War grounds and winning streaks

The latest award rendered by an International Centre for Settlement of Investment Disputes (ICSID) Tribunal in favour of Peru casts light on how ICSID Tribunals approach multilingual interpretation of treaties and frames the boundaries of what constitutes an abuse of the investment treaty arbitral process. This award has potentially far reaching consequences for any corporate who, as a foreign investor in an international jurisdiction, has standing under a relevant investment treaty to bring an action against the host State.

The award rendered in Renée Rose Levy and Gremcitel S.A. v Republic of Peru issued on January 9, 2015 concerned a proposed tourism and real estate development on beachfront land adjacent to the site of the Battle of San Juan and Chorrillos – ‘one of the most important battles in Peruvian history’. Such historical sites come under the purview of the National Institute of Culture of Peru (INC). In 2003/2004, the Peruvian-incorporated company Gremcitel acquired the land and rights relating to a tourism and real estate project on it. Through the course of the project, negotiations had been underway between the owners and various local authorities including INC, for a favourable demarcation of the battle site to the owners, with varying levels of success. However, in 2007 a resolution (the Resolution) finally published by INC set the boundaries of the battle site such that Gremcitel claimed it made the proposed development meaningless.

Both Ms Renée Levy and Gremcitel launched ICSID proceedings as claimants on the basis that because Ms Levy, a French national, had obtained direct rights in Gremcitel just before the publication of the Resolution that gave rise to the dispute, the dispute fell within the ambit of the Peru-France bilateral investment treaty of October 6, 1993 (the BIT).

The material aspects of Peru’s defence were that the Tribunal lacked jurisdiction and that the claimants were abusing the international treaty arbitration process.

The Tribunal found it had formal jurisdiction over the dispute. The critical issue upon which this turned was the linguistic and substantive interpretation of the jurisdictional clause at Article 8(3) of the BIT. Because the BIT has Spanish and French official versions, which were equally authentic, the Tribunal had to harmonise the meanings of the Article in each language. It found that, whereas the Spanish version had only one possible meaning – that the locally incorporated company (Gremcitel) must have been under foreign control ‘before the emergence of the dispute’, the French version had two possible meanings, neither of which aligned precisely with the Spanish version. One meaning required foreign ownership ‘before the dispute is brought before an international arbitral tribunal’ and the other ‘before the dispute is raised with the other side’.

Applying the Vienna Convention on the Law of Treaties, by which the Tribunal determined it had the discretion to find the meaning that best reconciled the texts, the Tribunal found that the most harmonious meaning was that, in order to have jurisdiction, Gremcitel had to have been foreign owned ‘before the dispute is raised with the other side’. Following this construction, the Tribunal also adopted a strict view on when a ‘dispute’ is said to arise, judging that, notwithstanding an existing treaty breach or violation, a ‘dispute’ does not occur until the claimant identifies said breach or violation and objects to it.

The Tribunal found that the claimants satisfied the formal jurisdictional requirements, as Ms Levy acquired a direct shareholding in Gremcitel on October 9, 2007, nine days before the publication of the Resolution, which was when the dispute was deemed to have arisen.

The next challenge by Peru, that the acquisition of Gremcitel shares by Ms Levy was an abuse of the investment protection treaty regime, found more favour with the Tribunal.

The Tribunal reiterated that restructuring of a company to obtain the benefit of investment treaties was a legitimate goal, and this would only constitute an abuse of the regime if the goal was to internationalise a pre-existing or foreseeable dispute. It further approved the test cited in Pac Rim Cayman LLC v Republic of El Salvador that such a dispute had to be foreseeable ‘as a very high probability and not merely as a possible controversy’.

