Dominant and effective nationality objection prevails in CAFTA-DR arbitration
Michael Ballantine and Lisa Ballantine v. The Dominican Republic, PCA Case No. 2016-17
On September 3, 2019, an UNCITRAL tribunal declined jurisdiction over a claim filed in 2014 against the Dominican Republic by two dual nationals based on an allegedly discriminatory denial of real estate projects in environmentally sensitive and protected areas. The claimants alleged breaches of the FET standard and the expropriation provision of the Dominican Republic–Central America Free Trade Agreement (CAFTA-DR), among others.
Background and claims
In 2000, U.S. nationals Michael and Lisa Ballantine first carried out Christian missionary work in the Dominican Republic. They remained connected to the country, even acquiring Dominican nationality. The couple observed that there was no successful luxury real estate development with infrastructure and amenities around the Jarabacoa mountains. Consequently, they started acquiring land for the Jamaca de Dios Project, which consisted of two phases: the first, begun in 2005, entailed infrastructure and individual luxury homes; the second, started in 2009, entailed the construction of a luxury hotel and spa, among other amenities.
The Ballantines acquired less than half of the land intended for Phase 2 and incurred substantial expenses for the construction of roads, infrastructure, reforestation, high-speed internet, maintenance, security, among others. However, Presidential Decree No. 571-09 of August 7, 2009 created the Baiguate National Park to protect and preserve the Baiguate Waterfall, a highly diverse and fragile ecosystem. Furthermore, conflicts arose regarding the use of a road passing through the Ballantines’ property. Ultimately, some violent episodes occurred, and several local authorities became involved.
After completing Phase 1 of the project, the claimants could not complete Phase 2 because the Ministry of Environment, since 2011, had refused to grant several environmental permits. Consequently, in 2014, they initiated UNCITRAL arbitration for breaches of several CAFTA-DR provisions: national treatment, MFN treatment, minimum standard of treatment, expropriation and compensation, and transparency (para. 189).
The burden of proof and standard of interpretation
The tribunal noted that the CAFTA-DR does not contain any provision addressing the issue of burden of proof. It held that, since Article 27(1) of the UNCITRAL Rules provided that each party has the burden of proof to support their claim or defence, both parties had to demonstrate whether or not the tribunal had jurisdiction over the dispute. This holding was in accordance with the general approach of other CAFTA-DR tribunals (for example, Pac Rim LLC v. El Salvador).
As for the standard of interpretation, the tribunal held that VCLT Articles 31 and 32 applied to the identification of (i) who is entitled to submit a claim to arbitration and how to do so (CAFTA-DR Article 10.16) and (ii) the requirements for a national or an enterprise to be an investor and in turn a claimant (CAFTA-DR Article 10.28). Regarding the latter, the tribunal held that “[t]he concept of national is particularly fundamental … and has a bearing on the issue of jurisdiction” (para. 514).
Considering that the claimants were dual nationals (U.S. and Dominican), the tribunal determined that it had to establish, which was the dominant and effective nationality. For that purpose, it established that it needed to answer two fundamental questions that relate to each other: “(i) what are the relevant times in which an individual shall comply with the nationality requirement? and (ii) what is the legal standard … to determine [the] dominant and effective nationality[?]” (para. 515).
Relevant times, and dominant and effective nationality
The majority of the tribunal answered the first question by indicating that the relevant times (or critical dates) to examine the compliance with the nationality requirement were (i) the time in which the alleged breach was committed (September 12, 2011), and (ii) the time of the filing of the claim (September 11, 2014); such dates provided temporal context in which to interpret Article 10.28 in light of the VCLT. On the other hand, the tribunal held that the moment in which the investment was made is not relevant for such an examination.
As for the second question, the tribunal established that the CAFTA-DR did not “prescribe specifically the factors that may be considered to determine the dominance and effectiveness” (para. 530). Hence, it turned to determine the applicable legal standard first by resorting to the specific meaning of the treaty terms and then to explore customary international law, given that the CAFTA-DR and rules of international law formed the governing law, pursuant to CAFTA-DR Article 10.22.
Because the tribunal found that the treaty did not provide more guidance for interpretation, it resorted to analyzing the jurisprudence of other international courts and tribunals (the International Court of Justice, the Iran–United States Claims Tribunal and the Italian–U.S. Conciliation Commission). In doing so, the tribunal considered that the criteria previously indicated in its Procedural Order No. 2 were applicable, namely: the claimants’ (i) habitual residence, (ii) personal connections, (iii) economic and family centre and (iv) acquisition of the second nationality.
In analyzing these criteria, the majority of the tribunal asserted that it did not intend to determine whether the claimants ceased to be U.S. nationals or to have connections to that country. Nonetheless, the majority concluded that the Dominican nationality took precedence during the relevant times, and, therefore, the Ballantines did not qualify as investors under CAFTA-DR Article 10.28. On this point, arbitrator Cheek dissented.
Consequently, by majority, the tribunal declared that it had no jurisdiction over any of the claims.
Decision on costs
The tribunal considered that the complexity of the proceedings, the novelty of the issues of fact and law and other relevant circumstances rendered the costs of the arbitration reasonable in accordance with UNCITRAL Arbitration Rule 40(2)(e). Arbitration costs amounted to USD 900,000; claimants’ legal fees and expenses to USD 1.8 million; and respondent’s legal fees and expenses, USD 3.2 million.
The majority of the tribunal (arbitrators Hernández and Cheek) decided to split the arbitration costs evenly between the parties and ordered each party to bear its own costs. On this point, arbitrator Vinuesa dissented.
Partial dissenting opinions
Arbitrator Cheek partially dissented as to the relevance of the moment in which the investment was made. In her view, when examining the claimants’ ties to the United States and the Dominican Republic, the tribunal should have established that not only the critical dates were relevant but also the entire life of the claimants, as customary international law prescribes.
Arbitrator Vinuesa partially dissented as to the apportionment of costs. He considered that “PCA’s costs, including the tribunal’s fees and expenses, should be borne entirely by the claimants,” given that the majority made a value judgement by stating that “the claimants brought a credible case,” a finding that had not been previously endorsed in CAFTA-DR arbitrations. Moreover, Vinuesa was of the opinion that the Ballantines’ opposition to bifurcating the proceedings could not have been overlooked, primarily because this “demanded considerable time and effort and greater costs to the Parties throughout the procedure” (Vinuesa’s dissent, paras. 29–35).
Notes: The tribunal was composed of Ricardo Ramírez Hernández (presiding arbitrator, appointed by the parties, Mexican national), Marney Cheek (claimant’s appointee, U.S. national) and Raúl Vinuesa (respondent’s appointee, Argentinian national). The award of September 3, 2019, including the dissenting opinions, is available at https://www.italaw.com/sites/default/files/case-documents/italaw10818.pdf
Juan Carlos Herrera-Quenguan is a senior associate at Flor & Hurtado in Quito, Ecuador. He specializes in public international law and international dispute settlement.