tribunal finds Canada’s environmental assessment breached international minimum standard of treatment and national treatment standard
William Ralph Clayton, William Richard Clayton, Douglas Clayton, Daniel Clayton and Bilcon of Delaware Inc. v. Government of Canada, UNCITRAL
Marquita Davis [*]
In an award dated March 17, 2015, a majority of Bruno Simma (chair) and Bryan Schwartz (investor’s nominee) of a tribunal under the arbitration rules of the United Nations Commission for International Trade Law (UNCITRAL) found that Canada’s environmental assessment of the investors’ proposed quarry and marine terminal project breached the minimum standard of treatment and national treatment provisions under the investment chapter of the North-American Free Trade Agreement (). Canada’s nominee, Donald McRae, strongly dissented from the majority’s analysis of the facts and application of the NAFTA Article 1105 standard. The tribunal deferred the calculation of damages; the investors—four U.S. nationals and a company constituted under U.S. law—initially claimed $300 million.
In April 2002, a permit was issued to build and operate a quarry in the Canadian province of Nova Scotia. In 2004, through a Canadian subsidiary, the claimant company (Bilcon) acquired the quarry and a marine terminal at Whites Point (the Project). Canada and Nova Scotia established a Joint Review Panel (JRP) to conduct an environmental assessment (EA) of the Project. Based on a 2007 JRP report, Nova Scotia and then Canada rejected the Project for its incompatibility with “community core values.” Bilcon initiated arbitration in June 2008, alleging defects in the JRP process and report and in Canada’s subsequent rejection of the project.
At the outset of the analysis, the tribunal addressed Canada’s jurisdictional objections, including that some claimants did not qualify as “investors,” that some claims were time barred, and that the JRP’s acts could not be attributed to Canada. Yet the tribunal upheld its jurisdiction and set out to analyze the key substantive aspects of the case.
Majority declares international minimum treatment standard is bound by FTC Note, but decides standard has evolved since Neer case
The investors argued for the fair and equitable treatment () standard in NAFTA Article 1105 to be interpreted as an autonomous standard encompassing the investor’s legitimate expectations, protection against arbitrary and discriminatory measures, and a general requirement that the state “act reasonably” (para. 359). Canada countered that the standard did not include stand-alone obligations such as legitimate expectations, but that the NAFTA Free Trade Commission’s (FTC) Notes of Interpretation of Certain Chapter Eleven Provisions limited FET to the international minimum standard in accordance with customary international law. The tribunal agreed with Canada that it was bound by the interpretation under the FTC Note and that there was a “high threshold” for Article 1105 to apply (para. 441).
The tribunal then determined that the general standard for Article 1105 as articulated in Waste Management was the most appropriate interpretation. According to Waste Management, “the minimum standard of treatment of fair and equitable treatment is infringed by conduct attributable to the State and harmful to the claimant if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety” (para. 442).
But the tribunal then decided that an international breach was not limited to “outrageous” state conduct, because the current international minimum standard had evolved to provide greater protection than that under the Neer case. It determined that a tribunal must be fact-sensitive, which included weighing investors’ “reasonably relied-on representations by a host state” to determine if Article 1105 was breached (para. 444).
Majority finds Canada in breach of international minimum standard of treatment
Based on specific declarations by Nova Scotia officials, and even on the province’s general investment promotion materials and policy statements, the tribunal held that the investors were clearly and repeatedly encouraged to pursue the Project. According to the tribunal, Canada led the investors to the reasonable belief that, subject to compliance with federal and provincial laws, the Whites Point area was not a “no go” zone for investment (para. 590), as the majority concluded it turned out to be through the JRP’s assessment. In McRae’s dissent, he argued that the fact that Nova Scotia officials encouraged investment in mining and any consequent “legitimate expectations” are irrelevant to whether the JRP has met the Article 1105 standards. He determined that any investor would have the expectation that Canadian law would be properly applied during an environmental assessment and this expectation has nothing to do with any assurances or encouragement provincial officials provided.
The majority found the review was arbitrary because the JRP failed to determine the Project’s viability based on the “likely significant adverse effects after mitigation” criterion. According to the majority, the JRP exceeded its mandate by, without notice or proper legal authority, adopting a new standard of “community core values” assessment, which the majority compared to a public referendum on the project.
Though the majority hedged that a “mere error in legal or factual analysis” (para. 594) would not be sufficient to meet the high threshold of international responsibility, it determined that the breach in this case did rise to that level. First, the majority considered that the investors had reasonable expectations and invested substantial resources and reputation in the JRP process. Second, it took into account their lack of notice regarding the “community core values” assessment standard. Finally, it considered that the JRP fundamentally departed from the standard of evaluation required under Canadian law.
McRae criticized the majority’s reliance on investors’ experts and witnesses for alleged issues in the JRP hearing process, saying the majority did not examine the actual hearing record. According to him, the majority wrongly interpreted the JRP’s elaboration of “community core values.” He stated that a closer examination of the actual report showed that the JRP’s use of “core values” and “community core values” were simply names given to address “human environmental effects,” a term that was a key component of the JRP’s terms of reference (para. 15). In its analysis, the JRP found that the investors had failed to address human environmental effects in their Environmental Impact Statement, even though the JRP’s terms or reference gave them notice of the need to address those effects. McRae rejected the majority’s finding that the JRP in effect made a “zoning decision,” arguing that its recommendations were based on the specific details of the investors’ project (para. 27). He also determined that the JRP had provided sufficient reasoning for its decision not to include individual mitigation measures. Ultimately, McRae concluded that the majority’s finding that the JRP’s actions were arbitrary was not supported by any evidence or reasoning.
Finally, McRae argued that even if the JRP’s report was incompatible with domestic law, this was not sufficient to sustain a NAFTA breach, as the breach did not meet the high threshold of the Waste Management standard. McRae determined that the JRP’s actions were not arbitrary, and the majority did not show that other elements of the Waste Management standard were met. McRae argued that, “[b]y treating a potential violation of Canadian law as itself a violation of NAFTA Article 1105[,] the majority had in effect introduced the potential for getting damages for what is a breach of Canadian law, where Canadian law does not provide a damages claim for such a breach” (para 43).
Majority finds Canada did not accord national treatment to Bilcon’s investment
Bilcon argued that Canada accorded it treatment less favourable than that accorded to domestic investors, by subjecting it to the rarely used JRP review method and by failing to apply the “likely significant adverse effects after mitigation” standard. While the tribunal dismissed the first claim as time-barred, it upheld the second claim.
The majority rejected Canada’s attempt to restrict comparators to investments or investors in “like circumstances” such as those undergoing the more stringent JRP or those projects with significant pushback from a local community. It determined that the broad language in Article 1102 and NAFTA’s general objective to materially increase investments meant that the range of comparators should be broader.
