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Denial of benefits precludes CAFTA claims (ICSID)
Practical Law UK Legal Update 1-519-8260 (Approx. 5 pages)
Denial of benefits precludes CAFTA claims (ICSID)
by PLC Arbitration
| Published on 13 Jun 2012 • International |
In Pac Rim Cayman LLC v Republic of El Salvador (ICSID Case No. ARB/09/12), an ICSID tribunal considered challenges to its jurisdiction to hear claims under CAFTA.
Speedread
An ICSID tribunal held that it lacked jurisdiction to hear claims brought under CAFTA because the respondent had validly denied the benefits of Chapter 10 of CAFTA to the claimant investor, pursuant to Article 10.12.2. However, the claimant's non-CAFTA claims, brought under El Salvadorean investment laws, fell within the tribunal's jurisdiction and will now proceed to the merits stage.
This is the first time that a tribunal has considered denial of benefits under CAFTA, and the tribunal's decision provides some welcome guidance as to the scope and meaning of Article 10.12.2.
The decision is also of interest for the detailed analysis of the approach that investment tribunals should take when considering whether a change of nationality amounts to an abuse of process, and of the interrelationship between abuse of process and jurisdiction ratione temporis in such cases. (Pac Rim Cayman LLC v Republic of El Salvador (ICSID Case No. ARB/09/12).)
Background
Chapter 10 of the US-Dominican Republic-Central America Free Trade Agreement (CAFTA) establishes treatment standards for investors of member countries.
CAFTA Article 10.12.2 permits a CAFTA Party to:
"... deny the benefits of [Chapter 10 of CAFTA] to an investor of another Party that is an enterprise of such other Party and to investments of that investor if the enterprise has no substantial business activities in the territory of any Party, other than the denying Party, and persons of a non-Party, or of the denying Party, own or control the enterprise."
Facts
The claimant invested in mineral exploration activities in El Salvador. Its claims arose from the respondent's failure, between December 2004 and March 2008, to grant the necessary environmental permit and mining concession. In March 2008, the President of El Salvador made a speech announcing his opposition to the grant of any further mining permits.
Until December 2007, the claimant was a Canadian company. Canada is not a party to CAFTA or the ICSID Convention. On 13 December 2007, the claimant changed its nationality to become a US company, at which point it became entitled to invoke CAFTA investor protections.
The claimant commenced ICSID arbitration, alleging breaches of CAFTA obligations including national treatment, most favoured nation treatment, minimum standard of treatment and expropriation. The claimant also brought various non-CAFTA claims pursuant to domestic El Salvadorean investment laws.
The respondent raised preliminary objections to the claims, but these were dismissed (see Legal update, Preliminary objections in CAFTA arbitration). The day after the tribunal's decision dismissing its preliminary objections, the respondent formally invoked its right under Article 10.12.2 to deny all benefits to the claimant.
The respondent challenged the tribunal's jurisdiction to hear the claims. It argued that:
- The proceedings were an abuse of process because the claimant, originally a Canadian company with no rights under CAFTA, had changed nationality in order to secure CAFTA protections.
- The tribunal lacked jurisdiction ratione temporis because the relevant acts complained of occurred before the change of nationality.
- The respondent had validly denied all relevant benefits to the claimant.
Decision
The tribunal held that it lacked jurisdiction to hear the CAFTA claims on the basis that, as a result of the respondent's denial of benefits, the claimant was not entitled to any protection under the provisions of CAFTA. However, the objections based on abuse of process and jurisdiction ratione temporis were rejected. The tribunal further held that it had jurisdiction to determine the non-CAFTA claims, which will proceed to the merits stage.
Abuse of process
The tribunal first noted that the respondent was required to establish its jurisdictional objection on the basis of the preponderance of the evidence or a balance of probabilities. The lower test of a "prima facie case" was not applicable when considering factual issues on which the tribunal's jurisdiction directly depended (as opposed to testing the merits of a claimant's case at the jurisdictional stage).
