default by Ukraine of its obligations under the Settlement Agreement.
208. For the reasons explained above, the Tribunal concludes that, although Claimant encountered difficulties and delays in the obtaining of the frequencies expected under the Settlement Agreement, and although the end
result may not have satisfied all the expectations harboured by Claimant, Respondent did not breach any of the obligations it had assumed in that Agreement.
VII. ALLEGED VIOLATIONS OF THE BIT
209. The Tribunal will first summarize Claimant’s general allegations (VII.1), then Respondent’s (VII.2), before analyzing and deciding the claims:
- in first instance, the Tribunal will study the alleged violation of the FET standard in the awarding of frequencies, and will effectively come to the conclusion that certain actions of Respondent are not compatible with this standard (VII.3);
- a second section will be devoted to the alleged continuous harassment of Claimant, and his request for moral damages (VII.4);
- in the next sections the Tribunal will reject Claimant’s additional allegations, regarding an alleged violation of the FET standard by other actions performed by Ukraine (VII.5) and the applicability of the “Umbrella Clause” (VII.6); and
- the Tribunal will then decide whether the 2006 amendment of the LTR and in particular the 50% Ukrainian music requirement amounts to a violation of the BIT (VII.7), and finally devote a short section to other allegations submitted by Claimant (VII.8).
VII.1. CLAIMANT’S GENERAL ALLEGATIONS
210. Claimant’s starting point is that, after having made the investment in Gala Radio, he had a legitimate expectation that he would be authorized to increase the size and audience of his radio company, and to establish three radio networks in Ukraine aimed at three different age groups. This plan had been discussed with the National Council members and encouraged by them.
211. As evidence of his expectations, Claimant especially relies on three documents, namely:
- a letter of July 18, 1995 from the Chairman of the National Council to the Chairman of the State Inspection on Electric Communications. This letter advises that “the National Council...considers possibility to issue a licence to radio company GALA” and requests the State Inspection “to consider a possibility to give the company the frequency channels” in 13 cities “up to” a specified power53;
- a letter from the Chairman of the State Inspection on Electronic Communications to Claimant of October 18, 1995 informing of the availability of high power frequencies in the cities concerned and advising that the requisite permissions would be issued after Gala had received the pertinent broadcasting licences from the National Council54; and
- a “Plan of Measures” negotiated between Claimant and the National Council in 1997 envisaging the allocation of frequencies to set up the Gala networks.
212. The main thrust of Claimant’s submission is that his legitimate expectations were thwarted by Ukraine’s actions in violation of the BIT. Claimant divides his allegations regarding these violations into four different sections55.
213. (i): In the first section, Claimant argues that Ukraine has violated the FET standard applicable to protected investments, and the prohibition of arbitrary and discriminatory measures, established in Article II.3. (a) and (b) of the BIT. Respondent’s specific actions, which have resulted in violation, can be divided in two groups:
- denial by the National Council of nearly 300 applications for frequencies submitted by Gala or Energy (a company also owned by Claimant), and illegal award of frequencies to companies other than Gala, during the period when the National Council was not operative; and
- other actions performed by Respondent, like failure to correct the interferences on Gala’s 100 FM frequency, failure of the National Council to acknowledge its obligations under the Settlement Agreement; allocation of low powered frequencies to Gala; allocation of frequencies contested by the Army.
214. Of the alleged violations, the first one, the systematic denial of applications, is by far the most important one. Claimant argues that the Ukrainian legal procedure for allocation of frequencies is in itself unfair, inequitable, discriminatory and arbitrary. The procedure was moreover applied by the National Council in an unfair, inequitable and discriminatory fashion. It was tainted by interferences from other political organs of Respondent, including the President of Ukraine. The National Council’s aim was to preclude Gala from establishing multiple networks with national coverage. And it was successful in achieving this.
215. Claimant specifically refers to six tenders for frequencies, from 2002 through 2008, which in his view demonstrate Respondent’s practice in breach of the BIT.
216. (ii): In the second section, Claimant asserts that Respondent is submitting Gala to continuous harassment, in violation of Article II.3 (a) of the BIT. Respondent attempted to rely on the “founder” principle to deny Gala Radio an extension of its licence beyond the expiry date of September 18, 2008. Furthermore, there have been concerted efforts by the National Council to force Claimant out of the radio industry through ongoing actions of harassment and the issuance of unlawful warnings.
217. Claimant acknowledges that Respondent, after a few years of costly and lengthy litigation, ultimately cancelled the warnings, renewed the broadcasting
licence and applied the correct fee. But this eventual acceptance of Claimant’s rights does not provide Ukraine with immunity from paying damages. Claimant alleges that Respondent’s harassment since the Award has inflicted significant moral harm for which Respondent should be held liable in an amount of three million USD.
218. (iii): In the third section, Claimant submits that the 50% local music requirement in the LTR implies a violation of Article II.6 of the BIT, namely of the prohibition to “impose performance requirements ... which specify that goods and services must be purchased locally, or which impose any other similar requirements”. Respondent has tried to justify the local music requirement on public policy grounds. In Claimant’s opinion, the argument can at best justify an expropriation subject to the payment of the corresponding damages. The abnormal high level of the requirement and its abrupt incorporation caused Claimant to suffer loss for 2008 of advertising revenue, and such loss will continue until the expiration of the licence in 2015.
