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"The ad hoc committee highlighted that a lack of reasoning for dismissing the initial claim was enough to annul the decision."
In Almasryia v. Kuwait,¹ an ad hoc committee at the International Centre for Settlement of Investment Disputes (“ICSID”) has issued the first-ever decision annulling an award granted under ICSID Rule 41(5), an expedited dismissal mechanism created to allow swift disposition of claims that are “manifestly without legal merit.” The ICSID ad hoc committee found that the original Almasryia tribunal failed to state sufficient reasons for its dismissal of claims related to the development of a tourist resort in southern Kuwait. The ad hoc committee highlighted that a lack of reasoning for dismissing the initial claim was enough to annul the decision.
As global capital allocations to hotel investments continue to grow, foreign investors need to be aware of the available avenues that can be used to protect their interests. Foreign investors in hospitality have a successful history of using Investor-State Dispute Settlement (“ISDS”) to resolve disputes with host States. Unlike traditional arbitrations in hospitality (which often centre on disagreements between owners and operators or other pertinent issues under commercial agreements like HMAs), ISDS disputes in the sector usually focus on unexpected regulatory changes (that cut across the regulatory regime on which investor had relied upon when making initial investment), inconsistent/discriminatory treatment and adverse policy decisions from host governments that undercut the value of a given real estate investment.
The Middle East is currently the leading hotel investment region globally. Almasryia v. Kuwait is a pertinent and timely reminder for cross-border hotel investors, and indeed global infrastructure developers, to ensure they are informed of available treaty (see details below) and ISDS protections and the implications these may have on the structuring of their hotel investments, agreements between hotel investors and host states as well as any potential disputes.
"Unlike traditional arbitrations in hospitality, ISDS disputes in the sector usually focus on unexpected regulatory changes, inconsistent/discriminatory treatment and adverse policy decisions from host governments that undercut the value of a given real estate investment."
International Investment Treaties
International Investment Treaties or International Investment Agreements (“IITs”) can be in a form of bilateral or multilateral treaty between countries that commit the government of each contracting country to afford specific standards of treatment and investment protections to foreign investors from the other state-party(-ies). Similar standards of treatment and investment protections can also be negotiated directly by way of a host State agreement.
The scope of IITs vary on a case-by-case basis, however typically an IIT requires each contracting state to provide foreign investors from the other state-party(-ies) certain standards of treatment, such as:
- compensation to investors in the event of direct and indirect expropriation;
- protection of investors against unfair or inequitable treatment by government of the host-state; and
- protections against discrimination, which have been interpreted to prevent disparate treatment even in the absence of nationality-based discrimination.
IITs allow foreign investors to enforce their investment protections by resolving disputes through arbitration. In most cases, investors are not required to attempt to resolve disputes through available domestic remedies before filing ISDS claims.
Background of the Almasryia v. Kuwait case
Almasryia, the claimant, an Egyptian construction company, entered into a joint venture investment agreement (the “Agreement”) in May 2009 with a Kuwaiti national (the “Kuwaiti Owner”). The Agreement was struck with the purpose of developing and constructing touristic hotels, real estate and logistics projects on a piece of land located in Wafra in southern Kuwait (the “Land”) within the boundaries of the former Saudi–Kuwaiti neutral zone.
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"The scope of IITs vary on a case-by-case basis, however typically an IIT requires each contracting state to provide foreign investors from the other state-party(-ies) certain standards of treatment."
Almasryia paid US$20m to obtain a stake in the joint venture and a 5% interest in the Land itself. Through the domestic courts of Kuwait, the claimant attempted to secure a deed of ownership to the Land, claiming that real estate title should have transferred from the Kuwaiti Owner under the terms of the Agreement. The Kuwaiti courts rejected this claim, finding that the Kuwaiti Owner possessed that Land under a Saudi deed of ownership and therefore, had no right to claim property rights as a matter of Kuwaiti law.
Almasryia filed an ICSID arbitration against Kuwait, arguing that in failing to grant a deed of ownership for the Land, Kuwait had destroyed the joint venture investment in violation of Kuwait’s obligations under the Egypt-Kuwait bilateral investment treaty (“BIT”), an international agreement containing a set of protections for foreign investors. Specifically, Almasryia argued that their investments were expropriated in violation of article 7 of the BIT.
