ICSID’S LONGEST RUNNING DISPUTE: TRIBUNAL DISMISSES APPLICATION FOR ANNULMENT OF RESUBMISSION AWARD

An ad hoc committee (the “Resubmission Committee“) has recently dismissed the claimants’ application to annul a resubmission award issued in September 2016 (and subsequently rectified) in Victor Pey Casado and President Allende Foundation v Republic of Chile (ICSID Case No. ARB/98/2), the longest dispute in the history of the International Centre for Settlement of Investment Disputes (“ICSID“). The award came one month after an UNCITRAL tribunal in a parallel case declined to hear the claimants’ claims, unanimously holding that it lacked jurisdiction. The dispute in Pey Casado, which arose from the confiscation of assets of two Chilean companies (the “Companies“) following the coup d’état led by General Augusto Pinochet in 1973, may have finally come to an end after 22 years of arbitration proceedings. The Resubmission Committee reminded the arbitration community of the limited grounds on which an ICSID award can be annulled and the importance of the res judicata principle which aims to preclude attempts to re-adjudicate a resolved dispute in the context of ICSID dispute resolution.

Background

First Arbitration Proceedings

The original ICSID proceedings (the “First Arbitration“) were initiated by Mr Victor Pey Casado and the President Allende Foundation (the “Claimants“) in 1997 on the basis of the 1994 Spain-Chile bilateral investment treaty (the “BIT“) and the ICSID Convention (the “Convention“). In the First Arbitration, the Claimants alleged that Chile (i) unlawfully expropriated their investments in the Companies (in breach of Article 5 of the BIT); and (ii) discriminated against them and denied them justice in connection with the request Mr Casado filed with the Chilean courts in 1995 seeking reparation for the confiscation of the assets (in breach of Article 4 of the BIT). Specifically, the Claimants argued that, whereas they had unsuccessfully attempted to recover compensation in the Chilean national courts, Chile awarded compensation to other individuals for the same expropriation.

In May 2008, the tribunal in the First Arbitration (the “First Tribunal“) issued an award (the “First Award“) dismissing the expropriation claim (holding that it was beyond the temporal scope of the BIT) but finding that Chile was in breach of Article 4 of the BIT. The First Tribunal also noted that since expropriation fell outside the scope of the BIT, the allegations and evidence regarding the damage caused by the expropriation were not relevant and could not be relied upon in order to establish the damages caused by the breach of Article 4 of the BIT. Nevertheless, the First Tribunal awarded the Claimants US$10 million in damages.

First Annulment Proceedings

As we discussed in detail in our earlier blog post on this case, in December 2012, upon Chile’s application, an ad hoc committee (the “First Committee“) annulled the First Award. The annulment  in part relied on limbs (d) and (e) of Article 52(1) of the Convention, having found an annullable error in the process the First Tribunal followed in deciding to award damages. The order to pay US$10 million in damages and the “corresponding paragraphs” in the First Award were therefore annulled (the “First Annulment Decision“). The First Committee’s failure to delineate clearly the contours of the partial annulment proved to be a source of disagreement at later stages of the proceedings.

Resubmission Arbitration Proceedings

In June 2013, the Claimants filed a new request for arbitration pursuant to Article 52(6) of the Convention, among other things seeking US$150 million in damages for Chile’s alleged breaches of Article 4 of the BIT. Specifically, the Claimants argued that had Article 4 of the BIT not been breached, they would have been able to recover the confiscated property or establish before the First Tribunal that the expropriation was not an instantaneous act in 1975 but rather went on for a number of years (thereby falling within the temporal scope of the BIT).

In September 2016, the tribunal (the “Resubmission Tribunal“) confirmed that (i) the unanulled findings of the First Tribunal (i.e. that Chile was in breach of Article 4 of the BIT and any further or other claims were rejected) were res judicata; (ii) it was open for the parties to re-arbitrate the nature of compensation due to the Claimants following the breach of Article 4 of the BIT; and (iii) refused to award any compensation to the Claimants, as they failed to prove any further quantifiable injury caused by the breach of Article 4 of the BIT as found by the First Tribunal (the “Resubmission Award“). The Resubmission Tribunal therefore left the Claimants without compensation, noting that the finding by the First Tribunal that the Claimants were victims of a denial of justice constitutes in itself a form of satisfaction under international law for Chile’s breach of Article 4 of the BIT.

Resubmission Annulment Proceedings

Claimants’ arguments

In October 2017, the Claimants applied to annul the Resubmission Award (as subsequently rectified) on the following Convention grounds: (i) improper constitution of the tribunal (Article 52(1)(a)); (ii) manifest excess of powers (Article 52(1)(b)); (iii) serious departure from a fundamental rule of procedure (Article 52(1)(d)); and (iv) failure to state the reasons on which the award was based (Article 51(1)(e)).