219. (iv): Finally, Claimant submits that, as a consequence of the Umbrella Clause contained in Article II.3 (c) of the BIT, all the contractual breaches of the Settlement Agreement have also been transformed into violations of the BIT, which entitle Claimant to be compensated for the damages suffered.
VII.2. RESPONDENT’S GENERAL ALLEGATIONS
220. Respondent submits that its legal procedures for tenders involving radio frequencies are consistent with the requirements of the BIT; the implementation of these procedures also conforms with the BIT requirements.
221. The procedures for allocation of frequencies meet the standards of due process and procedural fairness, including the right to be heard. Frequencies are awarded by means of tenders announced in the press; prospective participants may submit their applications within one month of the notice. Such applications must include an information package. Thereafter, the National Council reviews the requests applying statutory criteria, and especially valuing the programming content proposed by each applicant. The meetings of the National Council are public, and the National Council holds briefings with representatives of the radio industry. A frequency is awarded to a radio company if the application receives at least five of the votes of the eight members of the National Council. All decisions of the National Council are published on the National Council’s official website. Finally, the decisions of the National Council are subject to judicial review.
222. The National Council is an independent body. Each of its members exercises his or her judgment without external pressure, and Claimant’s allegations of corruption and undue pressure are unsupported by any evidence. Furthermore, the LTR was amended in 2006, and since then members may be removed from their functions only by a joint decision from the Parliament and the President. Claimant’s allegations of political influence were not corroborated during the hearing. No member of the National Council has been impeached, no one
associated with the National Council has been prosecuted for corruption, and no one has been convicted of wrongdoing.
223. Gala Radio was treated in a fair and equitable manner and was not discriminated against during the tenders. Claimant lost the four tenders which were analyzed during the hearing for objective reasons. There is no proof of unfair, inequitable, arbitrary and discriminatory treatment against Claimant.
224. Respondent also addresses Claimant’s allegations regarding harassment. In Respondent’s opinion, the procedure and practice of monitoring radio companies is consistent with Ukraine’s obligations under the BIT. The results of any inspection are reviewed in a meeting of the National Council, where its members listen to a presentation of one of them, review a set of documents, listen to oral explanations from the representative of the radio company, and only thereafter take a decision.
225. All radio stations are continuously monitored. Those inspected and sanctioned are publicly mentioned in the Annual Report of the National Council. None of Gala’s inspections was conducted in an unfair, inequitable or abusive manner. The warning issued against Gala on October 5, 2005 sanctioned Gala’s refusal to produce documents and materials required for the inspection. This warning was successfully challenged before the Ukrainian Courts. On November 23, 2005 a second warning was issued for violating the quota of broadcasting in Ukrainian, the law on advertising, and the terms of its licence. The second warning was also cancelled by the Kiev Court. In May 2006 a third inspection was carried out. Since Gala had significantly improved its business activities, compared to previous periods, the National Council decided not to issue a third warning. There were subsequent inspections in March and June 2008, but they did not lead to any sanction, although Gala Radio admitted that by accident it had committed violations of the election legislation.
226. Other radio companies have also been inspected and received warnings - some of them three, and the National Council has started court proceedings in five cases in order to cancel the broadcasting licence.
227. The 2006 LTR had been debated by members of Parliament for more than three years, and its purpose was to make Ukrainian Law comply with European requirements. In Respondent’s opinion, the LTR must be considered as part of the State’s legitimate right to organize broadcasting. The 50% Ukrainian music requirement, which requires that either the author, the composer and/or the performer of 50% of the music broadcast be Ukrainian, was neither abrupt, nor excessive nor unfair. Gala Radio signed in August 2006 a Memorandum proposed by the National Council for the progressive implementation of the 50% requirement, and Gala Radio and all its competitors are presently in compliance. There is no link between the 50% Ukrainian music quota and the decline in Gala Radio’s ratings.
228. Respondent finally makes three additional allegations:
- Claimant did not behave as a diligent businessman;
- Gala Radio did not take advantage of available remedies; and - Claimant abused his position as a foreign investor.
VII.3. CLAIMANT’S FIRST ALLEGATION: THE VIOLATION OF THE FET STANDARD IN THE AWARDING OF FREQUENCIES
229. The main thrust of Claimant’s allegation is that Ukraine has failed to provide fair and equitable treatment to its investment in Gala, and subjected it to arbitrary or discriminatory measures. Ukraine rejects both allegations. The Tribunal will analyze this dispute – which is the basic issue submitted to its adjudication - in a short introduction and three separate sections:
- the first devoted to the concept of FET standard, as defined in the BIT (VII.3.2);
- the second to the procedures for awarding frequencies under Ukrainian law (VII.3.3); and
- the third to the facts surrounding Gala’s applications for frequencies (VII.3.4).
230. Claimant, Mr. Joseph Charles Lemire, is an American citizen residing in Ukraine. By profession, Mr. Lemire is a lawyer, although he also has experience in accounting. He is the owner and chairman of Gala, a closed joint stock company constituted in 1995 under the laws of Ukraine. His participation in Gala is held through another Ukrainian company, Mirakom. He initially purchased 30% of Gala, but since 2006 he indirectly owns 100% of the company56. The proven amount of his investment is 236,000 USD. There is circumstantial evidence that Mr. Lemire has made payments with his own monies on behalf of Gala. But the record of the actual amounts paid has not been produced, and Mr.Lemire’s statement that the total exceeds 5,000,000 USD57has not been locked up with hard evidence. The personal assets of Mr. Lemire and those of Gala appear to some extent commingled58.
