{"id":3786,"date":"2016-08-10T09:40:57","date_gmt":"2016-08-10T14:40:57","guid":{"rendered":"http:\/\/itn.mattrock.ca\/?p=3786"},"modified":"2024-08-09T18:27:09","modified_gmt":"2024-08-09T16:27:09","slug":"awards-and-decisions-24","status":"publish","type":"post","link":"https:\/\/www.iisd.org\/itn\/2016\/08\/10\/awards-and-decisions-24\/","title":{"rendered":"Awards and Decisions"},"content":{"rendered":"

Philip Morris v. Uruguay: all claims dismissed; Uruguay to receive US$7 million reimbursement<\/strong><\/h2>\n

Philip Morris Brands S\u00e0rl, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay, ICSID<\/span> Case No. ARB\/10\/7<\/em><\/p>\n

Martin Dietrich Brauch\u00a0<\/strong>[*]<\/a><\/p>\n

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\u2019s legal expenses.<\/p>\n

Background<\/em><\/h3>\n

Claimants were Philip Morris Brand S\u00e0rl 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 \u201cPhilip Morris\u201d in this summary.<\/p>\n

To counter the public health and economic impacts of the country\u2019s 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).<\/p>\n

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<\/em>, Blue<\/em> and Fresh Mint<\/em>, keeping Marlboro Red <\/em>only. The 80\/80 Regulation increased the size of the warnings from 50 to 80 per cent.<\/p>\n

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<\/span>), among other breaches of the Switzerland\u00ad\u00ad\u2013Uruguay bilateral investment treaty (BIT<\/span>).<\/p>\n

Indirect expropriation: claims and structure of tribunal\u2019s analysis<\/em><\/h3>\n

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.<\/p>\n

The tribunal started from the undisputed point that trademarks and the associated goodwill are protected investments under the BIT, and assumed that Philip Morris\u2019s 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\u2019s investment.<\/p>\n

Trademarks give an exclusive right to exclude others from use, not an absolute right of use<\/em><\/h3>\n

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).<\/p>\n

The tribunal found that, under all these applicable sources of law, \u201cthe 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\u2019s regulatory power\u201d (para. 271).<\/p>\n

The SPR and the 80\/80 Regulation did not expropriate Philip Morris\u2019s investment<\/em><\/h3>\n

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\u2019 business.<\/p>\n

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\u2019s investment as a whole, \u201csince the measure affected its activities in their entirety\u201d (para. 283). From this standpoint, the tribunal concluded that the SPR was far from causing a substantial deprivation of the value of Philip Morris\u2019s 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.<\/p>\n

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\u2019s view, the measures were a valid exercise of Uruguay\u2019s police powers, which cannot constitute an expropriation. Accordingly, the tribunal dismissed the expropriation claims entirely.<\/p>\n

FET claim rejected in absence of arbitrariness and breach of legitimate expectations <\/em><\/h3>\n

The tribunal started its FET analysis addressing Philip Morris\u2019s allegation that the challenged measures were arbitrary. Referring to the international law standard under the ELSI<\/em> case, which defines arbitrariness as a \u201cwilful disregard of due process of law, an act which shocks, or at least surprises, a sense of juridical propriety\u201d (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\u2019s 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.<\/p>\n

In view of the circumstances of their adoption, the tribunal held that both measures were reasonable, and not \u201carbitrary, grossly unfair, unjust, discriminatory or [\u2026] disproportionate,\u201d with \u201cminor impact\u201d on Philip Morris\u2019s 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.<\/p>\n

However, the claimants\u2019 appointee to the tribunal, Gary Born, dissented on this point, finding single presentation a manifestly arbitrary and unreasonable requirement, \u201cbecause it is wholly unnecessary to accomplishing its only stated objective,\u201d (para. 196 of the dissent) namely, \u201cprotecting consumers against deceptive uses of trademarks\u201d (para. 172 of the dissent).<\/p>\n

According to Philip Morris, Uruguay\u2019s measures \u201ceviscerated\u201d its legitimate expectations to explore its brand assets and enjoy its intellectual property rights, as well as undermined the legal stability of Uruguay\u2019s legal framework. However, relying on EDF v. Romania <\/em>and El Paso v. Argentina<\/em>, 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\u2019s business, it held that the challenged measures did not change the legal framework beyond the \u201cacceptable margin of change\u201d tolerated under the El Paso<\/em> standard.<\/p>\n

