Philip Morris v. Uruguay: all claims dismissed; Uruguay to receive US$7 million reimbursement
Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7
Martin Dietrich Brauch [*]
The long-expected final award has been rendered in the high-profile case initiated by tobacco giant Philip Morris in early 2010 against Uruguay over its tobacco control measures. On July 8, 2016, a tribunal at the International Centre for Settlement of Investment Disputes (ICSID) dismissed all claims by Philip Morris, ordering it to bear the full cost of the arbitration and to pay Uruguay US$7 million as partial reimbursement of the country’s legal expenses.
Claimants were Philip Morris Brand Sàrl and Philip Morris Products S.A., both Swiss companies, and Abal Hermanos S.A. (Abal), a Uruguayan company acquired by the Philip Morris group in 1979. U.S.-based Philip Morris International Inc. is the ultimate parent company of the three claimants, jointly referred to as “Philip Morris” in this summary.
To counter the public health and economic impacts of the country’s high smoking rate, Uruguay became a party to the 2003 Framework Convention on Tobacco Control (FCTC) of the World Health Organization (WHO) and enacted a series of domestic measures of tobacco control. In particular, the measures challenged by Philip Morris were Ordinance 514 of August 18, 2008 (the Single Presentation Regulation [SPR]) and Presidential Decree 287/009 of June 15, 2009 (the 80/80 Regulation).
SPR required graphic and textual anti-smoking warnings to be printed on the lower half of cigarette packs. It also prohibited the use of variants of any brand. To comply, for example, Philip Morris had to remove Light, Blue and Fresh Mint, keeping Marlboro Red only. The 80/80 Regulation increased the size of the warnings from 50 to 80 per cent.
In addition to challenging the two measures before Uruguayan courts, on February 19, 2010 Philip Morris filed with a request for ICSID arbitration, claiming that Uruguay expropriated its investment and denied it fair and equitable treatment (FET), among other breaches of the Switzerland–Uruguay bilateral investment treaty (BIT).
Indirect expropriation: claims and structure of tribunal’s analysis
Philip Morris argued that the SPR expropriated several of its brand variants, including the associated goodwill and the intellectual property rights. Furthermore, it argued that the 80/80 Regulation destroyed the brand equity of the remaining variants, by depriving Philip Morris of its ability to charge a premium price for them and thus affecting its profits. Uruguay denied that the measures were expropriatory and argued that, even if they were, they did not reduce the value of the business substantially.
The tribunal started from the undisputed point that trademarks and the associated goodwill are protected investments under the BIT, and assumed that Philip Morris’s brands continued to be protected under Uruguayan trademark law even after the changes motivated by the challenged measures. It then focused its analysis on two questions: first, whether a trademark confers a right to use or only a right to protect against use by others, and second, whether the measures expropriated Philip Morris’s investment.
Trademarks give an exclusive right to exclude others from use, not an absolute right of use
To answer the first question, the tribunal analyzed the legal framework applicable to trademark protection in Uruguay: Law No. 17,011 (Trademark Law), the Paris Convention for the Protection of Intellectual Property (Paris Convention), the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) and the Protocol on Harmonization of Intellectual Property Norms in MERCOSUR in the Field of Trademarks, Indications of Source and Appellations of Origin (the MERCOSUR Protocol).
The tribunal found that, under all these applicable sources of law, “the trademark holder does not enjoy an absolute right of use, free of regulation, but only an exclusive right to exclude third parties from the market so that only the trademark holder has the possibility to use the trademark in commerce, subject to the State’s regulatory power” (para. 271).
The SPR and the 80/80 Regulation did not expropriate Philip Morris’s investment
The tribunal also dismissed the expropriation claim regarding the 80/80 Regulation. Considering that the brands continued to be printed on cigarette packs, it held that the limitation to 20 per cent of the package merely restricted the modalities of the use of trademarks, but could not have a substantial effect on the claimants’ business.
Rather than considering each brand that Philip Morris had to discontinue when the SPR was enacted as an individual investment, the tribunal looked at Philip Morris’s investment as a whole, “since the measure affected its activities in their entirety” (para. 283). From this standpoint, the tribunal concluded that the SPR was far from causing a substantial deprivation of the value of Philip Morris’s investment. Even if it could have been more profitable in the absence of the SPR, the tribunal held that there could be no indirect expropriation as sufficient value remained after the implementation of the measure.
The tribunal went on to hold that, in adopting both the SPR and the 80/80 Regulation, Uruguay complied with its national and international legal obligations for protecting public health. It further stated that both measures were taken in good faith, in a non-discriminatory manner and proportionately to the intended objective. As such, in the tribunal’s view, the measures were a valid exercise of Uruguay’s police powers, which cannot constitute an expropriation. Accordingly, the tribunal dismissed the expropriation claims entirely.
FET claim rejected in absence of arbitrariness and breach of legitimate expectations
The tribunal started its FET analysis addressing Philip Morris’s allegation that the challenged measures were arbitrary. Referring to the international law standard under the ELSI case, which defines arbitrariness as a “wilful disregard of due process of law, an act which shocks, or at least surprises, a sense of juridical propriety” (para. 390), the tribunal concluded that the measures were not arbitrary. Rather, it agreed that Uruguay adopted them in good faith and in order to protect public health. Furthermore, contrary to Philip Morris’s contention that the measures were adopted without scientific support, the tribunal indicated that they were based on the FCTC process, which in turn was supported by scientific evidence.
In view of the circumstances of their adoption, the tribunal held that both measures were reasonable, and not “arbitrary, grossly unfair, unjust, discriminatory or […] disproportionate,” with “minor impact” on Philip Morris’s business (paras. 410 and 420). A unanimous tribunal concluded that the adoption of the 80/80 Regulation did not breach the BIT. A majority tribunal concluded the same with respect to SPR.
However, the claimants’ appointee to the tribunal, Gary Born, dissented on this point, finding single presentation a manifestly arbitrary and unreasonable requirement, “because it is wholly unnecessary to accomplishing its only stated objective,” (para. 196 of the dissent) namely, “protecting consumers against deceptive uses of trademarks” (para. 172 of the dissent).
According to Philip Morris, Uruguay’s measures “eviscerated” its legitimate expectations to explore its brand assets and enjoy its intellectual property rights, as well as undermined the legal stability of Uruguay’s legal framework. However, relying on EDF v. Romania and El Paso v. Argentina, the tribunal noted that only specific undertakings or commitments could create legitimate expectations, and that Philip Morris did not provide evidence of specific commitments made by Uruguay regarding tobacco control measures. Furthermore, in view of the limited impact of the measures on Philip Morris’s business, it held that the challenged measures did not change the legal framework beyond the “acceptable margin of change” tolerated under the El Paso standard.
Tribunal dismisses Philip Morris’s denial of justice claims
Philip Morris alleged that contradictory decisions of two Uruguayan courts—the Supreme Court of Justice (SCJ) and the Tribunal de lo Contencioso Administrativo (TCA)—concerning the 80/80 Regulation amounted to a denial of justice. However, according to the majority, although “unusual” and “surprising,” the contradiction was not serious enough to amount to a denial of justice. “Outright conflicts within national legal systems may be regrettable but they are not unheard of,” the majority reasoned (para. 529).
