Tribunal has jurisdiction over collective claim (ICSID)

Practical Law Legal Update 9-507-4388 (Approx. 10 pages)

Tribunal has jurisdiction over collective claim (ICSID)

by PLC Arbitration

Background

ICSID jurisdiction

Article 25 of the ICSID Convention provides:

"The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State ... and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre."

Article 8 of the Agreement between the Argentine Republic and the Republic of Italy on the Promotion and Protection of Investments, dated 22 May 1990 (Argentina-Italy BIT) provides:

"1. Any dispute in relation to the investmentts between an Contracting Party and an investor of the other Contracting Party in relation to the issues governed by this Agreement shall be settled, if possible, by means of amicable consultation between the parties to the dispute.

2. If the dispute has not been settled in such consultation, it may be subject to the competent ordinary or administrative court of the Contracting Party in the territory of which the investment is located.

3. If, after 18 months from the notification of commencement of an action before the national courts indicated in the above paragraph 2, the dispute between the Contracting Party and the investors still continues to exist, it may be subject to international arbitration.

With this purpose and under this Agreement, each Contracting Party grants its anticipated and irrevocable consent that any dispute may be subject to arbitration.

4. Since the commencement of the arbitration proceeding, each disputing party will adopt any initiative suitable to desist from the judicial action in course."

Investment

An ICSID tribunal has jurisdiction over disputes only if they relate to an "investment". Several tribunals have held that this involves applying a dual test. The alleged investment must qualify as such both under:

The definition in the relevant BIT, which reflects the limits of the state contracting party's consent.
Article 25 of the ICSID Convention, which sets the limits of ICSID's jurisdiction.

To qualify as an investment under Article 25, many (but not all) ICSID tribunals have held that the investment must meet certain objective criteria first identified in Salini Construttori SpA v Morocco (ICSID Case No ARB/00/4) (Salini criteria), namely:

A substantial contribution by the investor.
Over a certain duration.
Involving the existence of an operation risk.
Regularity of profit.
Contribution to the economic development of the host state.

For further discussion, see Practice note, The definition of investment in international investment law.

Facts

The claims in these proceedings were advanced by around 60,000 Italian holders of bonds issued by the Argentine government. The claimants were represented by a body called Task Force Argentina (TFA), which was formed in September 2002. The claims arose out of Argentina's default on its sovereign debt obligations and subsequent debt restructuring.

In December 2001, Argentina defaulted on its debt and payment on government bonds was suspended. In January 2005, following various negotiations with bondholders and the International Monetary Fund, it launched an exchange offer, under which existing bonds would be exchanged for new bonds on revised terms.

The claimant bondholders refused to participate in the exchange offer. Instead, the TFA was mandated to commence ICSID arbitration against Argentina. The terms of the mandate:

Confirmed that participation in the ICSID arbitration would preclude a claimant from pursuing other proceedings at the same time.
Set out various provisions regarding the representation of the bondholders by a single law firm.

All instructions to the law firm would be given by the TFA, which would operate autonomously, while taking into account the claimants' "general interest, without being able to adopt different conducts for each or only some of the various bondholders".

In September 2006, a Request for Arbitration was filed on behalf of the claimants. The claimants alleged that the sovereign debt restructuring and the terms of the exchange offer breached the Italy-Argentina BIT, in that they were arbitrary, discriminatory, and in breach of fair and equitable treatment standards.

Argentina challenged the jurisdiction of the tribunal. The issues arising on the jurisdictional challenge included:

Was there a dispute arising out of the BIT?
Was there an investment?
Were the claimants "investors" entitled to claim?
Was there written consent to arbitration?
Were the collective claims admissible?

Decision

Before embarking on the various issues arising from the jurisdictional challenge, the tribunal noted that:

The jurisdictional phase was limited to general issues and its decision would not deal with any issues specifically touching on each individual claimant. Therefore, it would not determine whether the tribunal had jurisdiction with regard to each specific claimant. Instead, it would:
- set out general requirements for jurisdiction and admissibility;
- examine to what extent those requirements could be considered fulfilled, without entering into examination of individual circumstances; and
- determine how to address any outstanding individual issues in the future.

