Agility v. Iraq: A rare ICSID annulment

30 April 2024

ICSID awards are rarely annulled. The ICSID Annulment Committee in Agility v. Iraq has bucked that trend by partially annulling an ICSID award issued in favour of Iraq. On 8 February 2024, the Annulment Committee annulled the award under Article 52(1) of the ICSID Convention, leaving the investor to decide whether to submit the dispute to a new tribunal.

Background

In February 2017, Agility Public Warehousing Company K.S.C. (Agility), a Kuwaiti multinational, commenced arbitration under the Iraq-Kuwait bilateral investment treaty (BIT) seeking more than USD 650 million in compensation from the Republic of Iraq (Iraq).

Agility argued that Iraq had breached its obligations under the BIT by expropriating Agility's investment in Korek Telecom - Iraq's largest telecommunications provider. The dispute concerned Agility's challenge to (i) an order issued by Iraq's Communications and Media Commission (CMC) requiring Agility to rescind and terminate its acquisition of shares in Korek Telecom (CMC Order), and (ii) Iraq's subsequent measures to implement the CMC Order. Agility's appeals against the CMC Order were unsuccessful before the local courts and administrative bodies. In response, it initiated arbitration under the 2006 ICSID Arbitration Rules in 2017, on the basis that Iraq had expropriated its investment without compensation and denied Agility justice in relation to Agility's attempts to seek remedies before the local courts. On 19 March 2019, the Registrar of Companies in the Kurdistan Region of Iraq issued a decree revoking the assignment of Agility's shares in Korek, which resulted in the transferal of those shares to its previous Iraqi shareholders (the KCR Decree).

In the substantive phase of the arbitration, the Tribunal considered whether Iraq had breached the BIT by:

(1) issuing and implementing the CMC Order; and
(2) denying Agility justice in its attempts to seek recourse before the Iraqi courts.

On 22 February 2021, the Tribunal issued its Final Award, rejecting all of Agility's claims. The Tribunal concluded that the KCR Decree was a valid continuation of the 2014 CMC Order, which the Tribunal determined to be a lawful act that took place before the entry into force of the BIT and therefore not an unlawful expropriation.

Unsatisfied, Agility sought annulment.

On 8 February 2024, a majority of the Annulment Committee (Majority) (with one partial dissent) granted a partial annulment of the Award – annulling the parts of the award relating to Agility's claims in respect of the CMC Order – on the basis that:

the Tribunal manifestly exceeded its powers in its assessment of the Agility's claim regarding the manner of the implementation of the CMC Order; and
the Tribunal had failed to state reasons in respect of its ruling regarding Iraq's implementation of the CMC Order.

Grounds for Annulment

The partial annulment was granted pursuant to Articles 52(1)(b) ("manifest excess of powers by the Tribunal) and 52(1)(e) ("failure to state reasons") of the ICSID Convention.

Article 52(1)(b) is the most commonly invoked grounds - raised in almost 90% of all annulment proceedings. For this specific ground, a number of annulment committees have adopted a two-pronged analysis: (i) whether there is an "excess of power"; and (ii) if there is a an "obvious" or "self-evident" excess of power.

As for Article 52(1)(e) ("failure to state reasons"), annulment committees have explained that the requirement to state reasons seeks to ensure that parties can understand the Tribunal's reasoning, and allow readers to grasp how the Tribunal applied the facts and law in reaching its conclusion. Hence, "insufficient" or "inadequate" reasons can result in an annulment.

The Majority's analysis

(i) Article 52(1)(b)

The Majority disagreed with the Tribunal's approach to determining whether the KCR Decree was a continuation of the CMC Order, to the exclusion of any consideration of the broad manner of the conduct in question. The Majority stated that the Tribunal had failed “to explain why the ‘proper interpretation’ of a measure which was outside the scope of its jurisdiction would assist the Tribunal in determining the ‘manner’ i.e. a way to proceed or act, in which the relevant measure […] was implemented would be consistent with the BIT.” The Committee thus concluded that the Tribunal had not satisfactorily assessed whether Iraq had conducted itself consistently with its obligations under the BIT. Consequently, the Tribunal had exceeded its powers in applying the relevant law (i.e. the BIT), and that this was manifest upon a plain reading of the Final Award.

(ii) Article 52(1)(e)

The Majority observed that the Tribunal stated that it would assess Agility's implementation claim by reviewing the consistency of Iraq's actions in view of its obligations under the BIT, yet it did not do so. The Majority remarked that the Tribunal focused its inquiry on interpreting the CMC Order, which had already been determined as "out of scope" by the same Tribunal, rather than framing its decision in respect of what it had initially defined as its central point of inquiry. Noting that the Tribunal's analysis of the issue at hand lacked a thorough line of logic, the Majority determined that this constituted an annullable error because the Tribunal had failed to state its reasons.

Why is this a rare decision?

Any party may apply for the annulment of an award, provided that the award is final. An annulment committee's role is generally to prevent significant procedural errors and not to act as an appeal body that revisits the merits of a case. As a result, applications for annulment rarely succeed. According to the ICSID's 2024 Updated Background Paper on Annulment (Updated Paper), the annulment rate for awards during the period 2021-2023 was 5%. Furthermore, the Updated Paper shows that it is more frequent for respondent States to seek annulment (57% of applications) and to be successful (58% of States' application succeed) as compared to investors.

Conclusion

ICSID annulments are now rarer than before and continue to be so. Agility v Iraq is an exception to this rule and may therefore provide some comfort to investors seeking annulment in the future. Nonetheless, annulment remains a "limited and exceptional" post-award remedy under the ICSID Convention. Applicants must remember that it is rarely granted, and there are high bars to satisfy the ground for annulment under Article 52. Moreover, unless the parties agree to share the costs, the applicant will typically bear responsibility for all advances on costs (for example, to cover hearing expenses) that ICSID may call for during an annulment proceeding. Therefore, applicants should carefully consider the potential risks and costs when considering whether to seek annulment of an award.