Partial annulment of ICSID award against Chile

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.

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The Law of State Responsibility: University’s conduct not attributable to Ukraine

In an Award on jurisdiction and liability published on 25 October 2012, an ICSID Tribunal dismissed the claims brought by US investors Bosh International, Inc and B&P Ltd Foreign Investments Enterprise (“Bosh International“) for breach of the US-Ukraine BIT (the “BIT“). The claims against Ukraine were based on the Taras Shevchenko National University of Kiev (the “University“)’s decision to terminate a contract for the redevelopment and operation of a property belonging to the University (the “Science-Hotel Complex“).  Bosh attempted to claim under the BIT for breach of contract using the umbrella clause in the BIT which elevated contractual breaches to the level of breaches of treaty. The Tribunal dismissed the claims relating to the conduct of the University on the basis that the the University, not Ukraine, was party to the contract and the conduct of the University was not attributable to Ukraine under the law of State responsibility.

The University was not a “State organ” within the meaning of Article 4 of the Articles on State Responsibility of the International Law Commission (“ILC Articles“), nor was its conduct attributable to Ukraine under Article 5 of the ILC Articles.

The Tribunal’s analysis of the ILC Articles confirms that an investor very often has more than just the jurisdiction and admissibility hurdles to overcome before the Tribunal will address its claims on the merits. In order to establish liability, the investor must show that the conduct complained of is attributable to the State. The Tribunal’s ruling also confirms the two limbs of Article 5 of the ILC Articles: the investor has to show both that the entity in question is empowered to exercise governmental authority, and that the entity actually exercised such authority vis-a-vis the investor.

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Record Award Against Ecuador Demonstrates Willingness of Tribunal to Review State Decisions on Grounds of Proportionality

In an award notified to the parties on 5 October 2012 (the Award), the majority of a three-member arbitral tribunal established under the ICSID Convention has directed the Republic of Ecuador (Ecuador or the Respondent) to pay US companies Occidental Petroleum Corporation (Occidental) and Occidental Exploration and Production Company (OEPC)(collectively, the Claimants) damages in the sum of approximately USD1.77 billion (if interest is taken into account it has been reported that this sum would exceed USD2.3 billion)1.  It has been reported that this is the largest sum ever awarded by a tribunal under the ICSID Convention and, unsurprisingly, will be challenged by Ecuador.

The dispute arose out of Ecuador’s decision to terminate in April 2006 by way of a decree (the Decree) the contract (the Participation Contract) under which the Claimants were undertaking oil operations in an area known as Block 15 (which covers 200,000 hectares situated in the Oriente Basin, in the Ecuadorean Amazon rainforest).

Notwithstanding the fact that the Claimants breached the Participation Contract (and, according to one member of the tribunal, acted illegally), Ecuador was found to have acted disproportionately and therefore had violated the US-Ecuador bilateral investment treaty (the BIT).  In particular, the tribunal held that Ecuador failed “to accord fair and equitable treatment to the Claimants’ investment, and to accord to the Claimants treatment no less than that required under international law“; and breached the BIT “by expropriating the Claimants’ investment in Block 15 through a measure ‘tantamount’ to expropriation.” [876]

Whilst the tribunal –comprised Yves Fortier QC (presiding arbitrator), David AR Williams QC and Professor Brigitte Stern –was unanimous in respect of liability, the impact of the Claimants’ breach of the Participation Contract upon the calculation of damages divided the arbitrators.  The majority concluded that due to their breach of the Participation Contract, “the Claimants have contributed to the extent of 25% to the prejudice they suffered when the Respondent issued the Caducidad [termination] Decree.” [687] Prof Stern, in a strongly-worded dissenting opinion, considered that a 50/50 split would have been justified as she concluded that “the Claimants have acted both very imprudently and illegally.” [7]

The Award is significant for both States and investors for the following reasons:

  • The tribunal considered it within its power to review the suitability of the administrative decisions of Ecuador, particularly on the basis of the principle of proportionality (considered by this tribunal as an aspect of the fair and equitable treatment (FET) standard).
  • Also taking into account the principle of proportionality, the tribunal found that misbehaviour on the part of the investor did not preclude it from obtaining redress against the State.  The breach of the Participation Contract was punished by a reduction in the damages instead.
  • The Award also highlights the importance of dissenting opinions: it is no surprise that Ecuador reportedly plans to rely upon Prof Stern’s dissenting opinion to seek the annulment of the Award.

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Consistently inconsistent: another contrasting decision on ‘Most Favoured Nation’ provisions, another split decision

In Daimler Financial Services AG v Argentine Republic, an ICSID tribunal considered whether Daimler, a German investor, could rely on the ‘most favoured nation’ (MFN) clause in the Argentina-Germany bilateral investment treaty (BIT) to import a more favourable dispute resolution provision from the Argentina-Chile BIT.