Tribunal dismisses Philip Morris\u2019s denial of justice claims<\/em><\/h3>\n

Philip Morris alleged that contradictory decisions of two Uruguayan courts\u2014the Supreme Court of Justice (SCJ) and the Tribunal de lo Contencioso Administrativo <\/em>(TCA)\u2014concerning the 80\/80 Regulation amounted to a denial of justice. However, according to the majority, although \u201cunusual\u201d and \u201csurprising,\u201d the contradiction was not serious enough to amount to a denial of justice. \u201cOutright conflicts within national legal systems may be regrettable but they are not unheard of,\u201d the majority reasoned (para. 529).<\/p>\n

According to dissenting arbitrator Gary Born, the contradictory decisions, in both cases rejecting Philip Morris\u2019s claims, \u201camounted to \u2018Heads, I win; tails, you lose\u2019 treatment\u201d (para. 40 of the dissent), and Uruguay\u2019s failure to provide Philip Morris access to a judicial forum to address the contradiction consisted in a denial of justice.<\/p>\n

A second denial of justice claim was that the TCA rejected Philip Morris\u2019s application to partially annul the SPR not based on Philip Morris\u2019s 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\u2019s arguments were addressed, concluding that there was no denial of justice.<\/p>\n

Notes<\/em>: The ICSID tribunal was composed of Piero Bernardini (President appointed by ICSID\u2019s Secretary-General, Italian national), Gary Born (claimant\u2019s appointee, U.S. national) and James R. Crawford (respondent\u2019s 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<\/a>.<\/p>\n

\n

Corporate restructuring and abuse of rights: PCA<\/span> tribunal deems <\/strong>Philip Morris\u2019s claims against Australia\u2019s tobacco plain packaging rules inadmissible <\/strong><\/h2>\n

Philip Morris Asia Limited v. The Commonwealth of Australia, PCA Case No. 2012-12<\/em><\/p>\n

Ina\u00ea Siqueira de Oliveira\u00a0<\/strong>[*]<\/a><\/p>\n

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-\u2013Australia bilateral investment treaty (BIT), claiming that plain tobacco packaging amounted to an expropriation of its intellectual property rights.<\/p>\n

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\u2019s objections\u2014the 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\u2014and declined to hear the case.<\/p>\n

Australia\u2019s tobacco plain packaging rules<\/em><\/h3>\n

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.<\/p>\n

In 2009, Australia\u2019s 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 \u201cconcern about the unconstitutionality\u201d of the measure (para. 110) and willingness to challenge it by litigation if necessary.<\/p>\n

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.<\/p>\n

Philip Morris\u2019s corporate restructuring<\/em><\/h3>\n

Philip Morris International Inc. (PMI) is one of the world\u2019s 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.<\/p>\n

The claimant, PM Asia, is a company based in Hong Kong that serves as regional headquarters for PMI\u2019s 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.<\/p>\n

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\u2019s investment in the country. Moreover, PM Asia alleged it had managed and controlled the Australian subsidiaries since 2001.<\/p>\n

According to PM Asia, the restructuring of the Australian subsidiaries was part of a group-wide reorganization to \u201crefine, rationalize and streamline PMI\u2019s corporate structure\u201d (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.<\/p>\n

Australia\u2019s objections to the tribunal\u2019s jurisdiction: lack of control of the investment since 2001, irregular admission of the investment, lack of temporal jurisdiction, and abuse of rights<\/em><\/h3>\n

As the PCA tribunal accepted Australia\u2019s plea to bifurcate proceedings, the December 2015 decision deals solely with questions of jurisdiction and admissibility.<\/p>\n

First, Australia disputed that PM Asia had exercised control of the Australian subsidiaries since 2001. Interpreting the control test under the BIT, which required \u201csubstantial interest in the company\u201d (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\u2019s allegations for failure to present evidence of control.<\/p>\n

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<\/em> evidence of admission\u2014a No-objection Letter issued by government authorities\u2014the tribunal shifted the burden of proof and went on to assess whether Australia had proven that the investment was not <\/em>lawfully admitted.<\/p>\n

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\u2019s Treasurer was aware of Philip Morris\u2019s intention to challenge the plain packaging measures. In the tribunal\u2019s view, Australia\u2019s assertion that it did not know PMI\u2019s intention \u201cseem[ed] to be rather an admission of defect in its own internal procedures, where a matter of potentially important public policy was missed\u201d (para. 518).\u00a0 Therefore, the tribunal dismissed the objection.<\/p>\n

Third, Australia alleged that the tribunal lacked temporal jurisdiction because the dispute between Philip Morris and Australia over plain packaging regulation arose before<\/em> PM Asia acquired the shares of PM Australia. For Australia, \u201cthe existence of a dispute is a question of substance\u201d (para. 525) and a dispute pertaining the plain packaging measures existed in substance prior to the PMI Group\u2019s corporate restructuring.<\/p>\n

