In the latest instalment of the Victor Pey Casado and Foundation “Presidente Allende” v Republic of Chile saga, an ad hoc committee (the Committee) has partially annulled a 2008 ICSID award (the Award) that ordered Chile to pay over US$10 million in damages for breach of the Chile-Spain bilateral investment treaty (the BIT).

The Committee ruled that the ICSID tribunal had: (i) seriously departed from a fundamental rule of procedure when it denied the parties an opportunity to be heard on the appropriate method for the calculation of damages; and (ii) given contradictory reasoning for its own determination of what that method should be, amounting to a failure to state reasons. Both of these points constitute grounds for annulment under Article 52 of the ICSID Convention (the Convention).

The decision is notable for the committee’s view that, once a serious departure from a fundamental rule of procedure had been established, the committee had no discretion not to annul the sections of the award relating to the damages awarded. In the view of this committee, any available discretion is exercised at the point of determining whether or not the departure from a rule of procedure is “serious” for the purposes of Article 52 of the ICSID Convention.

More generally, the numerous rejected grounds serve as a reminder that annulment is an exceptional and narrowly circumscribed remedy. It is not within the remit of an ad hoc committee to act as a court of appeal, and nor will the ad hoc committee substitute its decision for that of the tribunal.

As the decision on annulment does not replace the Award, but invalidates parts of it, this decision also creates an opportunity for resubmission proceedings on damages before a new tribunal in what is already ICSID’s longest running dispute.


The Claimants brought proceedings against Chile under the BIT in 1997 claiming US$515 million for the military expropriation of the left wing newspaper El Clarin during Pinochet’s coup d’etat in 1973. The Claimants had been unsuccessfully attempting to recover compensation in the Chilean national courts since 1995, yet in 2000 Chile awarded compensation to other individuals (not including the Claimants) for the same expropriation under Decision No. 43. In the Award, the tribunal held that the expropriation was beyond the temporal scope of the BIT, which only entered into force in 1994, but awarded the Claimants over US$10 million for what it considered to be a denial of justice and a discriminatory violation of the fair and equitable treatment standard in Article 4 of the BIT (in relation to Decision No. 43 and the failure of the Chilean judicial system to render a decision within seven years).

Significantly in relation to the annulment proceedings, the only submissions made on damages during the substantive proceedings were in relation to the Claimants’ expropriation claim (which did not succeed) and not the breach of Article 4 (which did). In calculating the damages, the tribunal tried to put the Claimants in the position they would have been in but for the BIT violations, and consequentially awarded the amount of damages fixed in Decision No. 43.

Annulment proceedings

The narrow grounds for annulment of an ICSID award are set out in an exhaustive list in Article 52(1) of the Convention:

  • The tribunal was not properly constituted (Article 52(1)(a)).
  • The tribunal manifestly exceeded its powers (Article 52(1)(b)).
  • There was corruption on the part of a tribunal member (Article 52(1)(c)).
  • There was a serious departure from a fundamental rule of procedure (Article 52(1)(d)).
  • The award failed to state the reasons on which it is based (Article 52(1)(e)).

Chile applied for annulment of the Award under Article 52(1)(b), (d) and (e) of the Convention in respect of eleven areas of the proceedings, although the Committee only upheld grounds (d) and (e) in relation to the tribunal’s calculation of the damages awarded. The remainder of the Award was declared not annullable and not capable of being reconsidered, including the findings on jurisdiction and decisions on the merits that Chile had breached its obligations under the BIT and that the Claimants had a right to compensation.

The Committee ordered the ICSID costs incurred in connection with the annulment proceedings to be split equally, with each party bearing its own legal costs.

Decision on annulment

(a) Serious departure from a fundamental rule of procedure

In finding that there had been a serious departure from a fundamental rule of procedure, the Committee applied a three part test: (i) the procedural rule must be fundamental; (ii) the tribunal must have departed from it; and (iii) the departure must have been serious.

