|Claimant see also OEG see also Olympic||Olympic Entertainment Group AS|
|CMU Decree||Decree of the Cabinet of Ministers No. 494 on Measures to Increase the Level of Public Safety|
|FET||Fair and equitable treatment|
|FPS||Full protection and security|
|FTI||FTI Consulting LLP|
|Gambling Ban Law see also Law on the Prohibition of Gambling||Law No. 38/2009 "On the Prohibition of Gambling Business in Ukraine" adopted on 15 May 2009|
|Hearing||The hearing on all issues held between 13 and 20 December 2020 on the Zoom videoconference platform|
|Law on the Prohibition of Gambling see also Gambling Ban Law||Law No. 38/2009 "On the Prohibition of Gambling Business in Ukraine" adopted on 15 May 2009|
|Licensing Conditions||Licensing Conditions adopted by Order No. 40/374 of the State Committee for Regulatory Policy and Entrepreneurship of Ukraine and the Ministry of Finance of Ukraine dated 18 April 2006|
|Licensing Law||Law of Ukraine No. 1775-III "On Licensing of Certain Commercial Activities" dated 1 June 2000|
|March Draft Law on the Prohibition of Gambling||Draft Law No. 4268 "On Prohibition of the Gambling Business in Ukraine" dated 26 March 2009|
|Maxbet||The Maxbet Group, a gambling operator in Ukraine|
|MFU||Ministry of Finance of Ukraine|
|MFU Order||Order of the Ministry of Finance of Ukraine No. 650 dated 8 May 2009|
|New Gambling Law||Law of Ukraine No. 768-IX "On State Regulation of Organization and Operation of Gambling" dated 14 July 2020|
|OCU||Olympic Casino Ukraine LLC|
|OEGsee also Claimant see also Olympic||Olympic Entertainment Group AS|
|Olympic see also Claimant see also OEG||Olympic Entertainment Group AS|
|Parties||The Claimant and the Respondent|
|Pledge Agreement||Movable Property Pledge Agreement No. 020609-PM between the Claimant and OCU dated 2 June 2009|
|Rejoinder||Respondent's Rejoinder dated 17 July 2020|
|SOC||Claimant's Statement of Claim dated 21 June 2019|
|SOD||Respondent's Statement of Defence dated|
|SOR||Claimant's Statement of Reply dated 22 May 2020|
|Trade Patent Law||Law of Ukraine No. 98/96-BP "On Patenting of Certain Types of Entrepreneurial Activity" dated 23 March 1996|
|Treaty||Agreement between the Government of the Republic of Estonia and the Government of Ukraine for the Promotion and Reciprocal Protection of Investments, dated 15 February 1995|
|UNCITRAL Rules||1976 Arbitration Rules of the United Nations Commission on International Trade Law|
A dispute has arisen between the Claimant and the Respondent concerning the Claimant's alleged investment in Ukraine in the gambling industry in respect of which the Claimant filed a Notice of Arbitration on 5 November 2018, pursuant to Article 8 of the Agreement between the Government of the Republic of Estonia and the Government of Ukraine for the Promotion and Reciprocal Protection of Investments, dated 15 February 1995 ("Treaty").
Professor Michael Pryles AO PBM was appointed as a co-arbitrator by the Claimant in its Notice of Arbitration, dated 5 November 2018, pursuant to Article 3.4(b) of the UNCITRAL Rules. Professor Pryles' contact details are as follows:
Professor Michael Pryles AO PBM
521 Toorak Road, Toorak
Mr Neil Kaplan QC CBE SBS
Suite 1906, Level 19
644 Chapel Street
COMO Office Tower
South Yarra, 3141
Mr Neil Kaplan CBE QC SBS (Presiding Arbitrator)
Professor Michael Pryles AO PBM
Mr J Christopher Thomas QC
Dr Noam Zamir (Tribunal Secretary)
Mr Joris Bertrand (Assistant to Mr Kaplan)
Mr Aleksandr Kostjukevitš
Mr Aare Reinsalu
Mr Luis Gonzalez Garcia
Mr Pavlo Byelousov
Mr Denys Lysenko
Ms Myroslava Savchuk
Ms Iryna Glushchenko
Ms Anna Konovalova
Mr Oleksandr Kushch
Ms Kateryna Ilieva
Ms Nataliia Savula
Ms Nataliia Abramovych
AEQUO Law Firm
Mr Ilja Šterenberg
Mr Meelis Pielberg
Mr James Nicholson
Mr Alexander Davie
Dr Olexander Martinenko
Ms Leona Josifidis
Mr Freddie Hurford
Ms Daryna Ushchapivska
Assistants to Expert Witnesses
Mr Ivan Lishchyna
Ms Anna Tyshchenko
Ms Yulia Dikhtiievska
Mr Georgiy Grabchak
Ministry of Justice
Mr Timothy Otty QC
Mr Hussein Haeri
Ms Camilla Gambarini
Dr Robert Kovacs
Dr Aniruddha Rajput
Ms Natalia Faekova
Ms Christina Liew
Ms Iuliia Zozulia
Ms Lily-May Austen
Ms Yulia Atamanova
Ms Valeria Lada
Mr Dmytro Kaba
Mr David Clifton
Mr Geoffrey Senogles
Ms Svetlana Ksenofontova
Assistant to Expert Witness
Permanent Court of Arbitration
Ms Helen Brown
Mr Benjamin Craddock
Mr Trevor McGowan
Mr Rohan Kondel
Mr Fabian Sadler
[…] In 2004, the only gambling activities that were subject to licensing under the 2000 Licensing Law were "totalizators and gambling establishments". All other types of gambling other than casinos or gambling establishments were not subject to licencing. This included slot machines in shared premises. During 2004-2005, OCU's operations consisted of slot machines in shared premises. Thus, Olympic was not required under the existing regulations to obtain a license to operate its slot machines in Ukraine. During the period of March 2005 to April 2006 there was a gap in the law which prevented gambling activities without a license. However, the Supreme Court of Ukraine declared that it was not illegal to conduct activities without a license "if the person who was engaged in such activities could not obtain a license in the prescribed manner (no licensing authority was created, no licensing conditions were determined". In April 2006, the Ministry of Finance was appointed as the licensing authority. Olympic acquired all the required licenses as provided by law. All 2006 licenses have been exhibited in this arbitration. There cannot be any doubt that the Claimant has operated in accordance with the law in Ukraine at all times.
Having considered the draft law, the Chief Scientific and Expert Department does not affirm its adoption. First of all, this may be explained in view that a general ban (even temporarily) on economic activities related to the organization of gambling will lead to their criminalization, in particular, by a surge in a number of illegal gambling establishments and increasing corruption. It should be noted that the draft law proposes dividing gambles into public and domestic ones so that the same game (for example, roulette or totalizators) may be both public and domestic. In our view, this will complicate significantly bringing to justice those who are held liable for organizing public gambling. Another negative consequence from adopting the said draft law will be the "shadowing" of the relevant business affecting the replenishment of the state budget of the country.
While supporting the need for a strict state regulation of holding of gambling activities, organization and maintenance of betting houses, gambling establishments, in particular, restriction of the territories where gambling business zones may be located, as well as minimization of negative social consequences of this activity, I cannot agree with the concept proposed by the above Law to solve this problem as violating a number of provisions of the Constitution of Ukraine.
The Law submitted for signing bans gambling business and participation in gambling games (Article 2), establishes liability for violation of this Law by business entities that organize and hold gambling games on the territory of Ukraine (Article 3) and cancels licences for gambling activities as of the effective date of the Law, and terminates further issuance of such licences (Part 2 of Article 4). This Law shall enter into force on the day of its publication and shall be effective until adoption of the special legislation providing for the right to do gambling business in specially established gambling zones (Part 1 of Article 4).
An instantaneous implementation of such provisions may result in a mass liquidation of gambling establishments and, as a consequence, mass dismissal of their employees who join the ranks of the unemployed (approximately 200 thousand people). So, this will result in a violation of the constitutional right of citizens to work, including the possibility to earn a living by work they are free to choose (Part 1 of Article 43), and the right to an adequate standard of living for themselves and their families (Article 48).
At the same time, it is a violation of the rights of entrepreneurs organizing gambling games that will suffer significant losses as a result of the ban on gambling, which is a violation of the constitutional provision binding the state to ensure protection of all subjects of the right of ownership and business entities (Part 4 of Article 13 of the Constitution of Ukraine).