Nonetheless, although the 2007 Resolution was the definitive act that gave rise to the dispute, the Tribunal found that as early as 2005 the claimants had been notified of an internal INC report which was adverse to their position and thus could foresee a dispute arising from that report. The Tribunal stated that this foreseeability only increased with the passage of time between 2005 and the 2007 Resolution and inferred that at some point this foreseeability crossed the ‘highly probable’ threshold. Note however that the 2005 report that the Tribunal relied upon heavily to establish a ‘foreseeable dispute’ was an internal INC document that had not been officially communicated to the claimants.

The Tribunal found that the circumstances under which the acquisition of Gremcitel shares occurred constituted an abuse of process. On the evidence, the Tribunal found that the ‘only reason for the sudden transfer of the majority of the shares in Gremcitel to Ms Levy was her nationality’, that this reason was motivated by the desire to internationalise the domestic dispute and that the dispute was foreseeable at the time of the transfer.

The Tribunal found it unnecessary, given the abuse of process finding, to proceed to consider Peru’s defences on the merits. The claimants were ordered to pay the entire costs of the Tribunal/ administrative costs plus a contribution of USD$1.57 million to Peru’s legal fees and expenses.

The Tribunal’s approach to the BIT jurisdiction clause casts light on a crucial aspect of bilingual BITs and the wide discretion tribunals draw from customary international law in construing ‘true’ meanings of treaties amid the potential subjectivity inherent to translation.

The Tribunal’s formulation of abuse of process is also of interest. Approving a line of ICSID cases, it found that a finding of formal jurisdiction alone is insufficient to sustain a challenge if the investor is abusing the investment treaty dispute resolution process. It is now clear that a restructuring intended solely to internationalise a dispute constitutes such an abuse, and the test for establishing such an intention would be if the restructuring was carried out when the dispute was foreseen as a ‘high probability’.

The Tribunal also left open the question of whether abuse of process was a question of jurisdiction or merit, deeming it a ‘distinction without a difference’. The ambiguity as to the characterisation of the objection might produce difficulties in bifurcated proceedings where tribunals split proceedings to issue a jurisdictional decision before a final decision based on merits.

Investors and clients are advised to approach prospective investorstate actions involving multilingual investment treaties with caution. Proper due diligence on material provisions of all the language versions of the treaties may be required when contemplating investment treaty arbitration. This is particularly true where there is no provision which expressly states which version will prevail if there is a conflict of meaning, or there is a provision (as in this case) expressly providing that both are equal.

Investors undertaking corporate restructurings to obtain investment treaty protection should do so at the soonest opportunity, ideally before correspondence on permits, licences and various other local approvals begins. Hard-nosed commercial negotiations are often entered into with local regulators or authorities once a project commences, and it is not possible to say with certainty what a tribunal down the line might construe as normal negotiation or a highly probable or foreseeable dispute. Such restructurings should be executed with due attention to constitutional requirements under local law and accompanied by written records (e.g. notices and board resolutions) evincing clear and defined commercial objectives for said restructuring.

Conversely, for commercial parties which have ongoing disagreements with authorities, a restructuring to include a foreign element carries a risk of being deemed an ‘abuse of process’ and rejected if such disagreements subsequently escalate to international treaty arbitration. Adverse costs may also follow such a finding. Parties in such a position should seek legal advice if either international restructuring or arbitration is contemplated. This is further underlined by the fact that foreseeable disputes only constitute one test for abuse of process, and the Tribunal left open the possibility of other classes of abuse which are ‘to be determined in each case, taking into account all the circumstances of the case’.

The investment treaty arbitration regime continues to permit investors putting in place commercial structures with the intention of attracting the ambit of investment treaties, and tribunals have considerable discretion in interpreting the meaning of such treaties where they are promulgated in multiple languages. Where a dispute is in existence or foreseeable however, a restructuring may constitute an abuse of process, although the threshold for proving this remains high. It is clear, however, that once such an abuse is made out tribunals are willing to throw out cases notwithstanding formal jurisdiction, without further contemplation of the merits. We would advise clients to seek legal advice if they find themselves in facts or situations analogous to those set out above.