According to dissenting arbitrator Gary Born, the contradictory decisions, in both cases rejecting Philip Morris’s claims, “amounted to ‘Heads, I win; tails, you lose’ treatment” (para. 40 of the dissent), and Uruguay’s failure to provide Philip Morris access to a judicial forum to address the contradiction consisted in a denial of justice.
A second denial of justice claim was that the TCA rejected Philip Morris’s application to partially annul the SPR not based on Philip Morris’s own arguments, but on those brought by British American Tobacco in a different proceeding challenging the same regulation. While recognizing the procedural improprieties, the tribunal considered that the cases and claims were very similar and that Philip Morris’s arguments were addressed, concluding that there was no denial of justice.
Notes: The ICSID tribunal was composed of Piero Bernardini (President appointed by ICSID’s Secretary-General, Italian national), Gary Born (claimant’s appointee, U.S. national) and James R. Crawford (respondent’s appointee, Australian national). The award, including the Decision on Jurisdiction of July 2, 2013 as an annex, is available at http://www.italaw.com/sites/default/files/case-documents/italaw7417.pdf.
Corporate restructuring and abuse of rights: PCA tribunal deems Philip Morris’s claims against Australia’s tobacco plain packaging rules inadmissible
Philip Morris Asia Limited v. The Commonwealth of Australia, PCA Case No. 2012-12
Inaê Siqueira de Oliveira [*]
Australia enacted the Tobacco Plain Packaging Act, a tobacco control legislation that removed brands from cigarette packs, on November 21, 2011. On the very same day, Philip Morris Asia Limited (PM Asia) served a Notice of Arbitration against Australia under the Hong Kong-–Australia bilateral investment treaty (BIT), claiming that plain tobacco packaging amounted to an expropriation of its intellectual property rights.
A redacted version of the December 2015 decision by the arbitral tribunal established under the auspices of the Permanent Court of Arbitration (PCA) was published in May 2016. The tribunal accepted one of Australia’s objections—the commencement of the arbitration configured abuse of rights because Philip Morris had changed its corporate structure to gain the protection of the BIT when a specific dispute was already foreseeable—and declined to hear the case.
Australia’s tobacco plain packaging rules
Australia first considered plain packaging of cigarette packs in 1995, but the initiative gained momentum ten years later, after the World Health Organization (WHO) Framework Convention on Tobacco Control entered into force for Australia. State parties to this convention are under an obligation to develop and implement tobacco control measures, including comprehensive bans on advertising, promotion and sponsorship.
In 2009, Australia’s National Preventive Health Taskforce recommended plain packaging of tobacco products, and a bill to remove brands, trademarks and logos from tobacco packaging was introduced in the Australian Senate. A heated debate about plain packaging legislation took place in Australia throughout the following months. Philip Morris vigorously opposed the proposal throughout the entire legislative process, expressing “concern about the unconstitutionality” of the measure (para. 110) and willingness to challenge it by litigation if necessary.
In November 2011, the government secured the votes to approve the bill at last. Australia then enacted the Tobacco Plain Packaging Act and implemented ensuing regulations.
Philip Morris’s corporate restructuring
Philip Morris International Inc. (PMI) is one of the world’s largest tobacco manufacturers. To manage its business in different regions around the world, PMI owns dozen of subsidiaries and affiliates, forming the so-called PMI Group.
The claimant, PM Asia, is a company based in Hong Kong that serves as regional headquarters for PMI’s operations. The investment, Philip Morris Australia (PM Australia), is a holding company registered under the laws of Australia that owns all shares of Philip Morris Limited (PML), a trading company that engages in manufacturing, importing, marketing and distributing tobacco products for sale within Australia and for regional export.
A Switzerland-based company of the PMI Group owned PM Australia until February 23, 2011, when the ownership of the Australian subsidiaries was restructured. PM Asia acquired all shares of PM Australia and became the direct owner of the PMI Group’s investment in the country. Moreover, PM Asia alleged it had managed and controlled the Australian subsidiaries since 2001.
According to PM Asia, the restructuring of the Australian subsidiaries was part of a group-wide reorganization to “refine, rationalize and streamline PMI’s corporate structure” (para. 466). Said differently, PM Asia alleged that the restructuring was unrelated to the plain packaging measures that formed the subject matter of the arbitration.
Australia’s objections to the tribunal’s jurisdiction: lack of control of the investment since 2001, irregular admission of the investment, lack of temporal jurisdiction, and abuse of rights
As the PCA tribunal accepted Australia’s plea to bifurcate proceedings, the December 2015 decision deals solely with questions of jurisdiction and admissibility.
First, Australia disputed that PM Asia had exercised control of the Australian subsidiaries since 2001. Interpreting the control test under the BIT, which required “substantial interest in the company” (para. 497), the tribunal pointed out that oversight and management did not seem sufficient to establish control, given this particular aspect of the treaty. However, it did not decide the objection based on it. The tribunal departed from the interpretation task and indicated that PM Asia had not proven it exercised management control of the Australian subsidiaries. Thus, it dismissed PM Asia’s allegations for failure to present evidence of control.
Second, Australia maintained that the investment was not admitted under Australian law and investment policies, as required by the BIT, because PM Asia had not disclosed its intention to bring a claim under the BIT, nor described how the restructuring could have an impact on national interest, making the application incomplete and thus misleading. However, considering that PM Asia had a prima facie evidence of admission—a No-objection Letter issued by government authorities—the tribunal shifted the burden of proof and went on to assess whether Australia had proven that the investment was not lawfully admitted.
The tribunal was not convinced that disclosure of intentions and description of impact on national interest were mandatory. Furthermore, the tribunal highlighted that, although PM Asia had not disclosed it was seeking BIT protection, Australia’s Treasurer was aware of Philip Morris’s intention to challenge the plain packaging measures. In the tribunal’s view, Australia’s assertion that it did not know PMI’s intention “seem[ed] to be rather an admission of defect in its own internal procedures, where a matter of potentially important public policy was missed” (para. 518). Therefore, the tribunal dismissed the objection.
Third, Australia alleged that the tribunal lacked temporal jurisdiction because the dispute between Philip Morris and Australia over plain packaging regulation arose before PM Asia acquired the shares of PM Australia. For Australia, “the existence of a dispute is a question of substance” (para. 525) and a dispute pertaining the plain packaging measures existed in substance prior to the PMI Group’s corporate restructuring.
The tribunal disagreed. Relying on Gremcitel v. Peru, it pointed out that “whenever the cause of action is based on a treaty breach, the test for a ratione temporis objection is whether a claimant made a protected investment before the moment when the alleged breach occurred” (para. 529). In the present case, the temporal jurisdiction requirement was met because the investment (namely, the acquisition of shares) was made before the alleged breach (namely, the Tobacco Plain Packaging Act of November 2011).
Australia’s final—and, as it turned out, decisive—objection was that PM Asia’s claim configured an abuse of right. Australia argued that, even if the tribunal had temporal jurisdiction, it would be precluded from exercising it because the acquisition of jurisdiction was abusive. Philip Morris, according to Australia, had modified its corporate structure to obtain BIT protection for an existing or foreseeable dispute. Thus, in Australia’s view, the claim constituted abuse of rights and was inadmissible.