The initial proceedings
Kuwait filed preliminary objections to Almasryia’s claim pursuant to Rule 41(5) of the ICSID Convention, requesting that the claim be dismissed. Rule 41(5) allows for claims that manifestly lack legal merit to be dismissed early in the process to prevent an unnecessary use of either of the parties’ resources.
Kuwait’s key argument focused on the assertion that Almasryia had failed to establish the existence of any property rights that could form the subject of an expropriation claim and therefore Almasryia’s claims manifestly lacked legal merit.
"In most cases, investors are not required to attempt to resolve disputes through available domestic remedies before filing ISDS claims."
In a terse, 70-paragraph decision, the first-instance tribunal relied on a breakdown of the word “manifestly” and the phrase “without legal merit” identified in a previous ICSID case, Trans-Global Petroleum v. Jordan. The Trans-Global tribunal had recognised that under Rule 41(5) “it is rarely possible to assess the legal merits of any claim without also examining the factual premise upon which that claim is advanced”. In light of this reasoning, the Almasryia tribunal considered that the proper test was “whether taking the facts as a given, unless they are plainly without foundation, the claims are such that they ‘manifestly’ (i.e. clearly and obviously) lack legal merit”.
The tribunal noted that expropriation claims by definition involve the taking or deprivation of valid property rights. The tribunal found no evidence establishing recognition or registration by any Kuwaiti authority of the property rights claimed by Almasryia, rendering it “obvious that an essential element for the Claimant’s expropriation claim is missing, i.e. the existence of property rights in accordance with the laws of Kuwait”. Almasryia’s expropriation claim therefore manifestly lacked legal merit.
In parallel with this objection, Kuwait also argued that the claim was brought without complying with Article 10(2) of the BIT, which imposes a mandatory requirement on the parties to wait six months after a request for amicable settlement to initiate dispute resolution proceedings. Almasryia argued that it had complied with Article 10(2) of the BIT, but relied on a series of communications that, under scrutiny, neither “directly identified the Claimant [n]or the BIT at issue”. The Almasryia tribunal considered that the documents did not constitute a notification from Almasryia to Kuwait requesting an amicable settlement of the dispute, nor did they comply with the mandatory requirement of waiting six months after giving such notice before initiating arbitration. As such, Almasryia had failed to fulfil the BIT’s dispute prerequisites.
"Almasryia had failed to demonstrate that it had a property right in accordance with the laws of Kuwait in order to bring an expropriation claim, and it had also failed to comply with the jurisdictional conditions of giving notice under the BIT."
The majority of the Almasryia tribunal decided in Kuwait’s favour on both accounts. It was the majority’s view that “while it must take the facts as given by the Claimant as true, it is not to turn a blind eye as to what the evidence provided shows on its face”. Almasryia had failed to demonstrate that it had a property right in accordance with the laws of Kuwait in order to bring an expropriation claim, and it had also failed to comply with the jurisdictional conditions of giving notice under the BIT.
Annulment proceedings
In December 2023, the dispute was revisited in light of the annulment proceedings initiated by Almasryia.
The annulment process is unique for arbitrations conducted under the ICSID Convention and is designed to safeguard the integrity of the process. An ad-hoc committee is specifically formed and although it may not revisit the merits of the case it may fully or partially annul the award based on one of the following grounds: (i) the Tribunal was not properly constituted; (ii) the Tribunal has manifestly exceeded its powers; (iii) there was corruption on the part of a member of the Tribunal; (iv) there has been a serious departure from a fundamental rule of procedure; or (v) the award has failed to state the reasons on which it is based. The application for annulment may be filed by either party within 120 days after the award was rendered. Note that once an ad-hoc committee is formed it is empowered to stay the enforcement of the original award pending its decision on annulment.
In Almasryia matter an ad-hoc committee focused its review on the application of Rule 41(5). The committee considered the Almasryia tribunal majority’s decision and concluded that they had not offered substantive reasoning to dismiss Almasryia’s initial claim. The text of the decision is not yet available, but Almasryia has celebrated the win and apparently intends to revive its claim against Kuwait. Note that if an award is annulled, either party may request the resubmission of the dispute to a new tribunal.
"The annulment process is unique for arbitrations conducted under the ICSID Convention and is designed to safeguard the integrity of the process."
