This case summary was prepared in the course of research for
S Ripinsky with K Williams, Damages in International Investment Law (BIICL, 2008)
Case summary
Nykomb Synergetics Technology Holding AB
v
The Republic of Latvia
Year of the award: 2003
Forum: Arbitration Institute of the Stockholm Chamber of Commerce
Applicable investment treaty: Energy Charter Treaty (1994)
Arbitrators
Bjørn Haug, Chairman
Rolf A. Schütze
Johan Gernandt
Timeline of the dispute
11 December 2001 – request for arbitration
16 December 2003 – arbitral award
Table of contents
I. Executive Summary....................................................................................................2
II. Factual Background and Claims of the Investor........................................................2
III. Findings on Merits....................................................................................................4
A. Correct Price..........................................................................................................4
B. Attribution to the State...........................................................................................4
C. Unreasonable and Discriminatory Measures.........................................................5
D. Expropriation and Other Claims............................................................................5
IV. Findings on Damages...............................................................................................5
A. Law Applicable to the Determination of Damages...............................................5
B. Standard of Compensation.....................................................................................5
C. Damages Claimed ................................................................................................6
D. Damages Awarded.................................................................................................6
1. Damages to the investment v. damages to the investor......................................6
2. Loss of the investor (Nykomb)...........................................................................6
E. Claim for Future Profits.........................................................................................7
F. Interest ...................................................................................................................7
G. Costs......................................................................................................................8
V. Implications/ Initial Analysis....................................................................................8
1
I. Executive Summary
Nykomb, a Swedish company, acquired a Latvian subsidiary (Windau) in order to
engage in the business of producing and supplying electric power in Latvia. In 1997
Windau entered into a contract with Latvenergo, a State-owned Latvian company and
a sole purchaser and distributor of electricity through the national grid. Under the
Contract, Windau undertook to construct a power plant and Latvenergo agreed to
purchase the electric power from Windau at a price composed of two elements – the
general tariff and a multiplier, both set by Latvian laws.
At the time of concluding the Contract, the Latvian law provided for a multiplier of
two (a “double tariff”) to be paid during the initial eight years of plant operation.
However, that law was modified in October 1998 to provide for 0.75 tariff. After the
construction of the plant was finished in 1999, a dispute arose between Windau and
Latvenergo about the proper price. Latvenergo refused to pay the double tariff and
paid 0.75 tariff instead.
Nykomb initiated arbitral proceedings against Latvia under the Energy Charter Treaty
(“ECT”) alleging that the non-payment of the double tariff violated several ECT
obligations: on fair and equitable treatment, on arbitrary and discriminatory measures
and others. Nykomb claimed damages that have arisen from the price difference both
for the past period and for the remainder of 8 years, with the overall amount totalling
approx. US$ 12.8 million (expressed in Latvian currency).
Having examined both the Latvian legislation and the Contract, the Tribunal found
that Latvenergo was obliged to pay the double tariff for the first 8 years of plant
operation. The Tribunal also found that the non-payment of the double tariff was
attributable to Latvia and that this non-payment was discriminatory (Latvenergo had
paid the double tariff to two other Latvian producers of electric power). On this basis,
the Tribunal concluded that Latvia breached Article 10(1) of the ECT prohibiting
discriminatory measures.
The Tribunal found it inappropriate to apply the standard of compensation envisaged
for expropriation cases and chose the route of monetary restitution. The Tribunal
limited recoverable damages to the losses pre-dating the Award (with regard to the
remainder of the 8 years, the Tribunal ordered Latvia to ensure the payment of the
double tariff). Notably, the Tribunal did not accept that the investor, Nykomb,
suffered the same amount of damages as its investment, Windau. At the same time,
there was not enough data to calculate the exact loss suffered by Nykomb. Therefore,
the Tribunal awarded, on a discretionary basis, only one third of the missing price
difference to Nykomb (approx. US$ 2.4 million). The Tribunal also awarded simple
interest at the rate of 6% p.a. from the dates of breach until the date of payment.
II. Factual Background and Claims of the Investor
Nykomb Synergetics Technology Holding AB (“Nykomb”) is a Swedish company
which acquired 100% interest in a Latvian company, SIA Windau (“Windau”). In
March 1997, Windau entered into a contract with Latvenergo, a State-owned Latvian
2
company actively involved in the production of electric power in Latvia, as well as the
sole purchaser and distributor of electricity through the national grid.
