All claims rejected on merits in Lidercón’s case against Peru: Changing regulatory framework and judicial decisions did not breach the FET standard
Lidercón, S. L. v. Republic of Peru, ICSID Case No. ARB/17/9
Lidercón, a Spanish company operating vehicle inspection centres in the Metropolitan Municipality of Lima, lost its claim against Peru on all counts in an ICSID arbitration. While foreign investors frequently complain of suffering from discrimination, this is an unusual case of a company claiming that it was entitled to the exclusion of competitors, both foreign and national, based on a clause in its concession contract. The company claimed that the changing regulatory framework, decisions of state authorities and courts regarding the exclusivity clause, and the competencies of the authorities to supervise Lidercón, resulted in a breach of the fair and equitable treatment standard.
Lidercón was ordered to reimburse Peru for 60% of the latter’s contribution to the costs of the arbitration, as well as 60% of its legal fees, amounting to a total of over USD 4 million.
Background and claims
Lidercón entered into a concession contract with the Metropolitan Municipality of Lima (MML) in 2004 to build and operate vehicle inspection centres within the MML’s territory. The supervision of the area by the local authority was an anomaly, as in the rest of the country the inspection was under the control of the Ministry of Transportation and Communications (“the Ministry”). However, the legislative framework underwent changes following Fujimori’s rule, which was when Lidercón and MML signed the concession contract. The evolving regulations culminated in the 2008 National Vehicle Inspection Law (“Ley ITV”), which gave the Ministry exclusive competence for approval and oversight of vehicle inspections, superseding all contrary regulations.
The concession contract contained a clause that granted Lidercón exclusivity in the provision of inspection services. While initial reports of the Ministry and INDECOPI, the Peruvian competition authority, stated that exclusivity would be maintained, it was later found by INDECOPI to be an illegal bureaucratic barrier. In 2017 Lidercón challenged this decision in the Corte Superior de Justicia de Lima, but INDECOPI’s resolution was upheld.
Lidercón and MML had been involved in several domestic arbitration proceedings prior to the 2017 case. These ended with the 2011 award upholding the parties’ concession contract. The Corte Superior declared the 2011 Award to be unenforceable to the extent that it called upon the MML to act beyond its competence in supervising Lidercón’s work.
Lidercón contended that Peru breached the Spain–Peru BIT (the “Treaty”) by failing to accord FET in the form of denial of justice and by non-transparent acts in bad faith that denied legitimate expectations. It also claimed that Peru imposed unjustified and discriminatory measures and breached the concession contract. The contractual breach was rejected by the tribunal based on the lack of an umbrella clause in the Treaty. The reasoning regarding the other claims is discussed below.
Provision of remedies for regulatory change in the contract relevant to legitimate expectations and discriminatory treatment
The tribunal rejected the claim that Peru breached the FET standard by denying Lidercón the right to exclusivity in the provision of services, in defiance of its legitimate expectations. It defined a legitimate expectation as one that is of a nature to induce reasonable reliance, and it found that Lidercón could not have had an expectation that the concession contract would be insulated from regulatory change. The principal reason was that the concession contract contained clauses that referred to the possibility of regulatory change altering the conditions of the concession and provided for remedies (paras. 197–206). The inclusion of these clauses in the concession meant that the parties had explicitly contemplated the possibility of regulatory change and agreed to the remedies. Similarly, the inclusion of these clauses also answered Lidercón’s claim that it had been treated in a discriminatory manner.
“Familiar functioning” of a decision-making system does not breach the FET standard
The claimant alleged that the seemingly contradictory positions taken by INDECOPI, which initially accepted the exclusivity clause but later rejected it, breached the FET standard. The tribunal disagreed, finding that the changes were not proof of inconsistency, but constituted “familiar functioning of decision-making concerning different circumstances at different moments in time” (para. 248). INDECOPI was making decisions in the context of a changing regulatory framework, and its resolutions after the Ley ITV (granting the Ministry exclusive competence over vehicle inspection), were necessarily going to be different than what it had found beforehand.
Treaty breach by judicial conduct: Tribunal rejects the claimant’s expansive interpretation and reaffirms narrower view based on Alghanim v. Jordan
The claimant alleged that the judicial decision that confirmed INDECOPI’s finding and rejected the exclusivity provision was a breach of the BIT. It argued that “if the original measure came so close to being a treaty breach that only the availability of local remedies prevented it from qualifying as such, the host State may effectively have an obligation to provide redress through its domestic courts to avoid that consequence. The failure to do so may well have the consequence that the original measure finally crystallizes into a breach, even in circumstances where the court proceedings do not give rise to a denial of justice” (para. 271, citing article by Hanno Wehland).
The tribunal found that this approach was not endorsed in previous decisions and agreed with Peru’s argument that Alghanim v. Jordan explicitly rejects it. As stated in that case, the tribunal’s role is not to determine the correctness of domestic courts, but only to consider whether their judgement was inexcusable (i.e., one that no reasonably competent court could arrive at), and thus constitutes a denial of justice. In that way, the tribunal in Lidercón v. Perú maintained a narrow view of when judicial conduct constitutes a treaty breach. It reaffirmed that denial of justice may take the form of (a) the failure of due process (which was not argued in the case) and (b) decisions so lacking in seriousness as to indicate bias (which the facts did not show) (para. 270). Further, the tribunal held that there was no autonomous standard in international law, above and beyond domestic law, which the Peruvian courts could have breached, and thus no way in which the tribunal’s assessment could trump Peruvian law (para. 273).
Absence of discrimination does not entail that governments are obliged to protect foreign investors from opposition by business competitors or legislators
Finally, in response to Lidercón’s argument that there was hostility toward it from legislators, and that the INDECOPI’s resolutions had been fomented by its competitors, the tribunal found that mere opposition by business competitors or legislators not in favour of the company cannot of itself amount to discrimination under the Treaty (para. 244).
Notes: The tribunal was composed of Professor Jan Paulsson (president appointed by both parties, French and Swedish national), Dr. Francisco González de Cossío (claimant’s appointee, Mexican national) and Professor Hugo Perezcano (respondent’s appointee, Mexican national). The award of March 6, 2020, is available at https://www.italaw.com/sites/default/files/case-documents/italaw11419.pdf.
Anna Sands is currently finishing an MPhil in development studies at Oxford University. Her MPhil research focused on the empirical effects of investment arbitration on government policy choices. She has a bachelor’s degree in law with French law from Oxford University.