Based on a review of investment arbitration case law on abuse of rights, the tribunal recalled that “restructuring an investment to obtain BIT benefits is not per se illegitimate” (para. 540) and that what distinguishes a legitimate restructuring from an illegitimate one is the existence of a foreseeable dispute. The tribunal’s assessment of whether the acquisition of the jurisdiction was abusive then depended on a key question: was a dispute about plain packaging reasonably foreseeable before the restructuring that resulted in PM Asia’s acquisition of PM Australia?
In the tribunal’s view, it was. Relying on Tidewater v. Venezuela, the tribunal defined foreseeability as “a reasonable prospect […] that a measure which may give rise to a treaty claim will materialise” (para. 554). In applying this lower threshold to define abusive restructuring, it departed from the definition in Pac Rim v. El Salvador, which required “a very high probability” of dispute.
Applying the test to the case, the tribunal understood that, by the time PM Asia acquired PM Australia, there was no uncertainty about Australia’s intention to introduce plain packaging. Therefore, a dispute was foreseeable. In addition, given the evidence submitted, the tribunal ruled out Philip Morris’s allegations that taxes and other business reasons were determinative factors in the restructuring.
In sum, the tribunal concluded that Philip Morris committed abuse of rights because it changed its corporate structure to gain BIT protection when a specific dispute against Australia over tobacco plain packaging was reasonably foreseeable. Therefore, it deemed all claims inadmissible and declined to exercise jurisdiction over the dispute, reserving the issue of costs for a final award.
Notes: The arbitral tribunal was composed of Karl-Heinz Böckstiegel (President appointed by the PCA Secretary-General, German national), Gabrielle Kaufmann-Kohler (Claimant’s appointee, Swiss national), and Donald M. McRae (Respondent’s appointee, Canadian national). The award is available at http://www.italaw.com/sites/default/files/case-documents/italaw7303_0.pdf.
ICSID tribunal upholds Panama’s abuse of process objection; Transglobal to pay arbitration costs and most of Panama’s legal expenses
Transglobal Green Energy, LLC and Transglobal Green Panama, S.A. v. Republic of Panama (ICSID Case No. ARB/13/28)
Inaê Siqueira de Oliveira [*]
In the proceeding brought by Transglobal Green Energy, LLC (a U.S.-based company) and Transglobal Green Panama S.A. (a Panama-based company) against Panama under the United States–Panama bilateral investment treaty (BIT), an ICSID tribunal accepted Panama’s abuse of process objection. Pointing out that Transglobal abused the international investment treaty system to bring its claims, the tribunal declined jurisdiction and condemned Transglobal to pay all arbitration costs, as well as most of Panama’s legal fees and expenses.
As the tribunal accepted Panama’s request to bifurcate proceedings, the award deals solely with jurisdiction and arbitration costs. In fact, as the tribunal decided on the abuse of process objection, it deemed unnecessary to deliberate on Panama’s remaining objections, which were related to absence of investment, waiver of the right to bring a dispute, most-favoured-nation (MFN) clause and domestic control of the investment.
Relevant Facts I: Bajo de Mina concession and Supreme Court decision
Transglobal’s claims arose out of events that date back to 2005. In May that year, La Mina Hydro-Power Corp. (La Mina), a Panamanian company, entered into a Concession Contract with Panama’s agency for regulation of public utilities (in Spanish, Autoridad Nacional de los Servicios Publicos [ASEP]) to design, build and operate a hydroelectric power plant at Bajo de Mina.
La Mina failed to commence the construction of the power plant within the agreed-upon deadline, so ASEP issued a resolution terminating the Concession Contract. In response, La Mina requested the Supreme Court of Panama to grant injunctive relief against the termination and to review the administrative decision. The Supreme Court denied the request for injunctive relief.
Pending the Supreme Court’s decision on the review of the termination decision, ASEP entered into a concession contract for the same project with another company, Ideal Panama S.A., which proceeded with the construction of the power plant. Later, in November 2010, the Supreme Court decided that La Mina’s contract with ASEP remained in force and ordered the restitution of the concession to La Mina, which was not immediately executed.
Relevant Facts II: Transglobal Green Energy enters the scene
Just over a month after the Supreme Court’s ruling, which remained unimplemented, Mr. Julio Lisac, the owner of La Mina, signed a Memorandum of Understanding (MOU) with Transglobal Green Energy (TGGE). In September 2011, both entered into a Partnership and Transfer Agreement (PTA), which provided for the creation of Transglobal Green Energy Panama (TGGE Panama), a special-purpose company to undertake the hydropower project at Bajo de Mina. Importantly, the PTA had the stated purpose of “individually or jointly look[ing] for and obtaining mechanisms to enable the execution of the November 11, 2011 [sic] Judgment, and enable[ing] the partnership to acquire the concession rights” (para. 85). Shortly thereafter, TGGE Panama was incorporated, with Mr. Lisac and TGGE as sole shareholders. Although TGGE held 70 per cent of shares, the tribunal later found that the voting arrangements and the principle of exclusive execution by Mr. Lisac revealed “Mr. Lisac’s intent to remain in de facto control of TGGE Panama (para. 111).
Mr. Lisac requested the transfer of the Bajo de Mina concession rights to TGGE Panama. Then, on January 2012, before ASEP had decided on the transfer request, the Cabinet Council, a deliberative organ of high-ranking state officials, authorized the administrative rescue (rescate administrativo) of the concession “on grounds of urgent social interest” (para. 69).
ASEP implemented the administrative rescue of the Concession Contract. Since then, Mr. Lisac has initiated several judicial proceedings to recover the concession rights. On September 19, 2013, the Request for Arbitration was filed with ICSID.
Transglobal’s abuse of process
The tribunal begun its analysis of jurisdiction by considering the objection based on abuse of process “because the existence of abuse of process is a threshold issue that would bar the exercise of the Tribunal’s jurisdiction even if jurisdiction existed” (para. 100).
Panama asserted that Transglobal “attempted to create artificial international jurisdiction over a domestic dispute […] by inserting a foreign investor into the ownership of a domestic project, at a time when the project was already embroiled in a domestic dispute” (para. 85). To prove that Mr. Lisac’s dispute with Panama arose before Transglobal’s investment, it listed a number of events, such as ASEP’s 2006 resolution terminating the Concession Contract and the Supreme Court’s 2010 decision. Transglobal did not offer counterarguments to the objection—in fact, it did not submit a counter-memorial on jurisdiction.
Citing Phoenix v. Czech Republic, the tribunal stated that “there is a line of consistent decisions of arbitral tribunals on objections to jurisdiction based on abuse of the investment treaty system” (para. 102). According to this line of cases, transferring a national investment to a foreign company in an attempt to obtain BIT protection to a pre-existing dispute configures abuse of rights and precludes the exercise of jurisdiction.
