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Arbitral award annulled for violation of claimant's right to be heard
Practical Law UK Legal Update Case Report 1-504-9581 (Approx. 6 pages)
Arbitral award annulled for violation of claimant's right to be heard
by PLC Arbitration
| Published on 02 Mar 2011 • International, USA (National/Federal) |
In Fraport AG Frankfurt Airport Services Worldwide v The Philippines (ICSID Case No ARB/03/25) Decision of the Annulment Committee of 23 December 2010, the Committee found that the arbitral tribunal had seriously departed from a fundamental rule of procedure by denying the applicant the right to be heard and annulled the award in its entirety.
Speedread
Fraport sought annulment of an award in which the ICSID tribunal had found that it did not have jurisdiction. The Annulment Committee annulled the award in its entirety.
Pursuant to Article 52(1)(d) of the ICSID Convention, the Committee found that the arbitral tribunal had seriously departed from a fundamental rule of procedure by denying Fraport the right to be heard. However, the Committee dismissed Fraport's claims that the tribunal had manifestly exceeded its powers (Article 52(1)(b)) or that the award had failed to state the reasons on which it was based (Article 52(1)(e)).
The decision confirms that the right to be heard is a fundamental rule of procedure in international arbitration proceedings in general and in investment treaty arbitrations in particular. Departure from this rule warrants annulment of an award. The decision highlights the importance of granting the parties the right to comment on new evidence which is relevant to the tribunal's final determination. Where the tribunal receives important new evidence after the proceedings have been closed, it is obliged to reopen the proceedings and give the parties an opportunity to make submissions. The tribunal is not entitled to simply analyse such new evidence itself, in particular if the evidentiary record is not complete and the new evidence concerns municipal law. (Fraport AG Frankfurt Airport Services Worldwide v The Philippines (ICSID Case No ARB/03/25) (23 December 2010).)
Background
Article 52(1) of the ICSID Convention provides:
"Either party may request annulment of the award by an application in writing addressed to the Secretary-General on one or more of the following grounds: ...
(b) that the Tribunal has manifestly exceeded its powers; ...
(d) that there has been a serious departure from a fundamental rule of procedure; or
(e) that the award has failed to state the reasons on which it is based."
Rule 38(2) of the ICSID Arbitration Rules provides:
"Exceptionally, the Tribunal may, before the award has been rendered, reopen the proceeding on the ground that new evidence is forthcoming of such a nature as to constitute a decisive factor, or that there is a vital need for clarification on certain specific points."
Article 32 of the Vienna Convention on the Law of Treaties (VCLT) provides:
"Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31:
(a) leaves the meaning ambiguous or obscure; or
(b) leads to a result which is manifestly absurd or unreasonable."
Facts
Fraport, a German company, invested in various Philippine companies for the purpose of finance, construction and operation of an international passenger terminal at Manila's principal airport, based on a concession agreement granted by the Philippine government. However, among other things, the Philippine government refused to honour the concession agreement and Fraport initiated ICSID arbitration proceedings pursuant to the Germany–Philippines bilateral investment treaty (BIT).
After the proceedings were closed, but before the award was given, the Philippines informed the tribunal of a material development concerning issues of the Philippine law which were discussed in the proceedings. Without reopening the proceedings, the tribunal decided to complete the evidentiary record and asked the parties to provide relevant documents. Over 1,900 pages of documentation were filed, although the parties agreed that the evidentiary record was not complete. This documentation provided specific evidence on the relevant municipal law issues for the first time in the proceedings. However, the parties were not invited to comment.
On the basis of this new evidence, but without informing the parties about it, the tribunal attached great importance to certain secret shareholder agreements. In its award the tribunal made extensive use of the new evidence and the issue arising out of the new evidence formed an essential part of the ratio of the award. In essence, the arbitral tribunal found that Fraport's investment violated Philippine Anti-Dummy Law (a criminal law limiting foreign investors' shareholding of Philippine companies) by way of the secret shareholder agreements. As a result, there was no investment "in accordance with law" as required by the BIT and the tribunal lacked jurisdiction ratione materiae (that is, subject-matter jurisdiction).
For further details of the award, see Legal update, Investment not in accordance with law.
In the annulment proceedings Fraport relied on:
- Article 52(1)(b) of the ICSID Convention and claimed that the tribunal manifestly exceeded its powers in declining jurisdiction which it possessed.