Of the comparison cases involving quarries and taking place in sensitive coastal areas, at least three underwent “likely significant adverse effects” assessments. For the majority, this was sufficient to show that they received more favorable treatment than the investors. The majority determined that a state could justify its differential and adverse treatment under the Pope & Talbot test, but found that Canada did not provide compelling justification for its actions.
McRae disagreed with this finding as well, stating that the investors were treated in accordance with Canadian law.
Investors’ other claims dismissed and majority makes caveat to ruling
The investors claimed other issues with the JRP assessment, but the majority determined that these factors did not rise to the level of international liability.
The majority also decided it was unnecessary to determine if Canada breached the most-favoured-nation () provision since it would not affect the measure of damages.
The majority also took pains to stress that its finding in favour of the investors was not an assessment of substantive Canadian environmental law, but that its decision was based on the specific facts of the investors’ claims and the JRP report’s non-compliance with existing Canadian environmental law.
McRae disagreed, stating that the majority added a control at the international level for investors to challenge decisions of domestic environmental review panels. He warned that this was “a significant intrusion into domestic jurisdiction and will create a chill in the operation of environmental review panels” (para. 48). For him, the most troubling aspect of the majority decision was that a state was held liable in damages to an investor for putting important value on how a project affects the human environment and for taking into account the community’s articulation of its own interests and values.
Notes: The tribunal was composed of Bruno Simma, Bryan Schwartz and Donald McRae. The majority award is available at http://www.italaw.com/cases/documents/2984 and the dissent, at http://www.italaw.com/cases/documents/2985.
tribunal finds Venezuela’s 2009 seizure to be lawful expropriation and awards US$46.4 million in compensation
Tidewater Investment SRL & Tidewater Caribe, C.A. v. The Bolivarian Republic of Venezuela, ICSID Case No ARB/10/5
Matthew Levine [*]
An oil and gas marine services dispute with Venezuela has resulted in an arbitration award at the International Centre for Settlement of Investment Disputes (ICSID).
The tribunal agreed with the claimants, two companies within the Tidewater group, that the government’s 2009 seizure constituted an expropriation under the Barbados–Venezuela bilateral investment treaty (). It awarded US$46.4 million in compensation plus interest compounded from the date of expropriation.
The damages awarded fell significantly short of the claimants’ ask of US$234 million. The tribunal did not accept that the expropriation was illegal under the BIT. In addition, the tribunal’s discounted cash flow (DCF) analysis led to an assessment of fair market value that was significantly lower than the claimants’ suggestion
SEMARCA, a Venezuelan company within the Tidewater group, has been operating marine transportation services since 1958. From 1975 onwards, SEMARCA provided maritime support services to subsidiaries of Venezuela’s national oil company, PDVSA, under various contracts.
On May 7, 2009, Venezuela enacted the “Organic Law that Reserves to the State the Assets and Services Related to Primary Activities of Hydrocarbons” (Reserve Law). The following day, May 8, 2009, Venezuela issued Resolution No. 51, identifying the claimants, along with 38 other service providers, as subject to the Reserve Law. PDVSA’s subsidiaries seized SEMARCA’s assets on Lake Maracaibo—its offices and 11 vessels—almost immediately and, later, its four vessels in the Gulf of Paria. Tidewater initiated arbitration in February 2010.
In its February 2013 Decision on Jurisdiction, the tribunal dismissed the claims of six of eight claimants from the Tidewater group. The tribunal found jurisdiction over only Tidewater Caribe, C.A., a Venezuelan company that owned SEMARCA at all material times, and Tidewater Investment SRL, a Barbados company that owned Tidewater Caribe, C.A., since 2009 (jointly referred to as Tidewater).
Seizure of Tidewater’s assets had effect of expropriation
The tribunal assessed whether the seizure of Tidewater’s vessels constituted an expropriation. It remarked that BIT Article 5 on expropriation included a formulation that is commonly found in many investment treaties. The tribunal highlighted the question of “effect,” stating that “it is well accepted in international law that expropriation need not involve a taking of legal title to property. It is sufficient if the State’s measures have an equivalent effect” (para. 104).
In assessing whether the measures in the current case had an effect equivalent to expropriation, the tribunal found it useful to consider the factors relied upon by the tribunal in Pope & Talbot, namely, whether:
- the investment has been nationalized or the measure is confiscatory;
- the state has taken over control of the investment and directs its day-to-day operations;
- the state now supervises the work of employees of the investment; and,
- the state takes the proceeds of the company’s sales.
On the evidence, including the statements of witnesses from Tidewater and PDVSA’s subsidiaries, the tribunal found that expropriation had occurred upon the physical seizure of the vessels.
The tribunal found that, “[w]hilst the seizure would have come as a surprise,” it was natural for the claimants not to accept its effect immediately. According to the tribunal, “the scope of that effect upon Claimants’ investment did not finally become clear until the seizure of the remainder of the vessels at Corocoro [in the Gulf of Paria] some two months later. In these circumstances, documents from Claimants asserting the continuation of their business in the intervening period are consistent with a dawning realisation that their business had been nationalised” (para. 109).
Tidewater fails to establish that expropriation was unlawful
Tidewater had sought to convince the tribunal that the government’s failure to pay compensation rendered the expropriation illegal under the BIT. Based on the parties’ pleadings, the tribunal reviewed the international case law from Chorzow Factory onwards pertaining to a taking that lacks only the payment of fair compensation to be lawful. It further noted recent investment arbitrations following a consistent approach. The tribunal in Goetz v. Burundi, for example, held that “all other conditions for a lawful taking having been met, the failure to pay prompt and adequate compensation did not suffice ‘to taint this measure as illegal under international law’” (para. 135).
In the present case, Tidewater argued that the taking was illegal since Venezuela’s contemplated level of compensation under the Reserve Law was inconsistent with the standard of compensation required by the BIT. The tribunal observed that, while the BIT defines the compensation payable for expropriation as market value immediately before an expropriation, the determination of that market value is delegated to the tribunal.
Fair and Equitable Treatment claim is quickly dismissed
The real focus of the claim was not on the procedural fairness of Venezuela’s treatment of the claimants, but on its taking of their property. The tribunal saw as simply inapposite claims for breach of fair and equitable treatment as well as arguments based on national treatment and most-favored-nation treatment.
Material factors of fair market value, such as country risk, determined by tribunal
The tribunal found that determining fair market value by reference to either the liquidation value or the book value of the seized assets, as Venezuela proposed, would likely only be appropriate where the enterprise was not a proven going concern. Rather, given that SEMARCA was not a publicly listed company and that its business was limited to one country and one customer, a DCF analysis was appropriate.
