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Fraport files new claim at ICSID over expropriation of airport terminal project; Annulment committee ruling paved way for new hearing by finding breach of investor's right to be heard

publication date: Mar 31, 2011
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By Jarrod Hepburn

A German multinational has filed a new claim against the Republic of Philippines, in a long-running dispute over the expropriation of an investment in an airport terminal construction project. The claim was officially filed yesterday at the World Bank's International Centre for Settlement of Investment Disputes (ICSID), and is likely to be registered by the Centre in the coming weeks.

In 2007 the majority of a panel of ICSID arbitrators dismissed an earlier claim by Fraport, on the grounds that the company had surreptitiously circumvented a Philippines law designed to ensure that public utilities remained in Philippines' ownership (the so-called Anti-Dummy Law (ADL)).

However, in a striking further development, an ICSID ad-hoc committee ruled on December 23, 2010 that the 2007 award should be annulled due to the arbitral tribunal’s failure to hear submissions from the parties on evidence that, in the committee's view, was crucial to the tribunal's ultimate dismissal of the case.

The ICSID annulment decision came as Fraport’s local subsidiary, PIATCO, is requesting the High Court of Singapore to set aside a separate award, rendered by an ICC tribunal, in an arbitration in the same dispute. The ICC tribunal ruled in July 2010 in favour of the Philippines, again citing Fraport’s violation of the ADL.

Further reporting on some of the key findings of the recent ICSID annulment decision are sketched below.

Disagreement on interpretation of local law

At the heart of the ICSID committee's decision was the handling by the original tribunal of an authoritative legal opinion issued by the Philippines Special Prosecutor in related domestic court proceedings. The Special Prosecutor had concluded that Fraport had not breached the terms of the ADL.

In the Prosecutor's opinion, the relevant fact for determining a breach of the ADL in Philippines law was simply the size of the formal shareholding held by a foreign investor, and not any evidence of actual managerial control exerted by the foreigner.

Notwithstanding this domestic law finding in favour of Fraport, the original tribunal had held that evidence of Fraport's actual exertion of managerial control over the airport terminal project – rather than Fraport’s surface degree of shareholding in the project – was indicative of the company’s breach of the ADL.

Crucially, the tribunal had ruled that Fraport’s violation of this local law meant that it could not benefit from the protections in the Germany-Philippines bilateral investment treaty (BIT); this arbitral holding was subsequently criticized by the ICSID ad-hoc committee for the manner in which the Special Prosecutor’s opinion was handled.

The Prosecutor's opinion had been presented to the tribunal after the formal close of proceedings. This complicated the tribunal’s task, and, ultimately, the annulment committee expressed two serious concerns about the way in which the tribunal treated this new evidence.

Shortcomings in Tribunal’s treatment of key evidence

The tribunal, in supporting its own finding that managerial control was determinative of compliance with the ADL, concluded that the local Prosecutor absolved Fraport of wrongdoing because he was not aware of secret shareholder agreements (that allegedly demonstrated Fraport’s intentions to violate the ADL by keeping their shareholding under a certain threshold, while in practice exerting full managerial control). Had the Prosecutor known about these agreements, the tribunal ruled, his legal opinion would have been different. The tribunal was therefore justified, in its view, in disregarding the Prosecutor’s opinion and concluding that Fraport had breached Philippines law.

However, the annulment committee found that it was not clear that the complete factual record considered by the Prosecutor had been tendered in evidence to the arbitral tribunal. As such, the committee noted that it was possible that the Prosecutor did know about the secret shareholder agreements, but that they failed to sway his legal opinion.

Of great significance for the annulment committee, the tribunal had ordered the parties not to present further submissions on the scope and implications of the factual evidence used by the Special Prosecutor. Nor did the tribunal signal to the parties how crucial it considered this evidence to be, but simply continued its deliberations and declined to re-open proceedings.

The committee took issue with this, finding that the tribunal should not have continued its deliberations on a key piece of evidence without hearing submissions from the parties. This was enough to find a serious departure of a fundamental rule of procedure, giving grounds for annulment under Article 52(1)(d) of the ICSID Convention.

(Interestingly, the committee also pointed out that the secret agreements actual managerial control, and could not answer the legal question of whether the key factor for finding a breach of the ADL was managerial control or formal shareholding. However, as an organ of annulment but not of appeal, the committee was only interested in the implications of the tribunal’s reasoning on Fraport’s right to be heard.)

The committee rejected the argument that Fraport had lost its right to object about this procedural breach by not complaining earlier in the arbitral process – that is, when the tribunal issued its order disclaiming further submissions from the parties. The annulment committee held that Fraport could not have known at that stage what significance the tribunal would place on the evidence of the Prosecutor’s factual record, since the tribunal had never indicated that it was a crucial factor.

Tribunal failed to allow submissions on effect of domestic legal opinion

A second concern highlighted by the annulment committee was the fact that the tribunal requested no submissions on the actual effect of the Prosecutor’s opinion.

The committee noted that, under general international law, the tribunal was bound to give consideration to domestic decisions interpreting the ADL, particularly when none of the tribunal members was expert in Philippine law. Confronted with one such domestic decision – in fact the first piece of specific evidence in the case that directly assisted the interpretation of the ADL – the tribunal ought to have ensured the parties’ rights to present their views on its effect.

Certainly, the tribunal was not required to defer unconditionally to the Prosecutor’s interpretation. The tribunal must ensure that the domestic decision-maker issued the opinion impartially, with heightened scrutiny of an opinion applying to a foreigner. But here, the committee thought, the tribunal surely had excellent reasons to rely on the opinion: it addressed the specific question at hand, it was issued by the very official directly responsible for the ADL, and, because it absolved Fraport of guilt and so was adverse to the Philippines’ own interests, it could be taken as an impartial opinion.

In these circumstances, it violated Fraport’s right to be heard in the arbitration for the tribunal to deny the investor the possibility of making submissions on the opinion. In particular, Fraport could have argued either that the state was estopped from claiming that managerial control was relevant in light of its own official’s contrary position, or that the tribunal should have deferred to the local official’s authoritative interpretation.

Irrespective of whether the tribunal in the end interpreted the ADL incorrectly (as urged in the underlying award by the dissenting arbitrator Bernardo Cremades), the annulment committee found that Fraport had been materially prejudiced by the tribunal’s procedural failures.

Fraport’s secondary claims for annulment, based on the tribunal’s alleged manifest excess of power and failure to state reasons, were rejected by the committee.

Fraport also claimed annulment on the grounds that the tribunal’s interpretation of the jurisdictional provisions of the Germany-Philippines BIT, as well as its interpretation of the ADL, were both so untenable as to constitute a manifest excess of power. Acknowledging its limited role, the committee rejected both these secondary claims. It further rejected Fraport’s argument that the tribunal had failed to state reasons for various specific findings.

* For a copy of the ruling, see our announcement in February of the release of the decision.

Investment Arbitration Reporter is a specialized news publication tracking developments in the area of international investment law and policy.

The publication does not offer legal or financial advice or recommendations of any kind.
To offer news-tips or comments, email the Editor, Luke Eric Peterson, at: editor@iareporter.com
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