231. Gala is a company which since 1995 operates a contemporary music radio station. It holds a licence to broadcast on two frequencies in Kyiv and on 12 other frequencies in nine areas of Ukraine. Gala Radio applied for and received a licence recognizing its status as a national broadcaster on October 17, 200759. In the late 1990’s, Gala ranked amongst the most popular radio stations in Ukraine. Claimant acknowledges that its market share has declined – and attributes this decline to Respondent’s actions.
232. Gala has been a reasonably successful company. Its revenues have gone up from 600,000 USD in the year 2000 to 1.369,000 USD in the year 2007 (with a profit of 121,000 USD)60. As Respondent’s expert witness says, “while being small business in a competitive market and risky environment, it is obvious that Gala has become a successful national radio station, and as investor, Joseph Charles Lemire has achieved reasonably good results and revenue growth61”.
233. On a qualitative basis, Claimant has alleged and Respondent has accepted that Gala won the Radio Company of the year award for brand recognition in 1999, won an award for the best radio program on Olympic News from the Golden Pen competition organized by journalists and that four of the top 10 disk jockeys in Ukraine work for Gala, including the well-known DJ Pascha (the alias of Mr. Pavel Shylko), who testified in this arbitration62.
Mr. Lemire’s relationship with the National Council
234. Respondent has insisted, throughout the procedure, that Mr. Lemire abused his position as foreign investor and harassed the National Council with rude, disrespectful and to some extent even aggressive conduct63. Respondent argues that Mr. Lemire has sent scores of hostile letters to the National Council, copying the former President of Ukraine, the current President of Ukraine, the Vice President of the United States, the US Ambassador and others. He also video-recorded meetings of the National Council.
235. The relation between Mr. Lemire and the National Council was not always tense. At the outset of the investment, in 1995, the relationship seems to have been friendly, and the National Council supported Mr. Lemire’s efforts to invest in the Ukrainian radio sector. Suddenly the relationship soured in 1996, for no obvious reason. Asked by the Tribunal why his relationships with the National Council became hostile, Mr. Lemire has declared under oath that the reason was that “at one point I was asked for a bribe and I said I would not pay64”. No further evidence of this alleged request for bribes has been produced.
236. What is undisputed is that in 1996 Gala Radio sued the National Council before the Ukrainian Courts, because Gala had been removed from the air by a decision of the National Council. On February 26, 1997, the Supreme Arbitration Court of Ukraine ruled in Gala’s favor65. In 1997, Mr. Lemire initiated the First Arbitration against Ukraine, which eventually led to the Settlement Agreement and 2000 Award. In 2006 Gala challenged before the
Ukrainian Courts, and again successfully, two decisions of the National Council to issue warnings66. Finally, Mr.Lemire of course started this arbitration, accusing the National Council of having treated him in “an unfair, inequitable, arbitrary and discriminatory manner in breach of its BIT obligations”.
237. The fact that Mr. Lemire challenged a number of decisions of the National Council before the Ukrainian Courts and filed two successive investment arbitrations against Ukraine cannot have helped to improve the climate between Gala Radio, a company acting in a highly regulated and supervised legal environment, and the National Council, its regulator and supervisor. The existence of successive court actions may have been one of the reasons for deterioration of the relationship. The Tribunal is also convinced that on certain occasions, Mr. Lemire felt threatened, and that he was afraid that Gala would be taken off the air by the authorities. There were at least two incidents – the third inspection, which could have led to a third warning and revocation of the licence, and the difficulties in obtaining a renewal of Gala Radio’s licence – where Mr. Lemire’s reaction shows real worry. Mr. Lemire’s tactics vis-à-vis Gala’s regulator and supervisor may seem high handed and sometimes even aggressive, but they may have been the only method available to a small, private radio company in Ukraine owned by a foreigner, to draw attention to its situation.
238. Respondent in this arbitration is the Republic of Ukraine. The actions and omissions on which Claimant bases his claims were carried out by the National Council, the State Centre and the State Committee, all of which are organs of Ukraine, for which under international law the Republic is responsible.
239. As Respondent has explained to the Tribunal, Ukraine became an independent State on August 24, 1991, and after independence its political, economic and legal systems underwent a substantial transformation67. Ukraine has acknowledged that in the initial years of independence, constant political battles and economic instability caused a lack of coordination in the activities of state bodies and hampered their ability to create an effective system of government.
240. Ukraine is an independent and sovereign state, governed by a Constitution, which entrusts to Parliament, elected by general democratic vote, the task of promulgating laws. The Arbitral Tribunal naturally respects the legislative function or the Ukrainian Parliament. It certainly is not the task of this Arbitral Tribunal, constituted under the ICSID Convention, to review or second-guess the rules which the representatives of the Ukrainian people have promulgated. The powers of this Tribunal are much more limited: they only encompass the authority to decide on a case-by-case basis whether Ukraine has violated
certain guarantees, offered to American investors under the BIT, and to establish the appropriate remedies.