Under the Contract, Windau undertook to build a “cogeneration plant” in the town of
Bauska, which was to produce electric power and heat on the basis of natural gas, the
electric power to be purchased by Latvenergo and distributed over the national grid,
and the heat to be purchased and distributed by the Bauska municipality. The price of
electric power for Latvenergo was composed of two elements – the general tariff and
a multiplier, both set in accordance with Latvian laws and regulations.
The dispute arose because according to the Claimant, Windau was guaranteed a
multiplier of two (the “double tariff”) for the first eight years of operation, while
Latvenergo considered the correct multiplier to be 0.75 of the tariff. The lack of
clarity on this issue was due to the evolution of Latvian legislation. Without going
into detail, at the time of the conclusion of the Contract, Latvian law provided for a
double tariff to be paid during the initial 8 years of production. However, that law was
modified in October 1998 to provide for 0.75 tariff.
Although the Bauska plant was built by Windau and was ready to start production in
September 1999, it did not start until 28 February 2000 due to a mentioned price
dispute between Windau and Latvenergo (“deadlock period”). Since 28 February
2000 the Bauska plant was delivering electric power to Latvenergo according to an
interim or settlement agreement of 10 March 2000, at a price of 0.75 tariff, with the
remaining part of the double tariff being paid to an escrow account pending the
resolution of the price dispute.
In December 2001, Nykomb initiated arbitration proceedings against Latvia claiming
several violations of the Energy Charter Treaty (hereinafter “ECT”) (signed 1994, in
force 1998), including provisions on expropriation (Article 13(1)), fair and equitable
treatment standard, treatment less favourable than required by international law,
impairment by unreasonable or discriminatory measures (Article 10(1)). Nykomb
argued that the treaty breaches attributable to Latvia caused the following losses
totalling approx. 7 million Lats:1
• During the deadlock period, 17 September 1999 – 28 February 2000, when no
energy or heat was generated (667,158 Lats);
• Loss of income during the period 28 February 2000 –16 September 2002
calculated on the basis of the actual production during that period (2,311,020
Lats);
• Loss of income in the rest of the 8 years’ period, 16 September 2002 –
16 September 2007, calculated on the basis of the 2001 production volume
and discounted at 6% per annum (4,119,502 Lats).
Except for the deadlock period, the claimed amounts were calculated on the basis of a
price at a double tariff, less the price at 0.75 of the tariff actually paid by Latvenergo
to Windau. In other words, the amounts claimed were equal to Windau’s alleged loss
of net income for non-delivered heat and electricity in the deadlock period plus
Windau’s alleged loss of income for the period after 28 February 2000 due to the fact
that Latvenergo has only paid 0.75 of the tariff for delivered electricity.
1
Approx. US$ 12.8 million (using the exchange rate at the time of writing the summary).
3
III. Findings on Merits2
A. Correct Price
After analysing the facts, the Tribunal concluded that the Contract had to be
interpreted as fixing the multiplier in effect at the moment of signing the Contract.
Specifically, the Tribunal found that Windau had both a statutory and a contractually
established right to the double tariff for an eight year period. (p.29)
The Tribunal’s conclusion was supported, inter alia, by judgements of Latvian courts,
including the Latvian Supreme Court, in a similar price dispute between Latvenergo
and Latelektro-Gulbene Ltd, another independent electricity producer. Relevant court
decisions reaffirmed the right of Latelektro-Gulbene to a double tariff. Following the
Supreme Court decision in that case, in October 2001 Latvenergo entered into a new
agreement with Latelektro-Gulbene clearly assuming the double tariff in the first eight
years.
B. Attribution to the State
The Tribunal reasoned that for State responsibility to arise, the “non-payment [of the
double tariff] must be caused directly by the Republic or a state organ, or
Latvenergo’s actions in the contractual relationship with Windau must be attributable
to the Republic”. (p.29)
The Tribunal considered that the reason for Latvenergo’s refusal to pay was the repeal
of the statutory right to the double tariff (Latvenergo had no authority of its own to
decide or negotiate purchase prices). Therefore the Tribunal assumed that
“Latvenergo felt it to be its duty to deny Windau the double tariff after the legislators’
decision to repeal Windau's established statutory right to the double tariff.” (p.30)
According to the evidence before the Tribunal, the Latvian government had been fully
aware of Latvenergo’s refusal to pay the double tariff and, therefore, the Tribunal
concluded that “the breach of Windau’s contractual rights was allowed to continue,
and in that sense was caused, by the government’s failure to act in order to correct the
situation.” (p.30)
Finally, the Tribunal found that Latvia must be considered responsible for
Latvenergo’s actions under the rules of attribution in international law because
Latvenergo was fully owned and controlled by the State and “clearly an instrument of
the State in a highly regulated electricity market” and a “vehicle to implement the
Republic's decisions concerning the price setting for electric power.” (p.31)
Consequently, Latvenergo’s actions concerning the purchase price were attributable to
the Republic and the latter must be found responsible for Latvenergo’s failure to pay
the double tariff. (p.31)
2
Before proceeding to the merits, the Tribunal affirmed its jurisdiction over the claims.