A clear distinction should be maintained between:
- issues of jurisdiction, that is, the competence of the tribunal to entertain the claims at all; and
- admissibility, that is, whether the claim was fit or mature for determination.
In the tribunal's view, the guiding principle in this regard was to identify the requirements for ICSID jurisdiction if there was only one claimant. Any issue relating to such requirements was a matter of jurisdiction. Any issue relating to other aspects of the proceedings, which would not apply if there was just one claimant, was an issue of admissibility.

This appeared to be the first case in ICSID's history in which mass claims had been advanced. Neither the ICSID Convention nor the Argentina-Italy BIT addressed how these claims should be dealt with.

Dispute arising out of Argentina-Italy BIT (jurisdiction rationae materiae)

Argentina argued that the dispute between the parties was, in truth, a contractual dispute arising out of its failure to honour the bonds. The tribunal disagreed. The facts relied on by the claimants were capable of establishing a breach of the Argentina-Italy BIT provisions relating to fair and equitable treatment, discrimination and, possibly, expropriation. Furthermore, properly analysed, the claims did not arise merely from the failure to perform payment obligations under the bonds, but rather, from Argentina's intervention and exercise of its sovereign power to restructure its sovereign debt. As such, the claims were not pure contractual claims, but treaty claims based on the act of a sovereign state. The existence of alternative contractual claims against third parties, in particular, Italian banks who acted as intermediaries in the bond distribution process, was irrelevant.

Having decided that the claims were treaty (not contract) claims, the tribunal did not need to consider the claimants' alternative argument that contract claims were actionable in any event by reason of the combined operation of the most favoured nation clause in the Argentina-Italy BIT and an umbrella clause contained in the Chile-Argentina BIT. For further discussion of most favoured nation clauses, see Practice note, How most favoured nation clauses in bilateral investment treaties affect arbitration.

Investment

Argentina disputed whether the claims (which arose in connection with the security entitlements in the various bonds) arose out an investment for the purposes of Article 1 of the Argentina-Italy BIT and Article 25 of the ICSID Convention.

The tribunal noted that several ICSID tribunals had applied a double-barrelled test (applying the definitions from both Article 25 and the BIT) to determine whether there was an investment. In the present case, the BIT and Article 25 were focusing on slightly different aspects of an investment. Article 25 was concerned with the contribution to investment in the host state, whereas the primary focus of the BIT was the protection of the fruits and value generated by those contributions. As such, the two perspectives were complementary and it was appropriate to have regard to each when determining whether an investment existed.

The BIT definition of "investment" was broad and included, in particular:

"bonds, private or public financial instruments or any other right to performances or services having economic value."

This was plainly broad enough to encompass the bonds and their related security entitlements. For these purposes, the security entitlements, which were the primary focus of the dispute, were sufficiently closely connected with the bonds themselves to justify the conclusion that the dispute related directly to an investment.

Furthermore, the bonds and related security entitlements amounted to an investment for the purposes of Article 25. In this connection, the tribunal declined to apply the Salini criteria, reasoning that to disqualify the investments on the basis of a failure to meet those criteria would be contrary to the aim of the ICSID Convention (to encourage private investment, while enabling the parties to define which investments they want to promote) and the intentions of the parties.

In the tribunal's view, the better approach was to ask whether the contribution was apt to create a value that was protected under the BIT. Here, there was no doubt that the claimants had made a contribution, by purchasing security entitlements in the bonds. The value generated by the contribution (namely the right to claim under the bond) was expressly protected by the BIT. Therefore, the claimant's contribution should be recognised as an investment for the purposes of Article 25.

It followed that the double-barrelled test was satisfied and there was an investment for the purposes of establishing jurisdiction.

The tribunal went on to hold that:

The relevant investment had been made in Argentina. Although the bonds had been purchased through Italian intermediaries, the funds generated through the issue of the bonds were ultimately made available to Argentina and served to finance Argentina's economic development. Furthermore, the existence of contractual forum selection clauses in the bonds themselves did not affect this conclusion.
The investment was in compliance with Argentine law for the purposes of Article 1 of the BIT. The allegation that the bonds had been sold, by the Italian intermediary banks in breach of various EU regulations was irrelevant for these purposes.