241. The respect for Ukraine’s sovereignty is reinforced by the sector in which Claimant made his investment: radio broadcasting. In all jurisdictions, Radio and TV are special sectors subject to specific regulation. There are two reasons for this:
- first, radio frequencies are by technical nature scarce assets, and consequently the law must articulate systems for allocating licences to prospective bidders;
- but there is also a second reason: when regulating private activity in the media sector, States can, and frequently do, take into consideration a number of legitimate public policy issues; thus, media companies can be subject to specific regulation and supervision in order to guarantee transparency, political and linguistic pluralism, protection of children or minorities and other similar factors.
242. The exceptional character of media companies, and specifically of radio broadcasting companies, is accepted in the BIT itself. In its Annex, both the United States and Ukraine reserve the right to make or maintain limited exceptions to the national treatment principle (provided for in Article II.1 of the BIT) with regard to radio broadcasting stations. The exception does not affect the principles which are being pleaded by Claimant in this procedure, but it proves the special sensitivity towards the media shown by both States when approving the BIT.
VII.3.2. THE FET STANDARD AS DEFINED IN THE BIT
243. The purpose of this section is to determine the general scope and meaning of the FET standard defined in the BIT.
244. Article II.3 (a) and (b) of the BIT reads as follows:
“3. (a) Investment shall at all times be accorded fair and equitable treatment, shall enjoy full protection and security and shall in no case be accorded treatment less than that required by international law.
(b) Neither Party shall in any way impair by arbitrary or discriminatory measures the management, operation, maintenance, use, enjoyment, acquisition, expansion, or disposal of investments. For purposes of dispute resolution under Articles VI and VII, a measure may be arbitrary or discriminatory notwithstanding the fact that a Party has had or has exercised the opportunity to review such measure in the courts or administrative tribunals of a Party”.
245. The origin of Article II.3 (a) and (b) can be traced to the 1992 and 1994 US Model BIT, which proposed the following wording:
“Investments shall at all times be accorded fair and equitable treatment, shall enjoy full protection and security and shall in no case be accorded
treatment less than that required by international law. Neither Party shall in any way impair by arbitrary and discriminatory measures the management, operation, maintenance, use, enjoyment, acquisition, expansion or disposal of investments. Each Party shall observe any obligation it may have entered into with regard to investments”68.
246. Article II.3 of the BIT was thus taken literally from the US Model BIT which was in force at the time when the BIT was negotiated, with only the addition of the phrase referring to judicial review. It is a rule of Delphic economy of language, which manages in just three sentences to formulate a series of wide ranging principles: FET standard, protection and security standard, international minimum standard and prohibition of arbitrary or discriminatory measures.
A) Customary International Law Minimum Standard and FET Standard
247. A classic debate in investment arbitration law is whether the FET standard established by bilateral or multilateral investment treaties coincides with or differs from the international minimum standard of protection for aliens imposed by customary international law.
248. The starting point of this debate is the very definition of the international minimum standard – a question which is fraught with difficulties69. For claims arising from administrative or legislative acts of Governments – which are the type of claims typically submitted in investment disputes – the historic leading case seems to be Roberts70, issued by the United States – Mexico General Claims Commission in 1926, which defined the minimum treatment as that required “in accordance with ordinary standards of civilization”. Mr. Roberts, a US citizen, had been imprisoned in Mexico in what he held to be inhumane conditions. Mexico had argued that Mexicans were held in identical conditions. And the Tribunal decided:
“Facts with respect to equality of treatment of aliens and nationals may be important in determining the merits of a complaint of mistreatment of an alien. But such equality is not the ultimate test of the propriety of the acts of authorities in the light of international law. That test is, broadly speaking, whether aliens are treated in accordance with ordinary standards of civilization. We do not hesitate to say that the treatment of Roberts was such as to warrant an indemnity on the ground of cruel and inhumane imprisonment”.
249. Roberts is understood to stand for the propositions that a certain treatment may give rise to international responsibility notwithstanding that it affects citizens and aliens alike, and that administrative and legislative actions may amount to
a violation of the customary minimum treatment even if the State did not act in bad faith or with willful neglect of duty71.
250. The relationship between FET and customary minimum standard has been the subject of much debate, especially in NAFTA based arbitrations, and has led the NAFTA Free Trade Commission to issue a binding interpretation on July 31, 2001. According to this interpretation:
“2. Minimum Standard of Treatment in Accordance with International Law
1. Article 1105(1) prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another Party.
2. The concept of ‘fair and equitable treatment’ and ‘full protection and security’ do not require treatment in addition to or beyond that, which is required by the customary international law minimum standard of treatment of aliens. [...]”.
251. The same proposition, that the FET standard should be reduced to the customary international law minimum standard, was afterwards adopted in the new 2004 US Model BIT. Article 5 of this model provides72:
“Article 5: Minimum Standard of Treatment73
1. Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security.
2. For greater certainty, paragraph 1 prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to covered investments”.
252. Is this principle of assimilation between customary minimum standard and FET standard also applicable to the US – Ukraine BIT?
253. The answer must be in the negative. The BIT was adopted in 1996, and was based on the standard drafting then proposed by the US. The words used are clear, and do not leave room for doubt: “Investments shall at all times be accorded fair and equitable treatment ... and shall in no case be accorded treatment less than that required by international law”. What the US and Ukraine agreed when they executed the BIT, was that the international customary minimum standard should not operate as a ceiling, but rather as a floor. Investments protected by the BIT should in any case be awarded the level of protection offered by customary international law. But this level of
protection could and should be transcended if the FET standard provided the investor with a superior set of rights74.
