{"id":7472,"date":"2015-05-21T23:16:29","date_gmt":"2015-05-22T04:16:29","guid":{"rendered":"https:\/\/iisd.org\/itn\/?p=7472"},"modified":"2024-08-09T18:26:05","modified_gmt":"2024-08-09T16:26:05","slug":"german-investors-claim-against-the-philippines-over-manila-airport-concession-fails-for-the-second-time-at-icsid","status":"publish","type":"post","link":"https:\/\/www.iisd.org\/itn\/2015\/05\/21\/german-investors-claim-against-the-philippines-over-manila-airport-concession-fails-for-the-second-time-at-icsid\/","title":{"rendered":"German investor\u2019s claim against the Philippines over Manila airport concession fails for the second time at ICSID"},"content":{"rendered":"

Fraport AG Frankfurt Airport Services Worldwide v. Republic of the Philippines, ICSID<\/span> Case No.\u00a0ARB\/11\/12<\/em><\/h2>\n

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

A second arbitration tribunal at the International Centre for Settlement of Investment Disputes (ICSID) has reached the award stage in a long-running dispute between German multinational Fraport and the Republic of the Philippines.<\/p>\n

The ICSID tribunal found that illegalities associated with Fraport\u2019s initial investment resulted in a lack of subject matter jurisdiction under the 1997 Germany\u2013Philippines bilateral investment treaty (BIT<\/span>). At the same time, the tribunal declined jurisdiction over counterclaims pertaining to Fraport\u2019s alleged corruption and fraud.<\/p>\n

The tribunal ordered Fraport to pay US$5 million towards the fees and costs of the Philippines, in a partial application of the \u201closer pays\u201d principle.<\/p>\n

Background <\/strong><\/p>\n

The Philippine government of then President Ramos decided in the early 1990s to establish a third passenger terminal at Manila\u2019s main airport. A local consortium successfully bid for the project and incorporated Philippines International Air Terminals Co., Inc. (PIATCO) to hold the concession agreement.<\/p>\n

Fraport, an experienced airport operator, purchased stock in both PIATCO and a \u201ccascade\u201d of Philippine companies holding interests in PIATCO in 1999. Between 2001 and 2002, the relationship between PIATCO and the government soured. In November 2002, as construction of the new terminal neared completion (according to Fraport), then President Macapagal-Arroyo announced that the concession agreement was legally invalid and would not be honoured. Subsequently, the Philippine Supreme Court declared the concession to be void from the beginning. Pursuant to expropriation procedures under domestic law, a court transferred possession to the government, which began operating the new terminal in 2008. Domestic court proceedings to determine the amount of compensation are still ongoing.<\/p>\n

In 2007 a first ICSID tribunal dismissed Fraport\u2019s claims under the Germany\u2013Philippines BIT finding that it had circumvented a domestic law (namely, the \u201cAnti-Dummy Law\u201d).\u00a0In 2010, however, an ICSID ad hoc<\/em> committee annulled the 2007 award.<\/p>\n

Following the annulment of the 2007 award, Fraport filed a new request for arbitration with ICSID in 2011.<\/p>\n

Admission is condition precedent of investment <\/strong><\/p>\n

The Philippines objected to the tribunal\u2019s jurisdiction on the basis that\u00a0Fraport\u2019s venture had not been accepted in accordance with domestic law and therefore did not qualify as an investment under the BIT.<\/p>\n

Article 1(1) of the BIT defines \u201cinvestment\u201d as \u201cany kind of asset accepted in accordance with the respective laws and regulations of either Contracting State.\u201d While Fraport attempted to argue that this language should be understood as an \u201cadmittance clause,\u201d the tribunal accepted that it was a \u201clegality requirement.\u201d The tribunal then noted EDF International and others v. Argentina<\/em> and observed: \u201ceven absent the sort of explicit legality requirement that exists here, it would be still be appropriate to consider the legality of the investment. As other tribunals have recognized, there is an increasingly well-established international principle which makes international legal remedies unavailable with respect to illegal investments, at least when such illegality goes to the essence of the investment\u201d (para. 332).<\/p>\n

Investment not admitted due to violation of domestic law<\/strong><\/p>\n

The Philippines successfully argued that the share agreements through which Fraport invested in PIATCO and its affiliates triggered violations of a domestic law. The Anti-Dummy Law prohibits foreign intervention in the management, operation, administration, or control of a public utility; however, Fraport\u2019s share purchase agreements dictated that the Philippine shareholders in PIATCO would in certain circumstances act upon Fraport\u2019s recommendation. The tribunal agreed that these arrangements violated domestic law and that Fraport had not been \u201cadmitted\u201d in accordance with Article 1(1) of the BIT. There was therefore no \u201cinvestment\u201d for the purpose of the tribunal\u2019s jurisdiction.<\/p>\n

Fraport unsuccessfully suggested that the share agreements constituted mere \u201cplanning\u201d to intervene in management, operation, administration, or control of PIATCO and that such planning was insufficient grounds for the tribunal to find a violation of domestic law. Fraport also stated that it had amended the offending shareholder agreements, but the tribunal found that at domestic law the original breach could not be cured. Finally, the tribunal did not accept that Fraport had merely relied in good faith on the advice of local counsel. Instead, it found that it had been made aware of the illegality and nonetheless decided to take a risk.<\/p>\n

Allegations of corruption and fraud not substantiated<\/strong><\/p>\n

The tribunal also considered whether jurisdiction was vitiated and the claims were inadmissible as a result of Fraport\u2019s corruption and fraud. It held that, in view of the difficulty of proving corruption by direct evidence, circumstantial evidence could be considered, but that it must be clear and convincing so as to reasonably make one believe that the facts, as alleged, have occurred. In this case, upon review of the submissions and the underlying evidence, the tribunal was not satisfied that the standard had been met.<\/p>\n

No jurisdiction over counterclaims <\/strong><\/p>\n

The Philippines raised twelve counterclaims, primarily on the basis that the delayed completion of the new terminal was attributable to Fraport or PIATCO. It argued that the reference to \u201call kinds of divergencies […] concerning an investment\u201d in Article 9 of the BIT represents the parties\u2019 consent to arbitrate counterclaims. It further argued that the close factual connection between the original claim and the counterclaims means that the counterclaims arose directly out of the subject matter of the dispute for the purpose of ICSID Arbitration Rule 40(1).<\/p>\n

Upon finding no jurisdiction over Fraport\u2019s claims, however, the tribunal found that it consequently lacked jurisdiction over the respondent\u2019s counterclaims, in view of their necessary connection with the subject matter of the dispute, pursuant to Article 46 of the ICSID Convention<\/span>.<\/p>\n

\u201cLoser pays\u201d principle appropriate to certain extent<\/strong><\/p>\n

The tribunal noted that, while traditionally the parties in investment arbitration bear their own legal fees and share the arbitration costs equally, there have been a number of cases that have departed from this principle, awarding fees and costs on a \u201closer pays\u201d basis. In the circumstances of this particular arbitration, it found the application of the \u201closer pays\u201d principle to be appropriate to a certain extent, and ordered Fraport to pay US$5 million towards respondent\u2019s fees and costs.<\/p>\n

Notes<\/em>: The tribunal was composed of Piero Bernardini (President appointed by agreement of the parties, Italian national), Stanimir A. Alexandrov (claimant\u2019s appointee, Bulgarian national), and Albert Jan van den Berg\u00a0(respondent\u2019s appointee, Dutch national). The final award of December 10, 2014 is available at http:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw4114.pdf<\/a>.<\/p>\n

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