As noted above, the Law cancels licences for gambling activities as of its effective date. However, neither the Law of Ukraine "On Licensing of Certain Types of Business Activity", which provides for licensing of organization and maintenance of betting houses, gambling establishments (paragraph 29 of Article 9), nor other laws provide for the grounds for cancellation (invalidation) of licences such as ban on a certain type of activity, and, accordingly, the issue of reimbursement for the cost of a licence that is cancelled early without violation of licence terms and conditions by the licensee. In addition, the Law does not take into account the issue of trade patents that were obtained in the manner established by the Law of Ukraine "On Patenting of Certain Types of Entrepreneurial Activity" for each individual gambling place (slot machine, gambling table), and the cost of which was paid by business entities or their structural (standalone) units to provide gambling services. […]
It also should be noted that organizers of gambling games have entered into agreements related to carrying out such business activities, in particular, rent agreements for the relevant premises, which, upon entry of the Law into force, have to be terminated because of the ban on gambling business, which will result in significant financial losses of entrepreneurs carrying out gambling business as they must ensure fulfilment of their obligations under such agreements due to the forced unilateral repudiation thereof.
Thus, the enactment of the Law will result in a narrowing of the content and scope of the rights of everyone to work, free choice of work, possibility to earn a living by the work they are free to choose, right to an adequate standard of living for themselves and their families, which is contrary to Part 3 of Article 22 of the Constitution, according to which the adoption of new laws or amendments to the effective laws may not narrow the content and scope of the existing rights and freedoms. In Part 2 of Article 3 of the Constitution of Ukraine, under which the State is responsible to a person for its actions, the protection of human rights is the principal responsibility of the State.
Article 1. Terms and Definitions
As used in this Law, the following terms shall have the following meanings:
1) gambling business - activities of gambling organization and operation in casinos, on gambling machines, at bookmaker's offices, and in electronic (virtual) casinos, undertaken for profit;
2) gambling game - any game requiring the player to make a wager that enables it to receive a prize and the result of which depends on chance partially or completely.
The gambling games shall exclude:
creative contests, sports competitions, etc., regardless of whether or not their terms and conditions promise any monetary or property winnings by chance; […]
[additional exceptions are stated in article 1(2)]
3) gambling organizers - individuals and legal entities engaged in business activities associated with gambling organization and operation for profit;
4) gambling organization and operation - the activities of gambling organizers intending to create the conditions and environment for gambling and prize awarding;
5) gamblers - individuals with full civil capacity who play gambling games.
Article 2. Prohibition of the Gambling Business in Ukraine
The gambling business and participation in gambling games shall be prohibited in Ukraine.
Article 3. Liability for Infringing this Law
Any business entities that are found to be organizing and conducting gambling activities in Ukraine shall be subjected to financial sanctions in the form of a fine equaling eight thousand minimum wages, with confiscation of the gambling equipment, and the profit (income) from such gambling operations shall be seized and transferred to the State Budget of Ukraine.
The sanctions mentioned in part one of this Article shall be imposable by a court decision adopted on a lawsuit initiated by state tax authorities.
Article 4. Final Provisions
1. This Law shall come into force from the day of its publication and shall remain in effect until the adoption of special legislation on gambling business in specially designated gambling zones.
2. From the effective date of this Law, the issuance of gambling organization and operation licenses in Ukraine shall be discontinued, and the licenses issued to business entities before the effective date of this Law shall be deemed invalidated.
4. The Cabinet of Ministers of Ukraine shall have three months from the effective date of this Law to:
develop a draft law on the gambling organization and operation activities in specially designated gaming zones and submit it to the Verkhovna Rada of Ukraine for consideration;
propose to the Verkhovna Rada of Ukraine amendments to the legislation of Ukraine to align it with this Law;
bring its regulatory acts into compliance with this Law;
adopt the regulatory acts required for the implementation of this Law;
ensure that ministries and other central bodies of executive power revise and repeal their regulatory acts which are in conflict with this Law.
The Claimant requests that the Tribunal issue an award:43
(1) Declaring that the 2009 Gambling Ban Law constitute an indirect expropriation of the Claimant's investments in violation of Article 5 of the Treaty;
(3) Declaring that the objection to the jurisdiction is without merits and must be dismissed;
(4) Ordering Ukraine to pay compensation on the full reparation basis of the Claimant's losses suffered as a result of Ukraine's violations listed above in the amount of no less than Euro 12,404,000.00 (twelve million four hundred and four thousand);
(5) Alternatively to relief set out in item (4) above, ordering Ukraine to pay compensation on the full reparation basis of the Claimant's losses suffered as a result of Ukraine's violations listed above in the amount to be calculated as (i) Euro equivalent of US Dollars 15 (fifteen) million at the USD-EUR exchange rate effective as of the date of the Tribunal's award as referenced at Bloomberg website https://www.bloomberg.com/markets/currencies, less (ii) Euro 2,596,000.00 (two million five hundred and ninety six thousand) being the aggregate amount of loss actually recovered by the Claimant;
(6) Ordering Ukraine to pay interest on any amount awarded under item (4) above, or alternatively under item (5) above, at the rate of 12-month LIBOR +4%, compounded annually, accruing from 25 June 2009 until (and inclusive of) the date of the Tribunal's award;
(7) Ordering Ukraine to pay post-award interest on any amount awarded under item (4) above, or alternatively under item (5) above, at the rate of 12-month LIBOR +4%, compounded annually, accruing on the outstanding amount from the date of the Tribunal's award until payment in full;
(8) Ordering Ukraine to pay all costs incurred in connection with these arbitration proceedings, including the costs of the arbitration and of the Permanent Court of Arbitration as well as the legal and other expenses incurred by the Claimant including the fees of its legal counsel, experts and consultants, to be specified later with interest thereon at a reasonable rate.
(9) Ordering any other further relief that the Tribunal deems just and appropriate.
(a) Declare that it lacks jurisdiction ratione materiae to hear the Claimant's claims and hence dismiss its claims;
(b) Dismiss all the Claimant's claims on the merits;
(c) Dismiss all the Claimant's claims for lack of causation;
(d) Dismiss all the Claimant's claims for compensation; and
(e) Order the Claimant to reimburse the Respondent for all costs, fees and expenses incurred in relation to these proceedings. In the alternative, each party should bear their own costs of legal representation and assistance and the remaining "costs of arbitration" should be shared equally by the Parties.
According to the Parties, the following provisions of the Treaty are relevant to the Respondent's jurisdictional objection:
The term "investment" shall comprise every kind of asset invested in connection with economic activities by an investor of one Contracting Party in the territory of the other Contracting Party in accordance with the law and regulations of the latter and shall include, in particular, though not exclusively:
(a) movable and immovable property as well as any other property rights in rem such as mortgages, liens, pledges, and similar rights;
(b) shares, stocks and debentures of companies or any other form of participation in a company;
(c) claims to money or to any performance having an economic value associated with an investment;
(d) intellectual property rights, including copyrights, trade and service marks, patents, industrial designs, technical processes, know-how, trade secrets, trade names and goodwill associated with an investment;
(e) any rights conferred by laws or under contract and any licenses and permits pursuant to law, including the concessions to search for, extract, cultivate or exploit natural resources.
Any alteration of the form in which assets are invested shall not affect their character as investment provided that such an alteration is made in accordance with the laws of the Contracting Party in the territory of which the investment has been made.
The Respondent submits that the Tribunal does not have jurisdiction over this dispute because the Claimant did not make a qualifying "investment" "in accordance with Ukrainian law" within the meaning of Article 1(1) of the Treaty.
The Claimant on its own admission stated that it did not have a licence, arguing that it was not required to have it because OCU had its gambling operations in cafés or bars. OCU had not obtained the required local licence to operate its gambling operations in Ukraine in compliance with Ukrainian law when it entered the market in 2004. The fact that the Claimant did not make its purported "investment" in accordance with the laws and regulations of Ukraine –strikingly by failing to secure a gambling licence for its gambling operations – means that the Tribunal has no jurisdiction in this case under the Treaty given the clear jurisdictional requirement set forth in Article 1(1) of the Treaty.
First, the Claimant attempts to argue ex post facto that it did not need a licence to operate at the time of its entry into the Ukrainian market, alleging that it was merely operating slot machines in cafés or bars. This is despite the fact that the Claimant has itself consistently taken the position, up until the Reply, that it operated gambling halls and casinos.
However, […] the Claimant's arguments are not credible in light of the evidence showing that they had in fact operated gambling halls / establishments in 2004 and thus needed a licence under Ukrainian law, which it failed to have on its own admission.
Second, the Claimant argued that, as long as there was no illegality specifically in relation to its equity and financing to OCU and intellectual property rights, the Tribunal has jurisdiction over the dispute. Such an argument is misconceived.
The Respondent observes that there is no requirement under international investment treaty law that the illegality must specifically relate to the "contribution" by the investor. Instead, the Tribunal should look at the illegality in the context of the alleged investment.
Specifically, in the context of the present dispute, without the requisite license under the applicable domestic licensing laws, the Claimant's gambling operations in Ukraine through OCU had no value. Indeed, the Claimant's claim in this case centres on the licences of its Ukrainian subsidiaries and the earnings it says they would have made while the licences were current, not least since the Claimant substantially recovered its subsidiaries' assets or their sale value and thus cannot now claim for that.