254. In view of the drafting of Article II.3 of the BIT, the Tribunal finds that actions or omissions of the Parties may qualify as unfair and inequitable, even if they do not amount to an outrage, to willful neglect of duty, egregious insufficiency of State actions, or even in subjective bad faith.
255. This leads to the next question: what is the exact meaning of the FET standard acknowledged by the BIT?
B) Meaning of Article II.3 of the BIT
256. The words used by the Article II.3. are the following: “Investments shall at all times be accorded fair and equitable treatment [...] Neither party shall in any way impair by arbitrary or discriminatory measures the management, operation, maintenance, use, enjoyment, acquisition, expansion or disposal of investments”.
257. These general principles require interpretation in order to give them specific content and this interpretation must comply with the requirements of Article 31.1. of the Vienna Convention – it must be done “in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose75”.
a) Ordinary meaning
258. An inquiry into the ordinary meaning of the expression “fair and equitable treatment” does not clarify the meaning of the concept. “Fair and equitable treatment” is a term of art, and any effort to decipher the ordinary meaning of the words used only leads to analogous terms of almost equal vagueness.
259. The literal reading of Article II.3 of the BIT is more helpful. In accordance with the words used, Ukraine is assuming a positive and a negative obligation: the positive is to accord FET to the protected foreign investments, and the negative is to abstain from arbitrary or discriminatory measures affecting such investments. Any arbitrary or discriminatory measure, by definition, fails to be fair and equitable. Thus, any violation of subsection (b) seems ipso iure to also constitute a violation of subsection (a). The reverse is not true, though. An action or inaction of a State may fall short of fairness and equity without being discriminatory or arbitrary76. The prohibition of arbitrary or discriminatory measures is thus an example of possible violations of the FET standard.
260. The literal interpretation also shows that for a measure to violate the BIT it is sufficient if it is either arbitrary or discriminatory; it need not be both.
261. Discrimination, in the words of pertinent precedents, requires more than different treatment. To amount to discrimination, a case must be treated differently from similar cases without justification77; a measure must be “discriminatory and expose[s] the claimant to sectional or racial prejudice78”; or a measure must “target[ed] Claimant’s investments specifically as foreign investments79”.
262. Arbitrariness has been described as “founded on prejudice or preference rather than on reason or fact80”; “...contrary to the law because...[it] shocks, or at least surprises, a sense of juridical propriety81”; or “wilful disregard of due process of law, an act which shocks, or at least surprises a sense of judicial propriety82”; or conduct which “manifestly violate[s] the requirements of consistency, transparency, even-handedness and non-discrimination83”. Professor Schreuer has defined (and the Tribunal in EDF v. Romania84 has accepted) as “arbitrary”:
“a. a measure that inflicts damage on the investor without serving any apparent legitimate purpose;
b. a measure that is not based on legal standards but on discretion, prejudice or personal preference;
c. a measure taken for reasons that are different from those put forward by the decision maker;
d. a measure taken in wilful disregard of due process and proper procedure.”
263. Summing up, the underlying notion of arbitrariness is that prejudice, preference or bias is substituted for the rule of law.
264. Words used in treaties must be interpreted through their context. The context of Article II.3 is to be found in the Preamble of the BIT, in which the contracting parties state “that fair and equitable treatment of investment is desirable in order to maintain a stable framework for investment...”. The FET standard is thus closely tied to the notion of legitimate expectations - actions or omissions by Ukraine are contrary to the FET standard if they frustrate
legitimate and reasonable expectations on which the investor relied at the time when he made the investment85.
265. Which were the legitimate expectations of Claimant at the time he made his investment?
266. It must be recalled that when in 1995 Mr. Lemire made his first investment and acquired a controlling stake in Gala Radio, this was a small company in a nascent industry. Historically, before independence and political change, the radio industry in Ukraine had been in the hands of the State. In the mid 1990s the sector began to be privatized, a first Law on TV and Radio having been approved on December 21, 1993. All these factors had a bearing on Claimant’s legitimate expectations.
267. On a general level, Claimant could expect a regulatory system for the broadcasting industry which was to be consistent, transparent, fair, reasonable, and enforced without arbitrary or discriminatory decisions. It is true that Ukraine and the United States, when accepting the BIT, had reserved their right to make or maintain limited exceptions to the national treatment in the radio sector86. Under this exception, Ukraine could e.g., validly require that the founders of broadcasting companies be Ukrainian nationals. But Mr. Lemire could equally expect that, once he had been awarded the necessary administrative authorization to invest in the Ukrainian radio sector, there would be a level playing field, and the administrative measures would not be inequitable, unfair, arbitrary or discriminatory.
268. And on a more specific and personal level, Mr. Lemire undoubtedly had the legitimate expectation that Gala, which at that time was only a local station in Kyiv, would be allowed to expand, in parallel with the growth of the private radio industry in Ukraine.
269. The actual level of anticipated expansion has been the object of much discussion by the parties. Mr. Lemire has submitted that his intention at that time was to create three radio networks, two in FM, and one in AM, centered around three different age groups87. Respondent has challenged this statement, and has referred to the absence of any formal business plan setting out the intended business structure.