4
C. Unreasonable and Discriminatory Measures
The Claimant contended that Windau had been subject to a discriminatory measure
because Latvenergo had been paying the double tariff to two other companies in
Latvia. The Tribunal determined that Windau was comparable to these other
companies but subject to different treatment, therefore it found Latvia had acted in a
discriminatory fashion in violation of Article 10(1) of the ECT. (p.34)
D. Expropriation and Other Claims
The Tribunal found that there had been no expropriation of the investment because
there had been no taking of Windau or its assets, no interference with the
shareholder’s rights or with the management’s control over the enterprise. (p.33)
The Tribunal considered that in order to establish Latvia’s liability, it was sufficient to
find a violation of one of the relevant provisions because multiple violations would
not change the amount of the damage or loss caused by the non-payment of the double
tariff. Having found that the non-payment of the double tariff was discriminatory, the
Tribunal decided not to adjudge the other ECT violations asserted in the arbitration.
(p.34)
IV. Findings on Damages
A. Law Applicable to the Determination of Damages
In its award of damages, the Tribunal applied the ECT and international law.
B. Standard of Compensation
The ECT spelt out the principles of compensation only in relation to cases of
expropriation (Article 13(1)) and the Tribunal decided that those principles were not
applicable to the assessment of damages caused by other treaty violations. Instead, the
Tribunal resorted to customary international law which it considered to be
authoritatively restated in the ILC Draft Articles on State Responsibility. (p.38)
In particular, the Tribunal referred to Draft Articles 34 and 35 which imposed on a
responsible State an obligation to “make restitution, that is, to re-establish the
situation which existed before the wrongful act was committed”. The Tribunal
decided that a monetary restitution was an appropriate remedy in that case; the
assessment had to be made on the basis of the difference between the contractually
established double tariff and 0.75 of the tariff actually paid.
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C. Damages Claimed
As noted above, Nykomb requested a relief equal to Windau’s alleged loss of net
income on heat and electric power in the “dead-lock” period, 16 September 1999 –
28 February 2000, and Windau’s alleged loss of sales income on electric power for
the rest of the eight years’ period to 16 September 2007, namely the difference
between the double tariff and the 0.75 of the tariff actually paid, or expected to be
paid.
D. Damages Awarded
The Tribunal limited compensation to damages suffered by Nykomb up to the time of
the Award and declined to compensate future damages. Instead, the Tribunal ordered
Latvia to pay the double tariff for the remainder of the eight years. (p.41)
As regards, the quantum of damages suffered up to the date of the award, the Tribunal
reasoned as follows.
1. Damages to the investment v. damages to the
investor
First, the Tribunal found that the reduced flow of income into Windau did not cause
an identical loss for Nykomb as an investor:
“[I]t is clear that the higher payments for electric power would not
have flowed fully and directly through to Nykomb. The money
would have been subject to Latvian taxes etc., would have been used
to cover Windau’s costs and down payments on Windau’s loans etc.,
and disbursements to the shareholder would be subject to restrictions
in Latvian company law on payment of dividends. An assessment of
the Claimant's loss on or damage to its investment based directly on
the reduced income flow into Windau is unfounded and must be
rejected.” (p.39)
This quote suggests that the damages to the investor must be something less than a
difference between the double tariff and the 0.75 tariff multiplied by volume of
electricity supplied.