As the parties’ expert reports tended to contain overly optimistic estimates, the tribunal made its own assessment as to each of six key factors in the DCF analysis, namely: scope of business, accounts receivable, historical cash flow, equity risk, country risk, and business risk. In terms of country risk, the claimants’ expert had discounted a very modest 1.5 per cent to induce willing buyers prior to the 2009 taking. Venezuela’s expert, on the other hand, had been in the potentially awkward position of discounting 14.75 per cent in respect of perceived political risks. The tribunal found the respondent’s position reasonable adopting a 14.75 per cent premium. Ultimately, the expropriated assets’ market value was determined to be significantly lower than claimed.
Notes: The tribunal was composed of Campbell McLachlan QC (President appointed by the Chairman of the ICSID Administrative Counsel, New Zealand national), Andrés Rigo Sureda (claimant’s appointee, Spanish national), and Brigitte Stern (respondent’s appointee, French national). The final award of March 13, 2015 is available at http://www.italaw.com/sites/default/files/case-documents/italaw4206_0.pdf
Venezuela ordered to pay for unlawful expropriation of Owens-Illinois investments
OI European Group B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/11/25
Martin Dietrich Brauch [*]
Venezuela was ordered to pay US$372,461,982 plus interest to a company within the Owens-Illinois Group, one of the world’s largest producers of glass containers, for the expropriation of its investments in Venezuela. A tribunal at the International Centre for Settlement of Investment Disputes (ICSID) rendered the award on March 10, 2015.
Background and claims
The claimant, OI European Group B.V. (O-I), is a company constituted under Dutch law. Through two companies it controlled—Owens-Illinois de Venezuela C.A. (OIdV) and Fábrica de Vidrios los Andes C.A. (Favianca)—O-I owned the largest industrial plants for the production, processing and distribution of glass containers in Venezuela.
Venezuela’s intention to expropriate OIdV and Favianca became known on October 25, 2010, when then-President Hugo Chávez—during a television broadcast—ordered the Vice-President to take over the companies. The Expropriation Decree was issued the following day, directing the Office of the Attorney General to initiate the appropriate proceeding under Venezuela’s 2002 Expropriation Law. Armed National Guard officers were sent to the plants to control access and protect the assets.
At the employees’ urging, Venezuela took over the management of the plants a few days after the Expropriation Decree, and production was never halted. The newly created state-owned company Venvidrio has been managing the companies since April 30, 2011. At the time the arbitral award was rendered, the expropriation proceeding was still ongoing, and no compensation had been paid.
O-I initiated arbitration against Venezuela under the Venezuela–Netherlands bilateral investment treaty (BIT) in September 2011, alleging Venezuela breached the BIT clauses and standards on expropriation, fair and equitable treatment (FET), full physical protection and security, freedom of transfers, and the umbrella clause (through a breach of Venezuela’s Investment Law). O-I also asked for indirect and moral damages, claiming a total amount of damages of no less than US$929.544.714, plus interest.
Tribunal rejects Venezuela’s two jurisdictional objections
Venezuela objected that O-I did not have a covered investment, but the tribunal reasoned that O-I’s business assets, by their very nature, fulfill the definition of “investment” under the BIT and theand the objective of the treaties to promote economic development. Referencing KT Asia v. Kazakhstan, Venezuela countered that, by acquiring the companies through corporate reorganization, without an effective contribution, O-I did not make an “investment.” The tribunal rejected the argument as well, pointing out that O-I and the Owens-Illinois Group had legitimately acquired the companies, made significant capital contributions and reinvested dividends.
O-I had also asked for damages of US$50 million for losses it would experience because of Venvidrio in the Brazilian market. In its second objection, Venezuela affirmed that the damages to O-I’s businesses outside Venezuela were beyond the scope of the tribunal’s jurisdiction. The tribunal, reasoning that issues of damages were intrinsically connected to the determination of a breach, decided to deal with Venezuela’s objection in the merits phase.
Tribunal holds that expropriation was unlawful
O-I’s main claim was that Venezuela unlawfully expropriated its investment. The tribunal found that the expropriation was carried out in the public interest (to favour domestic development) and was not discriminatory, but a strategic decision, considering that O-I’s companies held 60 per cent of the glass container market. However, it also found that the expropriation was not conducted under due process, as the assets to be expropriated were not precisely identified, and that Venezuela had unjustifiably delayed payment of compensation.
Unlawful expropriation also an FET breach, tribunal holds
After an analysis of the FET clause under the BIT, the tribunal held that the standard obligates Venezuela to treat foreign investors in accordance with international law and, in particular, without arbitrariness or discrimination. For the tribunal, given that the expropriation was unlawful as Venezuela failed to comply with due process and to compensate O-I, Venezuela also breached FET, “as it is difficult to imagine an illicit direct expropriation that does not result in a breach of this standard” (para. 501). Venezuela was also held to have acted arbitrarily by taking control of O-I’s production plants through ill-founded administrative acts, the actual purpose of which was to avoid seeking a court order as required by the Expropriation Law.
Full protection and security, freedom of transfers, and umbrella clause claims
The tribunal agreed with Venezuela’s defense that, by sending the National Guard to the plants for the first weeks after the expropriation, the country was ensuring compliance with the full protection and security standard rather than breaching it. It also sided with Venezuela in holding that O-I waived its right to free transfers under the treaty when it opted to transfer funds via the parallel exchange market. Yet it upheld the investor’s umbrella clause claim, considering Venezuela’s breaches of the country’s Investment Law to be treaty breaches.
No sufficient basis for moral damages claim
O-I claimed for US$10 million in moral damages it allegedly suffered during the six months following the expropriation. Arguing that Venezuela’s conduct was “atrocious” (para. 904) during that period, O-I referred to some of the facts already claimed as breaches of the FET and full protection and security standards. However, the tribunal held that O-I did not appropriately describe the facts and their effects. It concluded that the claimant could not demonstrate that Venezuela’s officials harassed or threatened the employees to continue working in the plants, or were physically aggressive or threatening when dealing with the companies, or caused any psychic suffering or reputation loss to O-I or its agents.
Damages, costs, legal expenses
The tribunal analyzed in great depth the calculation of damages owing to O-I for expropriation. Finally adopting the discounted cash flow (DCF) method, it concluded that the market value of the expropriated companies as calculated by the experts was both reasonable and confirmed by alternative methodologies. The value of the two companies was estimated at US$510,340,740. Taking into account O-I’s shareholding of 72.983 per cent of the companies, the tribunal awarded O-I damages amounting to US$372,461,982. It also set interest at the 1-year LIBOR rate plus 4 per cent, compounded annually, accruing from the date of Expropriation Decree until the date of payment.