270. In the Tribunal’s opinion, the available evidence shows that what Mr. Lemire had in mind when he bought into Gala Radio in June 1995, was to convert Gala into a national broadcaster and to create a second AM channel. The idea to create a third radio network – called “Energy” – seems to have been an
afterthought. At the time of the acquisition of Gala, Claimant must have approached the National Council, and asked whether a national licence for Gala and an AM licence could be obtained. The National Council reacted in positive terms, as proven by a letter addressed to the State Centre, in which the National Council states that it is “considering the possibility” of issuing to Gala licences for a nationwide FM channel and for a second AM Band, and enquires whether the frequencies would be available. There is no reference to a third channel88. The State Centre reacted positively89.
271. Respondent has insisted that Claimant has not been able to produce a formal business plan90. That is true. But the Tribunal does not attach too much weight to this omission. Formal business plans are customary in sizeable investments in settled economic and business environments. None of these characteristics applied to Mr. Lemire’s investment in Gala Radio: a small amount was involved and the situation of Ukraine was anything but settled.
c) Object and purpose
272. The object and purpose of the BIT - the third interpretive criterion - is defined in its Preamble: the parties “desir[e] to promote greater economic cooperation between them, with respect to investment by nationals and companies of one Party in the territory of the other Party” and recognize that the BIT “will stimulate the flow of private capital and the economic development of the Parties”. The main purpose of the BIT is thus the stimulation of foreign investment and of the accompanying flow of capital.
273. But this main purpose is not sought in the abstract; it is inserted in a wider context, the economic development for both signatory countries. Economic development is an objective which must benefit all, primarily national citizens and national companies, and secondarily foreign investors. Thus, the object and purpose of the Treaty is not to protect foreign investments per se, but as an aid to the development of the domestic economy. And local development requires that the preferential treatment of foreigners be balanced against the legitimate right of Ukraine to pass legislation and adopt measures for the protection of what as a sovereign it perceives to be its public interest.
C) Pursuit of Local Remedies
274. Respondent has submitted that Gala Radio, although it asserts a list of errors concerning the tenders, never challenged any of the decisions before the Ukrainian Courts91. In Respondent’s opinion, Claimant should have taken advantage of the available local remedies that would have been capable of correcting the alleged administrative wrong. Claimant did so when confronted with the warnings issued by the National Council, and successfully challenged two decisions before the Ukrainian Courts. Respondent draws the Tribunal’s attention to the Generation Ukraine award, which stressed the need for the
investor to make a reasonable effort to obtain the legal correction of an administrative fault:
“[...]In such instances, an international tribunal may deem that the failure to seek redress from national authorities disqualifies the international claim, not because there is a requirement of exhaustion of local remedies but because the very reality of conduct tantamount to expropriation is doubtful in the absence of a reasonable – not necessarily exhaustive – effort by the investor to obtain correction92”.
275. The question which the Tribunal must answer is whether, given the fact that Gala Radio has not challenged the decisions of the National Council, it is now precluded from presenting its claim in this arbitration.
276. The starting point of the Tribunal’s analysis must be the text of the BIT. The BIT – unlike other Treaties – does not include any clause requiring the initiation or exhaustion of local remedies before the filing of an investment arbitration. Quite the contrary: Article II.3 deviates from the standard US Model BIT in only one point, the insertion of the following phrase:
“[...] For purposes of dispute resolution under Articles VI and VII, a measure may be arbitrary or discriminatory notwithstanding the fact that a Party has had or has exercised the opportunity to review such measure in the courts or administrative tribunals of a Party”.
277. The literal meaning of this phrase could not be clearer: even if a party has had (and has not exercised), or has exercised (with whichever outcome) the right to judicial review, such action or omission is irrelevant in an investment arbitration deciding whether the measure is arbitrary or discriminatory. The consequence is that in an arbitration under the US-Ukrainian BIT, the possibility to file a claim against a specific measure, is not burdened by any requirement to previously appeal to the national Courts.
278. This does not mean that an investor can come before an ICSID tribunal with any complaint, no matter how trivial, about any decision, no matter how routine, taken by any civil servant, no matter how modest his hierarchical place. In this case, however, the claim is raised against the conduct of the National Council, that is to say the highest regulatory organ for the broadcasting industry. On this basis, the Tribunal considers that there should be no impediment to Claimant seeking to hold Ukraine accountable for an alleged breach of the BIT.
279. Given the clear language of the BIT, the Tribunal rejects Respondent’s submission that Claimant is precluded from pursuing his claims in the present arbitration, due to his failure to appeal the tender decisions of the National Council.
280. The Tribunal would like to add that – even if Article II.3 of the BIT had lacked a specific reference to local remedies – the present case has significant differences with Generation Ukraine. In Generation Ukraine, the claim filed by Claimant was based on expropriation, and the appropriate level of compensation - a type of claim which could have been submitted to and decided by the local Courts. In the present arbitration, the situation is quite different: the claim is for damages arising from the violation of the BIT standards, and such claim can only be filed before an international arbitration tribunal.