The Claimants referred to a number of factual circumstances, which could, in their view, justify an annulment of the Resubmission Award on at least one of the above grounds. These circumstances (which will not all be covered in detail in this blog post) included the procedure of appointment of, and dealing with challenges to, the members of the Resubmission Tribunal, as well as various evidential and procedural matters in the Resubmission Annulment Proceedings.

In particular, the Claimants (in reference to annulment grounds under limbs (b), (d) and (e) of Article 52(1) of the Convention) argued that the Resubmission Tribunal (i) incorrectly interpreted the First Annulment Award in that it had disrespected the res judicata effect of the First Award; (ii) distorted the First Award and the First Annulment Decision in order to serve Chile’s interests; and (iii) presented inconsistent arguments with respect to the consideration of evidence and burden of proof, such that that they cancelled each other out.

Decision of the Resubmission Committee

On 8 January 2020, the Resubmission Committee dismissed the Claimants’ application for annulment of the Resubmission Award (“Second Annulment Decision“), confirming that none of the circumstances relied upon by the Claimants were sufficient for their application to succeed.  While Professor Dr Angelet issued a concurring opinion disagreeing with the majority’s reasons on the interpretation of the First Annulment Decision, this did not affect the Second Annulment Decision. Below we discuss some of the conclusions reached by the Resubmission Committee in relation to the Claimants’ res judicata arguments.

As a preliminary point, the majority concluded that the Resubmission Tribunal had not in fact reopened the determinations of the First Tribunal in relation to the BIT breaches, i.e. it correctly treated as res judicata the conclusion that the damages arising out of the breach of Article 4 of the BIT cannot be based on damages caused by expropriation. Further, according to the Resubmission Committee, it was open to the Resubmission Tribunal to disregard evidence relied upon by the Claimants (i.e. as to the damages arising out of expropriation), and to examine whether breaches of Article 4 of the BIT, as a distinct claim, had caused injury and damage.

The majority reiterated that Article 52(1)(b) of the Convention (“manifest excess of powers“) had a dual requirement: (i) the tribunal must do something in excess of its powers (e.g. determine an issue de novo that the original tribunal already determined and that had become res judicata); and (ii) that excess must be sufficiently clear and serious. Given its earlier conclusion that the Resubmission Tribunal respected the res judicata parts of the First Award, the Resubmission Committee rejected the Claimants’ assertions that the Resubmission Tribunal manifestly exceeded its powers in relation to these circumstances.

The Second Annulment Decision confirmed that Article 52(1)(d) of the Convention (“serious departure from a fundamental rule of procedure“) involved a four-part test: (i) the procedural rule must be fundamental (such as fair and equitable treatment of the parties, proper allocation of the burden of proof, absence of bias etc.); (ii) the tribunal must have departed from it; (iii) the departure must have been serious; and (iv) the party had not lost its right to object on this ground as a result of failing to promptly raise its objection upon becoming aware of the departure. The Resubmission Committee concluded that it was unable to discern bias and partiality on the part of the Resubmission Tribunal, therefore the Claimants’ argument relating to the alleged distortion of the First Award and the First Annulment Decision to serve Chile’s interests was unsuccessful.

As for Article 51(1)(e) (“failure to state reasons“) of the Convention, the Resubmission Committee restated that this concerned a failure to state any reasons with respect to all or part of an award, rather than the failure to state correct or convincing reasons. The Resubmission Committee also noted that inconsistencies between different parts of the award did not amount to a lack of reasons, unless the contradiction was of a kind that meant two arguments cancel each other out. The Resubmission Committee came to the conclusion that there was no contradiction in respect of the Resubmission Tribunal’s position regarding the evidence on loss and damages and its analysis as to whether the Claimants met the burden of proof.

Comment

It is well understood that the award of a tribunal constituted under Article 52(6) of the Convention is an award in the terms of Article 52 of the Convention, and can therefore be subject to annulment in the same way. However, those parts of an initial award that have not been annulled and become res judicata are not part of the award of the resubmission tribunal, and therefore cannot be annulled by a second ad hoc committee. While this may at first sight appear straightforward, the Pey Casado case illustrates that questions of interpretation of the first annulment decision, in particular whether or not certain parts of the initial award became res judicata, may result in lengthy and heated disputes. The Pey Casado case is not the first case where res judicata arguments have been raised; similar arguments have been made by the parties, for example, in Amco v Indonesia, and will, no doubt, be raised in future. It is, however, important to bear in mind that, as reiterated by the Pey Casado case, there are limited grounds on which an ICSID award can be annulled, and the consecutive use of Articles 52(1) and (6) of the Convention cannot be seen as an appeal system.

 

For more information, please contact Christian Leathley, Partner, Olga Dementyeva, Associate, or your usual Herbert Smith Freehills contact.

