Karkey Karadeniz Elektrik Uretim A.S. v. Islamic Republic of Pakistan
ICSID · Investment (ICSID and treaty) · Pakistan · 22 Aug 2017
Why it matters
This case is a landmark ICSID award addressing expropriation of a power ship investment, the interplay between corruption allegations and treaty protection, and the calculation of damages for detained vessels. It clarified that a state's anti-corruption measures, even if legitimate, can constitute expropriation if they destroy the investment's value without compensation. The award also set a precedent for awarding lost profits and replacement costs for detained assets, and for declining jurisdiction over counterclaims based on domestic law.
Summary
Karkey, a Turkish company, entered into a rental services contract with Pakistan's Lakhra Power Generation Company to supply power ships (floating power plants) to address Pakistan's energy crisis. The contract was signed in 2009, and Karkey deployed vessels including the Kaya Bey and Alican Bey. In 2012, Pakistan's Supreme Court declared the rental power projects illegal due to corruption and mismanagement, leading to termination of the contract and detention of Karkey's vessels. Karkey initiated ICSID arbitration under the Pakistan-Turkey BIT, claiming expropriation, breach of free transfer, and other violations. Pakistan argued that the investment was tainted by corruption and fraud, and that the tribunal lacked jurisdiction. The tribunal found that while there were irregularities, Karkey's investment was not procured by corruption attributable to Karkey. It held that Pakistan's actions, including the Supreme Court judgment and subsequent detention of vessels, amounted to expropriation without compensation, violating Article III of the BIT. It also found a breach of Article IV (free transfer) due to restrictions on repatriating funds. The tribunal awarded substantial damages for termination charges, unpaid invoices, lost profits, and replacement costs of vessels, plus interest. It declined jurisdiction over Pakistan's counterclaims. The award is significant for its detailed analysis of corruption defenses, expropriation of mobile assets, and quantum of damages.
The detail
Parties: Karkey Karadeniz Elektrik Uretim A.S. v. Islamic Republic of Pakistan
Case number: ICSID Case No. ARB/13/1
Outcome: Pakistan expropriated Karkey's investment and breached the BIT; Pakistan ordered to pay over US$500 million in damages plus interest and costs.
Quantum: US$500 million+ (approx. US$149.8M termination charges, US$28.9M unpaid invoices, US$566K mobilization, US$10M repair costs, US$98.2M lost profits Kaya Bey, US$120M replacement Alican Bey, US$64.8M lost profits Alican Bey, US$2M replacement Iraq, US$11.5M delay damages, US$4.6M insurance costs, plus interest and costs)
Applicable law: Pakistan-Turkey BIT (1997); ICSID Convention; Pakistani law; UNIDROIT Principles
Issues in play: The BIT's expropriation and free transfer provisions collided with Pakistan's sovereign right to regulate and its anti-corruption investigations. The tribunal balanced investment protection against allegations of corruption and procedural irregularities.
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