The tribunal disagreed. Relying on Gremcitel v. Peru<\/em>, it pointed out that \u201cwhenever the cause of action is based on a treaty breach, the test for a ratione temporis<\/em> objection is whether a claimant made a protected investment before the moment when the alleged breach occurred\u201d (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).<\/p>\n

Australia\u2019s final\u2014and, as it turned out, decisive\u2014objection was that PM Asia\u2019s 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\u2019s view, the claim constituted abuse of rights and was inadmissible.<\/p>\n

Based on a review of investment arbitration case law on abuse of rights, the tribunal recalled that \u201crestructuring an investment to obtain BIT benefits is not per se <\/em>illegitimate\u201d (para. 540) and that what distinguishes a legitimate restructuring from an illegitimate one is the existence of a foreseeable dispute. The tribunal\u2019s 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\u2019s acquisition of PM Australia?<\/p>\n

In the tribunal\u2019s view, it was. Relying on Tidewater v. Venezuela<\/em>, the tribunal defined foreseeability as \u201ca reasonable prospect [\u2026] that a measure which may give rise to a treaty claim will materialise\u201d (para. 554). In applying this lower threshold to define abusive restructuring, it departed from the definition in Pac Rim v. El Salvador<\/em>, which required \u201ca very high probability\u201d of dispute.<\/p>\n

Applying the test to the case, the tribunal understood that, by the time PM Asia acquired PM Australia, there was no uncertainty about Australia\u2019s intention to introduce plain packaging. Therefore, a dispute was foreseeable. In addition, given the evidence submitted, the tribunal ruled out Philip Morris\u2019s allegations that taxes and other business reasons were determinative factors in the restructuring.<\/p>\n

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.<\/p>\n

Notes: <\/em>The arbitral tribunal was composed of Karl-Heinz B\u00f6ckstiegel (President appointed by the PCA Secretary-General, German national), Gabrielle Kaufmann-Kohler (Claimant\u2019s appointee, Swiss national), and Donald M. McRae (Respondent\u2019s appointee, Canadian national). The award is available at http:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw7303_0.pdf<\/a>.<\/p>\n

\n

ICSID tribunal upholds Panama\u2019s abuse of process objection; Transglobal to pay arbitration costs and most of Panama\u2019s legal expenses<\/strong><\/h2>\n

Transglobal Green Energy, LLC and Transglobal Green Panama, S.A. v. Republic of Panama (ICSID Case No. ARB\/13\/28)<\/em><\/p>\n

Ina\u00ea Siqueira de Oliveira\u00a0<\/strong>[*]<\/a><\/p>\n

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\u2013Panama bilateral investment treaty (BIT), an ICSID tribunal accepted Panama\u2019s 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\u2019s legal fees and expenses.<\/p>\n

As the tribunal accepted Panama\u2019s 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\u2019s remaining objections, which were related to absence of investment, waiver of the right to bring a dispute, most-favoured-nation (MFN<\/span>) clause and domestic control of the investment.<\/p>\n

Relevant Facts I: Bajo de Mina concession and Supreme Court decision<\/em><\/h3>\n

Transglobal\u2019s 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\u2019s agency for regulation of public utilities (in Spanish, Autoridad Nacional de los Servicios Publicos<\/em> [ASEP]) to design, build and operate a hydroelectric power plant at Bajo de Mina.<\/p>\n

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.<\/p>\n

Pending the Supreme Court\u2019s 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\u2019s contract with ASEP remained in force and ordered the restitution of the concession to La Mina, which was not immediately executed.<\/p>\n

Relevant Facts II: Transglobal Green Energy enters the scene<\/em><\/h3>\n

Just over a month after the Supreme Court\u2019s 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 \u201cindividually 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\u201d (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 \u201cMr. Lisac\u2019s intent to remain in de facto<\/em> control of TGGE Panama (para. 111).<\/p>\n

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)<\/em> of the concession \u201con grounds of urgent social interest\u201d (para. 69).<\/p>\n

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.<\/p>\n

Transglobal\u2019s abuse of process<\/em><\/h3>\n

The tribunal begun its analysis of jurisdiction by considering the objection based on abuse of process \u201cbecause the existence of abuse of process is a threshold issue that would bar the exercise of the Tribunal\u2019s jurisdiction even if jurisdiction existed\u201d (para. 100).<\/p>\n

Panama asserted that Transglobal \u201cattempted to create artificial international jurisdiction over a domestic dispute [\u2026] 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\u201d (para. 85). To prove that Mr. Lisac\u2019s dispute with Panama arose before Transglobal\u2019s investment, it listed a number of events, such as ASEP\u2019s 2006 resolution terminating the Concession Contract and the Supreme Court\u2019s 2010 decision. Transglobal did not offer counterarguments to the objection\u2014in fact, it did not submit a counter-memorial on jurisdiction.<\/p>\n