Investors (jurisdiction rationae personae)

Argentina raised three issues relating to the capacity of the claimants to advance claims:

Were the claimants "Italian" for the purposes of the Argentina-Italy BIT? The tribunal decided that it was not possible to reach any final decision about the Italian nationality of the claimants. Each claimant would have to be assessed individually.
Did those claimants who were corporations have the necessary capacity to be party to the BIT where they did not have full legal personality as a matter of Italian law? The tribunal decided that it was not necessary to establish full legal personality.
Were those claimants who had purchased security entitlements through various layers of intermediaries "investors"? The tribunal decided that the alleged remote connection between the security entitlements and the original bonds was irrelevant, as it had already determined that the security entitlements themselves amounted to investments for the purposes of establishing jurisdiction.

Consent

Argentina denied that there was consent to arbitration for the purposes of Article 25 of the ICSID Convention. It submitted that:

The terms of and circumstances surrounding the mandate to the TFA, indicated that there was no proper consent to arbitration on the part of the claimants. Argentina alleged that the TFA had failed to disclose relevant information to the claimants and had obtained their consent fraudulently by means of a "seduction operation".
Argentina had not consented to the arbitration of mass proceedings relating to debt restructuring.

Consent by the claimants: the mandate to TFA

With regard to the alleged lack of consent by the claimants, the tribunal noted that it was necessary to consider both the formal validity of the consent and its substance. The Argentina-Italy BIT did not impose any formal requirements and Article 25 of the ICSID Convention required only that the consent be written. The mandate to the TFA was in writing and, therefore, all requirements relating to formalities were satisfied.

With regard to the substance of the consent, although both the BIT and the ICSID Convention were silent as to substantive requirements, the consent of the parties was the cornerstone of ICSID arbitration. It was, therefore, necessary to ask whether the consent was "genuine and intended" in the sense of being free from coercion, fraud or essential mistake. It was open to Argentina to challenge the genuineness of the claimants' consent, though the tribunal would give due regard to the fact that the claimants themselves did not invoke any lack of consent. This might result in a higher standard of proof than if the mistake or fraud was invoked by the affected party itself.

Having considered the evidence, in particular the terms of the various documents setting out the mandate to the TFA, the tribunal concluded that:

The power of attorney to the TFA was a clear and unambiguous consent to arbitration.
The TFA had provided sufficient information to allow the claimants to make an informed consent to arbitration. Although it was arguable that some information could have been better explained, it was necessary to have regard to the fact that this was not a consumer dispute. The TFA was entitled to assume a certain level of sophistication and knowledge. There was no evidence of systematic fraud or coercion (though it was left open to individual claimants to allege fraud, coercion or mistake with regard to their individual circumstances).

Consent by Argentina

Argentina argued that it had not consented to the arbitration of mass claims relating to restructuring of sovereign debt. The tribunal disagreed.

There was no merit in the argument that disputes about debt restructuring fell outside the scope of ICSID arbitration. It was open to a state to notify ICSID of a class of dispute that it wished to exclude from the jurisdiction of ICSID. No such notification had been made in respect of claims relating to debt restructuring and jurisdiction would be established, provided the claimant could establish that its claims related to a relevant investment.

Regarding mass claims, the tribunal identified two principal types of collective proceedings:

Representative proceedings, where a single claim is brought by a representative of an indeterminate number of unidentified claimants.
Aggregate proceedings, where claims are aggregated judicially and managed together.

The current claims were a hybrid of the two. The number and identity of claimants was known, but having chosen to participate in the proceedings, the claimants' role was limited to passive participation, with the TFA making all decisions on their behalf.

The issue facing the tribunal was whether a specific consent was required for this sort of collective proceedings. The tribunal decided that no such specific consent was required. It would be difficult to define the threshold (in terms of number of claimants) at which specific consent would be necessary and, in any event, if the tribunal would have jurisdiction over each individual claim, there was no basis on which it could lose jurisdiction when those claims were presented collectively. Furthermore, the collective nature of the present proceedings derived primarily from the nature of the investment, namely, bonds, which were susceptible of involving a high number of investors. It would be contrary to the purpose of the Argentina-Italy BIT and the spirit of ICSID to require any supplementary express consent to ensure that these investments were brought under the protection of ICSID arbitration.

Admissibility

Having determined that it had jurisdiction to determine the claims, the tribunal then considered whether any of the issues raised by Argentina affected the admissibility of those claims. In this connection, it considered issues including:

The collective nature of the proceedings.
The failure to conduct amicable consultations or to engage in litigation before arbitration.

