An Arbitration Mystery and Bulgaria’s Rule of Law: How Arnold & Porter Gave Away the Existence of a Secret Deal

Almost two years ago I started radosvetavassileva.blog to expose Bulgaria’s deteriorating rule of law. Sadly, the situation has exacerbated, so there are even more topics to write about. Inasmuch as I dislike this development, the only way forward is to keep denouncing the abuses and the rampant corruption. I would like to thank everyone who has supported me, everyone who follows my blog and all wonderful people who have gotten in touch to provide feedback and give me ideas.

To celebrate my blog-versary, I decided to shed light on an ICSID arbitration case which is more interesting from a rule of law perspective than from an arbitration perspective. The moral of the story is that spreading false information or half-truths eventually catches up on you no matter whether you are a famous law firm like Arnold & Porter, Bulgaria’s central bank (the Bulgarian National Bank) or Bulgaria’s Ministry of Finance. One definition of half-truth is “a statement that is only partly true, especially one that is intended to keep something secret.” This seems to be Arnold & Porter’s case in this scenario.

In 2015, the State General Reserve Fund Oman (SGRF), which is the sovereign fund of Oman, submitted an application against Bulgaria before the International Center for Settlement of Investment Disputes (ICSID) in Washington DC (Case No. ARB/15/43). The case concerns Corporate Commercial Bank in which SGRF was the second biggest shareholder. The bank was subjected to a corporate raiding attack with the participation of Bulgarian state institutions – it experienced an artificially induced bank run, its license was withdrawn based on a secret report, which Bulgaria refuses to make public to this day, and no one was allowed to appeal the decision on license withdrawal in violation of case law against Bulgaria by the European Court of Human Rights (Capital Bank v Bulgaria). SGRF sought to defend their investor rights pursuant to the Bulgaria-Oman Bilateral Investment Treaty.

This case is of paramount importance for Bulgaria’s corrupt regime for many reasons. Firstly, if there is a public award on the merits, the corrupt practices of Bulgaria’s institutions could be showcased. Secondly, if there is a public award on the merits in favor of the claimant, Bulgarian taxpayers will learn exactly how much they have paid. Thirdly, in prior articles I have emphasized that in Bulgaria there is virtually no FDI. Surely, investors will be further deterred to invest in a country which is a proven violator of investor rights.

Two misleading press releases and a media campaign

In April 2019, Bulgaria’s Ministry of Finance and Bulgaria’s central bank published press releases in which they claimed SGRF withdrew its claim. I have included screenshots in this article for those of you who speak Bulgarian (Figure 1 and Figure 2). The press release by the Ministry of Finance of 18 April 2019 concerns a number of claims against Bulgaria. There is one paragraph dedicated to the Corporate Commercial Bank case:

“After two rounds of exchange of written defense, in December 2018, SGRF withdrew its claims against Bulgaria without the opportunity to renew such claims before this tribunal or another arbitration tribunal. With this, all claims by SGRF can be deemed conclusively dropped. The case has ended in Bulgaria’s favor.”

Figure 1: Press release by Bulgaria’s Ministry of Finance of 18 April 2019

Four days after the Ministry of Finance published its press release, Bulgaria’s central bank made even bolder statements, which will put a smile on any commercial lawyer’s face. In the first paragraph, they stress the case “ended in Bulgaria’s favor”. The last two paragraphs are the most peculiar. The central bank argues that

“as a result of the successful defense by Bulgaria, SGRF gave up its claims against Bulgaria’s central bank and other institutions. This outcome of the case excludes the possibility that the same claims be made again in front of this tribunal or another international tribunal.

The fact the case ended in Bulgaria’s favor proved the legality of the central bank’s actions and decisions in the Corporate Commercial Bank case which were contested by SGRF.”

Figure 2: Press release by Bulgaria’s central bank of 22 April 2019

Bulgaria’s propaganda machine was also involved. Pro-government media manipulated the information further. BTV, the largest and most influential television in the country, informed the audience that “Bulgaria won the case against the Omani fund” and this “proved the legality of the central bank’s decisions regarding Corporate Commercial Bank.” (Figure 3)

Figure 3: BTV clearly misinforms its audience. The title of the article is “Bulgaria won the case against the Omani fund.”

Arnold & Porter’s contradictory case update

Arnold & Porter which historically represents Bulgaria in international arbitration claims for reasons unknown to the majority of Bulgarian citizens also informed the general audience of the latest developments vis-à-vis the case (Figure 4). Their statement is much closer to the truth compared to the press releases by Bulgaria’s institutions. It is also more helpful because it is written in English, so there can be no speculations about terminology. They informed us that “the claimant entirely withdrew all of its claims, with prejudice” before the main hearing. In other words, the claimant allegedly withdrew their claims definitively. Arnold & Porter also tell us the parties “are currently awaiting a decision of the Tribunal on the apportionment of costs.” Below we will see that these statements seem mutually exclusive. Unlike Bulgaria’s institutions, they have marked the case as “ongoing.”