Citing Phoenix v. Czech Republic<\/em>, the tribunal stated that \u201cthere is a line of consistent decisions of arbitral tribunals on objections to jurisdiction based on abuse of the investment treaty system\u201d (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.<\/p>\n

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\u2019s 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\u2019s view, the voting arrangement under the PTA revealed \u201cMr. Lisac\u2019s intent to remain in de facto<\/em> 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\u201d (para. 111).<\/p>\n

In its final remarks about the objection, the tribunal observed that procedural developments exposed an \u201cintimate relationship of the ongoing court proceedings in Panama and this proceeding\u201d (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.<\/p>\n

Arbitration costs and legal expenses<\/em><\/h3>\n

In its reasoning on costs, the tribunal acknowledged that, in cases involving abuse of process, \u201ctribunals have tended to decide that claimants should bear the costs of the proceeding, [but] as regards the attorney\u2019s fees and expenses, the record is mixed\u201d (para. 125). To illustrate this divide, it again quoted Phoenix<\/em>, in which the claimant was ordered to pay the respondent\u2019s legal fees and expenses, and Ren\u00e9e Rose Levy v. Peru<\/em>, in which the claimant was ordered to pay a reasonable\u2014in the tribunal\u2019s assessment\u2014contribution to the respondent\u2019s fees and expenses.<\/p>\n

The tribunal then sided with Ren\u00e9e Rose Levy<\/em>, holding that the claimant should bear the costs of proceedings, as well as attorney\u2019s fees and expenses, \u201cprovided that the latter are reasonable\u201d (para. 126).<\/p>\n

Panama had argued that Transglobal\u2019s conduct throughout the arbitration\u2014failing to provide translations of important documents, submitting discrepant documentary evidence and requesting suspensions while aware that Panama would oppose to them\u2014had unnecessarily complicated Panama\u2019s defense. The tribunal considered that Transglobal had a \u201ccavalier attitude\u201d (para. 126) and, taking into account the overall course of proceedings, concluded that Transglobal should bear Panama\u2019s attorneys\u2019 fees and expenses, exception made to some early requests for shifting the costs and provisional measures relating to security for costs that were rejected.<\/p>\n

Panama had also requested that the tribunal, based on its general authority under Article 61(2) of the ICSID Convention<\/span>, ordered that all remaining funds in the administrative account were given to Panama. The tribunal denied this latter request because it understood \u201cit had no authority to issue such an order\u201d (para. 129).<\/p>\n

Notes: <\/em>The arbitral tribunal was composed of Andr\u00e9s Rigo Sureda (President appointed by the co-arbitrators, Spanish national), Christoph H. Schreuer (Claimant\u2019s appointee, Austrian national), and Jan Paulsson (Respondent\u2019s 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<\/a>.<\/p>\n

\n

Claimant fails to comply with three-year limitation period under CAFTA-DR<\/strong><\/h2>\n

Corona Materials, LLC v. Dominican Republic, ICSID Case No. ARB (AF)\/14\/3<\/em><\/p>\n

Mar\u00eda Florencia Sarmiento<\/strong>\u00a0[*]<\/a><\/p>\n

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\u2019s request for arbitration was time-barred, as it failed to comply with the three-year limitation period under the Dominican Republic\u2013Central America Free Trade Agreement (CAFTA-DR).<\/p>\n

Factual background and claims<\/em><\/h3>\n

The case concerns a mining project to build and operate a mine in the Dominican Republic from which Corona would export construction aggregate materials.<\/p>\n

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.<\/p>\n

In August 2010 the Environmental Ministry informed Corona that it denied the licence as Corona\u2019s project was \u201cnot environmentally viable\u201d (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.<\/p>\n

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\u2019s 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.<\/p>\n

The Dominican Republic denied all claims and objected to the tribunal\u2019s 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 \u201c[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 [\u2026] and knowledge that the claimant [\u2026] or the enterprise [\u2026] has incurred loss or damage.\u201d<\/p>\n

Tribunal focuses analysis on whether claimant complied with three-year limitation period <\/em><\/h3>\n

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<\/span>). Following NAFTA tribunals such as Grand River v. United States <\/em>and Feldman v. Mexico<\/em>, the tribunal concluded that the time period shall not be subject to any \u201csuspension, prolongation or other qualification\u201d (para. 192).<\/p>\n

