Jurisdiction declined in case against Uruguay as ICSID tribunal concludes that American company lacked ownership or control over the investment
Italba Corporation v. Oriental Republic of Uruguay, ICSID Case No. ARB/16/9
In an arbitration initiated by U.S.-based Italba Corporation (Italba) against Uruguay, the ICSID tribunal declined its subject-matter jurisdiction. In its award of March 22, 2019, the tribunal concluded that Italba lacked ownership or control over the investment in dispute.
Background and claims
In 1997, the Uruguayan Ministry of National Defense granted Italian national and permanent U.S. resident Gustavo Alberelli the authorization to commercially provide dedicated wireless digital lines for data transmission. Further, the National Communications Authority DNC allocated to him the exclusive use of stipulated frequencies. Between 1999 and 2000, Alberelli transferred the authorization and frequencies to Trigosul Sociedad Anónima (Trigosul), a Uruguayan company allegedly acquired by him and his mother, Carmela Caravetta Durante, through Italba between 1996 and 1999.
Trigosul allegedly failed to pay its regulatory dues from July to September 2009. Additionally, upon inspection, the Uruguayan Regulatory Unit for Communications Services (URSEC) did not find Trigosul’s premises at its registered address. Hence, it recommended the revocation of Trigosul’s 1997 authorizations and the release of its frequencies. This was implemented in January 2011.
Trigosul challenged the URSEC resolution and consequent actions. A Uruguayan court’s finding in October 2014 annulled the revocation of Trigosul’s authorization and granted the company rights to new frequencies. In Trigosul’s view, however, these new frequencies were worthless. Moreover, it considered that the delayed restoration of its rights in 2016 was a breach of Uruguay’s obligation to tender prompt, adequate and effective compensation for its expropriatory acts.
Claiming full ownership and control over Trigosul, Italba instituted ICSID proceedings against Uruguay under the Uruguay–United States BIT (the BIT). It argued that Trigosul’s licence and associated rights were “investments” within the meaning of BIT Article 1, and characterized Uruguay’s actions as expropriatory, discriminatory, and in breach of the FET and full protection and security clauses.
Italba’s challenge to Uruguayan expert rejected
Italba challenged the independence of Uruguay’s expert, Eugenio Xavier de Mello Ferrand, alleging that he was a partner at a law firm concurrently representing Uruguay in another arbitration at the time. In response, the expert stressed that his firm was structured as an “economic interest group” (GIE, in its Spanish acronym), wherein each attorney and his or her clients have individual attorney–client relationships, independent and autonomous from other members of the firm.
The tribunal examined the structure of GIEs in Uruguayan law and concluded that, while such entities were formed to develop the economic activity of their members, these members were neither entitled to work jointly nor to seek shared profits. Further, it pointed to the distinct mode of operation of law firms in Latin America, where attorneys share expenses and facilities, but derive no benefit from each other’s work. In this light, the tribunal equated the GIE model of de Mello’s firm to a “barristers’ chambers in England,” distinguishing it from “a law firm in which the members are in partnership and share profits” (para. 151).
Recognizing that there is no automatic disqualification “where a member of a barristers’ chambers acts as an arbitrator in a case where another member is acting as counsel” (para. 151), the tribunal denied de Mello’s automatic disqualification as an expert. Additionally, it found Prof. de Mello under no obligation to disclose the ongoing activities undertaken by other members of his firm, due to the independent operations of each member.
These findings were corroborated by reference to the IBA Rules on Taking of Evidence in International Arbitration. The rules do not compel experts to furnish details of present or past relationships between the parties and their organizations—instead, the expert’s objectivity must be assessed based on his own economic or personal position.
Concluding that Prof. de Mello was not aware of his firm’s engagements with Uruguay and did not derive any benefit from those engagements, the tribunal denied Italba’s request to exclude his report from the record.
