Tribunal finds Costa Rica’s measures to protect the environment did not breach FET or its expropriation obligations under CAFTA-DR

David R. Aven and Others v. Republic of Costa Rica, ICSID Case No. UNCT/15/3

In an award dated September 18, 2018, an arbitral tribunal constituted under the Dominican Republic–Central America–United States FTA (CAFTA-DR) considered the claims brought against Costa Rica by David R. Aven, a dual national of Italy and the United States, and six other foreign investors, all U.S. nationals. The tribunal dismissed the FET and indirect expropriation claims, awarding Costa Rica arbitration costs.

Background and claims

In the early 2000s, the claimants decided to implement a tourism project in Esterillos Oeste, on the Pacific Coast of Costa Rica (Las Olas Project). For this purpose, Aven acquired a stake in the several special vehicle companies (SPVs) incorporated under the laws of Costa Rica, which owned a land plot of approximately 37 hectares. One of these SPVs entered into a concession contract with the Municipality of Parrita.

Las Olas Project comprises areas designated for a beach club, a hotel, 72 residential plots, a commercial area with supermarkets and restaurants, and a “condo” section of 288 individual lots. The claimants alleged that they received all required permits and approvals, including the most significant one, the Environmental Viability Permit (EV). However, the EV was issued by Costa Rican authorities in the absence of the report prepared by the claimants’ subcontractors, which identified potential wetlands on the project site.

Due to neighbours’ complaints regarding harm to the wetlands and the felling of trees, Costa Rican authorities undertook various inspections that resulted in contradictory reports as to the existence of wetlands and forests on the project site. Subsequently, the Costa Rican authorities issued a series of injunctions prohibiting the works at the Las Olas Project.

Criminal proceedings were initiated by the prosecutor against Aven and Damjanac (sales and marketing director of the Las Olas Project), who were accused of violating local laws on forestry and wildlife conservation. The criminal court issued the INTERPOL Red Notice to extradite Aven, since he left Costa Rica alleging email threats and being a victim of a shooting incident. Damjanac was acquitted of all charges, although the decision was later reversed. At the time the arbitral award was issued, his new trial was still pending.

In 2014 the claimants initiated UNCITRAL arbitration. They argued that Costa Rica’s interference in the Las Olas Project amounted to a failure to accord them FET and an unlawful expropriation of their investments, in breach of CAFTA-DR. They claimed for compensation in the amount of USD 69.1 million in material damages, plus interest, and USD 5 million in moral damages to Aven.

Tribunal affirms jurisdiction over dispute save for 67 disposed properties

Costa Rica objected to the tribunal’s jurisdiction on four grounds: (1) Aven is not a protected investor under CAFTA-DR because his effective and dominant nationality is Italian rather than American; (2) two other claimants are not protected investors since they committed no resources as required under CAFTA-DR; (3) certain properties were not owned by the claimants in the Las Olas Project; and (4) the concession site is out of the jurisdiction of the tribunal since 51 per cent of the shares of the concessioner SPV is not owned by a Costa Rican national as required under domestic law, and the SPV had overdue taxes.

The tribunal rejected the “dominant and effective nationality” interpretation raised by Costa Rica. It stated that CAFTA-DR Article 10.28 seeks to prevent claims from an investor who possesses citizenship of the host state, not of a third state. Given Aven’s dual nationality and considering that the investment was made in Costa Rica, the tribunal concluded that the provision was not applicable. Such factors as the habitual residence and centre of interest also demonstrated that Aven’s effective and dominant nationality is American.

The tribunal rejected Costa Rica’s argument that two claimants did not make any investments. It found that they contributed their marketing and real estate development experience and that their non-monetary contributions were confirmed by share certificates.

Regarding certain properties allegedly no longer owned by the claimants, the tribunal admitted that the claimants failed to disclose the ongoing sale of the lots to third parties during the arbitration. The tribunal concluded that an investment disposed of prior to the submission date of notice of arbitration should not be protected by CAFTA-DR. Thus, the tribunal refrained from exercising jurisdiction over 67 properties.

The claimants’ failure to comply with rules applicable to the concession site did not preclude the tribunal from upholding jurisdiction. It noted that Costa Rica did not challenge the prohibited share ownership structure and, thus, tacitly accepted it. Likewise, it held that no Costa Rican authorities challenged the failure by the claimants to pay the taxes and that such failure did not bar the tribunal’s jurisdiction.

All claims found admissible save for full protection and security claims

Costa Rica also raised three objections to admissibility: (1) unlawful and illegal conduct of the investors during the operation of the investment; (2) failure to raise full protection and security claims at the notice of arbitration; and (3) failure to exhaust domestic proceedings.

The tribunal concluded that Costa Rica failed to provide evidence that the claimants acted fraudulently in the establishment of the investment and held that the requirement of unlawful and illegal conduct does not extend to the actions during the operation of the investment. Thus, the tribunal dismissed the challenge of admissibility on this ground. However, it found the claims for full protection and security inadmissible since there were raised at the closing of the hearing rather than at the notice of arbitration.