First, the tribunal determined the earliest possible date on which Corona could have had actual or constructive knowledge of the breach or damage\u2014the \u201ccritical date\u201d (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.<\/p>\n

When did the claimant acquire actual or constructive knowledge?<\/em><\/h3>\n

The tribunal considered that the central measure adopted by the Dominican Republic was the Environment Ministry\u2019s 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.<\/p>\n

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).<\/p>\n

In the tribunal\u2019s 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).<\/p>\n

Tribunal addresses the issue of denial of justice<\/em><\/h3>\n

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.<\/p>\n

Although recognizing that it could end its task with the conclusion that Corona\u2019s 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.<\/p>\n

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 \u201cadjudicatory proceedings,\u201d 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.<\/p>\n

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\u2019s 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.<\/p>\n

As a final point, the tribunal rejected Corona\u2019s argument under the waiver requirement in Article 10.18(2), which first requires the claimant to waive \u201cany 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,\u201d 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.<\/p>\n

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.<\/p>\n

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.\u00a0<\/em><\/strong><\/p>\n

Decision and costs<\/em><\/h3>\n

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.\u00a0<\/em><\/strong><\/p>\n

Notes<\/em>: 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\u2019s appointee, Colombian national), and J. Cristopher Thomas (respondent\u2019s appointee, Canadian national). The award is available in English only at\u00a0http:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw7314.pdf<\/a>.<\/p>\n

\n

Venezuela ordered to pay US$1.202 billion plus interest to Canadian mining company Crystallex for FET breach and expropriation<\/strong><\/h2>\n

Crystallex International Corporation v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)\/11\/2<\/em><\/p>\n

Martin Dietrich Brauch\u00a0<\/strong>[*]<\/a><\/p>\n

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\u2019s 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.<\/p>\n

Factual background and claims<\/em><\/h3>\n

On September 17, 2002 Crystallex and Corporaci\u00f3n 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\u2019s Imataca National Forest Reserve.<\/p>\n

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 \u201cguarantee 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.\u201d The letter further stated that, after the bond-related formalities, \u201cthe [environmental permit] [\u2026] will be handed over\u201d (para. 561).<\/p>\n

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\u2019s impact on the environment and indigenous peoples in the Imataca reserve. In several public statements from 2008 to 2010, then-President Hugo Ch\u00e1vez and high-level officials expressed Venezuela\u2019s intention to nationalize gold deposits, including Las Cristinas.<\/p>\n

Crystallex notified the Ministry of Mines of a treaty dispute as early as November 2008. However, only on February 16, 2011\u2014after CVG formally rescinded the MOC on February 3, 2011\u2014did 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\u2013Venezuela bilateral investment treaty (BIT). Crystallex asked for compensation of US$3.16 billion plus interest.<\/p>\n

Venezuela frustrated Crystallex\u2019s legitimate expectations, among other FET breaches<\/em><\/h3>\n

The tribunal looked to case law\u2014including Rumeli v. Kazakhstan<\/em>, Lemire v. Ukraine<\/em> and Bayindir v. Pakistan<\/em>\u2014to determine the content of the treaty\u2019s FET standard, and concluded that it comprises a set of common elements that are relevant to the case at issue: \u201cprotection of legitimate expectations, protection against arbitrary and discriminatory treatment, transparency and consistency\u201d (para. 543). It added that the conduct does not need to be outrageous or in bad faith to breach the standard.<\/p>\n

According to the tribunal, most of Crystallex\u2019s alleged expectations presented a \u201ccircularity of argument\u201d (para. 551) or were \u201ctoo general and indeterminate\u201d (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.<\/p>\n

Importantly, the tribunal disagreed with Crystallex\u2019s suggestion that it had a right to the environmental permit. \u201cFrom the point of view of international law,\u201d the tribunal affirmed, \u201ca 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\u201d (para. 581).<\/p>\n

While the tribunal considered that, up to the letter of May 16, 2007, \u201cthe investor was overall treated in a straightforward manner\u201d (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\u2019s reference to global warming was \u201cparticularly troublesome,\u201d noting that \u201cto 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\u201d (para. 592).<\/p>\n

The tribunal also took issue with the lack of reference to scientific data or studies to justify the denial, and stated that it was \u201cunable 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\u201d (para. 597). These \u201chuge efforts,\u201d according to the tribunal, \u201centitled Crystallex to have its studies properly assessed and thoroughly evaluated\u201d (para. 597).<\/p>\n

The tribunal held the letter denying the permit was fundamentally deficient and frustrated Crystallex\u2019s legitimate expectations created by the May 16, 2007 letter. Furthermore, it considered that Venezuela subjected Crystallex to a \u201c\u2018roller-coaster\u2019 of contradictory and inconsistent statements\u201d (para. 606) in the lead-up to the MOC\u2019s rescission, thus breaching the FET standard under the BIT.<\/p>\n