ICSID awards are almost never annulled entirely, and Almasryia is procedurally unique. Notably, it constitutes the first decision in the history of ICSID to annul an award that dismissed claims pursuant to Rule 41(5). It is therefore unclear how popular Rule 41(5) will prove in the future, especially as post-Almasryia ICSID tribunals may eschew expedited dismissal to avoid annulment scrutiny.
Lessons for the hotels and hospitality sector
Given the projected growth of cross-border hospitality investments and the sometimes-uneasy relationship between host states and foreign property investors, ISDS will remain a significant reality in the sector for the foreseeable future. The sector has already seen several notable cases² and several investor-state disputes in the sector are still pending.³
ISDS does offer important protections, and Investors and states operating in the sector should therefore be aware of the key lessons arising from these disputes, including:
- Cross-Border Investments: The hospitality sector routinely sees investors acquiring operating hotels, financing hotel developments and tourism infrastructure in various jurisdictions, often with close government cooperation and occasionally by explicit government invitation. Cross-border investments in the sector create opportunities for economic development, job creation, and tourism promotion, but also entail risks related to political instability, regulatory uncertainty, and legal disputes. ISDS provides an international forum established by treaty for resolving disputes between foreign investors and host states, offering well-settled procedural safeguards and robust award enforcement regimes.
- Regulatory Stability: The international hospitality sector operates within a complicated regulatory framework. A wide range of laws and regulations at the national, regional, and local levels govern, for instance, land use planning, building codes, environmental regulations, health and safety standards, employment laws, taxation, and licensing requirements. Investors may challenge regulatory measures that adversely affect their investments, such as retroactive tax changes, exorbitant permit fees, or arbitrary licensing denials. ISDS tribunals must evaluate the legitimacy and proportionality of government actions considering the investor’s legitimate expectations and the state’s regulatory objectives.
- Property Expropriations: Property disputes are a routine issue in hospitality ISDS, as title and ownership conflicts can cause problems for even the best-designed international projects. Government repossessions or property takeovers may be challenged as direct expropriations under international investment law, while regulatory interferences with property rights that degrade or destroy the value of the project (such as revoking permits and issuing adverse, arbitrary rezoning decisions) may constitute indirect expropriations. Pertinent issues in property expropriation arbitrations will include the reasons behind government actions, the legality of government measures, the degree of harm suffered by an investor and the fair market value of the property at issue. Investors may also assert other treaty-based claims for violations of substantive protections, such as fair and equitable treatment, national treatment, and most-favoured-nation treatment.
- Jurisdictional Complications: Arbitration tribunals frequently confront jurisdictional challenges in hospitality disputes, including questions regarding the tribunal’s authority to hear specific claims and the scope of investment protections under applicable treaties. Jurisdictional disputes may involve whether the investor is entitled to bring a treaty claim, whether the project at issue is covered by the relevant investment treaty, the temporal scope of treaty protections, or the exhaustion of local remedies.
Bangkok Trainee Megan Parry also contributed to this article.
Footnote
[1] ICSID Case No. ARB/18/2
[2] In the early ICSID case of Wena Hotels v. Egypt, a government-owned hotel company in Egypt forcibly reclaimed properties leased to a British developer in Cairo and Luxor over rent-related disputes. The ICSID tribunal declared the repossession unlawful and ordered Egypt to pay compensation. This case represented one of the first (if not the first) ISDS award in the hospitality sector and highlighted the complexities surrounding property rights and contractual agreements in cross-border investments. In EBO Invest and others v. Latvia, an ICSID tribunal found that Latvia violated its investment treaty obligations during the construction of a hotel connected to an airport by providing a sub-standard business framework, effectively frustrating the claimants’ investment. This case illustrates the significance of investment stability and regulatory consistency within ISDS, an issue of perennial concern to hotel and hospitality investors in their dealings with host governments.
[3] Swiss investors are currently pursuing treaty arbitration against Tanzania related to ownership arguments over the land for a now-defunct ecolodge in a coastal nature park south of Dar es Salaam. The Caribbean island of Grenada recently settled a US$200m ICSID dispute stemming from a luxury hotel development, where investors accused Grenada of altering regulations and halting application approvals, thus derailing the project.
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