In determining costs, the tribunal considered that O-I was successful in most of it claims. It ordered Venezuela to reimburse O-I for its contribution of US$500,000 to the costs of the proceeding, and to pay US$5,750,000 for reasonable defense costs, plus post-award interest.
Notes: The ICSID tribunal was composed of Juan Fernández-Armesto (President appointed by the Chairman of the Administrative Council, Spanish national), Alexis Mourre, (claimants’ appointee, French national) and Francisco Orrego Vicuña (respondent’s appointee, Chilean national). The award is available, in Spanish only, at http://www.italaw.com/sites/default/files/case-documents/italaw4209.pdf.
Tribunal holds Romania in breach of Fair and Equitable Treatment
Hassan Awdi, Enterprise Business Consultants, Inc. and Alpha El Corporation v. Romania, ICSID Case No. ARB/10/13
Joe Zhang [*]
In an award dated March 2, 2015, a tribunal at the International Centre for Settlement of Investment Disputes (ICSID) found Romania violated the fair and equitable treatment (FET) standard under the 2012 Romania–United States bilateral investment treaty (BIT). The tribunal awarded the claimants over €7.7 million in compensation and legal fees and costs, plus interest, dismissing expropriation claims of more than €400 million.
The proceeding was initiated in 2010 by Hassan Awdi (a U.S. national) and two U.S. companies controlled by him. They alleged Romania breached the BIT in its treatment of their investments, namely Rodipet S.A., a formerly state-owned press distribution and retail company acquired by them through a privatization process, and Casa Bucur, a historic property acquired from Romania and remodelled by them into a luxury hotel and restaurant.
In particular, the claimants challenged two Romanian court decisions. First, a decision by the Romanian Constitutional Court, declaring Law 442 unconstitutional. Law 442 granted Rodipet the right to long-term concessions over the land housing its 1,400 existing news kiosks across the country and future kiosks it established. Second, a decision by the Romanian Supreme Court determining that Casa Bucur should be returned to its original owners.
At the outset of the proceeding, Romania challenged the tribunal’s jurisdiction and the admissibility of the claims on several bases. Rejecting all of the jurisdictional challenges, the tribunal held Romania liable for breaching FET standards in two separate occasions, but rejected the claimants’ expropriation and denial of justice claims.
“Investment” under ICSID Convention revisited
Romania challenged the jurisdiction of the tribunal claiming the alleged investment by Mr. Awdi and the group of companies directly and indirectly owned by him (Awdi Group) was “a dizzying carousel of transactions” intended to “to strip Rodipet of its business and assets” (para. 137). Romania further complained that, during Rodipet’s privatization, none of the claimants made any active contribution in the country and alleged that their practice were divestment rather than investment.
The tribunal rejected Romania’s contention that the Salini criteria, in particular, the requirement of a contribution to the development of the host state, should be read into the term “investment” under the ICSID Convention. It noted that, instead, the meaning of ”investment” should be determined exclusively and strictly as set forth in the BIT, with no room for additions or subtractions. It went on to hold that the open-ended asset-based definition under the BIT made the mere existence of an economic linkage between the claimants and the investments sufficient for purpose of jurisdiction.
Romania also challenged the jurisdiction on the basis that Mr. Awdi only owned a minority interest in Rodipet through some indirect arrangement. Noting that the BIT covered investments “owned or controlled directly or indirectly by nationals or companies of the other Party,” the tribunal rejected Romania’s objection. Recognizing minority shareholders and indirect shareholders both have rights to “bring investment treaty claims […] within the limits of their shareholding” (para. 194), the tribunal found Mr. Awdi, although a minority shareholder, dominated the decision-making structure of the entity that acquired Rodipet and, thus, gained de facto control sufficient for establishing jurisdiction.
Ongoing criminal proceedings insufficient for inadmissibility challenges
Romania objected to the admissibility of the claims, alleging that the claimants investments were illegal and made in bad faith. Mr. Awdi was subject to three different criminal investigations and proceedings in Romania. He was acquitted by the trial court in one of the proceedings relating to human trafficking charges, but convicted in a separate proceeding, confirmed by an appellate court. The third proceeding was still pending. The tribunal found the diverging outcome of those investigations and proceedings rendered it impossible to draw any convincing evidence to make out Romania’s case.
Fork-in-the-road challenge dismissed due to lack of parallel litigation
Romania also raised admissibility objections on the basis that the claimants has sought to resolve the Casa Bucur–related dispute in Romanian courts and, thus, should be barred from submitting it to the tribunal, as the BIT contained a fork-in-the-road provision. Noting that the local proceeding was annulled due to the claimants’ failure to pay court fees and was never heard by the courts, the tribunal rejected Romania’s challenge and found there was no parallel litigation, hence no room for application of the fork-in-the-road provision.
Repeal of Law 442 amounted to FET breach, but not expropriation or denial of justice
Turning to the merits, the tribunal rejected the claimants’ argument that Law 442 itself constituted a land concession, but sided with Romania’s contention that the law merely gave them a right to negotiate such concession, which was not covered by the BIT as an investment and, thus, not subject to expropriation claims. In addition, the tribunal rejected the claimants’ contention that the Romanian Constitutional Court’s proceeding repealing Law 422 was “so egregiously wrong under international law” that would warrant a finding of a denial of justice or of an arbitrary or discriminatory treatment (para. 326).
Even so, the tribunal considered that the repealing of Law 442 coupled with Romania’s failure to provide any alternative measures to remedy the situation constituted a breach by Romania of its commitment made in Rodipet’s Privatization Contract to make “all reasonable efforts” to facilitate Rodipet’s land concessions, which was relied upon by the claimants when making the investment. According to the tribunal, such failure to act, after the enactment of Law 442 had created relevant legitimate expectations, resulted in the breach of the FET standard under the BIT.
Restitution of Casa Bucur to its original owner did not amount to expropriation, but Claimants had a legitimate expectation for the return of the purchase price
The tribunal also found Romania liable for a separate FET breach in relation to the Casa Bucur dispute. The purchase of Casa Bucur was completed when Romania was reforming its property law and restituting many state-owned historical buildings to their original owners. Evidence showed that Casa Bucur’s title had long been contested by different parties. It also showed that the claimants were aware of and expressly assumed the uncertainty regarding the title and the risk of restitution when purchasing the property. The property was eventually taken and returned to its original owner pursuant to a ruling by the Romanian Supreme Court. The claimants argued that the result was a “text book example of an expropriation” (para. 426).