Applying that test, and having considered all the evidence, the tribunal concluded that the conduct relied upon by the claimant as establishing a breach of CAFTA should be regarded as continuing conduct in the form of a "de facto ban" on the claimant's activities. This continuing conduct commenced before the claimant's change of nationality, and continued afterwards. The de facto ban was first publicly acknowledged by the President's speech in March 2008. Until then, the claimant had proceeded on the basis of reassurances given by the El Salvadorean authorities that, even though deadlines had been missed, the applications for a permit and concession remained under consideration. Therefore, it was not until March 2008 that a dispute arose.
In the tribunal's view, a change of nationality made for the purposes of securing CAFTA protections would ordinarily amount to an abuse of process only when the relevant party could see an actual dispute, or could foresee a specific future dispute, as a "very high probability" and not merely as a possible controversy. Here, the dispute was not known to, or foreseen by, the claimant before 13 December 2007.
It followed that, even though the claimant's nationality was, on the evidence, changed for the principal purpose of attracting CAFTA protections, there was no abuse of process.
Jurisdiction ratione temporis
The tribunal rejected the objection to jurisdiction ratione temporis because:
- CAFTA imposed no requirement that, in order to qualify for protection under the treaty, an investor must have a state party's nationality prior to making its investment.
- To establish jurisdiction ratione temporis, a dispute must exist after the claimant became entitled to invoke CAFTA.
- When the dispute first arose (in March 2008, the date of the President's speech), the claimant was a national of the USA and was entitled to invoke CAFTA.
- In contrast to the abuse of process issue, the claimant's knowledge (or otherwise) of any potential claims was not relevant to this jurisdictional challenge.
- Where there was a continuous act which began before 13 December 2007 and continued thereafter, the tribunal would have jurisdiction ratione temporis over that portion of the continuous act that lasted after that date, regardless of events or knowledge by the claimant before 13 December 2007. However, evidence of pre-December 2007 events might be admissible as relevant background.
- Furthermore, the relevant measures alleged by the claimant would necessarily focus on unlawful acts or omissions under CAFTA that allegedly took place no earlier than March 2008, as this was when the dispute between the parties first arose.
Denial of benefits
The tribunal noted that this was the first occasion on which a tribunal had been asked to consider the effect of a denial of benefits under CAFTA.
CAFTA Article 10.12.2 required the respondent to establish that the claimant:
- Had no substantial business activities in the territory of the USA. This involved looking at the business activities of the claimant itself, rather than of the group of companies to which the claimant belonged. On the evidence, the tribunal found that this condition was established, principally because the claimant was a passive actor in the USA both before and after December 2007, with no material change following its change of nationality.
- Was owned or controlled by persons of a non-CAFTA state party (here, Canada). This was satisfied, as the claimant was wholly owned by its Canadian parent company.
The tribunal went on to consider whether there was any time limit for denying benefits under CAFTA Article 10.12.1. In the tribunal's view, the ICSID time limits for raising jurisdictional objections (under ICSID Arbitration Rule 41) were incorporated by reference into CAFTA 10.12.1, and no earlier time limit could be imposed. It followed that there could be no objection to the timing of the denial of benefits.
Comment
This is the first time that a tribunal has considered denial of benefits under CAFTA, and the tribunal's decision provides some welcome guidance as to the scope and meaning of CAFTA Article 10.12.2. Note, however, that the tribunal expressly did not hold that a traditional holding company could never meet the first condition in CAFTA Article 10.12.2 ("substantial business activities"). As the tribunal noted:
"The commercial purpose of a holding company is to own shares in its group of companies, with attendant benefits as to control, taxation and risk-management for the holding company's group of companies. It will usually have a board of directors, board minutes, a continuous physical presence and a bank account." (Decision, para 4.72).
Such activities might, depending on the circumstances, amount to "substantial business activities". Here, however, the claimant was not "a traditional holding company actively holding shares in subsidiaries but more akin to a shell company with no geographical location for its nominal, passive, limited and insubstantial activities." (Decision, para 4.75).
The decision is also of interest for the detailed analysis of the approach that investment tribunals should take when considering whether a change of nationality amounts to an abuse of process, and of the interrelationship between abuse of process and jurisdiction ratione temporis in such cases.