\u201cFull protection and security\u201d claim dismissed as it concerns physical, not legal security<\/em><\/h3>\n

Crystallex claimed that \u201cfull protection and security\u201d encompasses legal security and stability, while Venezuela argued that the standard is limited to physical security. The tribunal agreed with Venezuela\u2019s interpretation and based its decision on a line of cases including Saluka v. Czech Republic <\/em>and Rumeli v. Kazakhstan<\/em>. Given that Crystallex had neither claimed nor shown that Venezuela violated its physical security, the tribunal dismissed the claim.<\/p>\n

Tribunal finds indirect expropriation in three groups of actions by Venezuela<\/em><\/h3>\n

In view of the BIT\u2019s broad definition of investment, which covers contractual rights \u201cto search for, cultivate, extract or exploit natural resources\u201d (para. 661), the tribunal found that Crystallex\u2019s rights under the MOC were capable of being expropriated.<\/p>\n

Three groups of actions, cumulatively taken, led to the tribunal\u2019s 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\u2019s intention to nationalize Las Cristinas and gradually caused the value of Crystallex\u2019s investment to decrease; and third, the rescission of the MOC.<\/p>\n

The tribunal also assessed whether the expropriation was lawful. It accepted Venezuela\u2019s 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\u2019s investment in breach of the BIT.<\/p>\n

Tribunal uses average of two methodologies to calculate compensation<\/em><\/h3>\n

Considering the finding that Venezuela cumulatively breached the FET standard and the expropriation provision of the BIT, the tribunal decided to apply the \u201cfull reparation\u201d standard under customary international law, using a \u201cfair market value\u201d methodology. It sided with Venezuela in choosing April 13, 2008\u2014the day before the denial of the permit, which the tribunal saw as the first act in the creeping expropriation\u2014as the appropriate valuation date.<\/p>\n

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\u2019s expenditures in the investment). Crystallex\u2019s summary of costs indicated expenditures in the amount of US$644.8 million.<\/p>\n

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.<\/p>\n

It then turned to the four forward-looking methodologies proposed by Crystallex. Dismissing the P\/NAV <\/em>method for not providing reliable figures and the indirect sales comparison <\/em>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<\/em> and market multiples <\/em>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.<\/p>\n

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.<\/p>\n

Considering that \u201ceach side presented valid arguments in support of its respective case and acted fairly and professionally\u201d (para. 959), the tribunal ordered each party to bear its own legal expenses and to share equally in ICSID costs.<\/p>\n

Notes<\/em>: The ICSID tribunal was composed of Laurent L\u00e9vy (President appointed by the parties, Brazilian and Swiss national), John Y. Gotanda (claimant\u2019s appointee, U.S. national) and Laurence Boisson de Chazournes (respondent\u2019s appointee, French national). The award is available in English at http:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw7194.pdf<\/a> and in Spanish at http:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw7195.pdf<\/a>.<\/p>\n

\n

NAFTA tribunal dismisses claims against Canada on green energy Feed-In Tariff program<\/strong><\/h2>\n

M<\/em>esa Power Group, LLC v. Government of Canada<\/em>, UNCITRAL<\/span>,\u00a0PCA Case No. 2012-17<\/p>\n

Matthew Levine\u00a0<\/strong>[*]<\/a><\/p>\n

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.<\/p>\n

The majority of the tribunal found that Ontario\u2019s Feed-In Tariff program (FIT Program)\u2014which created a tender process for long-term power purchase agreements (PPA) whereby business would sell clean energy to the provincial grid\u2014constituted 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.<\/p>\n

Background <\/em><\/h3>\n

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.<\/p>\n

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\u2019s projects were located in Ontario\u2019s 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.<\/p>\n

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\u2019s consortium to establish and operate manufacturing facilities for wind and solar generation equipment in Ontario. In exchange, Samsung\u2019s group was, among others,<\/em> guaranteed priority access to certain transmission capacity.<\/p>\n

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\u2019s investments in accordance with the international law standard of treatment. Mesa requested damages of approximately US$75 million.<\/p>\n

The tribunal was constituted on July 16, 2012 under the auspices of the Permanent Court of Arbitration (PCA). Subsequently, all three arbitrators signed a \u201cDeclaration of Acceptance and Statement of Independence and Impartiality\u201d 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.<\/p>\n

No requirement for \u201ccooling-off period\u201d in relation to each and every event <\/em><\/h3>\n

Canada objected to the tribunal\u2019s 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.<\/p>\n