In applying the test, the Committee observed and held that:

  • The parties were in agreement that the right to be heard is a fundamental rule of procedure that is essential to the integrity of the arbitral process.
  • After an examination of the full case record including the transcripts and the Award, it appeared that neither party had pleaded the damages claims for the breach of Article 4 of the BIT, or was given a fair opportunity to discuss the remedy for this breach. The Claimants’ damages arguments were limited to their expropriation claims and were deemed not relevant to the denial of justice and discrimination.
  • The tribunal had gone beyond the “legal framework” established by the parties during the proceedings by creating its own objective methodology for the calculation of damages (Klöckner Industrie-Anlagen GmbH and others v United Republic of Cameroon and Société Camerounaise des Engrais S.A. (ICSID Case No. ARB/81/2, Decision on Annulment dated 3 May 1985)). Even if the tribunal had such power, it should have re-opened the proceedings and allowed each party the right to present its arguments on the tribunal’s proposed method of calculating the damages and to contradict those of the other party.
  • The departure from the right to be heard was serious, as the issue on which Chile was denied an opportunity to be heard was substantial and outcome-determinative. The Committee noted that:

Chile was deprived of the right to present its arguments on the standard applicable to the calculation of damages for the breach by Chile of the fair and equitable treatment provision of the BIT. In view of the Tribunal’s conclusions […] it is evident that this issue was a critical component of the award and that it materially prejudiced Chile.

In relation to the requirement for a “serious” departure, the Committee noted specifically that “[t]he impact will most likely be material and require an annulment if the departure affects the legal right of the parties with respect to an outcome-determinative issue“. However, the Committee did not consider that an applicant was required to prove that the tribunal would necessarily have changed its conclusion if the rule had been observed before an award could be annulled; the applicant need only demonstrate “the impact that the issue may have had on the award” (Wena Hotels Ltd v Arab Republic of Egypt (ICSID Case No. ARB/98/4, Decision on Annulment dated 5 February 2002)).

  • As a serious departure from a fundamental rule of procedure had been established, the Committee had “no discretion not to annul” the sections of the Award relating to the damages awarded.

The Committee also noted (in obiter comments) that its decision does not contradict the conclusions of other ad hoc committees ruling that tribunals have a wide discretion in determining quantum of damages. In Pey it was an error in the process which the tribunal followed when reaching its conclusion that was annullable, not the way in which the tribunal calculated the amount of damages.

(b) Failure to state reasons

The Committee held that:

  • It is well established by ad hoc committee decisions that the “failure to state reasons” may consist of contradictory reasons:

“as long as there is no express rationale for the conclusions with respect to a pivotal or outcome-determinative point, an annulment must follow, whether the lack of rational is due to a complete absence of reasons or the result of frivolous or contradictory explanations”.

  • The tribunal’s adoption of the expropriation-based calculation of damages under Decision No. 43 was “manifestly inconsistent” with its findings that such a basis of calculation was irrelevant since the expropriation claim fell outside the temporal scope of the BIT and that consequentially all evidence and submissions relevant to such a calculation could not be considered by the tribunal.
  • The contradictory reasoning adopted by the tribunal in its calculation of the damages amounted to a failure to state reasons for its determination of damages, and therefore the same sections of the Award were also annulled under this ground.


The Committee’s conclusion that it had to annul part of the Award once a serious departure from a fundamental rule of procedure had been established is notable as many ad hoc committees have previously concluded that they have some discretion not to annul, even if a ground for annulment is found (including a serious departure from a fundamental rule of procedure), provided that the ground has no practical consequences.

In reaching its decision on the above, the Committee referred to the view expressed in CDC Group plc v Seychelles (ICSID Case No. ARB/02/14, Decision on Annulment dated 29 June 2005) and Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri v Republic of Kazakhstan (ICSID Case No. ARB/05/16, Decision on Annulment dated 25 March 2010) that such reasoning does not apply to Article 52(1)(d) as “the requirement of a “serious” departure [from a fundamental rule of procedure] already incorporates the substantiality of the impact” and that therefore “if such ground is established, it requires annulment ipso facto“. The Committee observed that its discretion is exercised when determining whether or not a departure from a fundamental rule of procedure is serious, which it considered to imply a review of both the seriousness of the act concerned and of the impact of the departure.

Case: Victor Pey Casado and Foundation “Presidente Allende” v Republic of Chile (ICSID Case No. ARB/98/2, Annulment decision of 18 December 2012)

A version of this article has previously been published by Emily Blanshard, Herbert Smith Freehills LLP on PLC Arbitration.