The Claimant submits that Article 1(1) of the Treaty provides "a broad and non-exhaustive list of the types of assets that qualify as 'investments'".46 According to the Claimant, these assets include, "Olympic's subsidiaries, equity contribution into the shared capital of its subsidiary, the OCU, loans, and equipment exported by Olympic to Ukraine, acquired intellectual property rights, possessed movable and immovable tangible property in 24 gambling establishments. Clearly all these assets qualify as investments."47
It is important to note that the Respondent does not deny that Olympic's shareholding in OCU, the equity contribution into the share capital of OCU, the financing provided to OCU, the acquired intellectual property rights, constitute a covered investment under Article 1(1) of the Treaty. Given that there is no dispute that all these assets qualify as investments, the Tribunal has jurisdiction over this claim.
Furthermore, the Claimant has demonstrated that:
• Olympic registered and established its Ukrainian subsidiary according to the requirements of the Ukrainian laws;
• Olympic properly transferred loans to OCU under the loan agreements;
• the Claimant's Ukrainian subsidiaries properly obtained all required licenses and trade patents to operate its business in Ukraine in full compliance with the Ukrainian Licensing Law, the Licensing Conditions and the Trade Patent Law.
It is nonsensical to assume that an experienced and sophisticated gambling operator in the EU, investing millions of euros in Ukraine would have deliberately avoided applying for such straightforward formal administrative requirement that only costed less than 40 euros for 5 years to obtain. In any event, for the sake of discussion, the alleged irregularity even if proven, does not constitute a breach of a fundamental principle of Ukrainian law.
[…] the Respondent's argumentation also contradicts its duty of good faith in these proceedings. The Claimant conducted its business in a public and lawful manner in Ukraine during 5 years and the 2009 Gambling Ban Law immediately put a halt to its business in Ukraine. The Respondent, who had a sovereign duty to administer and enforce the laws in the territory of Ukraine, was perfectly aware of OEG's operation in Ukraine and its compliance with the necessary regulations. Furthermore, there is overwhelming evidence of the lengthy discussions between OEG and the Respondent at the highest level after the introduction of the 2009 Gambling Ban Law and never in the course of them did the question of legality arose [sic]. Thus, any allegations of the Respondent regarding illegality of OEG's investment were created for the purpose of making an artificial argument in this arbitration, are inconsistent with its previous position, and shall be precluded as being a distraction from the real facts of this case.
To ascertain whether the investment was illegal, the Tribunal has to decide precisely what the investment was. The Treaty contains a very wide definition of "investment". Article 1 of the Treaty states that the "term 'investment' shall comprise every kind of asset invested in connection with economic activities by an investor of one Contracting Party in the territory of the other Contracting Party […] in particular, though not exclusively […]." The Treaty then sets forth an open-list of examples of investments, including "movable and immovable property", "shares, stocks", and "intellectual property".
[…] in order to receive the protection of a bilateral investment treaty, the disputed investments have to be in conformity with the host State laws and regulations. On the other hand, as was determined by the arbitral tribunal in the Lesi case, investments in the host State will only be excluded from the protection of the treaty if they have been made in breach of fundamental legal principles of the host country. [emphasis added]
In State practice in the BIT area, the phrase "according to its laws and regulations" is quite familiar. Moreover, it has been well traversed by arbitral precedents […] which make clear that such references are intended to ensure the legality of the investment by excluding investments made in breach of fundamental principles of the host State's law, e.g. by fraudulent misrepresentations or the dissimulation of true ownership.
(I) Expropriated the Claimant's investment without compensation;
(II) Failed to provide the Claimant's investment with fair and equitable treatment ("FET") and maintain favourable conditions for the Claimant's investment;
(III) Failed to provide the Claimant's investment with full protection and security ("FPS").
Article 5 of the Treaty provides as follows:66
Investments of investors of either Contracting Party shall not be nationalized, expropriated or subjected to measures having effect equivalent to nationalization or expropriation (hereinafter referred to as "expropriation") in the territory of the other Contracting Party except for a public purpose. The expropriation shall be carried out under due process of law, on a non-discriminatory basis and shall be accompanied by provisions for the payment of prompt, adequate and effective compensation. Such compensation shall amount to the market value of the investment expropriated immediately before expropriation or before the impending expropriation became public knowledge. The compensation shall include interest calculated on the LIBOR basis from the date of expropriation, shall be made without delay, be effectively realizable and be freely transferable in a freely convertible currency.
The Claimant argues that Article 5 of the Treaty prohibits direct and indirect expropriations unless the conditions for lawful expropriation are met.67 According to those conditions, the expropriation must be (1) "for a public purpose"; (2) carried out on a "non-discriminatory basis"; (3) in accordance with the requirement of due process of law; and (4) accompanied by "payment of prompt, adequate and effective compensation".
According to the Claimant, the Respondent's expropriation of the Claimant's investment was unlawful because it failed to satisfy the conditions of Article 5(1) of the Treaty.73 In this regard, the Claimant makes the following submissions.
The Respondent failed to provide evidence, let alone a prima facie explanation, of how legal gambling services in Ukraine posed a serious and immediate threat to "public morals" and "health". The government of Ukraine submitted no evidence to the Ukrainian parliament linking a threat to morality or public health with the supply of gambling services. The Ukrainian parliament did not rely on any specific scientific evidence linking morality or even crime with gambling services. Furthermore, a mere reference to the words "public health" or "morality" does not satisfy the requirement of public interest. […]
In reality, the abrupt and radical total prohibition of gambling of 15 May 2009 was not linked to a genuine public interest. The circumstances surrounding the temporary ban of 7 May 2009 and the issuance of the total prohibition just three business days later (i.e. 15 May 2009), clearly show that the Gambling Ban Law came about as a result of an opportunistic political manoeuvre from Prime Minister Tymoshenko and members of parliament to gain the support of voters in the upcoming presidential election and gain favours from the Russian President Vladimir Putin, who was interested in having Russian gambling operators succumb to the 2009 Russian restrictions on gambling rather than fleeing to the neighbouring Ukraine to enjoy business opportunities. In the Russian Federation they had been legally preparing to restrict gambling since 2006 and the restriction was to come into effect on 1 July 2009 and gambling operators would have to operate in zones far remote from Russian touristic and business cities.
It is important to note that the total prohibition of casinos came at the time of a hugely contentious presidential election where Prime Minister Tymoshenko was one of the main contenders for the Presidency of Ukraine. According to some polls, the majority of working-class people were against casinos. Then the fire in a casino on 7 May 2009 which killed 7 people mounted pressure on the government to take an extravagant action against all casinos. The Prime Minister Tymoshenko used the accident, as tragic as it was, as the opportunity to (i) be seen as a moral political leader on the side of the people, and (ii) gain political support from voters in the upcoming presidential elections by imposing a total ban on gambling operations with immediate effect at a time where the parliament was under intense political and media pressure when by the time of the elections the fact of the ban would be remembered and the adverse consequences would not be seen yet, (iii) make favours for the Russian President Vladimir Putin by making sure, mere days before the restriction of gambling in the Russian Federation, that the Ukrainian market would be closed to Russian operators and would not undermine Russia's plans to have gambling zones in distant rural areas. As President Yushchenko pointed out, the Gambling Ban Law was a "populist" measure by Prime Minister Tymoshenko.
[…] the Gambling Ban Law was adopted for purely political reasons. No deficiencies in safety/security in the Claimant's (or any other operator) gambling halls had been found or even looked for at the time the Cabinet of Ministers ordered the suspension of all licenses. No evidence or scientific research had been conducted by the authorities or members of parliament showing that legal gambling posed a risk to human health and morality, let alone a serious one. No evidence that experts had recommended the government or members of parliament that urgent measures such as a total ban had to be put in place urgently to protect the population from all types of gambling with the exception of lottery.
The suspension of all licences and the total prohibition on gambling with immediate effect were not justified by any evidence of serious risk to health and morality caused by legal and responsible gambling operations or other risks to society.
[…] the Respondent shut down a lucrative industry in which legal operators had valid licenses, employed thousands of people and paid taxes to the state budget. Furthermore, the total ban only aggravated uncontrolled and illegal gambling, putting at a higher risk vulnerable people. As explained, there is no appropriate correlation between the alleged public purpose and the measure adopted to achieve it.
At the outset, the Respondent argues that its adoption of the Gambling Ban Law was a valid exercise of the state's police powers under international law and thus cannot constitute a breach of Article 5 of the Treaty.80 According to the Respondent, the state's police powers are well-established under customary international law, which must be considered when interpreting the Treaty in accordance with Article 31(3)(c) of the Vienna Convention on the Law of Treaties ("VCLT"), which provides that the interpretation of a treaty should take into account "[a]ny relevant rules of international law applicable in the relations between the parties."81
The Restatement (Third) of the Foreign Relations Law of the United States ("Third American Restatement"), which has been considered and applied by numerous arbitral tribunals in drawing a distinction between a State's police powers and expropriation, also focuses on the measure as opposed to its effects. The Third American Restatement states as follows:
"[a] state is not responsible for loss of property or for other economic disadvantage resulting from bona fide general taxation, regulation, forfeiture for crime, or other action of the kind that is commonly accepted as within the police power of states, if it is not discriminatory."
