Preliminary objections in CAFTA arbitration

Practical Law UK Legal Update Case Report 4-503-0306 (Approx. 5 pages)

Preliminary objections in CAFTA arbitration

by PLC Arbitration

Background

Chapter 10 of the US-Dominican Republic-Central America Free Trade Agreement (CAFTA) establishes treatment standards for investors of member countries, and further stipulates investor-state dispute resolution procedures.

Article 10.17 of CAFTA and Article 15 of the El Salvador Investment Law provide for disputes to be submitted to ICSID arbitration.

Article 10.20.4 of CAFTA permits respondents to raise preliminary objections to claims. Article 10.20.5 permits respondents to object that claims fall outside the tribunal's competence, and sets out an expedited procedure for dealing with preliminary objections. They both provide:

"4. Without prejudice to a tribunal's authority to address other objections as a preliminary question, a tribunal shall address and decide as a preliminary question any objection by the respondent that, as a matter of law, a claim submitted is not a claim for which an award in favor of the claimant may be made under Article 10.26 ...

(c) In deciding an objection under this paragraph, the tribunal shall assume to be true claimant's factual allegations in support of any claim in the notice of arbitration (or any amendment thereof) ... The tribunal may also consider any relevant facts not in dispute ...

5. In the event that the respondent so requests within 45 days after the tribunal is constituted, the tribunal shall decide on an expedited basis an objection under paragraph 4 and any objection that the dispute is not within the tribunal's competence".

Under CAFTA Article 10.16, a claimant must serve a notice of intent to claim arbitration which must specify the "legal and factual basis for each claim". CAFTA Article 10.18 requires the notice of arbitration to be accompanied by written waiver of "any right to initiate or continue before any administrative tribunal or court under the law of any Party, or other dispute settlement procedures, any proceeding with respect to any measure alleged to constitute a breach referred to in Article 10.16".

Facts

The claimant invested in mineral exploration activities in El Salvador. Following El Salvador's refusal to grant mining exploitation concessions or environmental permits, the claimant commenced ICSID arbitration, alleging breach of various CAFTA obligations including national treatment, most favoured nation treatment, minimum standard of treatment and expropriation. The notice of arbitration also included certain non-CAFTA claims.

El Salvador made preliminary objections under Article 10.20.4 and sought findings that the claims were not claims for which an award in favour of the claimant may be made. It argued that, even assuming that the claimant's factual allegations were true, there was no claim in law. It further argued, under Article 10.20.5, that certain non-CAFTA claims fell outside the tribunal's competence.

Decision

The application was dismissed.

The tribunal noted that the object of Article 10.20.4 was to provide an effective and flexible procedure for the swift and fair resolution of disputes. Accordingly, the article should be applied with a lack of formalism, with an emphasis on substance and practical common sense. Where the expedited procedure under Article 10.20.5 was adopted, the stringent deadlines indicated that the application was not intended to be a "mini-trial".

The standard of review under Article 10.20.4 was not limited to "frivolous" or "legally impossible" claims. Rather, to grant a preliminary objection, a tribunal must consider all relevant questions of law and all relevant alleged or undisputed facts and must conclude that an award should be made finally dismissing the claim at the very outset of the arbitration. The word "may" indicated that the tribunal had a discretion to grant or refuse the application: there might be circumstances where a tribunal might reasonably decide not to exercise the power against a claimant, even where it considered that the claim appeared likely (but not certain) to fail.

The tribunal was obliged to assume the truth of the allegations in the notice of arbitration. It followed that the respondent could not adduce evidence contradicting these assumed facts. With regard to the scope and effect of the assumption of truth under Article 10.20.4, the tribunal observed as follows:

The relevant factual allegations would include further factual allegations made in an amended notice of arbitration. In other words, the notice of arbitration could be "cured" by amendment.
The assumption of truth was limited to the notice of arbitration: it did not extend to factual allegations made elsewhere (for example, in other written or oral submissions). Here, for example, the assumption of truth did not extend to any factual allegation in the Response, Rejoinder or submissions at the hearing.
The assumption of truth was also limited to factual allegations. It did not extend to legal allegations, or a "legal allegation clothed as a factual allegation". Nor would it include a "mere conclusion unsupported by any relevant factual allegation".
Under CAFTA Article 10.16, a notice of intent to claim arbitration must plead the factual basis of a claim (including liability, causation and damages). Similar rules applied (by virtue of Article 26.2 of the ICSID Convention and Rule 2(e) of the Institution Rules) to the subsequent notice of arbitration served under the ICSID Convention.
However, a notice of arbitration was not required to be a full presentation of a claimant's case. It was not intended to be a complete documentary record of the claimant's factual evidence. Both ICSID and CAFTA procedure envisaged that the notice of arbitration would be followed by more substantive written submissions and evidence: there would be no point in such steps if the initial pleading was intended to be complete. Accordingly, the notice of arbitration was not to be judged by the formalistic standards more appropriate to later pleadings.
Under Article 10.20.4(c), the tribunal could also take into account "any relevant facts not in dispute". In practice, there could be no dispute as to whether or not a fact is undisputed, because a claimant could withdraw any admission of a fact by simply amending its notice of arbitration.

Applying these principles to the facts of the case, the tribunal concluded that the claims raised questions as to the interpretation and application of the relevant mining laws which were either to be assumed to be true or which could not be decided finally in favour of the respondent. Further, the issues of causation and damages raised issues of fact or mixed law and fact which could not be decided finally in the respondent's favour. The tribunal could not construct "relevant facts not in dispute" from other materials, because it was clear that the claimant disputed such facts.

Finally, the tribunal rejected the argument that the non-CAFTA claims fell outside its competence. El Salvador had argued that CAFTA Article 10.18 precluded a claimant from commencing parallel proceedings. In substance, it was argued, the non-CAFTA claims were separate proceedings falling outside CAFTA which were required to be waived under Article 10.18. The tribunal disagreed on the narrow basis that the arbitral proceedings were indivisible and did not comprise two separate dispute settlement procedures for the purposes of Article 10.18. The wider issues raised by this submission were left to other tribunals in future cases.

Comment

This is the first case to consider the scope and effect of Article 10.20.4 and the tribunal provided detailed guidance in its award, particularly on the issue of the scope and nature of the assumption of truth.

Note, in this regard, that the tribunal appears to have accepted that the assumption of truth extended to the interpretation of certain statements made by the President of El Salvador, unless that interpretation was "fanciful or so unreasonable as relevant alleged facts as to be disregarded by the tribunal for present purposes" (paragraph 79). It appears, therefore, that fanciful or unreasonable factual allegations may fall outside the scope of the facts assumed to be true, although the tribunal did not expand on this particular aspect of their reasoning.

The tribunal was clearly concerned to ensure that preliminary objections are dealt with swiftly and that they do not become a means of delaying an arbitration. This concern was particularly acute in view of the fact that the non-waiver provisions (in Article 10.20.4(d) of CAFTA) as to competence might allow a further intermediate stage under the ICSID Arbitration Rules before the claimant could reach the merits. To this end, they emphasised that the application should not become a mini-trial: indeed, the respondent should not be entitled to adduce evidence to contradict the factual allegations in the notice of arbitration. The tribunal further noted that it should not ordinarily be necessary to address, at length, complex issues of law (paragraph 112).

Case

Pac Rim Cayman LLC v The Republic of El Salvador (ICSID Case No ARB/09/12). Decision on the Respondent's Preliminary Objections under CAFTA Articles 10.20.4 and 10.20.5.

Preliminary objections in CAFTA arbitration | Practical Law