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 \u201cevents giving rise to a claim\u201d in the provision designates each and every event. In this respect, Canada was supported by the third-party submission of Mexico.<\/p>\n

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\u2019s 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<\/em>, an outcome that is contrary to treaty interpretation rules.<\/p>\n

FIT Program constitutes procurement <\/em><\/h3>\n

According to Canada, the obligations under NAFTA Articles 1102, 1103, and 1106 did not apply to Mesa\u2019s investment, because the FIT Program constituted \u201cprocurement\u201d 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<\/em> and UPS v. Canada<\/em>, as well as the World Trade Organization Panel and Appellate Body reports in Canada \u2014 Renewable Energy<\/em>. 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\u2013Czech Republic Foreign Investment Promotion and Protection Agreement (FIPA).<\/p>\n

In regards to the claimant\u2019s MFN argument, the tribunal observed that, \u201c[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<\/em><\/span> the treaty to claim through<\/em><\/span> the treaty. \u00a0Thus, […] for the Claimant to establish that Article 1103 of the NAFTA applies, it must show that the FIT Program does not constitute procurement\u201d (paras. 401\u2013402). 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.<\/p>\n

Charles Brower dissented from the finding that the FIT Program constituted procurement.<\/p>\n

Tribunal settles on scope of customary international law standard of treatment <\/em><\/h3>\n

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\u2019s 2011 Notes of Interpretation of Certain Chapter Eleven Provisions<\/em> (FTC Notes) to be binding.<\/p>\n

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 \u201cautonomous\u201d 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.<\/p>\n

Upon consideration of the parties\u2019 positions, the tribunal was of the unanimous opinion that the decision in Waste Management II<\/em> 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: \u201carbitrariness; \u2018gross\u2019 unfairness; discrimination; \u2018complete\u2019 lack of transparency and candor in an administrative process; lack of due process \u2018leading to an outcome which offends judicial propriety\u2019; and \u2018manifest failure\u2019 of natural justice in judicial proceedings\u201d (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 \u201cone 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\u201d (para. 505).<\/p>\n

Dissenting opinion on whether Canada ultimately breached Article 1105 <\/em><\/h3>\n

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, \u201c[m]oreover, \u2013 and this can only be characterized as grotesque \u2013 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\u201d (para. 4 of the dissenting opinion).<\/p>\n

Canada largely successful in application for costs <\/em><\/h3>\n

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\u2019s costs.<\/p>\n

Notes<\/em>: 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\u2019s appointee, U.S. national), and Toby Landau\u00a0(respondent\u2019s appointee, British national). The final award of March 24, 2016 is available at\u00a0http:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw7240.pdf<\/a> and Charles Brower\u2019s dissent at http:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw7241.pdf<\/a>.<\/p>\n

\n

TURKEY\u2013TURKMENISTAN BIT: TRIBUNAL FINDS CLAIMS ADMISSIBLE BUT DISMISSES THEM ON MERITS<\/strong><\/h3>\n

\u0130\u00e7kale \u0130n\u015faat Limited \u015eirketi v. Turkmenistan, ICSID Case No. ARB\/10\/24 <\/em><\/h3>\n

Matthew Levine<\/strong>\u00a0[*]<\/a><\/p>\n

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\u2013Turkmenistan bilateral investment treaty (BIT). The award also found that failure to access local remedies did not preclude arbitration of the dispute.<\/p>\n

On the merits, the tribunal declined to endorse the claimant\u2019s theory that Turkmenistan\u2019s substantive commitments in other investment treaties were applicable under the BIT\u2019s most-favoured-nation (MFN) provision.<\/p>\n

Background<\/em><\/h3>\n

\u0130\u00e7kale \u0130n\u015faat Limited \u015eirketi (\u0130\u00e7kale), 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, \u0130\u00e7kale entered numerous construction contracts with various Turkish state entities.<\/p>\n

Subsequently, \u0130\u00e7kale 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\u2019s founding President. \u0130\u00e7kale alleged that the scope of works was expanded without additional\u00a0compensation, that there were unjustified delays in payment and that the host state imposed unfair penalties.<\/p>\n

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. \u0130\u00e7kale claimed US$570 million in compensation relating to consequential damages, and loss of reputation, goodwill and business opportunities.<\/p>\n

Parties disagree on novel fork-in-the-road clause<\/em><\/h3>\n

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.<\/p>\n

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 \u201con the condition that\u201d or \u201cprovided that.\u201d Furthermore, the English version\u2019s \u201cprovided that, if\u201d clause did not have an ordinary meaning.<\/p>\n

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<\/span>), specifically in Articles 31 through 33. Article 33, in particular, deals with the interpretation of treaties authenticated in two or more languages.<\/p>\n