Later tribunals like the Methanex v USA tribunal have developed the test for a valid exercise of police powers and set out the following elements which must be satisfied:
a. the measure must be bona fide;
b. for a public purpose;
c. non-discriminatory; and
d. accomplished with due process.
The salient point is that with regard to regulatory measures for a public purpose, the role of an international tribunal is not to second-guess or to review a State's decisions in good faith. That is particularly the case when the measure at stake relates to a sensitive domain, such as gambling. […]
The World Health Organisation ("WHO") has confirmed that gambling is an international public health issue and the 2018 ICD-11 list recognises "gambling disorder" as an addictive, impulse control health disorder. Here, there is clearly a public interest, in particular public health and public morality, sought to be addressed by the Respondent's Law on the Prohibition of Gambling. […]
As the Respondent already noted in the Statement of Defence, the high degree of deference that should be accorded to a State in the context of the regulation of gambling is enhanced when the State's measure is taken by a democratically elected legislature, such as the Verkhovna Rada.
The Claimant does not dispute that the protection of public health and morality are legitimate public purposes. […]
As the Respondent has illustrated […], several independent research papers, surveys, newspaper articles and the numerous letters that local and regional State authorities sent to both the President of Ukraine and the Prime Minister evidence the serious public health and morality concerns related to the widespread of gambling and slot machines in Ukraine at the relevant time. These demonstrate the public health rationale behind the Law on the Prohibition of Gambling.
This concern about public health is plainly evidence in considering the legislative and other documents relating to the Law on the Prohibition of Gambling.
OEG knew of several attempts to reform the gambling industry in Ukraine, even prior to its entry into Ukraine, including discussions of absolute prohibition and creation of special zones. OEG had notice from March 2009 of draft legislation aimed at prohibiting gambling in Ukraine. The content of the March 2009 and the June 2009 Legislation was identical, save for a different implementation period.
Not only were the proceedings in the Verkhovna Rada in relation to the adoption of the June 2009 Legislation publicly available, but the expedited procedure was not unusual. In May– June 2009, no less than 139 draft laws were considered under the same procedure. The Verkhovna Rada routinely and lawfully used the expedited procedure as a legislative tool to enable the Verkhovna Rada to manage its schedule.
The President's veto – lobbied for by OEG – meant that Ukraine's legal system ensured that OEG had at least six weeks' notice of the legislation before the final version of the June 2009 Legislation came into effect. The Verkhovna Rada's overturn of the veto was not exceptional and the President could have challenged the June 2009 Legislation in the Constitutional Court, but decided not to do so. OCU could have challenged the CMU to bring forward legislation to establish special gambling zones before local courts. OEG preferred to commence liquidation proceedings even before the enactment of the June 2009 Legislation and almost immediately bring a claim against Ukraine.
[…] it's also important to emphasise that it's no answer here to say, "Oh, well, the cabinet in fact failed to bring forward gambling zone legislation, so the prohibition became de facto permanent by default, and Article 4 of the law can therefore be disregarded". It's no answer because the Claimant bases its case on both treaty breach and damages on the situation as it stood on 25th June 2009, before the three-month period had even commenced.
And it's no answer because, as I've already said, and as we've explained in the Rejoinder […] OCU could have compelled the introduction of such legislation by recourse to Article 17 of the Code of Ukraine on Administrative Procedure. That provision […] relates to an administrative court remedy which could have led to an order requiring the cabinet to act, had it been invoked.
As the Tribunal will see, Article 17(1) expressly gives the administrative courts jurisdiction over disputes in respect of omissions on the part of government authorities. As we've explained in the Rejoinder, this was a commonly used jurisdiction where the Cabinet of Ministers failed to comply with time limits for action set out in legislation, and it was a jurisdiction which allowed the court to order the cabinet to make remedial action.
The Tribunal acknowledges that Article 5 [concerning expropriation] of the Treaty in the present case is drafted very broadly and does not contain any exception for the exercise of regulatory power. However, in using the concept of deprivation, Article 5 imports into the Treaty the customary international law notion that a deprivation can be justified if it results from the exercise of regulatory actions aimed at the maintenance of public order. In interpreting a treaty, account has to be taken of "any relevant rules of international law applicable in the relations between the parties" – a requirement which the International Court of Justice ("ICJ") has held includes relevant rules of general customary international law.
It is now established in international law that States are not liable to pay compensation to a foreign investor when, in the normal exercise of their regulatory powers, they adopt in a non-discriminatory manner bona fide regulations that are aimed at the general welfare.
In the opinion of the Tribunal, the principle that a State does not commit an expropriation and is thus not liable to pay compensation to a dispossessed alien investor when it adopts general regulations that are "commonly accepted as within the police power of States" forms part of customary international law today.
An uncompensated taking of property of an alien or a deprivation of the use or enjoyment of property of an alien which results from […] the action of the competent authorities of the State in the maintenance of public order, health, or morality […] shall not be considered wrongful, provided:
(a) it is not a clear and discriminatory violation of the law of the State concerned;
(b) it is not the result of a violation of any provision of Articles 6 to 8 of this Convention [denial of justice] ;
(c) it is not an unreasonable departure from the principles of justice recognized by the principal legal systems of the world; and
(d) it is not an abuse of the powers specified in this paragraph for the purpose of depriving an alien of his property.
As indicated by earlier investment treaty decisions, in order for a State's action in exercise of regulatory powers not to constitute indirect expropriation, the action has to comply with certain conditions. Among those most commonly mentioned are that the action must be taken bona fide for the purpose of protecting the public welfare, must be non-discriminatory and proportionate.
[…] the Arbitral Tribunal will consider, in order to determine if they are to be characterized as expropriatory, whether such actions or measures are proportional to the public interest presumably protected thereby and to the protection legally granted to investments, taking into account that the significance of such impact has a key role upon deciding the proportionality. Although the analysis starts at the due deference owing to the State when defining the issues that affect its public policy or the interests of society as a whole, as well as the actions that will be implemented to protect such values, such situation does not prevent the Arbitral Tribunal, without thereby questioning such due deference, from examining the actions of the State in light of Article 5(1) of the Agreement to determine whether such measures are reasonable with respect to their goals, the deprivation of economic rights and the legitimate expectations of who suffered such deprivation. There must be a reasonable relationship of proportionality between the charge or weight imposed to the for eign investor and the aim sought to be realized by any expropriatory measure. To value such charge or weight, it is very important to measure the size of the ownership deprivation caused by the actions of the state and whether such deprivation was compensated or not. [emphasis added]
The Tribunal notes that Article 5 of the Treaty provides protection from direct and indirect unlawful expropriation. This is clear from the wording of the Article which states in part that "[i]nvestments of investors of either Contracting Party shall not be nationalized, expropriated or subjected to measures having effect equivalent to nationalization or expropriation […] in the territory of the other Contracting Party except for […]". [emphasis added]
When assessing the evidence of an expropriation, international tribunals have generally applied the sole effects test and focused on substantial deprivation. By way of example, one may cite Pope & Talbot v. Canada, where the tribunal stated that "under international law, expropriation requires a 'substantial deprivation'", or Occidental v. Ecuador, where in relation to tax measures, the tribunal referred to the same "criterion of 'substantial deprivation' under international law […]." In Archer Daniels v. Mexico, the tribunal noted that "expropriation occurs if the interference is substantial."
When a measure affects the environment or conditions under which the investor carries on its business, what appears to be decisive, in assessing whether there is a substantial deprivation, is the loss of the economic value or economic viability of the investment. In this sense, some tribunals have focused on the use and enjoyment of property. The loss of viability does not necessarily imply a loss of management or control. What matters is the capacity to earn a commercial return. After all, investors make investments to earn a return. If they lose this possibility as a result of a State measure, then they have lost the economic use of their investment.
Most tribunals apply the test of expropriation, however it is phrased, to the investment as a whole. Applied to the investment as a whole, the criterion of loss of the economic use or viability of the investment implies that the investment as a whole has become unviable. The measure is expropriatory, whether it affects the entire investment or only part of it, as long as the operation of the investment cannot generate a commercial return.
[…] in order to be considered an indirect expropriation, the government's measures interference with the investor's rights must have a major adverse impact on the Claimants' investments. As mentioned by other investment treaty decisions, the State's measures should amount to a "substantial deprivation" of its value, use or enjoyment, "determinative factors" to that effect being "the intensity and duration of the economic deprivation suffered by the investor as a result of such measures."
Having established that the Respondent indirectly expropriated the Claimant's investment, it is clear that such indirect expropriation was unlawful as it was not conducted in accordance with Article 5 of the Treaty. Specifically, the expropriation was not "accompanied by provisions for the payment of prompt, adequate and effective compensation".