In determining whether Mr. Lisac had tried to internationalize his domestic dispute with Panama to bring it under BIT protection, the tribunal noted that the enforcement of the 2010 Supreme Court’s ruling took a prominent place in the PTA signed between Mr. Lisac and TGGE. Indeed, the tribunal indicated that assisting in the enforcement of that judgment was the first obligation undertaken by TGGE under the PTA. Additionally, in the tribunal’s view, the voting arrangement under the PTA revealed “Mr. Lisac’s intent to remain in de facto control of TGGE Panama irrespective of the percentage of shares held and at the same time to benefit from the foreign nationality of TGGE for the purpose of pursuing this arbitration” (para. 111).
In its final remarks about the objection, the tribunal observed that procedural developments exposed an “intimate relationship of the ongoing court proceedings in Panama and this proceeding” (para. 113). Transglobal twice requested the suspension of the arbitration based on developments of the ongoing court proceedings in Panama. According to the tribunal, these suspension requests, made while Transglobal awaited the implementation of the 2010 decision, revealed that it was seeking international remedies for a pre-existing domestic dispute.
Arbitration costs and legal expenses
In its reasoning on costs, the tribunal acknowledged that, in cases involving abuse of process, “tribunals have tended to decide that claimants should bear the costs of the proceeding, [but] as regards the attorney’s fees and expenses, the record is mixed” (para. 125). To illustrate this divide, it again quoted Phoenix, in which the claimant was ordered to pay the respondent’s legal fees and expenses, and Renée Rose Levy v. Peru, in which the claimant was ordered to pay a reasonable—in the tribunal’s assessment—contribution to the respondent’s fees and expenses.
The tribunal then sided with Renée Rose Levy, holding that the claimant should bear the costs of proceedings, as well as attorney’s fees and expenses, “provided that the latter are reasonable” (para. 126).
Panama had argued that Transglobal’s conduct throughout the arbitration—failing to provide translations of important documents, submitting discrepant documentary evidence and requesting suspensions while aware that Panama would oppose to them—had unnecessarily complicated Panama’s defense. The tribunal considered that Transglobal had a “cavalier attitude” (para. 126) and, taking into account the overall course of proceedings, concluded that Transglobal should bear Panama’s attorneys’ fees and expenses, exception made to some early requests for shifting the costs and provisional measures relating to security for costs that were rejected.
Panama had also requested that the tribunal, based on its general authority under Article 61(2) of the ICSID Convention, ordered that all remaining funds in the administrative account were given to Panama. The tribunal denied this latter request because it understood “it had no authority to issue such an order” (para. 129).
Notes: The arbitral tribunal was composed of Andrés Rigo Sureda (President appointed by the co-arbitrators, Spanish national), Christoph H. Schreuer (Claimant’s appointee, Austrian national), and Jan Paulsson (Respondent’s appointee, Bahraini, French and Swedish national). The award of June 2, 2016 is available at http://www.italaw.com/sites/default/files/case-documents/italaw7336.pdf.
Claimant fails to comply with three-year limitation period under CAFTA-DR
Corona Materials, LLC v. Dominican Republic, ICSID Case No. ARB (AF)/14/3
María Florencia Sarmiento [*]
A tribunal at the International Centre for Settlement of Investment Disputes (ICSID) declared that it lacked jurisdiction in the case of Corona Materials LLC (a U.S. company) against the Dominican Republic. In an award dated May 31, 2016, the tribunal held that Corona’s request for arbitration was time-barred, as it failed to comply with the three-year limitation period under the Dominican Republic–Central America Free Trade Agreement (CAFTA-DR).
Factual background and claims
The case concerns a mining project to build and operate a mine in the Dominican Republic from which Corona would export construction aggregate materials.
In 2007 Corona submitted an application to operate a concession and a few months later applied for an environmental license. Corona, argued that there were delays in the proceeding, and the Dominican Republic objected that Corona itself delayed the process by omitting documents and changing the scope of the project several times.
In August 2010 the Environmental Ministry informed Corona that it denied the licence as Corona’s project was “not environmentally viable” (para. 43). Corona asserted that the negative was ill founded, while the respondent argued that the communication informed both the decision and the reasons. In October 2010 Corona submitted a request for reconsideration to which it had no formal response. According to the Dominican Republic, the deadline to seek reconsideration had expired.
Corona initiated arbitration against the Dominican Republic on July 30, 2014, challenging the following measures: (i) the denial of the environmental license application, which, in Corona’s view, breached the CAFTA-DR articles on national treatment and minimum standard of treatment (including fair and equitable treatment and full protection and security) and constituted an indirect expropriation, and (ii) the absence of response to the request for reconsideration, which would amount to denial of justice.
The Dominican Republic denied all claims and objected to the tribunal’s jurisdiction, maintaining that the alleged measures took place after the three-year period required under CAFTA-DR Article 10.18(1). The provision states that “[n]o claim may be submitted to arbitration under this Section if more than three years have elapsed from the date on which the claimant first acquired, or should have first acquired, knowledge of the breach alleged […] and knowledge that the claimant […] or the enterprise […] has incurred loss or damage.”
Tribunal focuses analysis on whether claimant complied with three-year limitation period
The tribunal pointed out the similar wording between the limitation period provision in CAFTA-DR and the corresponding provision in Articles 1116(2) and 1117(2) of the North American Free Trade Agreement (NAFTA). Following NAFTA tribunals such as Grand River v. United States and Feldman v. Mexico, the tribunal concluded that the time period shall not be subject to any “suspension, prolongation or other qualification” (para. 192).
First, the tribunal determined the earliest possible date on which Corona could have had actual or constructive knowledge of the breach or damage—the “critical date” (para. 199). Since the request for arbitration was dated June 10, 2014, the tribunal established the critical date three years earlier, on June 10, 2011, and set out to determinate whether Corona had knowledge before the critical date.
When did the claimant acquire actual or constructive knowledge?
The tribunal considered that the central measure adopted by the Dominican Republic was the Environment Ministry’s refusal to grant the environmental license, which was notified to Corona by a letter dated August 18, 2010, expressly setting out the final character of the decision.
It considered further evidence showing that, in early 2011, Corona already contemplated the possibility of initiating arbitration under CAFTA-DR, as stated in correspondence exchanged by Corona and local officials. As regards the knowledge of the loss or damage, a letter of the same period proves that Corona was not only conscious of it but also able to estimate the amount (US$342 million).
In the tribunal’s view, as Corona manifested its opinion in February 2011 by sending a letter to the Environment Ministry to reconsider the decision of August 18, 2010, therefore it explicitly acknowledged its awareness of the damage. Given that this occurred before the critical date, the tribunal concluded that Corona failed to comply with the time limit set out in DR-CAFTA Article 10.18(1).
Tribunal addresses the issue of denial of justice
Corona asserted that the alleged denial of justice was a separate breach from the non-issuance of the environmental license. The tribunal, before its analysis of when Corona acquired knowledge of the damage, had already concluded that there was no valid basis for this claim, as the failure of the Dominican Republic to reconsider the refusal to grant the license implicitly confirmed its previous decision.
