ICSID tribunal upholds Guatemala’s preliminary objection against the import of 10 umbrella clauses through an MFN clause while rejecting and joining to the merits the remaining preliminary objections raised by the state

Grupo Energía Bogotá S.A. E.S.P. and Transportadora de Energía de Centroamérica S.A. v. Republic of Guatemala, ICSID Case No. ARB/20/48, Decision on Preliminary Objections, November 24, 2023

Summary

The companies Grupo Energía Bogotá S.A. E.S.P., incorporated in Colombia, and Transportadora de Energía de Centroamérica S.A., incorporated in Guatemala (“claimants”), filed a request for the institution of ICSID proceedings against Guatemala. The claimants invoked the FTA between Colombia and El Salvador, Guatemala, and Honduras, which entered into force for Guatemala on November 12, 2009.

In its decision, issued on November 24, 2023, the tribunal upheld Guatemala’s preliminary objection against the import of umbrella clauses from other treaties through the FTA’s MFN clause, while it rejected two of the other preliminary objections and joined the remaining to the merits.

The dispute

Following a crisis in its electricity sector in the 1990s, Guatemala implemented regulatory reforms to encourage foreign investments in the electricity sector’s strategic segments to meet power demand. As those measures proved insufficient, in 2007, Guatemala adopted new reforms that included a project to expand the power transmission system and carried out a bidding process to provide the transportation service in 2009, which the claimants won. 

The claimants alleged that, throughout the following years, Guatemala harmed its investment through the actions of its municipal, judicial, and administrative bodies, as a result of which they commenced the arbitration (paras 30–32).

Guatemala raised four preliminary objections related to the tribunal’s lack of jurisdiction to decide claims that (i) did not amount to treaty violations, (ii) are time-barred under the FTA, (iii) have already been submitted to domestic courts, and (iv) are inadmissible because local remedies were not exhausted. Regarding the first preliminary objection, the tribunal divided its analysis between (i) claims of a contractual nature and claims related to the conduct of the Constitutional Court of Guatemala and (ii) claims related to alleged violations of the umbrella clauses imported through the FTA’s MFN clause.

The tribunal upheld Guatemala’s preliminary objection related to the umbrella clauses and concluded it lacked jurisdiction to decide on the alleged treaty violation in relation to such provisions. It then decided to join the rest of the first preliminary objection and the second to the merits, while it rejected the third and fourth preliminary objections.

The tribunal’s analysis

The obligation to decide the preliminary objection before entering into the merits

The tribunal found that under Article 12.23.5 of the FTA it had the obligation to make a decision in relation to the preliminary objections before entering into the merits stage of the proceedings. It interpreted the wording of the provision pursuant to Article 31 of the VCLT, noting that the treaty parties indeed sought to impose an obligation on the tribunal when drafting this article by incorporating specific language (deberá decidir, which translates into “must decide”) in this regard. Moreover, it reasoned that the fact that the FTA provided for the suspension of the proceedings when a preliminary objection was raised and allowed for the request for expedited decisions were also indications that the treaty parties intended that any preliminary objection be dealt with before the merits phase.

Nevertheless, the tribunal clarified that such obligation only implied the duty to adopt a decision on the preliminary objections but not a final one. Therefore, the tribunal considered that it would be in compliance with the FTA’s obligation by adopting a decision upholding the preliminary objections, by rejecting them, or even by joining them to the merits, if their determination was closely linked to it and required further analysis of fact and law (paras 252–269).

Part of the first and the second preliminary objections shall be joined to the merits

In its first preliminary objection, Guatemala argued that the tribunal lacked jurisdiction since, under Article 12.18.4 of the FTA, the claimant could only submit to arbitration disputes related to alleged breaches of the investment chapter of the FTA. In Guatemala’s view, the claimants’ claims did not relate to treaty violations—they related to alleged breaches of contract subject to the exclusive jurisdiction of Guatemalan courts, as they involved measures issued by the Wholesale Electricity Market (“WEM”) acting as a private party exercising its contractual rights and not as a sovereign (paras 46-57). On the contrary, the claimants asserted that the FTA’s provisions contained no limitation on treaty claims coexisting with contractual claims, that the WEM’s acts were indeed sovereign as they include, for instance, the imposition of sanctions, and that, in any event, the tribunal was not required to decide on that issue at this stage of the proceedings (paras 143–185).

The tribunal found it could not rule on its jurisdiction with respect to the state entity that was a party to the contract, as it needed to determine first whether that entity had acted in a private or sovereign capacity and, for that, it required further factual and legal elements. Hence, it could not establish at this stage whether such claims were contractual or amounted to treaty violations (paras 270–306). 

Guatemala also argued that the tribunal lacked jurisdiction with regards to the claims related to the conduct of the Constitutional Court as they did not involve claims for denial of justice or serious procedural errors that could amount to a treaty violation (paras 80–83). On their part, the claimants asserted that they have indeed submitted a claim of denial of justice over which the tribunal had jurisdiction (paras 205–215).

On this point, the tribunal found that the analysis of the claimants’ arguments and proof of the alleged denial of justice committed by the Constitutional Court was a matter to be dealt with at the merits stage of the proceedings (paras 307–310).