[…] when testing regulatory decisions against international law standards, the regulators' right and duty to regulate must not be subjected to undue second-guessing by international tribunals. Tribunals need not be satisfied that they would have made precisely the same decision as the regulator in order for them to uphold such decisions.
Actions by legislative assemblies are not beyond the reach of bilateral investment treaties A State is not immune from claims by foreign investors in connection with legislation passed by its legislative body, unless a specific exemption is included in the relevant treaty.
On the other hand, the fact that a democratically elected legislature has passed legislation that may be considered as ill-conceived, counter-productive and excessively burdensome does not automatically allow to conclude that a breach of an investment treaty has occurred. If such were the case, the number of investment treaty claims would increase by a very large number. Legislative assemblies around the world spend a good part of their time amending substantive portions of existing laws in order to adjust them to changing times or to correct serious mistakes that were made at the time of their adoption. A claim for a breach under an investment treaty has to be proven by claimants under the specific rules established in that treaty.
Article 2 of the Treaty provides as follows:125
1. Each Contracting Party shall encourage and create favourable conditions in its territory for investments of investors of the other Contracting Party and shall admit such investments in accordance with its laws and regulations.
2. Investments of investors of either Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party.
The Claimant submits that Article 2(1) of the Treaty confers an obligation on the host state to "create favourable conditions" for foreign investors. This obligation means that Ukraine must provide a stable, predictable and transparent legal and business framework.126
The Claimant explains the content of Article 2(2) of the Treaty, which provides for the FET standard, by relying on Professor Schreuer's study, which concluded that the FET standard covers a number of concrete elements, including (i) lack of arbitrariness; (ii) stability and predictability that respect the investor's legitimate expectations; (iii) to act in good faith; (iv) transparency; (v) procedural propriety and due process; and (vi) prohibition of coercion and harassment.127 In addition, the Claimant argues that the FET standard includes the obligation not to cause damage to investments through exorbitant or disproportionate measures.128
According to the Claimant, the Respondent breached (i) the obligation to provide a stable and predictable legal framework in accordance with Article 2(1) of the Treaty, and (ii) the FET standard under Article 2(2) of the Treaty. In this regard, the Claimant submits that:129
[…] Ukraine did not make changes to the legal framework or replaced a regime with another regime – it obliterated the entire legal framework in a matter of days. No respect for those operators with valid licenses, like Olympic, no transitional period provided, no advance notice to investors, no compensation offered let alone provided. Ukraine's radical and disproportionate actions breached its treaty obligations to maintain favourable conditions for Olympic's investment.
Since its entry to the Ukraine's market (sic) in 2004 Olympic had relied on the legal framework and expected to run gambling business smoothly as there were no legal obstacles for operating the gambling business in Ukraine back then and nothing indicated that such business will be closed soon. In 2006, the Ministry of Finance issued to Olympic's subsidiaries all necessary licenses to conduct gambling business. The Licencing Law provided that the licences would not be revoked at the discretion of the authorities let alone Parliament. Therefore, (and this is the fundamental point) Olympic had the legitimate expectation that the licenses would remain operational and would be effectively prolonged "for as long as they would keep filing applications for the issuance of such licenses without defects that would allow the licensing authorities to reject applications under the Licensing Law". By unlawfully suspending Claimant's licenses on by the CMU Decree […] and MFU Order […] and by adopting the 2009 Gambling Ban Law effectively revoking the Claimant's licenses, Ukraine frustrated the legitimate expectations of Olympic. Simply put, Ukraine failed to honour the expectation created by the licenses and the Licencing Law, let alone the general legal framework at that time.
Furthermore, the 2009 Gambling Ban Law was contrary to the government's own policy towards gambling. It cannot be seriously disputed that the Government of Ukraine abandoned its policy written down in Draft Law 3535. A policy of responsible and balanced reform, one which protected licence holders. Interestingly, the Respondent has failed to explain the reasons for this drastic change in policy by the Government.
It cannot be seriously disputed that the Licencing Law (which provided for the grounds for revocation) and the licenses issued pursuant to that licenses create legitimate expectations.
Ukraine does not deny that the fair and equitable treatment obligation encompasses principles of procedural fairness. The principles of transparency and due process are embodied in the principal legal systems adhering to the rule of law
The Tribunal will have noted that Ukraine has little to say in respect to Olympic's claim on lack of transparency and due process. It should be noted that the Respondent does not deny that (i) no prior notice was given to the Claimant prior to the suspension of its licenses; (ii) that Olympic learned of the suspension on the very same day the order was issued; (iii) no notice was given to Olympic prior to the adoption of the 2009 Gambling Ban Law; and (iv) Olympic was forced to shut down its operations immediately when the Law was finally adopted on 25 June 2009.
The Tribunal will also note that:
a. No scientific research or assessment of public health risks associated with gambling was ever conducted by any governmental authority or parliamentary committee (in sharp contrast with the facts in Philip Morris v Uruguay and Methanex v USA).
b. No opportunity was given to the industry and Olympic to engage in a dialogue with the Government or Parliament during the debate of the draft Prohibition Ban Law.
c. No proper discussion or debate was conducted in Parliament.
d. No proper response was ever issued in relation to the President's veto.
Finally, the 2009 Gambling Ban Law was contrary to even the most conservative notion of due process. The law was passed without any proper discussion in government or the Verkhovna Rada. The Respondent says that the expedited procedure is contemplated in the law, therefore, legal. The Respondent misses the point. Although technically it was a procedure envisaged in the law, Ukraine has failed to provide evidence that all other laws adopted in the month of May 2009 were conducted under the expedited procedure. It has also failed to justify why it had to be passed in such a fast-track procedure considering that gambling operations were at the time suspended thus no immediate risk to public health.
The suspension of licences and the 2009 Gambling Ban Law were arbitrary, unreasonable and disproportionate because: (i) the gambling ban was not subjected to any scientific analysis; (ii) was politically motivated; (iii) contradicted the existing government's policy on gambling reform; (iv) it was not properly debated in parliament, nor the industry consulted; (v) imposed a heavy burden on licence holders, (vi) the burden placed on the Claimant was not necessary to achieve the proclaimed goal (at the relevant time more reasonable means were discussed), (vii) the burden imposed for the sake of the good result far outweighed the positive result that it yielded (the problem of negative effects of gambling was not solved but exacerbated). Ukraine places its benefit or purportedly protecting public health as higher than the benefit of investors, without consideration to the need to balance conflicting benefits and match its aim to its end result. This stance would be a simple Leviathanian "end justifies the means" if the end was not as futile as in this case.
Strikingly, for those politicians who first promoted a total ban on gambling in March 2009, the 2009 Gambling Ban Law would have been arbitrary even for their standards. The initial draft of the 2009 Gambling Ban Law dated 26 March 2009 provided for a transitional period for the 2009 Gambling Ban Law to come into force, which would had run for approximately 8 months until 1 January 2010. However, on 12 May 2009, three (3) days before the adoption of the 2009 Gambling Ban Law, the provision on the transitional period was deleted without explanation. Instead the new version of the law draft envisaged that the law would come into force "from the day of its publication". The mere fact that such an important provision was scratched out in three days before the Parliamentary consideration serves a perfect illustration of the arbitrary changes in the regime introduced at that time.
The incendiary statements made by Prime Minister Tymoshenko against a legal business, calling gambling as an industry that is "destroying the Ukrainian nation"; the parliamentary deputy from the Prime-Minister's party, comparing gambling with "AIDS" and "tuberculosis", and the author of the draft 2009 Gambling Ban Law comparing gambling with "drugs, tuberculosis and alcoholism". These incendiary statements shows a lack of intention to assess the reform of the gambling legal and business framework in an objective and facts-based manner. It is clear that the authorities and politicians had made up their minds about what to do with the gambling industry before any evidence, debate or recommendation by experts on public health and addiction was presented to them.
No prior notice, engagement or dialogue with the Claimant or the gambling industry association about the potential suspension and later total prohibition of gambling operations with immediate effect. This shows the bad faith conduct of the authorities by not giving to the industry an opportunity to defend itself or submit comments to the draft 2009 Gambling Ban Law prior to the adoption of the measures.
Adopting the extraordinary fast-track legislative process (only three days) to register, review, discuss, debate and approve the 2009 Gambling Ban Law. This is clearly a bad faith action to trigger the immediate revocation of all licences by law decree in breach of the Licencing Law.
Abruptly repealing the existing legal framework with no transitional period. This shows the lack of intention to consider the rights and effects that the total prohibition would bring to operators with existing valid licences. And, completely ignoring the legitimate concerns raised by the Respondent's own Head of State in his veto to the 2009 Gambling Ban Law. No response whatsoever to the veto was ever produced by the government or parliament.
