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Tribunal can consider jurisdiction under ICSID Arbitration Rule 41(5)
Practical Law Legal Update 3-500-1408 (Approx. 5 pages)
Tribunal can consider jurisdiction under ICSID Arbitration Rule 41(5)
by PLC Arbitration
| Published on 08 Sep 2009 • International, USA |
An update on Brandes Investment Partners, LP v Bolivarian Republic of Venezuela (ICSID Case No ARB/08/3), in which the tribunal considered the respondent's preliminary objection that the claim was manifestly without legal merit, under ICSID Arbitration Rule 41(5).
Speedread
In Brandes Investment Partners, LP v Bolivarian Republic of Venezuela (ICSID Case No ARB/08/3), the claimant, Brandes, claimed that Venezuela had expropriated its investment without compensation, taken arbitrary and discriminatory measures and failed to provide fair and equitable treatment. The respondent, Venezuela, filed a preliminary objection under ICSID Arbitration Rule 41(5) that the claim was manifestly without legal merit. Venezuela's objections included that the tribunal had no jurisdiction to hear the claims because Brandes was not an "investor" within the meaning of the ICSID Convention, and that it had, in any event, waived any claims.
The tribunal held that, although it did not expressly refer to jurisdiction, the term "legal merit" in Rule 41(5) was wide enough to cover jurisdictional objections. However, a claim should only be summarily dismissed under this rule if, assuming that the facts alleged by the claimant are true, the claim obviously lacks legal merit. That was not the case here and the tribunal therefore dismissed Venezuela's objections.
This is only the second decision on Rule 41(5), which was introduced in 2006. It usefully clarifies that the rule covers objections as to jurisdiction, as well as the merits of the claim. However, it is clear that the expedited procedure under Rule 41(5) will only result in summary dismissal in the clearest cases.
Background
Under the ICSID Convention, the Secretary-General of ICSID is required to register a request for arbitration unless he finds, on the basis of the information in the request, that the dispute is manifestly outside ICSID's jurisdiction (Article 36(3)).
It is also open to the parties to raise objections as to the jurisdiction of ICSID or the competence of the tribunal to hear the dispute (ICSID Arbitration Rule 41). The most common route for such objections is Rule 41(1), which requires objections to be made as early as possible. Rule 41 was amended in April 2006 to introduce a provision (Rule 41(5)) allowing parties to make preliminary objections (within 30 days after constitution of the tribunal or by the time of the tribunal's first session) in case of claims which are "manifestly without legal merit". The tribunal is required to notify the parties of its decision on the objection at its first session or promptly thereafter.
The first ruling on Rule 41(5) was Trans-Global Petroleum, Inc v Hashemite Kingdom of Jordan (ICSID Case No ARB/07/25). The tribunal held that the provision was intended only for clear and obvious cases of "patently unmeritorious claims". The reference in Rule 41(5) to "legal" merit indicated that the tribunal should not determine factual issues on an application pursuant to that provision. Despite this, the tribunal was not required to accept at face value any factual allegation which was "manifestly incredible, frivolous, vexatious or inaccurate". Nor did it need to accept any legal submission which was "dressed up" as a factual allegation (see Legal update, Claims "manifestly without legal merit": ICSID tribunal interprets rule 41(5)).
Facts
The claimant, Brandes, filed a request for arbitration with ICSID on 14 February 2008. Brandes' claim related to the purchase by the respondent, Venezuela, of American Depository Receipts and shares in Compania Anonima Nacional Telefonos de Venezuela (CANTV), which Brandes had acquired on behalf of its clients. Brandes alleged that it was coerced into accepting Venezuela's tender offer for the shares, which was substantially below market value. It claimed that Venezuela had:
- Expropriated Brandes' investment without compensation.
- Taken arbitrary and discriminatory measures against Brandes.
- Failed to provide fair and equitable treatment.
The request for arbitration was registered by ICSID on 24 March 2008 and a tribunal was constituted on 8 December 2008. On 19 December 2008, Venezuela filed preliminary objections, pursuant to ICSID Arbitration Rule 41(5). Venezuela argued that:
- Brandes was not an "investor" within the meaning of the ICSID Convention, as it was only acting as an agent not as an owner.
- Brandes had omitted essential facts from its request for arbitration, including that it had agreed to waive and release any claims against Venezuela on this matter.
On this basis, it objected that the tribunal had no jurisdiction to hear the claims, which were in any event manifestly without legal merit and should be dismissed on an expedited basis, as envisaged by Rule 41(5).
Brandes argued that Venezuela’s objections fell outside the scope of Rule 41(5), because they only concerned the tribunal's jurisdiction, rather than the merits of the claim. Further, the objections were factual, rather than legal, and therefore outside the scope of Rule 41(5).
Decision
The tribunal rejected Venezuela's objections to the claim. In doing so, it gave some useful guidance on the scope of Rule 41(5).
Does Rule 41(5) cover jurisdictional objections?
Yes. The tribunal concluded that the term "legal merit" in Rule 41(5) was wide enough to cover "all objections to the effect that the proceedings should be discontinued at an early stage because, for whatever reason, the claim can manifestly not be granted by the Tribunal". Although this meant that there were potentially three levels at which jurisdictional objections could be considered, the procedure under Rule 41(5) was not unduly onerous and the time limits were short. Early dismissal of claims where there was manifestly an absence of jurisdiction was consistent with the basic objectives of the rule.
Can issues of fact be considered at this stage?
The tribunal was clear that Rule 41(5) was for legal objections to claims, rather than factual objections. It recognised that it would rarely be possible to examine legal objections without also, to some extent, considering the factual basis for the claim. It concluded that, for the purposes of Rule 41(5), the factual basis for the claim should normally be that alleged by the claimant, provided that the facts as alleged were plausible on their face. A claim should only be summarily dismissed if it was manifestly without legal merit on the basis of the claimant's best case.
Were the claims manifestly without legal merit?
The tribunal agreed with the tribunal in Trans-Global that "manifestly" meant that the respondent had to establish its objection "clearly and obviously, with relative ease and dispatch", which was a high standard. Further, under this expedited procedure, the respondent had to show that the claimant's claim was without legal merit even if the alleged facts were proved. In other words, the question was whether, assuming that the alleged facts were proven, they were capable of supporting a finding of jurisdiction or liability.
Applying the above principles, the tribunal rejected Venezuela's objections. The waiver issue, which was alleged by Venezuela, raised questions which required the examination of complex legal and factual issues. Similarly, the question whether Brandes was an "investor" required the examination of complex issues of fact. It was not appropriate to resolve either issue in summary proceedings, where the tribunal had to proceed on the basis of the facts as alleged by the claimant, insofar as such facts were plausible. In this case, those facts were not manifestly of such a nature that the claim should be dismissed.
Comment
The expedited procedure in Rule 41(5) is relatively new and this decision provides helpful guidance on its scope. It usefully clarifies that, although it does not refer to objections to jurisdiction, such objections may be advanced pursuant to this provision. Therefore, there are three stages at which a claim may run into jurisdictional obstacles:
- At the stage of registration of the request for arbitration.
- If a preliminary objection is made under Rule 41(5).
- Under Rule 41(1).
The decision also confirms that it will only be in the clearest cases that the tribunal will summarily dismiss a claim; if it is necessary to examine the facts in any detail, an objection under Rule 41(5) is unlikely to succeed.