Tribunal addresses interpretation of BIT\u2019s multiple versions<\/em><\/h3>\n

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 \u201cprovided that, if\u201d clause, is drafted in a manner that effectively leaves its meaning unclear or obscure. Rather than seeking a \u201ccorrected\u201d version of the provision (para. 199), the tribunal was obligated to have recourse to supplementary means of interpretation under VCLT Article 32.<\/p>\n

According to Article 32, the supplementary means of interpretation to which the tribunal may resort include \u201cthe preparatory work of the treaty\u201d and \u201cthe circumstances of its conclusion.\u201d 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 \u201cauthentic\u201d 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 \u201cprovided that, if\u201d in light of the available, albeit limited, supplementary means of treaty interpretation set out in VCLT Article 32. Here, the \u201cthe circumstances of its conclusion\u201d 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.<\/p>\n

The arbitrator appointed by the claimant\u2014in a dissenting opinion, which is referenced below\u2014disagreed 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\u2019s interpretation of Article VII(2).<\/p>\n

Domestic litigation requirement found in Russian version of treaty<\/em><\/h3>\n

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 \u201ccan be translated in a manner that is literally the same as the English version\u201d (para. 219). Having carefully reviewed the expert evidence, including both the expert opinions and the oral evidence, the tribunal decided to accept the respondent\u2019s expert\u2019s 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.<\/p>\n

International arbitration claims are admissible<\/em><\/h3>\n

Having found that Article VII(2) contains a domestic litigation requirement, the tribunal had to consider whether \u0130\u00e7kale had failed to comply. The tribunal found that Article VII(2) sets out an admissibility requirement, rather than a question of jurisdiction.<\/p>\n

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<\/em> case. The tribunal found that the BIT\u2019s requirement was not a reflection or incorporation of a rule of customary international law, but rather a lex specialis<\/em> in the treaty itself. As a matter of admissibility, the consequences of \u0130\u00e7kale\u2019s 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.<\/p>\n

Although in agreement with the final outcome, the arbitrator appointed by Turkmenistan disagreed with the tribunal\u2019s 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 \u0130\u00e7kale\u2019s failure to take prior recourse to the national courts was not a bar to the admissibility of the claims.<\/p>\n

No grounds for importing <\/em>substantive protections in Turkmenistan\u2019s other treaties<\/em><\/h3>\n

The tribunal also had to address the issue of MFN protection. The claimant sought to rely on the BIT\u2019s 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 \u0130\u00e7kale, the term \u201ctreatment\u201d 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 \u201cimportation\u201d and that in any event the scope of application of the clause is limited to \u201csimilar situations\u201d (para. 327).<\/p>\n

The tribunal found the ordinary meaning of the MFN clause\u2019s 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 \u201ctreatment accorded in similar situations\u201d suggested that the MFN obligation required a comparison of the relevant factual situations.<\/p>\n

The tribunal disagreed with \u0130\u00e7kale\u2019s 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\u2019s derogation clause to import substantive investment protection standards included in other investment treaties concluded by Turkmenistan.<\/p>\n

On the remaining allegations of unlawful expropriation, the tribunal was unable to conclude on the facts that such claims could be sustained. Ultimately, \u0130\u00e7kale\u2019s claims were dismissed in their entirety for lack of merit.<\/p>\n

Claimant ordered to reimburse 20 per cent of respondent\u2019s arbitration costs<\/em><\/h3>\n

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 \u201ccosts follow the event\u201d 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\u2019s request, the majority found it appropriate to order \u0130\u00e7kale to reimburse 20 per cent of the respondent\u2019s arbitration costs (US$1.7 million).<\/p>\n

Notes<\/em>: The tribunal was composed of Veijo Heiskanen (President appointed by the Chairman of the Administrative Council, Finnish national), Carolyn Lamm (claimant\u2019s appointee, U.S. national), and Philippe Sands (respondent\u2019s 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<\/a>.<\/p>\n

\n

Authors<\/a><\/h2>\n

Martin Dietrich Brauch <\/strong>is an International Law Advisor and Associate of IISD<\/span>\u2019s Investment for Sustainable Development Program, based in Latin America.<\/p>\n

Ina\u00ea Siqueira de Oliveira<\/strong> is a Law student at the Federal University of Rio Grande do Sul, Brazil.<\/p>\n

Maria Florencia Sarmiento\u00a0<\/strong>is a teaching and research assistant at the Catholic University of Argentina.<\/p>\n

Matthew Levine<\/strong> is a Canadian lawyer and a contributor to IISD\u2019s Investment for Sustainable Development Program.<\/p>\n