In relation to the Claimant's reliance on Article 2(1) of the Treaty and the obligation to create predictable and stable conditions for the investment, the Respondent argues that the Claimant did not have legitimate expectations that the regulatory regime would remain unchanged when it started its gambling operations in Ukraine. In this regard, the Respondent submits as follows:134
[…] in order to rely on legitimate expectations, the Claimant should have enquired in advance regarding the prospects of change in the regulatory framework in light of the then prevailing or reasonably to be expected changes in the economic and social conditions of Ukraine. Specifically, where there are no specific undertakings by the host State, the onus is on the investor to "inquire in advance regarding the prospects of a change in the regulatory framework in light of the then prevailing or reasonably to be expected changes in the economic and social conditions of the host State."
The Claimant was aware of the concerns surrounding the problems of gambling in Ukrainian society and the possibility of regulation to restrict or prohibit it. Gambling was a serious public health and social problem in Ukraine and there had been longstanding attempts to legislate gambling in Ukraine. In fact, one of the draft laws published as early as 17 June 2001 proposed to restrict the location of businesses of the type that the Claimant intended to operate in Ukraine to the territory of the Autonomous Republic of Crimea. The effect of such a law on the Claimant, had it been adopted, would have been similar to the Law on the Prohibition of Gambling, given that the focus of the Claimant's Ukrainian business was on Kyiv's urban areas.
In any event […] the Claimant was well aware of the possibility of a prohibition on gambling. Further, as the Respondent's expert notes, in the circumstances in which the Claimant started its operations in Ukraine in 2004 – where there was no unified legislation dealing with gambling and the regulation on gambling was exceptionally light – the Claimant should have been alerted of the need to conduct due diligence enquiries and risk assessments for business planning purposes before starting operations in Ukraine. The Claimant however chose not to conduct appropriate due diligence and risk assessment before entering the Ukrainian market and thus assumed the risk of any adverse regulatory changes. Thus, it cannot now be said that the Claimant had a legitimate expectation that the regulatory regime in Ukraine regarding gambling would not change.
[…] the Claimant should not be considered to have any legitimate expectation that the legal regime on gambling in Ukraine would not be changed or that the Law on the Prohibition of Gambling would never be adopted.
[…] In the present case, the Claimant started it operations in Ukraine in 2004. At that time, it is now undisputed – despite the Claimant's earlier suggestions to the contrary – that the Claimant had not obtained or even applied for any licenses. Therefore, there could not possibly be any legitimate expectations regarding the renewal in perpetuity of its licences because OCU did not have any licences, as the Claimant has admitted.
The Claimant has failed to produce any evidence of any assurances given by the Respondent which would have given rise to a legitimate expectation that its licences would be renewed in perpetuity. Instead, the Claimant relies solely on the expert opinion of Dr. Martinenko to argue that as long as a company complied with the requirements of the laws, the government would renew its gambling licence. However, in Dr. Martinenko's opinion the renewal of the Claimant's licences is conditioned on the applications not containing any defects allowing the licencing authorities to reject them. There is simply no guarantee or expectation that the Claimant's licences would necessarily be renewed in perpetuity.
The adoption of the Law on the Prohibition of Gambling was adopted in a transparent manner. The Law on the Prohibition of Gambling was published in draft in March 2009 before it was adopted by the Verkhovna Rada and was accompanied by an Explanatory Note setting out the rationale for the law. All proceedings in the Verkhovna Rada in relation to the adoption of the Law on the Prohibition of Gambling were publicly available, as is evidenced by the fact that the Claimant has been able to obtain them.
[…] the Law on the Prohibition of Gambling was adopted in accordance with due process, transparency and in compliance with all the legislative and procedural requirements of the Verkhovna Rada.
The Claimant argues that due process and transparency require that it be notified of the measure in advance. The Claimant had advanced notice of the Respondent's intention to adopt the law. [Referring to the March Draft Law on the Prohibition of Gambling of 26 March 2009]
In addition, the Respondent denies that it acted arbitrarily. The Respondent submits as follows:137
In relation to arbitrariness, the Global Telecom v Canada tribunal, quoting Crystallex v Venezuela, observed that the notion of arbitrariness is essentially where a measure "is not based on legal standards but on excess of discretion, prejudice or personal preference, and taken for reasons that are different from those put forward by the decision maker."
The Respondent has demonstrated that the Law on the Prohibition of Gambling was adopted bona fide for a public purpose and in accordance with the rule of law. In this regard, the Philip Morris v Uruguay tribunal noted in the context of determining whether the challenged measure was arbitrary that "[s]ubstantial deference is due in that regard to national authorities' decisions as to the measures which should be taken to address an acknowledged and major public health problem."
Moreover, as explained by the Respondent's expert in his reports, from a survey of various countries, it is evident that countries have adopted a range of measures in relation to gambling and there is a wide spectrum of options available to a State in terms of the regulation of gambling.
The Respondent's choice to restrict gambling via the Law on the Prohibition of Gambling is one option on the spectrum and has been chosen by the Respondent, as indeed it has by numerous other countries as diverse as Brazil, Israel, India and Kyrgyzstan.
Further as noted by the Respondent's expert, gambling is not a "normal" product in light of its implication on sensitive issues of public health and morality. Given the nature of gambling and the public health issues it implicated, public opinion is also a legitimate factor regarding the policy decisions in this area and the majority of Ukrainian public opinion was undoubtedly against gambling.
In view of the foregoing, the Respondent's adoption of the Law on the Prohibition of Gambling was not arbitrary.
As a preliminary matter, the Claimant bears the high burden of proof in demonstrating that the Law on the Prohibition of Gambling was not adopted in good faith. "[T]he standard for proving bad faith is a demanding one, in particular if bad faith is to be established on the basis of circumstantial evidence." This is precisely the situation here where the Claimant is relying on circumstantial evidence in its bid to allege bad faith on the part of the Respondent. The Claimant has not even come close to proving that the Respondent acted in bad faith.
As to the specific allegations raised by the Claimant:
a. It is misleading to suggest that the opinions expressed by Prime Minister Tymoshenko and the author of the Law on the Prohibition of Gambling regarding the issues of gambling in Ukraine amount to evidence of bad faith. Indeed, the words used by Prime Minister Tymoshenko and the author of the Law on the Prohibition of Gambling clearly demonstrated their view that gambling raised serious public health and morality concerns.
b. The Respondent has shown that the Claimant, both directly and as a member of the "Ukrainian Association of Gambling Personalities", lobbied the President of Ukraine in a bid to stop the Law on the Prohibition of Gambling. Thus the Claimant was clearly aware of and engaged regarding the Law on the Prohibition of Gambling, preferring to focus its lobbying efforts through the President of Ukraine.
c. […] the Law on the Prohibition of Gambling was adopted following the legal framework in place in Ukraine. As held in Indian Metals v Indonesia, the principle of good faith cannot preclude the State from amending its law.
Article 2.2 of the Treaty provides that "[i]nvestments of investors of either Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party". [emphasis added]
[…] the Respondent's conduct clearly amounted to a breach of regulatory and full legal protection. As of 7 May 2009, the Respondent increased the number of controls and inspections to the Claimant's casino facilities pursuant to the Order. This was followed by the adoption of the Gambling Ban Law which contradicted more than 6 six years of consistent regulatory and government policy. It was done in complete disregard to the fact that the Claimant had valid licenses to operate at least two more years. There was no public consultation period, no prior notice was given to the Claimant so it could prepare for the total prohibition. The total prohibition was unilateral and constituted an abusive use of the powers of the State with no regard whatsoever to the legal rights of the Claimant under the valid licenses it held. The Gambling Ban Law had the malicious purpose of annihilation of the entire gambling industry in Ukraine from one day to the other. This is a breach of the obligation to provide full protection to the Claimant's investment in Ukraine.
[…] the Respondent actively encouraged such economic injury to the Claimant's investments with several statements to the population against gambling. Prime Minister Tymoshenko and other high-ranking officials made inflammatory and irresponsible statements against the gambling industry that, in the Claimant's submission, amount to harassment. For example, she declared that: "[gambling] is destroying the Ukrainian nation on a moral level."
Mr. Valeriy Pysarenko, a parliamentary deputy from the Prime-Minister's party Batkivshchyna, stated that: "Gambling has become an epidemic that can be compared with AIDS and tuberculosis".
These statements created a negative environment during the period of 7 May to 25 June 2009 which resulted in the annihilation of Olympic's gambling business activity in Ukraine.
In any event, even if the Tribunal considers that the FPS standard does extend to regulatory and legal protections, arbitral tribunals have found that the FPS protection does not protect against a State's police powers. In the present case, the Respondent has shown that its adoption of the Law on the Prohibition of Gambling was a legitimate exercise of its police powers and thus is not a breach of the FPS standard.
The Claimant also attempted to make the argument that the FPS standard was breached because the Respondent allegedly harassed the Claimant by actively encouraging economic injury to the Claimant's investments with statements to the population against gambling. This argument is without merit. The statements the Claimant referred to derive from one single article reporting comments by Prime Minister Tymoshenko and Mr Valeriy Pysarenko. This can hardly amount to harassment, much less a breach of the FPS standard.
