Israel Chemicals to pay NIS 230m extra royalties

Israel Chemicals Photo: Eyal Yizhar

The Israeli government has won an arbitration ruling on interest and linkage on royalties that were not paid on time.

The state has triumphed in its arbitration proceeding against Israel Chemicals (TASE: ICL: NYSE: ICL) regarding royalties on minerals produced by Israel Chemicals' Dead Sea Works subsidiary. The arbitrator accepted the state's method for calculating interest and linkage on the royalties, and ordered Israel Chemicals to pay NIS 230 million, in addition to the amounts awarded in previous arbitration proceedings. Dr. Gil Orion and Adv. Doron Kol from the Fischer Behar Chen Well Orion & Co. law firm, who represented the state in the arbitration, proposed the calculation method.

The principal arbitration ruling stating that Israel Chemicals owed the state royalties was handed down on May 19, 2014. This ruling was followed by the accounting stage, in which the parties presented documents explaining how much they believed Israel Chemicals should pay the state in view of the liability determined in the ruling.

In a supplementary ruling in June 2015 (which Israel Chemicals asked the court to overturn in a petition that the court dismissed), the arbitrators, Supreme Court Justice (ret.) Tova Strasberg-Cohen and Advocates Alex Hertman and Ram Caspi, accepted most of the state's arguments concerning the method for calculating the royalties owed to the state by Israel Chemicals for past use of the state's natural resources - the minerals it produces at the Dead Sea and other sites.

Israel Chemicals argued that it owed the state $90 million in royalties for the period from 2000 until the payment date in December 2014. According to the state, however, this calculation did not reflect the arbitration ruling, and the arbitrators had to rule on a number of disputes between the parties concerning the calculation method.

Among other things, Israel Chemicals argued that the raw materials in the Dead Sea it uses account for only a small percentage of the downstream products it produces, and therefore did not owe royalties on these products, but its argument was rejected. The arbitrators accepted the state's argument that Israel Chemicals owes royalties on all its downstream products, regardless of the percentage of the product taken from the Dead Sea.

Another argument by Israel Chemicals rejected in the supplementary ruling was that it should pay royalties on the products made by its subsidiaries according to the percentage of its holdings in them. The arbitrators ruled that Israel Chemicals had to pay full royalties, regardless of the extent of its holdings. "When Israel Chemicals controls the companies in the concern, Dead Sea Works is liable for the full amount of royalties, regardless of the structure of its holdings in the share capital of the companies in the concern," the ruling stated.

Israel Chemicals further argued that expenses for energy and treatment and storage of raw materials should be deducted from its royalties. This argument was rejected by a majority consisting of Hertman and Strasberg-Cohen, who ruled that deduction of these expenses was not permissible. Another Israel Chemicals argument rejected by the arbitrators concerned the order of calculation for deductions from the amount of royalties to be paid.

Israel Chemicals' position on one disputed question was accepted: the arbitrators accepted the company's argument that when it transfers raw materials from Israel to China, and production is conducted in China, the company is entitled to take the shipping costs into account in calculating royalties, and to deduct the shipping costs from the royalties.

Israel Chemicals was obligated to pay $90 million in royalties for the first arbitration and $60 million more in the supplementary arbitration.

After this dispute was concluded, the two parties contested the final amount owed to the state by Israel Chemicals following interest and linkage calculations.

According to yesterday's arbitration ruling, the unpaid amounts will be converted into New Israeli Shekels at the shekel-dollar representative rate on the original debiting date. As from this date, differences for linkage to the consumer price index and interest stated in the Adjudication of Interest and Linkage Law will be added to the royalties. The arbitrators rejected Israel Chemicals' argument that the interest rate in the law should be reduced because for many years, the state's policy was not to charge royalties.

The ruling followed the opinions of Strasberg-Cohen and Hertman, with a minority opinion by Caspi, who said that only 50% of the amount of the principal should be recalculated according to the Adjudication of Interest and Linkage Law, with the remaining 50% remaining linked to the dollar until the date of the actual payment.

Published by Globes [online], Israel business news - www.globes-online.com - on November 10, 2016

© Copyright of Globes Publisher Itonut (1983) Ltd. 2016

Israel Chemicals Photo: Eyal Yizhar
Israel Chemicals Photo: Eyal Yizhar
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