Although recognizing that it could end its task with the conclusion that Corona’s claim was time barred, the tribunal considered appropriate to address the issue of the denial of justice, to which Corona had given important weight as the proceeding unfolded. In particular, Corona had stated that, for over five and a half years, the Dominican Republic has failed to respond to its motion for reconsideration.
First, the tribunal disagreed with Corona and held that an administrative act at the level of a first-instance decision-maker cannot constitute a denial of justice under customary international law. Furthermore, it noted that the CAFTA-DR is not drafted in broad terms, but focuses on different forms of “adjudicatory proceedings,” accordingly, not all criminal, civil or administrative matters, acts or procedures fall within its scope. The tribunal noted that no administrative adjudicatory proceedings existed when Corona submitted its motion for reconsideration.
In addition, the tribunal indicated that, even if the motion could be considered to have triggered an administrative adjudicatory proceeding, the tribunal would have to analyze whether local remedies had been exhausted in that particular case, as local remedies must be exhausted for a denial of justice to be upheld. Recalling that denial of justice rests upon a systemic failure of the state’s justice system, the tribunal concluded that Corona failed to prove that taking a further step in the domestic legal system of the Dominican Republic would have been futile.
As a final point, the tribunal rejected Corona’s argument under the waiver requirement in Article 10.18(2), which first requires the claimant to waive “any right to initiate or continue before any administrative tribunal or court under the law of any Party, or other dispute settlement procedures, any proceeding with respect to any measure alleged to constitute a breach,” and then establishes the possibility of an action regarding an interim injunctive relief not involving the payment of damages while pursuing a DR-CAFTA claim for damages.
Corona argued that the waiver required in order to submit the claim for damages barred it from initiating proceedings before the domestic courts of the Dominican Republic. However, the tribunal disagreed, considering that the DR-CAFTA is clear in its terms. Also, the tribunal indicated that the DR-CAFTA sets out a fork-in-the-road provision that did not prevent Corona from resorting to local remedies, but prohibited it from submitting a claim for the same alleged breach to local courts and international arbitration.
In conclusion, the tribunal decided that, under the CAFTA-DR, it could not make an award in favour of Corona for its denial of justice claim.
Decision and costs
The tribunal decided that the request for arbitration was time-barred and that it had no jurisdiction over the claims. It also ordered each of the parties to pay half of the arbitration costs and to bear its own legal fees and expenses.
Notes: The ICSID tribunal was composed by Pierre-Marie Dupuy (President proposed by the Chairman of the Administrative Council and agreed to by the parties, French national), Fernando Mantilla-Serrano (claimant’s appointee, Colombian national), and J. Cristopher Thomas (respondent’s appointee, Canadian national). The award is available in English only at http://www.italaw.com/sites/default/files/case-documents/italaw7314.pdf.
Venezuela ordered to pay US$1.202 billion plus interest to Canadian mining company Crystallex for FET breach and expropriation
Crystallex International Corporation v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/11/2
Martin Dietrich Brauch [*]
In a 273-page award dated April 4, 2016, a tribunal at the Additional Facility (AF) of the International Centre for Settlement of Investment Disputes (ICSID) ordered Venezuela to pay US$1.202 billion plus interest to Canadian company Crystallex International Corporation (Crystallex). The tribunal considered that the denial of Crystallex’s environmental permit and the termination of its mining contract, among other actions by Venezuela, amounted to a high-level political agenda to nationalize a gold mine without compensation.
Factual background and claims
On September 17, 2002 Crystallex and Corporación Venezolana de Guayana (CVG), a Venezuelan state corporation, entered into a Mining Operation Contract (MOC) to develop mining concessions in the Las Cristinas area. Large gold deposits are said to exist in the area, located within Venezuela’s Imataca National Forest Reserve.
Between 2003 and 2008 Crystallex sought the necessary permits. To address certain concerns raised by Venezuela, Crystallex had to submit a revised environmental impact study. Afterwards, in a letter of May 16, 2007, the Ministry of Environment requested Crystallex to post a bond to “guarantee the implementation of the measures proposed in the document presented for the Environmental Impact Evaluation of the project, which have been analyzed and approved by this Office.” The letter further stated that, after the bond-related formalities, “the [environmental permit] […] will be handed over” (para. 561).
Even though Crystallex posted the bond and paid the environmental taxes, the Ministry of Environment denied the environmental permit in a letter dated April 14, 2008, based on concerns over the project’s impact on the environment and indigenous peoples in the Imataca reserve. In several public statements from 2008 to 2010, then-President Hugo Chávez and high-level officials expressed Venezuela’s intention to nationalize gold deposits, including Las Cristinas.
Crystallex notified the Ministry of Mines of a treaty dispute as early as November 2008. However, only on February 16, 2011—after CVG formally rescinded the MOC on February 3, 2011—did Crystallex initiate arbitration against Venezuela for expropriation of its investments and failure to accord them fair and equitable treatment (FET) and full protection and security, in breach of the Canada–Venezuela bilateral investment treaty (BIT). Crystallex asked for compensation of US$3.16 billion plus interest.
Venezuela frustrated Crystallex’s legitimate expectations, among other FET breaches
The tribunal looked to case law—including Rumeli v. Kazakhstan, Lemire v. Ukraine and Bayindir v. Pakistan—to determine the content of the treaty’s FET standard, and concluded that it comprises a set of common elements that are relevant to the case at issue: “protection of legitimate expectations, protection against arbitrary and discriminatory treatment, transparency and consistency” (para. 543). It added that the conduct does not need to be outrageous or in bad faith to breach the standard.
According to the tribunal, most of Crystallex’s alleged expectations presented a “circularity of argument” (para. 551) or were “too general and indeterminate” (para. 553) to constitute a frustration of legitimate expectations, and therefore a breach of FET. However, looking more closely at the May 16, 2007 letter, the tribunal considered that it clearly indicated that Venezuela had completed the process of analysis and would deliver the permit once the bond had been posted, thus creating legitimate expectations on which Crystallex relied, by posting the bond and paying the environmental taxes.
Importantly, the tribunal disagreed with Crystallex’s suggestion that it had a right to the environmental permit. “From the point of view of international law,” the tribunal affirmed, “a state could not be said to be under an obligation to grant a permit to affect natural resources, and would always maintain the freedom to deny a permit if it so considers” (para. 581).
While the tribunal considered that, up to the letter of May 16, 2007, “the investor was overall treated in a straightforward manner” (para. 588), it concluded that the permit denial letter of April 14, 2008 contained elements of arbitrariness and evidenced lack of transparency and consistency. For example, the tribunal stated that the letter’s reference to global warming was “particularly troublesome,” noting that “to raise this concern for the first time in an attempt to justify the denial of the Permit is a clear example of arbitrary and unfair conduct” (para. 592).
The tribunal also took issue with the lack of reference to scientific data or studies to justify the denial, and stated that it was “unable to see how thousands and thousands of pages submitted by Crystallex, ensuing from years of work and millions of dollars of costs, could be so blatantly ignored” (para. 597). These “huge efforts,” according to the tribunal, “entitled Crystallex to have its studies properly assessed and thoroughly evaluated” (para. 597).