Figure 4: Information about the case on the website of Arnold & Porter

ICSID’s arbitration rules

To understand why Bulgaria’s institutions are telling lies and why Arnold & Porter are spreading half-truths, one needs to take a look at ICSID’s Arbitration Rules as well as the procedural details of the case as they appear on ICSID’s website.

The option to “withdraw a claim” or “all of your claims” does not exist in ICSID’s Institution Rules and Arbitration Rules. Rule 8 of ICSID’s Institution Rules allows a party to withdraw its arbitration request BEFORE it has been registered. 

 Rule 8
 Withdrawal of the Request 
 The requesting party may, by written notice to the Secretary-General,
 withdraw the request before it has been registered. The Secretary-
 General shall promptly notify the other party, unless, pursuant to Rule
 5(1)(b), the request had not been transmitted to it.

As visible from the procedural details of this case, the request was registered on 22 October 2015 (Figure 5). SGRF could have withdrawn their request before this, but they did not.

Figure 5: Procedural details of ICSID Case No. ARB/15/43

Rules 43 and 44 of ICSID’s Arbitration Rules merit more attention. Rule 43 allows parties to settle and discontinue proceedings. Rule 44 allows a party to discontinue proceedings unilaterally. If parties had invoked Rule 43 or 44, however, this would have been indicated in the procedural details of the case. As visible from the procedural details (Figure 5), the proceedings have not been discontinued. If you wonder how this would have been noted had it been true, take a look at Figure 6.

Even more importantly, if proceedings are discontinued, the arbitration tribunal issues an order, not an award. In this scenario, there is usually no decision on the apportionment of costs. This seems to be the view in “ICSID Rules of Procedure for Arbitration Proceedings (Arbitration Rules)”, 4 Int’lTax& Bus. Law. 362 (1986):

“An order discontinuing a proceeding under [Rule 44], whether issued by the Tribunal or the Secretary-General, is not an award, and therefore would not normally contain any provision regarding the division of expenses…”

In addition, if proceedings are discontinued at the request of one party, nothing in Rule 44 seems to preclude either party from renewing the proceedings again in the future.

In other words, there seems to be a contradiction in Arnold & Porter’s statement for the only way to withdraw an ICSID claim (to use their terminology) after an arbitration request is registered is to discontinue the proceedings, but in this scenario costs usually lie where they fall. Here is an example of a discontinuance order.

 Rule 43
 Settlement and Discontinuance
 (1) If, before the award is rendered, the parties agree on a settlement
 of the dispute or otherwise to discontinue the proceeding, the Tribunal,
 or the Secretary-General if the Tribunal has not yet been
 constituted, shall, at their written request, in an order take note of the
 discontinuance of the proceeding.
 (2) If the parties file with the Secretary-General the full and signed
 text of their settlement and in writing request the Tribunal to embody
 such settlement in an award, the Tribunal may record the settlement in
 the form of its award.
 Rule 44
 Discontinuance at Request of a Party
 If a party requests the discontinuance of the proceeding, the Tribunal,
 or the Secretary-General if the Tribunal has not yet been constituted,
 shall in an order fix a time limit within which the other party may
 state whether it opposes the discontinuance. If no objection is made in
 writing within the time limit, the other party shall be deemed to have
 acquiesced in the discontinuance and the Tribunal, or if appropriate 
 the Secretary-General, shall in an order take note of the discontinuance
 of the proceeding. If objection is made, the proceeding shall continue.
Figure 6: An example of an ICSID case which was discontinued.

As seen from the procedural details of SGRF v Bulgaria (Figure 5), the arbitration tribunal closed the proceedings pursuant to Rule 38(1) on 3 June 2019, which means that the next step is the handing down of an arbitration award pursuant to Rule 46.

 Rule 38
 Closure of the Proceeding
 (1) When the presentation of the case by the parties is completed,
 the proceeding shall be declared closed.
 (2) Exceptionally, the Tribunal may, before the award has been
 rendered, reopen the proceeding on the ground that new evidence
 is forthcoming of such a nature as to constitute a decisive factor,
 or that there is a vital need for clarification on certain specific points.
Rule 46
 Preparation of the Award
 The award (including any individual or dissenting opinion) shall be
 drawn up and signed within 120 days after closure of the proceeding.
 The Tribunal may, however, extend this period by a further 60 days if it
 would otherwise be unable to draw up the award.

Rule 47 stipulates the precise contents of an ICSID arbitration award. There is no option to just render an award on costs. 