- Article 52(1)(d) of the ICSID Convention and claimed that the tribunal seriously departed from a fundamental rule of procedure by:
- not respecting the applicable principles of criminal law; and
- denying Fraport's right to be heard.
- Article 52(1)(e) of the ICSID Convention by failing to state reasons on which it based its decision concerning:
- Fraport's violation of the Anti-Dummy Law;
- the non-application of the principle nullum crimen sine lege (that is, no crime without a law); and
- its failure to apply the BIT separately to each of Fraport's investments.
Decision
The Annulment Committee annulled the award in its entirety on the basis of Article 52(1)(d) of the ICSID Convention, finding that the tribunal seriously departed from a fundamental rule of procedure.
Serious departure from a fundamental rule of procedure
The purpose of Article 52(1)(d) was to control the integrity of the arbitral procedure. The principles of criminal law referred to by Fraport (nullum crimen sine lege and in dubio pro reo (that is, the presumption of innocence)) were not fundamental rules of procedure. However, the right to be heard was a fundamental rule of procedure. The right to be heard was recognised in international arbitration generally, in international commercial arbitration, in proceedings before public international law courts and tribunals, as well as in investment treaty arbitrations. It was also recognised in human rights instruments as the right to fair trial. The right to be heard also covered the party's right to make submissions on new evidence received by the tribunal and relevant to the tribunal's final deliberations.
The tribunal's treatment of new evidence presented in the original proceedings deprived Fraport of its right to be heard.
The tribunal should have reopened the proceedings pursuant to Rule 38(2) of the ICSID Arbitration Rules and the parties should have been given an opportunity to make submissions. The tribunal should not have proceeded to analyse the evidence itself. Fraport had not waived its right to object to the departure from this fundamental rule of procedure as it was only from looking at the arbitral award that the Fraport realised the importance of the new evidence to the tribunal's decision. A party could only waive its right to object to the tribunal's failure to observe a fundamental rule of procedure if it was reasonably aware of the decision of the tribunal to which it may wish to object. This was not the case here.
Manifest excess of powers
The Annulment Committee found that the tribunal did not manifestly exceed its powers (Article 52(1)(b), ICSID Convention). The issue raised by Fraport was that of an interpretation whether there was an "investment" under the BIT. The purpose of the inquiry into whether the tribunal manifestly exceeded its powers was to determine the reasonableness of the tribunal's approach to that question.
On an issue of interpretation, the Committee would not intervene if the tribunal's decision was not unreasonable. The task of the Committee was not to decide which interpretation was more plausible or correct, but whether the interpretation applied by the tribunal was not untenable. While the Committee did not endorse the tribunal's interpretation, its position was not untenable. Fraport asked the Annulment Committee to use the documents exchanged between Germany and the Philippines in the process of negotiations of the BIT as a supplementary means of interpretation, pursuant to Article 32 of the VCLT. However, the Committee found that if such supplementary means of interpretation were not brought to the arbitral tribunal's attention, no recourse could be made to them during annulment proceedings.
Failure to state reasons
The Committee found that the tribunal did not fail to state reasons (Article 52(1)(e), ICSID Convention). The requirement to state reasons was a guarantee that the tribunal did not decide the case in an arbitrary manner .
In its award, the tribunal's analysis of the Anti-Dummy Law was limited to examination of whether applicant's investment was protected by BIT. However, it was not within the tribunal's remit to decide issues of criminal liability. It was also not within tribunal's remit to apply substantive principles of criminal law (nullum crimen sine lege). Moreover, these principles were not invoked by the parties in the original arbitration proceedings. Fraport could not criticise the award for omitting arguments which were presented for the first time in the annulment proceedings.
In the original proceedings, Fraport claimed its investments in the Philippines constituted one global investment. The tribunal was not presented with the question whether these investments should be treated individually and so the award could not be criticised for neglecting a question which was not presented to the tribunal.
Comment
The decision confirms that the right to be heard is a fundamental rule of procedure in international arbitration proceedings in general and in investment treaty arbitrations in particular. Departure from this rule warrants annulment of an award.
The decision highlights the importance of granting the parties the right to comment on new evidence that is relevant to tribunal's final determination. Where the tribunal receives such important new evidence after the proceedings have been closed, it is obliged to reopen the proceedings and give the parties an opportunity to make submissions. The tribunal is not entitled to analyse the new evidence simply by itself, in particular if the evidentiary record is incomplete and the new evidence concerns municipal law.