Article 31 of the ILC Articles on State Responsibility provides that:146
1. The responsible State is under an obligation to make full reparation for the injury caused by the internationally wrongful act.
2. Injury includes any damage, whether material or moral, caused by the internationally wrongful act of a State.
It is important to differentiate between the principles governing the compensation due for a lawful and unlawful expropriation because a wrongdoer should not benefit from its own wrong. […]
The compensation for an unlawful expropriation must account not only for the loss of an asset in the past but the investor's loss of choice that is protected by the BIT to hold the asset and sell it at some time in the future (the investor's choice if the State does not expropriate) or to invest the amount that would have been paid by the State at the time the asset was lawfully expropriated (the investor's choice if the State does expropriate).
The distinction between the standard of compensation for lawful and unlawful expropriations was explained by the Siemens v Argentina tribunal:
The key difference between compensation under the Draft Articles and the Factory at Chorzów case formula, and Article 4(2) of the Treaty is that under the former, compensation must take into account "all financially assessable damage" or "wipe out all the consequences of the illegal act" as opposed to compensation "equivalent to the value of the expropriated investment" under the Treaty. Under customary international law, Siemens is entitled not just to the value of its enterprise as of May 18, 2001, the date of expropriation, but also to any greater value that enterprise has gained up to the date of this Award, plus any consequential damages.
We understand that an award of damages is usually intended to put the claimant, so far as monetary compensation is able, in the financial position that it would have been in had the complained-of breach or breaches not occurred.
The loss in this matter can therefore be calculated as the difference between: (1) the actual position in which, following the introduction of the Gambling Ban, OEG liquidated OCU and recovered a small proportion of its investments in Ukraine; and (2) the but for (or counterfactual) position in which none of the CMU Decree, the MFU Order or the Gambling Ban were passed, and OEG would have continued to hold the market value of its Ukrainian operations in this hypothetical scenario.
In the actual position, OEG recovered EUR 2.6 million after the CMU Decree was passed […]
In calculating OEG's losses, we have adopted EUR 15 million as the value of the OCU Group in the 'but' for position. This figure is the midpoint of the result of our DCF valuation of EUR 18.7 million and the Maxbet offer for the OCU Group as agreed by OEG on 9 April 2009 of USD 15 million, or EUR 11.4 million as at that date.
Deducting the amount of EUR 2.6 million received by OEG since the introduction of the CMU Decree from EUR 15 million leaves OEG with a loss of EUR 12.4 million before interest.
We have calculated interest applicable to OEG's losses at a rate of LIBOR+4% of EUR 7.6 million.
As follows from [C-117], OEG as OCU Group's shareholder decided to liquidate its Ukrainian subsidiaries on 3 July 2009 in view of the adoption of Gambling Ban Law. Importantly, it was a decision approved and signed by Mr Avila, member of the Management Board and CEO, on behalf of the parent company, but not "the decision of the subsidiary, OCU, on 3rd July" as Respondent mistakenly suggested.
Also, Mr. Pielberg during his cross-examination confirmed that liquidation process began on 3 July 2009.
OEG's 2009 Annual Report refers to the adoption (on 15 May 2009) and publication (on 25 June 2009) of Gambling Ban Law, cancellation of licenses and termination of the activities of all casinos as the reason for OEG's decision to liquidate the Ukrainian subsidiaries. As evident from the context of the discussion and references to enactment of Gambling Ban Law it is only fair to assume that 9 June 2009 is a typo. As Mr. Davie commented, "we know that the EGM, which seems to be the first step in the liquidation process, took place on 3rd July. So there's at least a possibility that that date [9 June] is an error.".
As follows from the OEG's webpage official announcement [C-MP-8], Claimant reopened its Ukrainian subsidiaries in June 2009. As Mr. Davie explained, "[…] we can see from the weekly reports that OCU was continuing to trade after that date [9 June]. So it certainly didn't enter into liquidation as at that date."
At the outset, the Respondent claims that even if the Tribunal finds that there has been a breach of the Treaty, the Claimant is not entitled to any compensation because any losses suffered by the Claimant were not caused by measures adopted by the Respondent. According to the Respondent, the Claimant's investment was a failure well before the Gambling Ban Law was enacted. In this regard, the Respondent highlights that causation is a basic legal requirement that is reflected in the express words of Article 31(1) of the ILC Articles on State Responsibility, which provides for an obligation to make reparation "for the injury caused by the internationally wrongful act."
[…] at the time when the Law on the Prohibition of Gambling was implemented, the OCU Group was effectively insolvent. The OCU Group was loss-making and highly overleveraged with its liabilities massively exceeding their assets and had repeatedly defaulted in paying its significant and ever-increasing interest debts as they fell due. Its filing for bankruptcy, almost immediately following the implementation of the Law on the Prohibition of Gambling, was all but inevitable independently from the adoption of the Law on the Prohibition of Gambling.
As a result, the international law requirement that for a State to be responsible for damage, the damage must have been caused by its internationally wrongful conduct, is not met. Any losses suffered by the Claimant were not a consequence of the Respondent's actions. The Claimant's investment had already collapsed. The Claimant has failed to demonstrate that the Law on the Prohibition of Gambling, or any other acts of the Respondent, caused the Claimant's alleged losses.
Moreover, the Claimant's argument that its rush to liquidate was forced by the enactment of the Law on the Prohibition of Gambling is contradicted by its own evidence which indicates that OEG commenced the liquidation process of all subsidiaries of the OCU Group on 9 June 2009, two weeks before the Law on the Prohibition of Gambling came into force (on 25 June 2009).
The Claimant has failed to meet the necessary test for causation because prior to the adoption of the Law on the Prohibition of Gambling, the OCU Group was already essentially insolvent. […] [emphasis in the original]
FTI's primary valuation approach based on a DCF analysis is imprecise and inapplicable. First, there is not a sufficient track record to make the application of a DCF to the OCU Group anything other than speculative and moreover a DCF approach is inapt as the OCU Group was no longer a going concern. Second, the use of negotiations with Maxbet as a reliable reference of value of the OCU Group is inappropriate and misguided. Third, FTI's failure to identify any comparable transactions to assess the appropriateness of its valuation highlights the unreliability of FTI's overall approach. Finally, FTI failed to make the correct deductions from the damages claimed.
As Senogles' Second Expert Report explains, when appropriate valuation methodologies are applied and account is taken of the fact that the Claimant either recovered or sold the assets of the OCU Group, the value of the Claimant's residual investment at the valuation date was EUR 1,268,785. [emphasis added]
Article 5 of the Treaty provides that expropriation "must be accompanied by provisions for the payment of prompt, adequate and effective compensation. Such compensation shall amount to the market value of the investment expropriated immediately before expropriation or before the impending expropriation became public knowledge." However, as this provision deals with compensation for lawful expropriation, the Tribunal resorts instead to the relevant principles of customary international law as set out by the Permanent Court of International Justice in the Chorzów Factory case:163
The essential principle contained in the actual notion of an illegal act – a principle which seems to be established by international practice and in particular by the decisions of arbitral tribunals – is that reparation must, as far as possible, wipe-out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed. Restitution in kind, or, if this is not possible, payment of a sum corresponding to the value which a restitution in kind would bear; the award, if need be, of damages for loss sustained which would not be covered by restitution in kind or payment in place of it.
[…] the true cause of the Claimant's desire to exit Ukraine at a loss from 2008 was its failed venture. It lacked a buyer and it lacked cash to meet costs, and a liquidation scenario was therefore inevitable.
The Claimant now say they were a distressed seller. The problem is that they had no buyer. […] And a distressed company was not going to withstand the circumstance that they had created for themselves, was not going to be able to navigate the choppy waters into which they had placed themselves, and was going to be going over a precipice. And it's a question of when, not if.
[…] the only appropriate metric for compensation is the liquidation value of assets that were not recovered, plus the prorated residual value of the licences for which payment was made. The unrecovered liquidation value of the OCU Group, after accounting for amounts owed to third parties such as wage arrears and third party claims as well as loan repayments made to OEG, is EUR 1,268,785.
Loans owed to a shareholder are very different from loans owed to a third party because the interests of a third party in deciding whether to liquidate a company or put it into bankruptcy are very different from the interests of a shareholder in deciding whether to put a company into bankruptcy.
The amount of EUR 15 million is:
(1) below the result of our DCF valuation;
(2) below Hansabank's DCF valuation of OCU of EUR 18 million prepared around March 2009;
(4) above the USD 15 million Maxbet offer agreed on 9 April 2009. We observe that (i) OEG appears to have been under some pressure to raise finance from the sale of the OCU Group to invest in other markets and so may have agreed an offer below its market value; and (ii) the OCU Group's financial performance in April 2009, which was not known as at the date of the agreed offer, was strong;
(5) consistent with the amount of EUR 15 million described as the Maxbet offer in correspondence between the parties' legal representatives on 10 May 2019;
(6) consistent with the amount of EUR 14-15 million which Hansabank advised OEG would be a reasonable price for the OCU Group in March 2009; and
(7) consistent with the net asset value of EUR 14.6 million attributed to OEG's Ukrainian operations in its 2008 annual report, after deducting the shareholder loan.