2. Loss of the investor (Nykomb)
In spite of its finding that the damages did not flow to the investor in full, the Tribunal
stated that “the non-payment of the double tariff to Windau has caused a substantial
reduction of the economic value and security of the Claimant’s investments in the
Windau enterprise.” (p.39, emphasis added) The Tribunal reasoned that “a substantial
reduction of Windau's earnings as demonstrated in this case must be considered as
6
convincing evidence that a substantial damage to or loss on the Claimant's investment
has been suffered.” (pp. 39-40)
The Tribunal also noted positive effects that a payment of the double tariff would
have brought to both Windau and Nykomb. For Windau, “the higher income flow
would have served to consolidate [its] financial position, provided means for paying
back bank loans and other credits, and ensured a quicker pay-back on the investments
in the cogeneration plant. For Nykomb as an investor the effect would be increased
security for its investments in credits, shares and subordinated loans.” (p.40)
However, the Tribunal admitted that it was difficult to quantify the loss suffered by
Nykomb as an investor. This difficulty was aggravated by the “rather limited”
documentation presented by the Claimant. (p.40) In these circumstances, the Tribunal
said it was “compelled to make an assessment, taking into regard the requirements
under applicable customary international law of causation, foreseeability and the
reasonableness of the result.” (p.41, emphasis added)
The Tribunal decided that a “discretionary award of one third of the estimated loss in
purchase prices of electricity up to the time of this award may serve as a reasonable
basis for quantification of the Claimant’s assumed losses up to the time of this award”
(p.41, emphasis added). On this basis, the Tribunal assessed a compensation of Lats
1,600,0003
as reasonable (this figure also includes interest up to the date of the
Award, see below). (p.41)
Finally, the Tribunal stated that in its assessment and award it used the Latvian
currency (Lats) because this is the currency that the Claimant had used in its prayer
for relief. (p.41)
E. Claim for Future Profits
Regarding the claim for future losses (from the date of the Award for the remainder of
the 8-year period), the Tribunal considered that claim to be “too uncertain and
speculative to form the basis for an award of monetary compensation”. As noted
above, instead of providing relief on this claim, the Tribunal ordered Latvia “to ensure
the payment at the double tariff for electric power delivered under the Contract for the
rest of the eight year period”. (p.41)
F. Interest
The Tribunal referred to Article 26(8) of the ECT which provided that arbitral awards
may include an award of interest. The Tribunal found it “reasonable” to award simple
interest at the rate of 6% p.a., both for pre-award and post-award interest. The
Tribunal mentioned that the rate of 6% was accepted by parties as a “prevailing rate in
Latvia”.
3
Approx. US$ 2.4 million (using the average exchange rate at the time of writing the summary).
7
Nykomb claimed the post-award interest at the rate of 18% – the rate stipulated in the
Contract between Windau and Latvenergo in the event of late payment. However, the
Tribunal stated that that rate was inapplicable to the compensation to the Nykomb for
its own damages (not to Windau) under the ECT.
G. Costs
The Tribunal decided that arbitration costs should be borne by parties in equal shares.
As regards the expenses for legal representation, the Tribunal took into account that
the Claimant was successful on liability and awarded a “reasonable amount” of SEK
2,000,000 (the claimed amount of SEK 8,354,000 was considered too high).
V. Implications/ Initial Analysis
• Where the damages are caused by a single measure, it does not play a role
whether the measure is in violation of one or several of treaty obligations.
• The Tribunal declined to apply the expropriation standard of compensation
in this non-expropriation case. Presumably, this is because the ‘fair market
value’ standard would not be helpful, as there was nothing to value.
Apparently, the application (or non-application) of the expropriation standard
in non-expropriation cases depends on circumstances of a particular case, i.e.
on the type of damage caused to the investor. In this case, the investment did
not “sink” completely but remained a “going concern”.
• The Tribunal accepted that the Draft Articles on State Responsibility were a
restatement of customary international law on issues of damages and
compensation.
• This case raises a point of the flow of damages from the investment to the
investor and suggests that damages suffered by the investor may be different
from (less than) those suffered by the investment. Nykomb requested payment
of 100% of the difference between what was contractually due and what was
actually paid - for the past and the future - to itself. It relied on the theory of
the “economic unity” of the investment enterprise and the parent investor
(contrary to the ICJ Barcelona Traction judgement). The Tribunal, however,
effectively rejected the theory of the “economic unity” and chose to award
only the indirect damages suffered by the investor – a discretionary 1/3 of the
missing difference between what was paid and what was due.
• The Tribunal suggested that causation, foreseeability and the
reasonableness of the result were requirements under customary
international law in relation to quantification of damages. It appears that in
practice, the Tribunal did not consider (or at least, it did not discuss) causation
and foreseeability but based its award on its view of what was reasonable. The
Tribunal also applied the test of reasonableness for interest and costs.
• Proper currency of the award – the Tribunal followed the Claimant’s prayer
for relief. (This is OK if the respondent does not object?)
8
• The claim for future profits was rejected as too uncertain and speculative.
Instead, the Tribunal ordered Latvia to comply with the Contract in future (by
paying the double tariff). This is an example of application of two different
remedies (compensation and specific performance) in conjunction with each
other.
• Simple interest awarded, without discussion. Contractual interest rate (18%)
rejected because the parties to the dispute were different from the parties to the
contract.
9