The tribunal disagreed. It found that the claimants were indeed fully aware of the risks and uncertainties when purchasing the property. However, the tribunal did note that the claimants had a legitimate expectation that, if the risk materialized, the purchase price of the property would at least be returned. Thus, the tribunal held that Romania’s failure to return the purchase price to the claimants constituted a breach of the BIT’s FET standard.
The tribunal awarded the claimants approximately €7.5 million as compensation for the FET breach regarding Rodipet and approximately €147,000 for the breach regarding Casa Bucur. Both amounts were based on documented sunk cost suffered by the claimants. In addition, the tribunal also ordered Romania to reimburse the Claimants US$ 1 million for part of their legal fees and costs as well as awarded approximately €482,000 to the claimants as half of the cost incurred to gaining access to documents seized by the government. All other bases for compensation, as requested by the claimants, including loss of profit and possible future sales, were rejected by the tribunal.
Notes: The Tribunal was composed of Piero Bernardini (President appointed by agreement of the co-arbitrators, Italian national), Hamid Gharavi (claimants’ appointee, French and Iranian national), and Rudolf Dolzer (respondent’s appointee, German national). The award is available at http://www.italaw.com/sites/default/files/case-documents/italaw4208.pdf.
Tribunal finds an abuse of process in claimants’ corporate restructuring; Peru recoups costs
Renée Rose Levy and Gremcitel S.A. v. Republic of Peru, ICSID Case No. ARB/11/17
Martin Dietrich Brauch [*]
In an award of January 9, 2015, a tribunal at the International Centre for Settlement of Investment Disputes (ICSID) dismissed on jurisdictional grounds the case of Renée Rose Levy (a French national) and Gremcitel S.A. (Gremcitel) against Peru. The tribunal found an abuse of process in the corporate reorganization carried out by the claimants, whose sole purpose was to gain access to arbitration against Peru under the France–Peru bilateral investment treaty (BIT).
Morro Solar is a historical site in Peru, protected under Peruvian law since 1977. In 1995, the Levy Group purchased land in the surroundings of Morro Solar to develop the Costazul tourism and real estate project. Between 2003 and 2004, the land and the rights to the project were consolidated in claimant Gremcitel, a Levy Group company incorporated in Peru.
In 2001, the Levy Group submitted to the Peruvian National Institute of Culture (INC, in its Spanish acronym) a proposal for the historical delimitation of Morro Solar. The INC decided in 2003 that there were no grounds to lift the site’s protected status, requiring the Levy Group to submit a project for prospecting and excavation of its land, and stressing that any urban development plans would depend on INC approval.
The INC also created a commission to study the delimitation of the boundaries of Morro Solar. The studies were concluded by a 2005 report, and a 2007 resolution based on that report formalized the delimitation. Only one day before the 2007 resolution was issued, direct control over Gremcitel was transferred to the claimant, Ms. Levy.
Levy and Gremcitel bring FET claims
For Ms. Levy and Gremcitel, the 2007 resolution imposed on their land a status of intangibility that did not previously exist, frustrating their legitimate expectations to develop the Costazul project. They initiated arbitration in May 2011, alleging that Peru had breached the fair and equitable treatment (FET) standard under the BIT and seeking damages quantified by their expert at US$41 billion.
The status of claimants as “investors” when the dispute arose
Peru’s first objection to the tribunal’s jurisdiction was that the claimants had not demonstrated that they were “investors” within the meaning of the BIT and the ICSID Convention when the events giving rise to the dispute occurred. The tribunal reasoned that “the Treaty must be in force and the national or company must have already made its investment when the alleged breach occurs, for the Tribunal to have jurisdiction over a breach of that Treaty’s substantive standards” (para. 146). Peru also asserted that “the critical date is the one on which the State adopts the disputed measure, even when the measure represents the culmination of a process or sequence of events” (para. 146). Setting the date of publication of the 2007 resolution as the critical date, the tribunal found that both Ms. Levy (as a French national) and Gremcitel (then directly controlled by Ms. Levy) fulfilled the personal and temporal requirements to qualify as “investors.”
Abuse of process precludes tribunal from exercising jurisdiction
Peru argued that control of Gremcitel was transferred to Ms. Levy because of her French nationality, for the sole purpose of allowing the Levy Group to bring a treaty claim in a dispute that was “existing or foreseeable, and otherwise purely domestic” (para. 85). Alleging that this constituted an abuse of process, Peru objected to the tribunal’s jurisdiction.
The tribunal reasoned that a corporate reorganization to obtain treaty benefits is not illegitimate in itself. However, carrying it out to invoke treaty protections may constitute an abuse of process if a specific future dispute is “foresee[able] […] as a very high probability and not merely as a possible controversy,” according to the test in Pac Rim v. El Salvador (para. 185). It agreed with the claimants that a finding of abuse of rights was not to be presumed, but required a high threshold, to be met only “in very exceptional circumstances,” as per Chevron and Texaco v. Venezuela (para. 186). It then followed Mobil v. Venezuela in taking into account “all the circumstances of the case” (para. 186) to determine whether, when Ms. Levy acquired control of Gremcitel, the dispute was “foreseeable as a very high probability.”
For the tribunal, it was no coincidence that the transfer of Gremcitel’s shares to Ms. Levy happened “in a great hurry” and was perfected one day before the 2007 resolution was issued. The tribunal was convinced that the claimants—through an agent with connections in the INC—had knowledge of the contents of the 2005 report and could foresee that the land delimitation was to be formalized in 2007.
The claimants explained that the transfer of shares resulted from a family decision to internationalize the project. However, the tribunal did “not see how transferring shares to a family member with a foreign nationality would internationalize the project”; rather, it agreed with Peru that the only intention behind the transfer was to internationalize the “soon-to-be-crystallized domestic dispute,” to obtain access to ICSID arbitration (para. 191).
In addition, the tribunal took as “extremely serious” the claimants’ attempt to show through documents that were “untrustworthy, if not utterly misleading” that Ms. Levy had become an indirect shareholder in Gremcitel already in 2005 (par. 194). At the hearing, a notary public had admitted that twice, at the request of the claimants, she had altered the dates of notarized documents relating to the transfer of shares. The claimants later relied on these documents to attempt to establish the tribunal’s jurisdiction. According to the tribunal, the claimants’ “pattern of manipulative conduct [casted] a bad light on their actions” (para. 194).
In view of the circumstances, the tribunal held that the restructuring that made Levy the main shareholder of Gremcitel was an abuse of process, precluding the tribunal from exercising jurisdiction. Based on considerations of judicial economy, it also found that it was unnecessary to address Peru’s third jurisdictional objection—namely, that the claimants did not have an “investment,” as they could not demonstrate that they had a right to develop the Costazul project, and had not made monetary contributions or undertaken risks.