281. It is true that under Article 30.4 of the LTR, Gala Radio would have had the opportunity to challenge the decisions of the National Council awarding frequencies to other companies. But those claims would only have succeeded in setting aside the National Council’s decision, and forcing that the tender be repeated. Gala Radio would never be certain that in this repeat tender it would be successful. The practical result of an appeal against a tender decision of the National Council is very limited – if the procedure is unfair or the administrative body biased, it could again decide to grant the licence to another contender and not to Gala. The effect is quite different from that of an appeal against a warning – in this case the Court’s decision provokes the immediate setting aside of the measure.
282. The test proposed by Generation Ukraine is based on reasonableness. Claimant is only required to put in a reasonable effort to obtain correction of the wrong decision. In the circumstances of the present case, it would have been unreasonable to require Claimant to have fought in the Ukrainian Courts the National Council’s decisions adjudicating frequencies.
283. The Tribunal is not thereby suggesting that a breach occurs if the National Council makes a decision which is different from the one the arbitrators would have made if they were the regulators. The arbitrators are not superior regulators; they do not substitute their judgment for that of national bodies applying national laws. The international tribunal’s sole duty is to consider whether there has been a treaty violation. A claim that a regulatory decision is materially wrong will not suffice. It must be proven that the State organ acted in an arbitrary or capricious way. A regulatory organ charged with the attribution of licences on a competitive basis plainly violates essential notions of fairness if it refuses to consider the information provided by a qualified applicant, or if it engages in favouritism. And the State itself breaches its obligations under the treaty if it exercises undue influence over the decision- making of regulatory bodies.
284. The FET standard defined in the BIT is an autonomous treaty standard, whose precise meaning must be established on a case-by-case basis. It requires an action or omission by the State which violates a certain threshold of propriety, causing harm to the investor, and with a causal link between action or omission and harm. The threshold must be defined by the Tribunal, on the basis of the wording of Article II.3 of the BIT, and bearing in mind a number of factors, including among others the following:
- whether the State has failed to offer a stable and predictable legal framework;
- whether the State made specific representations to the investor;
- whether due process has been denied to the investor;
- whether there is an absence of transparency in the legal procedure or in the actions of the State;
- whether there has been harassment, coercion, abuse of power or other bad faith conduct by the host State;
- whether any of the actions of the State can be labeled as arbitrary, discriminatory or inconsistent.
285. The evaluation of the State’s action cannot be performed in the abstract and only with a view of protecting the investor’s rights. The Tribunal must also balance other legally relevant interests, and take into consideration a number of countervailing factors, before it can establish that a violation of the FET standard, which merits compensation, has actually occurred:
- the State’s sovereign right to pass legislation and to adopt decisions for the protection of its public interests, especially if they do not provoke a disproportionate impact on foreign investors;
- the legitimate expectations of the investor, at the time he made his investment;
- the investor’s duty to perform an investigation before effecting the investment;
- the investor’s conduct in the host country.
286. Once the scope and meaning of the FET standard has been defined in the abstract, the Tribunal must establish the facts and decide whether they constitute a violation of such standard. This will be achieved by reviewing the legal procedure created by Ukrainian law for the awarding of licences in the broadcasting sector (VI.3.3), then by analyzing in detail the facts surrounding the allocation of frequencies which affected Gala (VI.3.4).
VII.3.3. PROCEDURE FOR THE AWARDING OF LICENCES IN THE BROADCASTING SECTOR UNDER UKRAINIAN LAW
287. Two fundamental laws regulate the Ukrainian radio sector:
- the Law on National Television and Radio Council of Ukraine (“LNC”), originally issued on September 30, 199893, amended on a number of occasions, the last on January 12, 2006; the scope of this law is the designation and scope of responsibilities of the National Council;
- the Law on Television and Radio Broadcasting (“LTR”), originally issued on December 21, 1993, amended significantly a number of times, lastly on March 1, 200694, and which provides the general rules regarding the functioning of radio and TV in Ukraine.
A) The National Council
288. The LNC establishes the National Council as a “constitutional permanent collegiate agency95”. Its activities “shall be based upon the principles of legality, independence, impartiality, transparency...96”. The eight members of the National Council are appointed in parity by the President and the Parliament respectively, for five-year terms with the possibility of a single reappointment97. Until 2006, the President and the Parliament could at any time disqualify any of their appointees from office. That was no empty threat: on February 2, 2004 the Parliament’s Committee on Freedom of Speech and Information approved a resolution, recommending that Parliament carry out a “credibility impeachment” of all the members of the National Council98.
289. Since 2006 the situation has improved because the LNC has been amended, and the National Council in toto can be dismissed only upon a vote of no confidence carried by Parliament and confirmed by the President99.
290. The National Council derives its status and mandate directly from a constituent law. Its independence and impartiality is expressly guaranteed by that law. Formally, it thus is independent. The appointment of independent regulators by Parliament and/or the Head of State follows wide-spread practice. Before 2006, the power of the President and the Parliament, respectively, to remove their appointees from office indeed represented a threat to Council members’ independence. With the requirement of a concurring decision of both the President and the Parliament for removing the Council in toto from office, a safeguard against undue political pressure was introduced.
