Investor-State Update: ICSID Annulment in Almasryia v. Kuwait Holds Lessons for Hotel and Hospitality Investors10 May 2024

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.

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:

1. 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.
2. 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.
3. 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.
4. 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.