The tribunal held the letter denying the permit was fundamentally deficient and frustrated Crystallex’s legitimate expectations created by the May 16, 2007 letter. Furthermore, it considered that Venezuela subjected Crystallex to a “‘roller-coaster’ of contradictory and inconsistent statements” (para. 606) in the lead-up to the MOC’s rescission, thus breaching the FET standard under the BIT.
“Full protection and security” claim dismissed as it concerns physical, not legal security
Crystallex claimed that “full protection and security” encompasses legal security and stability, while Venezuela argued that the standard is limited to physical security. The tribunal agreed with Venezuela’s interpretation and based its decision on a line of cases including Saluka v. Czech Republic and Rumeli v. Kazakhstan. Given that Crystallex had neither claimed nor shown that Venezuela violated its physical security, the tribunal dismissed the claim.
Tribunal finds indirect expropriation in three groups of actions by Venezuela
In view of the BIT’s broad definition of investment, which covers contractual rights “to search for, cultivate, extract or exploit natural resources” (para. 661), the tribunal found that Crystallex’s rights under the MOC were capable of being expropriated.
Three groups of actions, cumulatively taken, led to the tribunal’s finding of indirect expropriation: first, the denial of the permit and its surrounding events; second, the public statements by high-level political authorities following the permit denial, which evidenced Venezuela’s intention to nationalize Las Cristinas and gradually caused the value of Crystallex’s investment to decrease; and third, the rescission of the MOC.
The tribunal also assessed whether the expropriation was lawful. It accepted Venezuela’s argument that the expropriation was carried out in pursuit of a public interest goal, and found that Crystallex did not establish that the expropriation occurred in violation of due process or in a discriminatory manner. However, given that Venezuela neither offered not provided prompt, adequate and effective compensation, the tribunal held that Venezuela expropriated Crystallex’s investment in breach of the BIT.
Tribunal uses average of two methodologies to calculate compensation
Considering the finding that Venezuela cumulatively breached the FET standard and the expropriation provision of the BIT, the tribunal decided to apply the “full reparation” standard under customary international law, using a “fair market value” methodology. It sided with Venezuela in choosing April 13, 2008—the day before the denial of the permit, which the tribunal saw as the first act in the creeping expropriation—as the appropriate valuation date.
In assessing the fair market value of the investment, the tribunal first asked whether it was appropriate to use the forward-looking approaches proposed by Crystallex (all of them aimed at calculating lost profits) or the backward-looking approach suggested by Venezuela (the cost approach, aimed at considering Crystallex’s expenditures in the investment). Crystallex’s summary of costs indicated expenditures in the amount of US$644.8 million.
The tribunal considered that, in the case at hand, it was appropriate to choose a methodology to calculate lost profits. It looked to the Standards and Guidelines for Valuation of Mineral Properties of the Canadian Institute of Mining, Metallurgy and Petroleum (CIMVal Guidelines) for confirmation of its methodological choice.
It then turned to the four forward-looking methodologies proposed by Crystallex. Dismissing the P/NAV method for not providing reliable figures and the indirect sales comparison method for yielding excessively speculative results, the tribunal awarded compensation of US$1.202 billion, based on the average of the figures resulting the stock market and market multiples methods. It also awarded pre- and post-award interest at the rate of the 6-month average U.S. dollar LIBOR plus one per cent, compounded annually.
Crystallex had also asked the tribunal to declare that the award was net of both Venezuelan and Canadian taxes, but the tribunal dismissed both requests.
Considering that “each side presented valid arguments in support of its respective case and acted fairly and professionally” (para. 959), the tribunal ordered each party to bear its own legal expenses and to share equally in ICSID costs.
Notes: The ICSID tribunal was composed of Laurent Lévy (President appointed by the parties, Brazilian and Swiss national), John Y. Gotanda (claimant’s appointee, U.S. national) and Laurence Boisson de Chazournes (respondent’s appointee, French national). The award is available in English at http://www.italaw.com/sites/default/files/case-documents/italaw7194.pdf and in Spanish at http://www.italaw.com/sites/default/files/case-documents/italaw7195.pdf.
NAFTA tribunal dismisses claims against Canada on green energy Feed-In Tariff program
Mesa Power Group, LLC v. Government of Canada, UNCITRAL, PCA Case No. 2012-17
Matthew Levine [*]
An arbitration tribunal constituted under the North American Free Trade Agreement (NAFTA) has issued its award subject to a dissenting opinion. The tribunal found jurisdiction under NAFTA Chapter 11 on Investment.
The majority of the tribunal found that Ontario’s Feed-In Tariff program (FIT Program)—which created a tender process for long-term power purchase agreements (PPA) whereby business would sell clean energy to the provincial grid—constituted procurement for the purposes of NAFTA, which resulted in the dismissal of certain claims. The majority also found that Canada did not breach its international obligations under NAFTA Article 1105.
The claimant, Mesa Power Group, LLC (Mesa), is a company constituted under U.S. laws. Mesa is part of a group of companies that oversees and develops renewable energy projects, notably in the wind sector.
In 2009, Ontario implemented the FIT Program for clean energy producers. Contrary to expectations, a high number of applications were filed. Although Mesa submitted a total of six applications, including two in the earliest possible window, it ultimately failed to secure a single PPA under the FIT Program. In particular, all of Mesa’s projects were located in Ontario’s Bruce Region. Following the first and second round of tenders under the FIT Program, the province cited transmission constraints as a material reason for not awarding PPAs in that region.
In January 2010, while the FIT Program was ongoing, Ontario entered into a Green Energy Investment Agreement (GEIA) with a consortium led by the multinational Samsung. The GEIA required Samsung’s consortium to establish and operate manufacturing facilities for wind and solar generation equipment in Ontario. In exchange, Samsung’s group was, among others, guaranteed priority access to certain transmission capacity.
Mesa served Canada with a Notice of Arbitration under NAFTA Chapter 11 on October 4, 2011. It alleged that Canada had, contrary to Articles 1102 and 1103, treated Mesa and its investments less favourably than other investors in like circumstances; contrary to Article 1106, imposed minimum domestic content requirements; and, contrary to Article 1105, failed to treat Mesa’s investments in accordance with the international law standard of treatment. Mesa requested damages of approximately US$75 million.
The tribunal was constituted on July 16, 2012 under the auspices of the Permanent Court of Arbitration (PCA). Subsequently, all three arbitrators signed a “Declaration of Acceptance and Statement of Independence and Impartiality” regarding their appointment. On May 4, 2015, the presiding arbitrator disclosed that she was chairing an ICSID arbitration in which one of the party-appointed arbitrators appeared as counsel.
No requirement for “cooling-off period” in relation to each and every event
Canada objected to the tribunal’s jurisdiction on the basis that the NAFTA Parties conditioned their consent to arbitration on a potential claimant following the procedures set out in NAFTA Articles 1118 to 1121 and that Mesa had not done so.
In particular, Mesa had filed its Notice of Arbitration only three months after the final decision of the Ontario government that it sought to challenge. Canada argued that Mesa did not comply with the six-month cooling-off period in Article 1120(1), and that the ordinary meaning of the phrase “events giving rise to a claim” in the provision designates each and every event. In this respect, Canada was supported by the third-party submission of Mexico.