Peru obtains award on costs
Based on the finding of abuse of process against the claimants, the tribunal ordered them to pay for all costs of the proceeding, including the arbitrators’ fees.
The claimants’ legal fees and expenses amounted to more than US$1.5 million, while Peru’s amounted to roughly US$5.3 million. For the tribunal, this disparity showed that the claimants tried to minimize costs, while Peru did not. It ordered the claimants to contribute US$1.5 million toward Peru’s fees and expenses—the same amount that they had spent.
Notes: The ICSID tribunal was composed of Gabrielle Kaufmann-Kohler (President appointed by the Chairman of the Administrative Council, Swiss national), Eduardo Zuleta (claimants’ appointee, Colombian national) and Raúl E. Vinuesa (respondent’s appointee, Argentinean and Spanish national). The award is available at https://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=showDoc&docId=DC5652_En&caseId=C1640.
UNCITRAL tribunal finds denial of justice by Indonesian courts, but denies claimant damages due to unclean hands
Hesham T. M. Al Warraq v. Republic of Indonesia, UNCITRAL
Marquita Davis [*]
In an award dated December 15, 2014, an UNCITRAL tribunal found a denial of justice in Indonesia’s criminal proceedings in absentia for claimant Hesham T. M. Al Warraq, a Saudi citizen.
Despite a finding that Indonesia breached its fair and equitable treatment (FET) obligations under the investment agreement of the Organization of the Islamic Conference (OIC Agreement), the majority of the tribunal determined that Warraq’s expropriation claim was inadmissible as he violated his obligation under the OIC Agreement to observe Indonesian laws. The tribunal dismissed Indonesia’s counterclaims on the merits and ordered the parties to bear their own legal expenses and split arbitration costs.
In 2004, Warraq became the sole shareholder in First Gulf Asia Holdings Limited (“FGAH”), a Bahamian company, which had acquired shares in three Indonesian banks that eventually merged into Bank Century. At the time of the arbitration, FGAH held approximately US$14 million worth in shares in Bank Century.
In October 2008, Bank Century was experiencing liquidity issues. Warraq, as its majority shareholder, and other shareholders signed a letter of commitment to Bank Indonesia, the central bank of Indonesia, to execute turnaround strategies. In November 2008, Bank Century requested short-term liquidity support from Bank Indonesia, which approved a bailout of Bank Century and placed it under “special surveillance” and, later, under the administration of Indonesia’s Deposit Insurance Agency.
Several investigations were commenced to address public claims surrounding the legality of the bailout. Bank Indonesia reported Warraq to the National Police for banking irregularities. These were followed by a criminal investigation of Warraq and others in connection with the collapse of Bank Century. A warrant was issued for Warraq’s arrest in December 2008, and in March 2010 he was charged with banking fraud, mismanagement and illegal transfer of banking funds. He did not travel to Indonesia for the court proceeding, fearing he would not be afforded a fair trail. His trial was conducted in his absence, he was convicted of various crimes on December 16, 2010, and approximately US$230,000 of his assets were seized as a result. Warraq initiated arbitration on August 1, 2011.
Warraq qualifies as an “investor” under the OIC Agreement
Warraq argued that he qualified as investor through his ownership of FGAH and his Saudi citizenship, while Indonesia countered that the OIC Agreement only afforded protection for “direct investments.” Reasoning that the OIC Agreement did not explicitly require investors to hold capital directly, the tribunal agreed that Warraq qualified as an investor “ by his indirect shareholding in Bank Century through FGAH” (para. 517).
Tribunal rejects claim that 2008 bailout constituted an expropriation
The tribunal then examined the claim that Bank Indonesia’s bailout of Bank Century and its resulting equity holding in Bank Century amounted to an expropriation of Warraq’s investment. Siding with Indonesia, the tribunal held that Warraq had full knowledge of and consented to the terms of the bailout and still maintained control over his pre-bailout shares. It further held that Indonesia had the discretion and authority to initiate the bailout.
Bank Indonesia’s supervision of Bank Century was not negligent
Warraq argued that Bank Indonesia’s negligent supervision of Bank Century amounted to expropriation. Supported by the statement of Indonesia’s expert, who affirmed that the weaknesses in the supervision did not reach the threshold level of negligence, the tribunal dismissed this claim, finding that Bank Indonesia exercised “sufficient diligence in its supervisory functions” (para. 538).
Legitimate expectations and adequate protection and security claims dismissed
Warraq raised a legitimate expectations claim based on Bank Indonesia’s supervision of Bank Century. The tribunal rejected the claim declaring that Bank Indonesia’s primary duty of care was to the depositors and not to portfolio investors such as Warraq.
It also dismissed the claim that Indonesia breached its duty to provide “adequate protection and security” during the bailout and its supervision of Bank Century. The tribunal stated that the host country had an obligation to provide “no more than a reasonable measure of protection, which a well administered government could be expected to exercise in similar circumstances” (para. 625), and that Indonesia met this standard.
Finally, it dismissed Warraq’s claim that Indonesia breached its adequate protection and security duty when it violated his due process rights during his trial, because it determined protection only extended to “investments” and not “investors.”
Tribunal rejects argument that the OIC Agreement entitles investors to a fair trial
Article 10 of the OIC Agreement provides “basic rights” for investors. Claimant argued that these encompassed “fundamental rights” and “human and civil and political rights codified in international law” (para. 519), including the right to a fair trial under Article 14 of the International Convention on Civil and Political Rights (ICCPR).
The tribunal determined that “basic rights” referred only to “basic property rights” related to the ownership, use, control, and enjoyment of the investment. However, it noted that it would revisit the argument when it examined the FET claim.
FET provision imported through MFN clause
Although the OIC Agreement contained no FET provision, Warraq sought to import the FET obligation contained in the United Kingdom–Indonesia bilateral investment treaty (BIT) by way of the most-favoured-nation (MFN) clause in the OIC Agreement. Indonesia countered that the MFN provision only applied within the context of the same economic activity and that the two treaties addressed different activities. The tribunal imported the FET clause, reasoning that the object and purpose of the OIC Agreement, as emphasized in the preamble, was investment promotion and protection, which conferred a broad range of rights on investors.
FET and the ICCPR
The tribunal emphasized that states had no obligation under international law to provide a “perfect system of justice but a system of justice where serious errors are avoided or corrected” (para. 620). It stressed that there was a high bar for a finding of a denial of justice and declared that a denial of justice constituted a violation of FET. According to the tribunal, the ICCPR was a relevant vehicle to measure the Indonesian courts’ conformity to international standards on due process to determine whether a denial of justice had occurred. For this determination, without elaboration on the elements of the FET standard itself, the tribunal relied heavily on the ICCPR, which it interpreted as containing binding legal obligations for Indonesia as a state party. It also determined that, beyond explicit provisions, the ICCPR incorporated a binding general “good faith” principle on states.