Mass action

The tribunal took the view that a mass action such as this was compatible with the ICSID framework and spirit. Although the ICSID framework did not mention collective proceedings, this should not be interpreted as excluding these proceedings. At the time the ICSID Convention was concluded, collective proceedings barely existed. It was possible to adapt the ICSID procedural framework to different types of investment, including investments involving a large number of investors.

Although the tribunal was unable to modify existing arbitration rules, any procedural adaptations could be made by the tribunal under its procedural powers to fill gaps in the ICSID Arbitration Rules (Article 44, ICSID Convention; Rule 19, ICSID Arbitration Rules). In such a case, the filling of the gap would not amount to an amendment of the written arbitration rules, but rather to an adaptation of the application of the rules in a specific case.

In the present case, it was clear that the tribunal would be unable to examine all the evidence in the same way as if there were only a handful of claimants. For example:

The tribunal's approach to the evidence would have to be simplified, for example, by:
- accepting copies instead of originals; or
- examining random samples instead of every document.
The claimants would be represented by the TFA and could not be treated as individuals in every respect.
Some issues would have to be examined collectively. This would be permissible where the claims raised were identical "or at least sufficiently homogenous". Here, the claims derived from the same provisions of the Argentina-Italy BIT and concerned the same debt restructuring. The claims appeared sufficiently homogenous to justify a simplified procedure.
It was also necessary to recognise that Argentina's rights might also be affected, though the effect was limited. Although Argentina might not be able to enter into full length and detail about the individual circumstances of each claimant, it was not clear that this was at all necessary to protect Argentina's rights in the light of the homogeneity of the claims.

Consultation and litigation

Article 8 of the Argentina-Italy BIT required the claimants to engage in amicable consultation and then litigation, before opting to arbitrate.

Having considered the evidence, the tribunal decided that the claimants had, in fact, engaged in negotiations sufficient to satisfy Article 8. In any event, this was not a mandatory requirement and a failure to consult would not prevent a party from arbitrating.

Similarly, the requirement of resorting to local courts for 18 months before resorting to arbitration was not a mandatory prerequisite to the right to arbitrate. The purpose of the litigation requirement was not to enable the state party to deal with issues within the context of its own legal system. Here, court proceedings in Argentina did not represent a realistic method of disposing of the dispute and Argentina had been deprived only of a theoretical opportunity to do so. In the circumstances, it was open to the claimants to commence arbitration.

Comment

The principal point of interest in the decision is the consideration, for the first time, of whether ICSID tribunals have jurisdiction to entertain mass claims and, if so, whether the ICSID procedural framework can be adapted to make those claims admissible.

The tribunal (by a majority) answered both those questions in the affirmative, though the precise method by which the claims will be determined remains to be defined. It is interesting to see that the tribunal was willing to contemplate at least some limits on the defendant's procedural rights to defend individual claims, though it took the view that, as the claims were largely homogenous, the effect on the defendant would be minimal. Furthermore, the tribunal pointed out that the only alternative would be to conduct 60,000 separate proceedings. It noted that the measures that Argentina would need to take to face 60,000 sets of proceedings would be a much bigger challenge to its effective defence rights than a mere limitation of its right to individual treatment of homogenous claims.

Nevertheless, it will be interesting to see whether these claims can be successfully disposed of on a collective basis. Various issues relating to jurisdiction (for example, the claimants' nationality and the issue of fraud or coercion affecting individual claimants' consent to arbitration) have been left over to be dealt with individually. The extent to which individual issues will also arise (or be permitted) in connection with the substantive claims remains to be seen.

The decision is of further significance because of the tribunal's refusal to apply the Salini criteria in the context of defining "investments". The tribunal's view, that Article 25 of the ICSID Convention and the Argentina-Italy BIT are focusing on different aspects of an investment (the contributions and value respectively) enables greater emphasis to be placed on the parties' intentions in terms of identifying the investments to which protection should be extended. The tribunal noted that the Salini criteria:

"may be useful to further describe what characteristics contributions should have. They should, however, not serve to create a limit, which the Convention itself nor the Contracting Parties to a specific BIT intended to create."

A dissenting opinion is awaited from the third arbitrator, Professor Georges Abi-Saab.

Case

Abaclat and others v Argentina (ICSID Case No ARB/07/5).

Tribunal has jurisdiction over collective claim (ICSID) | Practical Law