Italba fails to demonstrate ownership of Trigosul
Italba asserted its ownership over Trigosul on several grounds. First, it argued that through successive transfers, Trigosul’s shares now belonged to Italba. Second, it claimed that, as indicated on the back of the share certificates, they had been endorsed in favour of Italba. Third, Italba asserted that it made investments and negotiations on behalf of Trigosul. Thus, according to Italba, both the formal actions and the economic reality evinced its ownership of Trigosul. Conversely, Uruguay criticized these arguments based on inconsistencies and discrepancies in Italba’s evidence.
At the outset, the tribunal noted that Trigosul’s share certificates did not expressly suggest Italba’s ownership—only Ms. Durante’s and Mr. Alberelli’s. Their exclusive shareholding was further confirmed in three folios of the book of minutes of shareholders’ and board of directors’ meetings.
It also found that only one of the six available share certificates recorded an endorsement in Italba’s favour. Since this endorsement did not stipulate a place, the validity of the endorsement was checked under the law of Uruguay, where Trigosul was established, registered and operated. However, Uruguayan law compels notification of every endorsement in a registered securities ledger and a record in the company’s stock ledger. The endorsement in question was found to be invalid, since it was both unregistered and unrecorded. The tribunal also noted that this invalid endorsement could not show Trigosul’s intention to transfer its entire shareholding to Italba. Here, taking note of Mr. Alberelli’s experience as a businessman, the tribunal refused to excuse the inconsistencies in Trigosul’s books as his “lack of legal knowledge” (para. 209).
With respect to the economic reality of Trigosul’s ownership, the tribunal followed Prof. de Mello’s reasoning—the doctrine’s relevance was limited to cases where a company’s legal personality was misused to commit fraudulent acts. Additionally, Italba failed to furnish evidence of participation in Trigosul’s shareholder meetings, share in its profits and losses, role in the management of its business, or contributions to its capital. Thus, the tribunal held that Italba did not qualify as Trigosul’s owner under Uruguayan law.
The tribunal also assessed Italba’s claims of ownership under the laws of the U.S. state of Florida, where it was incorporated. Florida law requires delivery of the share certificates, intent to transfer the shares, and the acceptance of the shares by the transferee. Citing insufficient evidence on all three counts, the tribunal dismissed Italba’s contentions.
Italba did not control Trigosul
Article 1 of the BIT defines “investments” as assets owned or controlled by investors. The tribunal acknowledged that this article extends the BIT’s protection to investments merely “controlled” by investors. Since the term was not defined in the treaty, the tribunal ascertained its meaning based on the facts of the case.
Italba claimed that by making business decisions for Trigosul, contributing to its capital, funding its operations and representing itself to third parties as Trigosul’s owner, it exercised “control” over Trigosul. Upon evaluation of the evidence in this regard, the tribunal found that Italba’s claims were based on inconclusive evidence and inconsistent with documentary evidence filed by its witnesses. As evidence, Italba also alluded to the potential joint ventures it was negotiating, claiming Trigosul as its subsidiary, to realize the full value of its investments in Trigosul. The tribunal found no dispositive value in this fact alone.
Thus, dismissing Italba’s claims of ownership and control over Trigosul, the tribunal declined jurisdiction under Article 25 of the ICSID Convention. Consequently, Uruguay’s other jurisdictional objections were not evaluated by the tribunal.
Decision and costs
The tribunal upheld Uruguay’s objections to jurisdiction. Based on both parties’ agreement that the “loser pays” principle applied and on the tribunal’s discretion to allocate costs under Article 61(2) of the ICSID Convention, the tribunal directed Italba to bear its own costs and reimburse all of. Uruguay’s costs. Due to insufficient basis, it denied Uruguay’s request for interest on costs.
Notes: The tribunal was composed of Rodrigo Oreamuno (president, appointed by the parties, Costa Rican national), John Beechey (claimant’s nominee, British national), and Zachary Douglas (respondent’s nominee, Australian national). The award is available at https://www.italaw.com/sites/default/files/case-documents/italaw10439.pdf
Vishakha Choudhary is an LL.M. Candidate (2019) at the Europa-Institut, University of Saarland (Germany) and a Researcher at the Chair of Prof. Dr. Marc Bungenberg, Director of the Europa-Institut.