The tribunal proceeded to interpret Article 1120(1) in light of the principles of interpretation in the Vienna Convention on the Law of Treaties and bearing in mind the objectives stated in NAFTA Article 102(1). It ultimately agreed with Mesa: if Canada’s argument were accepted, every new event related to a claim would require a claimant to wait for a further six months, which would apply however secondary or ancillary the new event may be. Thus, if events relating to the same claim kept occurring, a claimant would effectively be precluded from ever initiating arbitration under Article 1116(1). This interpretation, according to the tribunal, would effectively deprive the provision of effet utile, an outcome that is contrary to treaty interpretation rules.
FIT Program constitutes procurement
According to Canada, the obligations under NAFTA Articles 1102, 1103, and 1106 did not apply to Mesa’s investment, because the FIT Program constituted “procurement” under Articles 1108(7)(a) and 1108(8)(b), which provide reservations and exceptions to the investment protections under NAFTA. As NAFTA Chapter 11 does not define the term procurement, Canada argued that the tribunal should accept the expansive approach taken in previous NAFTA arbitrations, for example, ADF v. United States and UPS v. Canada, as well as the World Trade Organization Panel and Appellate Body reports in Canada — Renewable Energy. Mesa, however, invoked the most-favoured-nation (MFN) clause in NAFTA Article 1103 and the better treatment provided under subsequent treaty practice, such as the 2009 Canada–Czech Republic Foreign Investment Promotion and Protection Agreement (FIPA).
In regards to the claimant’s MFN argument, the tribunal observed that, “[f]or an MFN clause in a base treaty to allow the importation of a more favorable standard of protection from a third party treaty, the applicability of the MFN clause in the base treaty must first be established. Put differently, one must first be under the treaty to claim through the treaty. Thus, […] for the Claimant to establish that Article 1103 of the NAFTA applies, it must show that the FIT Program does not constitute procurement” (paras. 401–402). However, Mesa ultimately failed in this regard, and the tribunal concluded that the FIT Program did constitute procurement, dismissing the discrimination claims under Articles 1102 and 1103.
Charles Brower dissented from the finding that the FIT Program constituted procurement.
Tribunal settles on scope of customary international law standard of treatment
The tribunal considered submissions from the parties to the dispute and the non-disputing NAFTA Parties (both Mexico and the United States) with regard to the interpretation and scope of Article 1105. In terms of interpretation, the tribunal found the Free Trade Commission’s 2011 Notes of Interpretation of Certain Chapter Eleven Provisions (FTC Notes) to be binding.
On the scope of the customary international law minimum standard of treatment found in Article 1105, the parties diverged: Mesa claimed that it has evolved and now has the same content and meaning as the so-called “autonomous” fair and equitable treatment (FET) standard of modern bilateral investment treaties (BITs), while Canada advanced the view that Article 1105 in no way creates an open-ended obligation to be defined by tribunals.
Upon consideration of the parties’ positions, the tribunal was of the unanimous opinion that the decision in Waste Management II had correctly identified the content of the customary international law minimum standard of treatment found in Article 1105. On this basis, it affirmed the following components of Article 1105: “arbitrariness; ‘gross’ unfairness; discrimination; ‘complete’ lack of transparency and candor in an administrative process; lack of due process ‘leading to an outcome which offends judicial propriety’; and ‘manifest failure’ of natural justice in judicial proceedings” (para. 502). The tribunal also upheld the view that the failure to respect legitimate expectations of an investor must be considered when applying the standard, but does not in and of itself constitute a breach of Article 1105. In conclusion, the tribunal noted that when defining the content of Article 1105 “one should further take into consideration that international law requires tribunals to give a good level of deference to the manner in which a state regulates its internal affairs” (para. 505).
Dissenting opinion on whether Canada ultimately breached Article 1105
Although concurring on the above formulation of the applicable standard, Charles Brower dissented from the finding that Canada had not breached Article 1105. According to Brower, “[m]oreover, – and this can only be characterized as grotesque – as it actually happened, the Korean Consortium was thereby enabled to acquire low-ranked FIT applicants in order to fill its allotted 500 MW, thereby jumping clear losers in the FIT Program over higher-ranked, but ultimately unsuccessful FIT applicants, due to the reduced available megawattage” (para. 4 of the dissenting opinion).
Canada largely successful in application for costs
Pursuant to NAFTA Article 1135(1), the tribunal was at liberty to award costs in accordance with the applicable arbitration rules and followed Article 40 of the 1976 UNCITRAL Rules in finding that the claimant as the unsuccessful party must bear all of the costs of the arbitration. In terms of costs of legal representation and assistance, however, the UNCITRAL Rules provided less direct guidance, and the tribunal was of the view that the claimant should bear all of its own and 30 per cent of Canada’s costs.
Notes: The tribunal was composed of Gabrielle Kaufmann-Kohler (President appointed by appointed by the International Centre for Settlement of Investment Disputes as appointing authority, Swiss national), Charles Brower (claimant’s appointee, U.S. national), and Toby Landau (respondent’s appointee, British national). The final award of March 24, 2016 is available at http://www.italaw.com/sites/default/files/case-documents/italaw7240.pdf and Charles Brower’s dissent at http://www.italaw.com/sites/default/files/case-documents/italaw7241.pdf.
TURKEY–TURKMENISTAN BIT: TRIBUNAL FINDS CLAIMS ADMISSIBLE BUT DISMISSES THEM ON MERITS
İçkale İnşaat Limited Şirketi v. Turkmenistan, ICSID Case No. ARB/10/24
Matthew Levine [*]
An arbitral tribunal at the International Centre for Settlement of Investment Disputes (ICSID) has issued its award on the claims by a Turkish company against Turkmenistan. It found the claims admissible, despite an unusually worded arbitration agreement in the Turkey–Turkmenistan bilateral investment treaty (BIT). The award also found that failure to access local remedies did not preclude arbitration of the dispute.
On the merits, the tribunal declined to endorse the claimant’s theory that Turkmenistan’s substantive commitments in other investment treaties were applicable under the BIT’s most-favoured-nation (MFN) provision.
İçkale İnşaat Limited Şirketi (İçkale), a Turkish company engaged in the design, development and implementation of real estate and infrastructure projects, opened a branch office in Turkmenistan in 2004. Between March 2007 and July 2008, İçkale entered numerous construction contracts with various Turkish state entities.
Subsequently, İçkale began to encounter resistance from its state-owned business partners, which it attributed in large part to the political dynamics following the death of Turkmenistan’s founding President. İçkale alleged that the scope of works was expanded without additional compensation, that there were unjustified delays in payment and that the host state imposed unfair penalties.
The claimant initiated ICSID arbitration under the BIT in 2010. The arbitration related to 13 construction projects, which included schools, kindergartens, a hotel and a cinema. İçkale claimed US$570 million in compensation relating to consequential damages, and loss of reputation, goodwill and business opportunities.
Parties disagree on novel fork-in-the-road clause
The claimant argued that the BIT contains a type of fork-in-the-road clause, which sets out that resorting to local courts is optional, but that if an investor chooses that option, it can only subsequently submit the dispute to arbitration if the local courts have not rendered a decision within a year. For the claimant, only the English and Russian versions of the BIT need be considered, and the Russian version was inaccurately translated from the English version.