These negotiations were ongoing as of January 2009 and were well advanced by May 2009. OEG was being advised by an investment bank and external lawyers, and an SPA had been drafted and was undergoing detailed negotiation. We see that in red-line versions of the SPA that were going back and forth between the parties.
The timeline here shows the exchanges, which were quite intensive, between the parties, particularly from the date that an NDA was signed in January 2009 and some significant information was shared about OCU's financials in particular. And the graphic shows the convergence on price to what looks like an agreed price of €15 million as of 9th April 2009.
Negotiations continue in detail up to -- I think it's 12th May 2009, which is the last exchange we have. The CMU decree was a couple of days before, and it seems --well, one possible inference, I know it's disputed, but one possible inference is that the negotiations ceased because of the CMU decree and the anticipation of the Gambling Ban Law.
The $15 million price from MaxBet was offered not just in the light of the information that they had received through the NDA -- and indeed some information was publicly available about OCU's operations because OEG was a listed company at all relevant times -- but also MaxBet was operating in Ukraine, was two and a half times bigger than the OCU Group. So, it's reasonable to assume that in any case it was well informed as to the particular sites that OCU was operating, the nature of those sites, the growth prospects for those sites in the particular segments, those sites they were targeting, the risks of OCU and the gambling market more generally.
So, we interpret this agreed price between the parties as being a well-informed agreed price, although due diligence -- and particularly legal due diligence -- was still to be performed.
OEG retained full possession of its assets via its shareholding in OCU and the Pledge Agreement and was free to realise their value. This included OCU's equipment.
In the Statement of Defence, the Respondent raised an issue of the significant discrepancy between the pledged assets valuation as at 2 June 2009 in the Pledge Agreement and the valuation as at the dates of the Acts of Transfer, about two months later.
Clause 1.4 of the Pledge Agreement values all of the pledged assets at EUR 10.1 million. Yet, the total value of property transferred by the Acts of Transfer was EUR 1.4 million. Some of the slot machines valued in the Pledge Agreement at over EUR 10,000 were transferred at EUR 10 each, that is to say only 0.1% of the original value.
It is the Respondent's position that the valuation in the Pledge Agreement should be used as the measure of value extracted by the Claimant from its Ukrainian subsidiaries. Therefore, EUR 9,993,104 should be deducted from the claimed damages figure.
The Claimant has already recovered €10.6 million in value from the OCU Group --that's crucially important -- both of equipment and cash. And that's a similar sort of figure that was being discussed with MaxBet. There is a real risk of double recovery here. They've gotten the equipment back -- the equipment was clearly part of the MaxBet discussion -- and there is also cash repayment. So they've taken away €10.6 million, and now they're looking to ask the Tribunal to give them more.
The asset values in the pledge agreement generally correspond to the book values of the equipment prior to any impairment due to the 2009 Gambling Ban Law.
Therefore, it would not be appropriate to value assets transferred from OCU to OEG by reference to the pledge agreement, comprising book values as calculated prior to the 2009 Gambling Ban Law. Instead, the equipment transferred from OCU to OEG should be transferred based on documents reflecting very material adjustments necessitated both by the second-hand nature of the equipment at hand and made inevitable after the passage of the Gambling Ban, just as FTI did in its second report.
The Claimant calculated the recovered amount based on reliable documents, including an arm's length transaction with a third-party buyer, ISMS, based in Hong Kong; the annex to the attorneys' report which reflected the value of other assets sold by OCU; and independent valuation reports prepared by Ukrainian certified valuer, all reflecting the contemporaneous value of the transferred property following the 2009 Gambling Ban.
[…] an impossibility or even a considerable difficulty that would make it unconscionable to prove the amount (rather than the existence) of damages with absolute precision does not bar their recovery altogether. Arbitral tribunals have been prepared to award compensation on the basis of a reasonable approximation of the loss, where they felt confident about the fact of the loss itself. In the Tribunal's view, this approach may be particularly warranted if the uncertainty in determining what exactly would have happened is the result of the other party's wrongdoing.
These principles should also be applied with regard to the proof of loss of profits, which is the crucial issue in this case as far as the determination of quantum is concerned.
Similarly, the Tribunal notes with approval the statement made by the tribunal in Gold Reserve Inc v Venezuela :209
[…] while a claimant must prove its damages to the required standard, the assessment of damages is often a difficult exercise and it is seldom that damages in an investment situation will be able to be established with scientific certainty. This is because such assessments will usually involve some degree of estimation and the weighing of competing (but equally legitimate) facts, valuation methods and opinions, which does not of itself mean that the burden of proof has not been satisfied. Because of this element of imprecision, it is accepted that tribunals retain a certain amount of discretion or a "margin of appreciation" when assessing damages, which will necessarily involve some approximation. The use of this discretion should not be confused with acting on an ex aequo et bono basis, even if equitable considerations are taken into account in the exercise of such discretion. Rather, in such circumstances, the tribunal exercises its judgment in a reasoned manner so as to discern an appropriate damages sum which results in compensation to Claimant in accordance with the principles of international law that have been discussed earlier.
In addition, the Tribunal considers that the Claimant is entitled to receive pre-award and post-award interest on the compensation awarded to it as to ensure full reparation. In this regard, the Tribunal notes Article 38 of the ILC Articles on State Responsibility, which provides as follows:
1. Interest on any principal sum due under this chapter shall be payable when necessary in order to ensure full reparation. The interest rate and mode of calculation shall be set so as to achieve that result.
2. Interest runs from the date when the principal sum should have been paid until the date the obligation to pay is fulfilled.
In the Tribunal's view, in order to achieve full reparations, which "wipe out all the consequences of the illegal act", the Claimant's request for interest at the rate of 12-month LIBOR + 4%, compounded annually, is reasonable. In this regard, the Tribunal notes that interest at the rate of LIBOR + 4% was also adopted by various tribunals.210 Accordingly, the Tribunal decides that the Respondent shall pay interest on the sum of EUR 7,500,000 at the rate of 12-month LIBOR + 4%, compounded annually, accruing from 25 June 2009 until (and inclusive of) the date of this Award. In addition, the Respondent shall pay post-award interest at the rate of 12-month LIBOR + 4%, compounded annually, accruing on the outstanding amount from the date of this Award until payment in full.
The Tribunal notes that Article 40(1) of the UNCITRAL Rules provides that the "costs of arbitration shall in principle be borne by the unsuccessful party. However, the arbitral tribunal may apportion each of such costs between the parties if it determines that apportionment is reasonable, taking into account the circumstances of the case". With respect to the costs of legal representation and assistance, Article 40(2) of the UNCITRAL Rules provides that "the arbitral tribunal, taking into account the circumstances of the case, shall be free to determine which party shall bear such costs or may apportion such costs between the parties if it determines that apportionment is reasonable."
In accordance with Article 40 of the UNCITRAL Rules, the Tribunal sees no reason why it should depart from the principle that costs follow the event. This rule is well established. The Tribunal nevertheless retains the discretion to assess a reasonable sum to be paid by the losing party and may take into account the conduct of the Parties and the amount awarded compared to the amount claimed.
The Tribunal notes the final costs of the arbitration are USD 543,154.40. In accordance with Article 38 of the UNCITRAL Rules, the fees and expenses of the Tribunal are fixed as follows:
a) Mr Neil Kaplan – USD 172,886.85;
b) Professor Michael Pryles – USD 132,160.00
c) Mr J. Christopher Thomas – USD 109,620.00
a) The Tribunal has jurisdiction and the Respondent's jurisdictional objection is dismissed;
b) The Gambling Ban Law constituted an indirect expropriation of the Claimant's investments in violation of Article 5 of the Treaty;
c) The Respondent shall pay damages to the Claimant in the sum of EUR 7,500,000. In addition, the Respondent shall pay pre-award interest on this sum at the rate of 12-month LIBOR + 4%, compounded annually, accruing from 25 June 2009 until (and inclusive of) the date of this Award;
d) The Respondent shall pay post-award interest at the rate of 12-month LIBOR + 4%, compounded annually, accruing on any outstanding amount stated in the preceding paragraph from the date of this Award until payment in full;
e) The Respondent shall pay the Claimant's costs in the sum of EUR 2,750,000. In addition, the Respondent shall pay simple interest theron at the rate of LIBOR + 4% per annum from the date of this Award until payment in full;
f) The sum outstanding to the credit of the Parties to this arbitration in the accounts of the PCA in the amount of USD 316,292.83 shall be paid to the Claimant's solicitors in part the satisfaction of the order for costs made herein; and
g) All of the Parties' other claims and requests for relief are rejected.
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