Regarding the exhaustion of domestic proceedings, the tribunal stated that CAFTA-DR does not require exhaustion of domestic remedies as a condition of admissibility to access international arbitration. It stated that exhaustion of local remedies was required to prove a denial of justice and would be addressed in the merits phase.

Investor protection is subordinate to the state’s right to adopt and enforce environment protection laws and measures

Relying on CAFTA-DR Art. 10.11, Costa Rica contended that the suspension of the Las Olas Project was justified by environment protection obligations assumed by Costa Rica under international and domestic law. It argued that any inconsistency between the standards under Chapter 17 (Environment) and those under Chapter 10 (Investment) must be interpreted in favour of Chapter 17.

The tribunal concluded that, under CAFTA-DR, the rights of investors are subordinate to the right of Costa Rica to ensure that the investments are carried out “in a manner sensitive to environmental concerns” (para. 412). However, it held that this subordination is not absolute and that the host state must implement and enforce its environmental laws “in a fair, non-discriminatory fashion, applying said laws to protect the environment, following principles of due process, not only for its adoption but also for its enforcement” (para. 413).

The tribunal identified that Costa Rica was a party to international conventions protecting wetlands and forests and adopted domestic laws on the matter. The tribunal’s task was to determine whether the enforcement of the laws was proper and lawful.

FET, expropriation and denial of justice claims dismissed

The tribunal stated that whether Costa Rica breached FET or unlawfully expropriated the investment depended on two factors: (1) whether there were wetlands and forests at the Las Olas Project at the time the measures were adopted and (2) whether wetlands and forests were adversely impacted.

Based on the analysis of various expert reports and Costa Rican laws, the tribunal concluded that there were wetlands in at least one location in the project site and that the conditions in the site allowed for a determination that a “forest” existed within the definition of the forestry law.

The tribunal considered that, under Costa Rican laws, as developers the claimants bear the burden of proof that no harm would be caused to the environment and have the duty to inform the authorities of any potential environmental damage. The tribunal found that they failed to disclose the existence of the “swamp-type flooded area” at the project site. Additionally, it concluded that the fragmentation of the land did not have a business purpose in and for itself, and that by doing so the claimants circumvented the requirement to secure an EV for that part of the area.

There was enough evidence for the tribunal to determine that wetland and forests were impacted by the claimants’ works. The tribunal concluded that the measures undertaken by Costa Rica to protect the environment are consistent with international law and neither arbitrary nor in breach of the obligations under CAFTA-DR.

Furthermore, according to the tribunal, the claimants did not meet the standard for bringing a denial of justice claim. The tribunal found no evidence that the prosecutor or the judicial system in Costa Rica acted or failed to take actions toward Aven or Damjanac that were not in accordance with domestic laws. It concluded that the prosecutor had reasonable grounds to treat the claimants’ conduct as a continued crime and validly used the discretion to issue the INTERPOL red notice.

Costa Rica’s counterclaim for environmental damage under CAFTA-DR

Costa Rica submitted a counterclaim seeking damages between USD 500,000 and USD 1 million to restore the natural conditions in Las Olas. It argued that nothing in the CAFTA-DR prevents the tribunal from exercising jurisdiction over a counterclaim under Chapter 10. The investors objected to the tribunal’s jurisdiction over the counterclaim, interpreting that, under the dispute settlement provisions in CAFTA-DR, only host states can be respondents.

The tribunal agreed that the majority of CAFTA-DR provisions concerns obligations of states, which could support the claimants’ argument that investors cannot be respondents. However, the tribunal analyzed CAFTA-DR provisions on environment protection and concluded that they implicitly imposed obligations on the investors to protect the environment. It considered that investors are not immune from being sued for breaching the environmental protection obligations under CAFTA-DR and upheld its jurisdiction over Costa Rica’s counterclaim.

However, the tribunal remarked that CAFTA-DR does not impose “affirmative obligations” (para. 743) on investors and does not provide that any failure to comply with environmental regulations will constitute a breach of CAFTA-DR and would serve a basis for a counterclaim. Accordingly, finding that Costa Rica failed to provide the facts supporting the counterclaims and relief sought as required by Art. 21 and 20 of the UNCITRAL Arbitration Rules, the tribunal found the counterclaims inadmissible.


The tribunal found that both parties were unsuccessful to a certain extent. It recognized that they acted properly during the proceedings, that the complexity of the case appeared in the inconsistencies of the facts, and that the claimants do not appear to be wealthy institutional investors. Therefore, it ordered the investors to bear all arbitration costs, but ordered each party to bear its own legal costs and expenses.

Notes: The tribunal was composed of Eduardo Siqueiros (president appointed by the ICSID Secretary General, Mexican national), C. Mark Baker (claimants’ appointee, U.S. national) and Pedro Nikken (respondent’s appointee, Venezuelan national). The award is available at:

Victoria Khandrimaylo is a MIDS LL.M. Candidate (2018–2019) at the University of Geneva – Graduate Institute (IHEID)