It held that it did not have jurisdiction to hear Daimler’s claim, on the basis that it had failed to first submit the dispute to the Argentine courts for 18 months, as required by the Argentina-Germany BIT.  That provision acts as a limit on Argentina’s consent to arbitration and must be strictly complied with before the investor’s right to proceed to international arbitration arises.

The tribunal also held that the MFN clause did not extend to dispute resolution provisions.  Therefore it did not enable investors to take advantage of arbitration clauses from Argentina’s other BITs.  However, in a strongly worded dissenting opinion, Judge Charles Brower described the majority stance as “unconvincing” and “profoundly wrong“.   In addition, one of the members of the majority, Professor Domingo Bello Janeiro, took a contrasting position on the issue of MFN application in this award compared to the position he took in an award in 2004 and he therefore provided a separate opinion in order to explain his “change of heart”.   

This decision adds further jurisprudence – and even more contrasting dicta – to an area of international law that remains unsettled.  Investors should bear this issue in mind and carefully consider the requirements of the dispute resolution provisions in any BIT upon which they may seek to rely, rather than assuming that an MFN provision will assist them to circumvent such provisions.

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ICSID tribunal takes jurisdiction over 60,000 bondholder claims against Argentina for sovereign debt default

In its decision of 4 August 2011, a majority tribunal took a monumental decision to accept a “mass claim” under the ICSID rules in relation to Argentina’s debt default in 2002. Such was the controversy of the decision in Abaclat and Others v Argentina that it has led to a challenge to two of the arbitrators, Pierre Tercier (President) and Albert Jan van den Berg and the proceedings are currently suspended.

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ICSID – first two successful challenges by States under ICSID’s summary dismissal procedure

In 2006, the ICSID Rules were amended to introduce Rule 41(5), which allows a party to raise a preliminary objection that claims brought against it are “manifestly without merit”. In two recent cases, for what is thought to be the first time, applications under Rule 41(5) have been upheld, leading to claims against the Ukraine and Grenada being dismissed.

In the first decision, in Global Trading Resource Corpn and Globex International Inc v Ukraine, the tribunal held that poultry sale contracts could not constitute an investment for the purposes of Article 25 of the ICSID Convention, which sets out the jurisdiction requirements for ICSID claims, including the requirement that disputes arise “directly out of an investment”. As a result of this jurisdictional defect, the tribunal concluded the claims were manifestly without merit and dismissed them.

In the second decision, in RSM Production Corporation and others v. Grenada, the tribunal ruled that the issues raised by the claims had already been resolved in an earlier arbitration, and that under the doctrine of collateral estoppel it was bound by the findings on those issues by the earlier tribunal. The tribunal found that in order for any of the claims to succeed it would need to re-litigate and decide in the claimants favour conclusions of fact or law already resolved against the claimant by the prior tribunal, which it was not permitted to do, and as a result the new claim was manifestly without legal merit and was therefore dismissed.

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Investment Treaty – failure to observe treaty’s cooling off period results in tribunal declining jurisdiction

In a decision in December 2010, an ICSID tribunal in Murphy v Ecuador ruled that it did not have jurisdiction due to the claimants’ failure to comply with the six month “cooling-off” period specified in the US-Ecuador BIT. This decision highlights the importance of considering compliance with such cooling off periods carefully before commencing an arbitration.

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Venezuela – international tribunal confirms that Article 22 of the Venezuelan Investment Law does not constitute consent to ICSID arbitration

At the end of December 2010, in a decision that will be of interest to international companies doing business in Venezuela, an ICSID tribunal in the case of Cemex v. Venezuela (ICSID Case No. ARB/08/15) concluded that it did not have jurisdiction over claims brought pursuant to Venezuela’s Investment Law. The tribunal concluded however that it did have jurisdiction over claims brought by the claimant companies pursuant to the Netherlands/Venezuela Bilateral Investment Treaty.

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Temporal arguments exclude majority of construction company’s claims under Turkey/Jordan BIT

TA v Jordan concerned a claim relating to interference with an arbitration award by the Jordanian courts. A tribunal constituted under the ICSID Rules, decided that the majority of Turkish construction company, ATA’s claims against Jordan related to disputes arising before the Turkey/Jordan Bilateral Investment Treaty (BIT) entered into force and were therefore inadmissible. In making its determination, the tribunal followed the restrictive reasoning in the Lucchetti v Peru decision.

However, the tribunal upheld ATA’s claim in respect of the extinguishment of the right to arbitration. This was held to be a breach of ATA’s legitimate expectations and of Jordan’s fair and equitable treatment obligation and the relevant dispute was considered to arise only after the BIT came into force.

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