The tribunal stated that “all persons charged with a criminal offence have a primary, unrestricted right to be present at the trial and to defend themselves” under the ICCPR (para. 564), but qualified that a trial in absentia was not an automatic violation of the ICCPR. It found that Warraq was not properly notified of his criminal charges or conviction, was not examined as suspect, and was barred from appointing legal counsel at his trial and during the appeal process. Thus, Indonesia failed to comply with the basic procedural safeguards outlined in the ICCPR, constituting a denial of justice in breach of FET.
The tribunal dismissed Warraq’s claims that alleged solicitation of bribes by Indonesian officials constituted a FET breach citing both a lack of evidence and a lack of connection between the alleged conduct and deprivation of Warraq’s investment.
Claimant’s breach of the OIC Agreement renders damages claim inadmissible
Article 9 of the OIC Agreement explicitly obligates investors to observe certain norms of conduct and abstain from illegal activity.
The tribunal found that Warraq engaged in six types of banking fraud and breached his Article 9 obligation not to act in a manner “prejudicial to the public interest” by not having full awareness of his obligations under Indonesian law as the sole member of the Board of Commissioners of Bank Century.
Invoking the doctrine of “clean hands,” a majority of the tribunal held that, because Warraq violated Indonesian law, he deprived himself of the protections under the OIC Agreement, and his damages claim was rendered inadmissible. One arbitrator disagreed that the “clean hands” doctrine rendered Warraq’s claims inadmissible, as his illegality did not relate to the acquisition of his investment. He stated that Warraq should be entitled to damages for legal expenses he incurred connected to his wrongful conviction.
Tribunal affirmed jurisdiction over counterclaims, but dismissed all on the merits
Based on a specific authorization in the OIC Agreement, the tribunal affirmed jurisdiction over Indonesia’s counterclaims regarding Warraq’s alleged banking fraud. Although the counterclaims were closely related to both the investment and the claims involving the bailout, they failed at the merit stage because Indonesia failed to define Warraq’s personal liability separate from all relevant individuals and entities not parties to the arbitration.
Notes: The tribunal was composed of Bernardo M. Cremades (President appointed by agreement of the co-arbitrators), Michael Hwang (claimant’s appointee), and Fali S. Nariman (respondent’s appointee). The final award is available at http://www.italaw.com/sites/default/files/case-documents/italaw4164.pdf.
After claimant’s notice of withdrawal, the Czech Republic obtains an award of costs
Forminster Enterprises Limited (Cyprus) v. the Czech Republic, UNCITRAL
Joe Zhang [*]
In a final award dated December 5, 2014, an UNICTRAL tribunal decided that the investor could not unilaterally terminate the arbitration proceeding by withdrawing its notice of arbitration and ordered it to reimburse the Czech Republic all costs and expenses incurred in relation to the proceeding.
On January 9, 2014, the Cyprus-incorporated claimant, Forminster Enterprise Limited (Forminster), filed a notice of arbitration against the Czech Republic, claiming that the country had expropriated Forminster’s investment in breach of the Czech Republic–Cyprus BIT. The Czech Republic acknowledged receipt of the notice of arbitration on January 21.
Only a few weeks later, on February 6, Forminster sent a notice of withdrawal to the Czech Republic, stating that it would change the forum “to take another course of action” (para. 14). Forminster claimed in the same letter that, since the arbitral tribunal had not been constituted, the proceeding should be terminated without prejudice upon delivery of the letter.
On February 26, the Czech Republic answered Forminster’s notice of withdrawal, objected to the termination of the proceeding and reserved its rights to claim for costs.
One month later, a three-person tribunal was constituted under the 1976 UNCITRAL Arbitration Rules (UNCITRAL Rules).
On July 10, the Czech Republic filed its first and only submission, requesting the tribunal to terminate the proceeding and to award it all costs and expenses incurred in relation to the proceeding.
In its submission of August 11, Forminster argued that the proceeding should have been terminated upon its notice of withdrawal either as a consequence of the notice itself or as the proceeding had become “unnecessary” within the meaning of Article 34(2) of the UNICTRAL Rules. It further argued that no cost should be awarded to the respondent.
Since neither of the parties disputed the facts giving rise to the dispute, the tribunal limited the subject matter of the arbitration to the termination of proceedings and the Czech Republic’s claim for costs.
Unilateral termination unacceptable
The tribunal first rejected Forminster’s argument that it was entitled to unilaterally terminate the arbitral proceeding by a notice of withdrawal, prior to and without the constitution of an arbitral tribunal. The tribunal found such argument would allow Forminster to walk away from respondent’s claim for costs, a result that would be “unacceptable by any standards” (para. 70).
Although acknowledging that the UNCITRAL Rules allowed a tribunal to terminate the proceeding when it deemed the proceedings became “unnecessary,” the tribunal refused to apply such provision as it saw that the respondent still had “a legitimate interest in asserting its claim for costs” (para. 77) and that the proceeding could not be terminated before such claim for costs was determined.
The Czech Republic’s claim for costs
The tribunal established its jurisdiction to hear the claim for costs, which the Czech Republic had timely reserved and later presented. It then found that the Czech Republic incurred significant costs due to Forminster’s failure to prosecute its claims after filing its notice of arbitration. Consequently, the tribunal held that the Czech Republic was entitled to an award on those costs.
The costs claimed by the Czech Republic were partly incurred prior to 2014, concerning a previous proceeding initiated by Forminster. The tribunal rejected that portion of the claim, as the Czech Republic failed to demonstrate how those costs related to the 2014 proceeding. However, the tribunal awarded the Czech Republic all of the remaining amount, as it took the view that “fairness requires that the amount of costs awarded to the Respondent in relation to the year 2014 should not be further reduced on the basis that the Respondent failed to recover any costs [incurred in the previous years].”
The costs awarded to the Czech Republic amounted to approximately €12,700 for in-house and external counsel and to €20,000 for the arbitration costs it had deposited in advance. The tribunal indicated that, in studying the file and making three procedural orders and the final award, the three arbitrators spent 80 hours altogether on the case.
However, the tribunal did not apply the hourly rate of €400 it had previously established (para. 22), which would have resulted in arbitration costs of €32,000. Instead, allocating fees of €8,000 for the president of the tribunal and €6,000 for each of the party-appointed arbitrators, the tribunal indicated that the entire deposit of €20,000 had been expended.