The respondent argued that the domestic litigation requirement is apparent from all three versions of the BIT, that is, the English, Russian and Turkish versions. According to the Russian version in particular, the phrase in question could only be understood as “on the condition that” or “provided that.” Furthermore, the English version’s “provided that, if” clause did not have an ordinary meaning.
The tribunal noted that it was undisputed that both the English and Russian versions were authentic, but that the parties disagreed on how the Russian version should be translated to English. It further noted that the relevant rules of treaty interpretation are reflected in the Vienna Convention on the Law of Treaties (VCLT), specifically in Articles 31 through 33. Article 33, in particular, deals with the interpretation of treaties authenticated in two or more languages.
Tribunal addresses interpretation of BIT’s multiple versions
The tribunal considered the first step in establishing the meaning of the BIT to be the general rule of treaty interpretation as set out in VCLT Article 31. When read in this context, it was evident to the tribunal that Article VII(2) of the BIT, and in particular the “provided that, if” clause, is drafted in a manner that effectively leaves its meaning unclear or obscure. Rather than seeking a “corrected” version of the provision (para. 199), the tribunal was obligated to have recourse to supplementary means of interpretation under VCLT Article 32.
According to Article 32, the supplementary means of interpretation to which the tribunal may resort include “the preparatory work of the treaty” and “the circumstances of its conclusion.” However, there was very limited evidence of preparatory works other than in relation to the Turkish version. As such, the tribunal had to decide at this stage whether it could be considered an “authentic” version. The tribunal ultimately determined that only the English and Russian versions of the BIT may be considered authentic versions and, as such, returned to the interpretation of the “provided that, if” in light of the available, albeit limited, supplementary means of treaty interpretation set out in VCLT Article 32. Here, the “the circumstances of its conclusion” took on considerable significance. However, the evidence as inconclusive and did not allow the tribunal to determine the meaning of the English version of the BIT.
The arbitrator appointed by the claimant—in a dissenting opinion, which is referenced below—disagreed with the tribunal on certain characterizations of expert evidence and underlying treaty provisions. Even so, in the context of the facts, treaty language, treaty practice and evidence in this particular case, the dissenting arbitrator accepted the tribunal’s interpretation of Article VII(2).
Domestic litigation requirement found in Russian version of treaty
The tribunal therefore turned to the interpretation of the Russian version of the BIT. While the respondent argued that the Russian uses language that is clearly mandatory on its face, the claimant maintained that it “can be translated in a manner that is literally the same as the English version” (para. 219). Having carefully reviewed the expert evidence, including both the expert opinions and the oral evidence, the tribunal decided to accept the respondent’s expert’s evidence on the proper translation. While the English version remained obscure, the Russian version was clear and unambiguous. The BIT did not establish which version prevails in case of divergence. Pursuant to the relevant rule of treaty interpretation in VCLT Article 33(4), the tribunal concluded by majority, to interpret Article VII(2) of the BIT so as to require recourse to domestic courts before international arbitration proceedings may be commenced.
International arbitration claims are admissible
Having found that Article VII(2) contains a domestic litigation requirement, the tribunal had to consider whether İçkale had failed to comply. The tribunal found that Article VII(2) sets out an admissibility requirement, rather than a question of jurisdiction.
The claimant acknowledged that it had not submitted the dispute to the local courts, but argued that domestic litigation would have been futile and was therefore unnecessary under well-established international law dating back to the 1903 Selwyn case. The tribunal found that the BIT’s requirement was not a reflection or incorporation of a rule of customary international law, but rather a lex specialis in the treaty itself. As a matter of admissibility, the consequences of İçkale’s non-compliance had to be determined in light of its procedural nature. In view of various facts related to the existence of related litigation in Turkish courts, the tribunal concluded that it would not be appropriate to require the claimant to first submit the present dispute to local courts.
Although in agreement with the final outcome, the arbitrator appointed by Turkmenistan disagreed with the tribunal’s interpretation of Article VII(2). According to the dissent, Article VII(2) went to jurisdiction rather than admissibility. The dissent also disagreed, on the facts of this case, that İçkale’s failure to take prior recourse to the national courts was not a bar to the admissibility of the claims.
No grounds for importing substantive protections in Turkmenistan’s other treaties
The tribunal also had to address the issue of MFN protection. The claimant sought to rely on the BIT’s MFN clause and non-derogation clause to advance claims relating to fair and equitable treatment (FET), full protection and security (FPS), non-discrimination standard and the umbrella clause. According to İçkale, the term “treatment” in the relevant articles of the BIT should be understood to cover at least the substantive protections provided to other foreign investors. Turkmenistan argued that the MFN clause does not allow such “importation” and that in any event the scope of application of the clause is limited to “similar situations” (para. 327).
The tribunal found the ordinary meaning of the MFN clause’s terms to suggest that each party agreed to treat investments in a manner no less favourable than the treatment accorded in similar situations to investments by investors of any third state. In particular, the words “treatment accorded in similar situations” suggested that the MFN obligation required a comparison of the relevant factual situations.
The tribunal disagreed with İçkale’s argument that any matters, including substantive protections, which are not expressly excluded from the scope of the MFN clause should be considered to be within in its scope. Nor was the tribunal able to agree with the argument that it can rely on the BIT’s derogation clause to import substantive investment protection standards included in other investment treaties concluded by Turkmenistan.
On the remaining allegations of unlawful expropriation, the tribunal was unable to conclude on the facts that such claims could be sustained. Ultimately, İçkale’s claims were dismissed in their entirety for lack of merit.
Claimant ordered to reimburse 20 per cent of respondent’s arbitration costs
The relevant rule on costs was Article 61(2) of the ICSID Convention, which does not prescribe any particular approach to the allocation of costs and thus granted the tribunal a considerable degree of discretion. Both parties accepted the “costs follow the event” principle. In view of the substantially greater amount spent by Turkmenistan on legal and expert fees and keeping in mind that the hearing was postponed at the respondent’s request, the majority found it appropriate to order İçkale to reimburse 20 per cent of the respondent’s arbitration costs (US$1.7 million).
Notes: The tribunal was composed of Veijo Heiskanen (President appointed by the Chairman of the Administrative Council, Finnish national), Carolyn Lamm (claimant’s appointee, U.S. national), and Philippe Sands (respondent’s appointee, British national). The final award as well as the partially dissenting opinions by Carolyn Lamm and by Philippe Sands, dispatched to the parties on March 8, 2016, are available at http://www.italaw.com/sites/default/files/case-documents/italaw7163_1.pdf.
Martin Dietrich Brauch is an International Law Advisor and Associate of IISD’s Investment for Sustainable Development Program, based in Latin America.
Inaê Siqueira de Oliveira is a Law student at the Federal University of Rio Grande do Sul, Brazil.
Maria Florencia Sarmiento is a teaching and research assistant at the Catholic University of Argentina.
Matthew Levine is a Canadian lawyer and a contributor to IISD’s Investment for Sustainable Development Program.