291. The level of political interference with the decisions of the National Council is difficult to gauge from the outside. The only incident which is proven beyond any doubt is the interference of the President of Ukraine with the tender of October 19, 2005, which was awarded to the bidder mentioned in the President’s letter to the National Council (which will be analyzed in detail below). During the hearing, Mr. Lyasovsky, a member of the National Council, was directly asked whether National Council members follow the instructions of the political establishment. His answer, under oath, was the following100:
“Well, we’re very accustomed to hearing this kind of language, I’ll be honest and frank. Yes, there have been – there are attempts at putting pressure on the council. However, due to the specifics of how the council is formed, such attempts are ineffective, especially since recently, since amendments were made, passed in 2006. Indeed, we now are an independent body and we’re not subject, or rather we’re immune to pressure”.
292. The answer acknowledges that pressure has been exercised on the National Council, but expresses the contention that since 2006 – when the LNC was amended and the Council was given a higher level of independence – the situation has been improving.
B) The Administrative Procedure for the Issuances of Licences
293. The LTR is an extensive law, comprising 75 articles, regulating the creation, licensing, functioning, supervision and sanctioning of companies operating in the TV and radio sectors. Section III of the Law, as it now stands, is devoted to the rules governing the tender procedure and the issuance of broadcasting licences.
294. From a historical perspective, the system for granting radio licences has gone through four phases:
- in a first phase, between 1993 and 1995, licences were issued by the National Council under Article 14 of the 1993 LTR, upon individual application of persons interested in setting up a radio station;
- after 1995, radio frequencies were awarded by means of tender announced in the press101;
- the third phase began on December 15, 1998, when the National Council became inoperative because it ceased to have five duly designated members, and consequently could not validly carry decisions; during this interregnum, radio frequencies were awarded directly by the State Committee, in clear violation of the LTR102. The situation was solved in June 2000, when the National Council regained all its members, and a
first tender in accordance with the LTR was then organized on January 1,2001;
- since January 2001, licences have all been awarded by way of tenders supervised by the National Council.
295. The LTR contains detailed rules with regard to the organization of tenders. The decision to launch a tender for new frequencies is adopted by the National Council, then published in the press. Prospective bidders have a one-month period to present their applications, which must include information required by Article 24 of the LTR. Applications are then reviewed by the individual members of the National Council. The criteria of review are now those established in Article 25.14 of the LTR:
“While considering the applications the National Council shall prefer TV/radio organization that:
a) is capable to fulfill the licence conditions to the best extent;
b) prefers socially important programs (informational, social and political, children, etc.), satisfies informational needs of national minorities and secures freedom of speech;
c) has an advantage in financial and economical as well as professional and technical capabilities for TV/radio broadcasting;”
296. The system for deciding the winner of the tender is simple: the National Council holds a formal meeting, the various applications for each frequency are presented, each member of the National Council expresses a vote and the licence is awarded to the applicant supported by at least five members of the National Council103. If no applicant reaches this threshold, the frequency is not awarded, although it may be put again to tender on a future occasion.
297. The voting system gives rise to three different issues:
a) Publicity of the vote
298. The first is the publicity of the vote.
299. The LTR contains no provision regarding the formal requirements of the National Council’s decision. Practices seem to have developed. It is undisputed that in an initial phase, the votes would be cast in a private meeting of the Council, behind closed doors, and that there was no transparency of how each member of the National Council had voted. The parties have debated when this phase ended. Claimant has submitted that the change occurred in 1995104; while Respondent’s position is that this happened in 2000105. The evidence submitted by Respondent in order to support its position are minutes of National Council meetings which took place from December 24, 2003 onwards. These minutes list representatives of participating radio companies as “invited persons” present during the discussions.
300. The Tribunal concludes that from the end of 2003 onwards, the practice of the National Council has been to “invite” interested parties to attend its meetings. This constitutes a significant improvement in the transparency of the decision procedure.
b) Reasoning of the vote
301. The second issue is the reasoning underlying the votes.
302. The LTR does not require that the votes of each member of the National Council, or the National Council’s decision as such, be reasoned. This derives clearly from the drafting of Article 25 of the LTR.
303. In paragraph 8 of this provision, the law specifically establishes that if the National Council is to exclude a person from participating in a tender, such decision must be “reasoned”. In the documents presented in this arbitration there is at least one example of a decision excluding a participant in the tender, and that decision is duly reasoned106.
304. The situation is different as regards decision for the awarding of frequencies. Paragraph 13 of the same article describes the procedure for awarding the licence to the winner of the tender:
“A decision on the winner of a tender and on broadcast licence issuance shall be made by the National Council within a 30-day period after application period is finished”.
305. It is very telling that for this decision of awarding frequencies the law omits the requirement that it be “reasoned” – a requirement which the same article of the Law specifically requires for exclusion of applicants.
306. The administrative practice of the National Council when awarding frequencies adhered to the principle established in the LTR. Respondent has presented a great number of minutes of decisions taken by the National Council. These minutes simply state in favour of whom each member is casting his vote. And if a participant received five votes, the frequency was awarded to him. The minutes do not include any discussion among the members or the reasoning of the decision.
307. The evidence presented in this arbitration does not indicate that before the National Council’s meeting, either the administrative staff of the Council, or its members, prepared a reasoned and researched report with a valuation and ranking of the applications submitted. This is surprising, since Article 25.14 of the LTR orders that in considering the application, the National Council “shall prefer” radio organizations that offer socially important programs, satisfy minorities, secure freedom of speech, have better financial resources or professional or technical capabilities. The evidence submitted seems to show