Notes: The tribunal was composed of Paolo Michele Patocchi (President appointed by agreement of the co-arbitrators), Martin Hunter (claimant’s appointee), and August Reinisch (respondent’s appointee). The award is available at http://www.italaw.com/sites/default/files/case-documents/italaw4109.pdf.
German investor’s claim against the Philippines over Manila airport concession fails for the second time at ICSID
Fraport AG Frankfurt Airport Services Worldwide v. Republic of the Philippines, ICSID Case No. ARB/11/12
Matthew Levine [*]
A second arbitration tribunal at the International Centre for Settlement of Investment Disputes (ICSID) has reached the award stage in a long-running dispute between German multinational Fraport and the Republic of the Philippines.
The ICSID tribunal found that illegalities associated with Fraport’s initial investment resulted in a lack of subject matter jurisdiction under the 1997 Germany–Philippines bilateral investment treaty (BIT). At the same time, the tribunal declined jurisdiction over counterclaims pertaining to Fraport’s alleged corruption and fraud.
The tribunal ordered Fraport to pay US$5 million towards the fees and costs of the Philippines, in a partial application of the “loser pays” principle.
The Philippine government of then President Ramos decided in the early 1990s to establish a third passenger terminal at Manila’s main airport. A local consortium successfully bid for the project and incorporated Philippines International Air Terminals Co., Inc. (PIATCO) to hold the concession agreement.
Fraport, an experienced airport operator, purchased stock in both PIATCO and a “cascade” of Philippine companies holding interests in PIATCO in 1999. Between 2001 and 2002, the relationship between PIATCO and the government soured. In November 2002, as construction of the new terminal neared completion (according to Fraport), then President Macapagal-Arroyo announced that the concession agreement was legally invalid and would not be honoured. Subsequently, the Philippine Supreme Court declared the concession to be void from the beginning. Pursuant to expropriation procedures under domestic law, a court transferred possession to the government, which began operating the new terminal in 2008. Domestic court proceedings to determine the amount of compensation are still ongoing.
In 2007 a first ICSID tribunal dismissed Fraport’s claims under the Germany–Philippines BIT finding that it had circumvented a domestic law (namely, the “Anti-Dummy Law”). In 2010, however, an ICSID ad hoc committee annulled the 2007 award.
Following the annulment of the 2007 award, Fraport filed a new request for arbitration with ICSID in 2011.
Admission is condition precedent of investment
The Philippines objected to the tribunal’s jurisdiction on the basis that Fraport’s venture had not been accepted in accordance with domestic law and therefore did not qualify as an investment under the BIT.
Article 1(1) of the BIT defines “investment” as “any kind of asset accepted in accordance with the respective laws and regulations of either Contracting State.” While Fraport attempted to argue that this language should be understood as an “admittance clause,” the tribunal accepted that it was a “legality requirement.” The tribunal then noted EDF International and others v. Argentina and observed: “even absent the sort of explicit legality requirement that exists here, it would be still be appropriate to consider the legality of the investment. As other tribunals have recognized, there is an increasingly well-established international principle which makes international legal remedies unavailable with respect to illegal investments, at least when such illegality goes to the essence of the investment” (para. 332).
Investment not admitted due to violation of domestic law
The Philippines successfully argued that the share agreements through which Fraport invested in PIATCO and its affiliates triggered violations of a domestic law. The Anti-Dummy Law prohibits foreign intervention in the management, operation, administration, or control of a public utility; however, Fraport’s share purchase agreements dictated that the Philippine shareholders in PIATCO would in certain circumstances act upon Fraport’s recommendation. The tribunal agreed that these arrangements violated domestic law and that Fraport had not been “admitted” in accordance with Article 1(1) of the BIT. There was therefore no “investment” for the purpose of the tribunal’s jurisdiction.
Fraport unsuccessfully suggested that the share agreements constituted mere “planning” to intervene in management, operation, administration, or control of PIATCO and that such planning was insufficient grounds for the tribunal to find a violation of domestic law. Fraport also stated that it had amended the offending shareholder agreements, but the tribunal found that at domestic law the original breach could not be cured. Finally, the tribunal did not accept that Fraport had merely relied in good faith on the advice of local counsel. Instead, it found that it had been made aware of the illegality and nonetheless decided to take a risk.
Allegations of corruption and fraud not substantiated
The tribunal also considered whether jurisdiction was vitiated and the claims were inadmissible as a result of Fraport’s corruption and fraud. It held that, in view of the difficulty of proving corruption by direct evidence, circumstantial evidence could be considered, but that it must be clear and convincing so as to reasonably make one believe that the facts, as alleged, have occurred. In this case, upon review of the submissions and the underlying evidence, the tribunal was not satisfied that the standard had been met.
No jurisdiction over counterclaims
The Philippines raised twelve counterclaims, primarily on the basis that the delayed completion of the new terminal was attributable to Fraport or PIATCO. It argued that the reference to “all kinds of divergencies […] concerning an investment” in Article 9 of the BIT represents the parties’ consent to arbitrate counterclaims. It further argued that the close factual connection between the original claim and the counterclaims means that the counterclaims arose directly out of the subject matter of the dispute for the purpose of ICSID Arbitration Rule 40(1).
Upon finding no jurisdiction over Fraport’s claims, however, the tribunal found that it consequently lacked jurisdiction over the respondent’s counterclaims, in view of their necessary connection with the subject matter of the dispute, pursuant to Article 46 of the ICSID Convention.
“Loser pays” principle appropriate to certain extent
The tribunal noted that, while traditionally the parties in investment arbitration bear their own legal fees and share the arbitration costs equally, there have been a number of cases that have departed from this principle, awarding fees and costs on a “loser pays” basis. In the circumstances of this particular arbitration, it found the application of the “loser pays” principle to be appropriate to a certain extent, and ordered Fraport to pay US$5 million towards respondent’s fees and costs.
Notes: The tribunal was composed of Piero Bernardini (President appointed by agreement of the parties, Italian national), Stanimir A. Alexandrov (claimant’s appointee, Bulgarian national), and Albert Jan van den Berg (respondent’s appointee, Dutch national). The final award of December 10, 2014 is available at http://www.italaw.com/sites/default/files/case-documents/italaw4114.pdf.
Martin Dietrich Brauch is an International Law Advisor and Associate of’s Investment for Sustainable Development Program, based in Latin America.
Marquita Davis is a Geneva International Fellow from University of Michigan Law and an extern with IISD’s Investment for Sustainable Development Program.
Matthew Levine is a Canadian lawyer and a contributor to IISD’s Investment for Sustainable Development Program.
Joe Zhang is a Law Advisor to IISD’s Investment for Sustainable Development Program.