Christian Leathley
Christian Leathley
Partner
+1 917 542 7812

Olga Dementyeva
Olga Dementyeva
Associate
+44 20 7466 6425

Update on the future of ISDS: latest Working Group III UNCITRAL discussions

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Background

UNCITRAL has been considering the possible reform of investor-state dispute settlement (“ISDS“) through the work of WGIII, which has been given a broad mandate to identify concerns regarding ISDS procedure, and develop relevant solutions to be recommended to the main UNCITRAL body. While WGIII enjoys broad discretion in discharging its mandate, any solutions devised will take into account the ongoing work of relevant international organisations, and each State may decide the extent to which it chooses to adopt the proposed solutions. For further information about WGIII’s previous work on ISDS reform, please see our previous PIL Notes blog posts here, here and here.

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HERBERT SMITH FREEHILLS LLP SPONSORS THE LONDON CONFERENCE ON INTERNATIONAL LAW

Herbert Smith Freehills is proud to be a co-partner and gold sponsor of the London Conference on International Law, taking place on 3 and 4 October 2019. The conference will bring together members of the international law community to explore ‘What is the use of international law and how do we engage with it?’ over a series of plenary and panel discussions across the two days.

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The Netherlands has released a new draft investment treaty for public comment (“Draft BIT“).  If adopted, the Draft BIT may raise questions about the Kingdom’s attractiveness for foreign investors who have long taken advantage of Dutch treaty protections by structuring their investment via companies in the Netherlands.  The Netherlands proposes to use the new model as a basis for renegotiating its existing BITs with non-EU states, and, as such, the new draft’s more restrictive provisions may be significant for existing investors with protection under existing BITs, as well as those considering future investments. Key features of the Draft BIT are considered below.

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On 6 April 2018, a Tribunal constituted under the UNCITRAL Arbitration Rules rendered an Award on Jurisdiction in the case Dawood Rawat v. The Republic of Mauritius (PCA Case 2016-20).  Following a thorough analysis of the interpretation of the 1973 Investment Protection Treaty between the Republic of France and Mauritius (the “France-Mauritius BIT” or the “Treaty”), the Tribunal denied protection of the relevant investment protection treaty to a dual national – a French-Mauritian businessman – despite the treaty was silent on its application to dual nationals.  This approach was contrary to prior investment treaty decisions, such as Serafín García Armas and other v Venezuela, in which tribunals have rejected jurisdictional objections brought by respondent states where relevant the bilateral investment treaty (“BIT”) was silent on the exclusion of dual nationals.

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The judgment is particularly noteworthy as it is the first time the Court has determined a damages claim for environmental harm. While the award fell short of the amount claimed by Costa Rica, both states have hailed the judgment as an important step in the normalisation of the relations between the two states.

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In an award dated 30 November 2017 (the “Award“), an ICSID Tribunal ordered Peru to pay around US$30.4million to Canadian company Bear Creek Mining (the “Claimant“) following its finding that a 2011 decree (“Decree 032“) constituted an unlawful indirect expropriation of the Claimant’s right to operate the Santa Ana mine (the “Project“).

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The impact the Claimant’s conduct had on the Tribunal’s calculation of damages was, in any case, significant. Given the extent of, and reasons for, the opposition to the Project by the time of Decree 032, the Tribunal thought a hypothetical purchaser would not have obtained the necessary ‘social license’ to proceed with the Project. Ultimately it awarded the Claimant only a fraction of the US$522 million claimed. The reduced damages award emphasises the importance of respect for human rights and engagement with indigenous communities by investors.

The respective views expressed by the arbitrators concerning the Claimant’s conduct are also interesting in light of the broader debate about the relevance of the human rights of non-parties in investor-state arbitration.

An overview of the overall Award can be found in the post published on 16 December 2017 on the Kluwer Arbitration Blog. Continue reading

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One month into 2018, the future of NAFTA continues to hang in the balance. The negotiating parties will reportedly convene in Ottawa for the sixth of seven planned negotiating sessions from January 23 – 29th.[1] The parties initially hoped to conclude the negotiations before the end of 2017, but US President Donald Trump indicated on January 11, 2018 that there was “no rush” in the negotiations.[2] In the same interview, Mr. Trump said that it may be difficult to reach an agreement before the July 1, 2018 federal election in Mexico, suggesting that the negotiations may continue for months. The parties’ agreement to keep the negotiations confidential[3] means that few concrete details about the negotiating texts and parties’ proposals have been made public.

For more analysis of the NAFTA renegotiations, see our previous updates:

August 7, 2017 – NAFTA renegotiation: ISDS reform objectives

August 16, 2017 – What to watch for as NAFTA (re)negotiators get to work

August 24, 2017 – A warning shot for Investor-State Dispute Settlement under NAFTA 2.0?

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