In relation to Guatemala’s second preliminary objection that some claims were time-barred, the tribunal identified it as an admissibility objection, rather than a jurisdictional one. According to Article 12.22.1 of the FTA, the investor had 3 years to submit its claim from the date on which it became aware of the alleged breach, the damage, or the losses suffered. Considering this, the tribunal concluded that it could not decide this objection before determining whether and for which of the disputed measures Guatemala was internationally responsible. It explained that to do so, it needed further analysis and proof as only then would it be able to determine the date of the breach and whether the claimant was aware of it for statute of limitations purposes (paras 319–338).

The preliminary objection related to the umbrella clauses shall be upheld

Guatemala claimed that the FTA and the reservation it had made to it prevented claimants from importing through the MFN clause standards, like umbrella clauses, from treaties that have entered into force before the FTA (paras 58–79). The claimants denied that the reservation prevented investors from invoking the umbrella clauses in other treaties. They argued that the reservation was designed to allow Guatemala to “adopt or maintain measures” and not to preclude investors from requesting the application of standards from other treaties. The claimants also asserted that the determination of the umbrella clauses’ scope was an issue to be analyzed in the merits stage (paras 186–204). 

The tribunal upheld this preliminary objection. It interpreted Article 12.6 of the FTA, containing the MFN clause, together with Article 12.12.2, which establishes that the MFN clause shall not apply to the treatment accorded by a party in accordance with any international treaty as detailed in Annex III. This annex contained Guatemala’s reservation of the right to adopt or maintain measures according to a different treatment to other states based on treaties in force or concluded before the FTA. The tribunal reasoned that these three provisions proved Guatemala’s unequivocal intention to reserve its right to extend the MFN treatment to any treaty that predated the FTA. 

In the tribunal’s opinion, the claimants failed to explain how its attempt to import clauses from treaties that predated the FTA did not fall within Guatemala’s reservation. Moreover, they did not provide satisfactory reasons for arguing that when the reservation mentions the treatment in relation to “another state,” it is not referring to investors or investments, despite the fact that Article 12.6.2 expressly indicates that it includes them. Furthermore, the tribunal stated that it was unclear on what basis the claimants asserted that the protection of an umbrella clause contained in another treaty would be automatically extended to them without even verifying whether the investors or investment were “in similar circumstances” as required by Article 12.6.2. Accordingly, it found it lacked jurisdiction to decide on the alleged violation of the umbrella clauses (paras 311–318).

The third and fourth preliminary objections shall be rejected

Regarding the third preliminary objection related to the FTA’s fork-in-the-road provision, Guatemala contended that at least four measures challenged by the claimants had already been submitted to Guatemala’s national courts, and, therefore, the tribunal lacked jurisdiction over them (paras 97–109). The claimants argued that whether such a provision was applicable in this case should be assessed under the triple identity test, i.e., if there was identity of the parties, the object of the dispute, and the cause of action between the domestic and the treaty claims submitted. Since there was not, it asserted that the provision was not applicable (paras 235–241).

The tribunal rejected the preliminary objection. It interpreted that the fork-in-the-road provision referred to disputes related to treaty violations and not to any type of claim that could be brought in domestic proceedings. Hence, for this provision to be applicable, the claims submitted to domestic courts must have the “same identity” as those submitted to arbitration. As the tribunal did not find such identity, it concluded that the commencement of the domestic proceedings did not prevent the claimants from pursuing international arbitration for the alleged violation of the FTA’s investment chapter (paras 339–351).

In relation to the fourth preliminary objection, Guatemala affirmed that the claims based on 18 administrative acts were inadmissible as the claimants failed to exhaust the local remedies under Guatemalan legislation (paras 110–117). The claimants argued that there was no such obligation under Guatemalan law and that, in any event, resorting to administrative remedies would be futile (paras 242–251).

The tribunal also rejected this preliminary objection. It considered that Article 12.18.1 required the prior exhaustion of local remedies when the measures involved were administrative in nature and when the Guatemalan legislation demanded (exija) it. Even though the alleged measures invoked by the claimants were of an administrative character, the tribunal concluded that none of the Guatemalan provisions cited by the respondent had an explicit obligation requiring the exhaustion of local remedies. Also, it reasoned that Guatemala’s argument collided with the respondent’s prior objection related to the fork-in-the-road provision since requiring the claimants to exhaust local remedies could be interpreted as forcing them into choosing the domestic court option, preventing them from resorting to arbitration (paras 352–360).

Conclusion

By interpreting the FTA’s obligation to decide the preliminary objections prior to the merits stage as allowing it to uphold, reject, or even join the objections to the merits, the tribunal was able to resolve several issues raised by the parties at this early stage of the proceedings. However, the tribunal opted for a cautious assessment of the elements available in this preliminary phase. This led it to conclude that it needed further analysis to decide certain questions which, being related to a decision on Guatemala’s international responsibility, belong to the merits phase.

Tribunal’s composition

Eduardo Siqueiros (Mexican national) – president (appointed by agreement of the parties); Alexis Mourre (French national) – claimant-appointed arbitrator; Prof. Ricardo Ramírez Hernández, (Mexican national) – respondent-appointed arbitrator.

Author

María Rosario Tejada is an LL.M. candidate at the Geneva LL.M. in international dispute settlement (MIDS).