 Rule 47
 The Award
 (1) The award shall be in writing and shall contain:
 (a) a precise designation of each party;
 (b) a statement that the Tribunal was established under the
 Convention, and a description of the method of its constitution;
 Arbitration Rules
 (c) the name of each member of the Tribunal, and an identification
 of the appointing authority of each;
 (d) the names of the agents, counsel and advocates of the
 parties;
 (e) the dates and place of the sittings of the Tribunal;
 (f) a summary of the proceeding;
 (g) a statement of the facts as found by the Tribunal;
 (h) the submissions of the parties;
 (i) the decision of the Tribunal on every question submitted to
 it, together with the reasons upon which the decision is
 based; and
 (j) any decision of the Tribunal regarding the cost of the
 proceeding.
 (2) The award shall be signed by the members of the Tribunal who
 voted for it; the date of each signature shall be indicated.
 (3) Any member of the Tribunal may attach his individual opinion
 to the award, whether he dissents from the majority or not, 
 or a statement of his dissent.

On lies and half-truths

There have been rumors that Bulgaria and Oman settled behind the curtain for months. The stakes are really high for Bulgaria’s corrupt regime. If they admit they settled, taxpayers will want to know the price. Bulgaria’s government does not have an interest in this.

It is clear that Bulgaria has not won this case because, to win a case, you need an award in your favor. It is also visible the case has not ended, as Bulgarian authorities argue, because the ICSID proceedings are still pending. In the hypothetical scenario that SGRF settled or discontinued proceedings for whatever reason, this does not prove the legality of the central bank’s policies towards Corporate Commercial Bank in any way. Investors exercise commercial sensibility and just want their money back, not necessarily a formal decision in their favor. In that light, it is highly unlikely that a claimant would give up its claims after 4 years of litigation without any compensation.

Oddities do not end here. We do not know what exactly happened in December 2018, but it is certainly interesting that Bulgarian authorities only shared the information that the claim was allegedly withdrawn in April 2019. SGRF has refrained from commenting. This is one more lead that there is a secret deal – SGRF and Bulgaria could have agreed on something which materialized in April 2019, so Bulgarian authorities could finally announce the news, albeit in a highly manipulative manner. The emphasis that SGRF would not bring action against Bulgaria before ICSID or other arbitration centers in the press releases by Bulgaria’s Ministry of Finance and the country’s central bank is also a sign that a settlement was reached in writing. How would they know what the future holds and enforce this promise otherwise? Unless, of course, they bluffed, which would not be surprising to those familiar with the Bulgarian context.

It is also strange that there was no oral phase before the proceedings were closed pursuant to Rule 38(1). As stipulated in Rule 29, oral procedures are part of the proceedings unless parties agree otherwise. 

 Rule 29
 Normal Procedures
 Except if the parties otherwise agree, the proceeding shall comprise
 two distinct phases: a written procedure followed by an oral one.

We will be better placed to figure out what happened behind the curtain and what “withdrawing all claims” means when/if the tribunal renders its award and ICSID marks the case as concluded. Will there be a procedural order for discontinuance pursuant to Rule 43 or 44 which, by exception, contains a decision on the apportionment of costs? Will there be a settlement which the Tribunal will record as an award pursuant to Rule 43(2)? Will there be a standard award? What did Arnold & Porter deliberately miss to tell us on their website to protect the interest of their client, Bulgaria’s corrupt government? We should know more before 3 December 2019 if we rely on Rule 46 (proceedings were closed on 3 June 2019). With regard to the secret settlement itself, SGRF’s investment in Corporate Commercial Bank was worth millions of Euros – receiving just compensation leaves tracks even if it is done in the dark and despite confidentiality clauses.

Meanwhile, Bulgaria’s central bank is really far from proving the legality of its actions regarding Corporate Commercial Bank. There is a pending claim against it under the US Racketeer Influenced and Corrupt Organizations Act because it allegedly facilitated the theft of assets through fraud after it closed the bank. There is also pending litigation against Bulgaria before the European Court of Human Rights in relation to Corporate Commercial Bank’s artificial bankruptcy.

The deliberate spreading of false information in official press releases of state institutions of an EU member serves as one more proof of the lack of rule of law in the country. Lies and half-truths will not prevent the truth from making a well-deserved appearance at some point.

If you have other ideas about what happened, feel free to get in touch!

The author would like to thank Julio-César Betancourt for an insightful discussion on this case.

UPDATE: The article above was published on 11 August 2019. On 13 August 2019, the arbitral tribunal rendered an Award. The only logical conclusion is that parties settled and asked the tribunal to record the settlement as an Award and to rule on costs. My reasoning here:

Liar, Liar, Pants on Fire!  How Bulgaria Deliberately Misinformed the General Public about the Outcome in ICSID Case No. ARB/15/43 (SGRF v Bulgaria)

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