Awards and Decisions

Claim against Turkmenistan dismissed for lack of jurisdiction; claimant failed to abide by domestic litigation requirement
Kılıç İnşaat İthalat İhracat Sanayi ve Ticaret Anonim Şirketi v. Turkmenistan, ICSID Case No. ARB/10/1

Damon Vis-Dunbar

A Turkish claimant’s case before an ICSID tribunal has been dismissed for failing to first pursue the dispute before Turkmenistan’s domestic courts.

In a decision dated July 2, 2013, arbitrators Mr. J. William Rowley and Professor Philippe Sands declined jurisdiction, while the claimant’s appointee, Professor William W. Park, issued a separate opinion.

The claimant, Kilic, is a Turkish construction company with investments that soured in Turkmenistan. It made no secret of the fact that it bypassed Turkmenistan’s courts on its road to international arbitration—but argued that this was permissible due to the Turkey-Turkmenistan BIT’s Most Favoured Nation (MFN) clause.

Specifically, Kilic sought to “borrow” the dispute resolution provisions in the Switzerland-Turkmenistan BIT, a treaty that does not require that investors litigate in the host state’s domestic courts as a pre-condition to accessing international arbitration. In the event that the tribunal rejected that argument, the claimant also claimed that recourse to Turkmenistan’s courts would have been “ineffective and otiose.”

Recourse to domestic courts deemed a pre-condition to accessing arbitration

The tribunal began by considering if the BIT did in fact demand that the dispute be brought to Turkmenistan’s courts as a condition of the state’s consent to arbitration.

That decision was complicated by the fact that the BIT existed in different languages, and the disputing parties disagreed over which texts should be considered official—as well as how they should be translated. Ultimately, the translation of the official Russian version into English would convince the majority that domestic litigation was a jurisdictional requirement. That decision was published in an earlier, May 7, 2012 decision.

Tribunal rejects jurisdiction vs. admissibility distinction

Referring to the Abaclat vs. Argentina decision on jurisdiction, the claimant argued that the domestic court requirement should be considered an issue of “admissibility” rather than “jurisdiction.” On that basis, the claimant asserted that the tribunal could suspend the proceedings while allowing the claimant to ‘perfect’ the admissibility requirements by pursuing its case before Turkmenistan’s courts.

However, this line of reasoning held little sway with the tribunal, which reasoned that the Abaclat tribunal “fell into legal error.” Rather than a question of admissibility, the tribunal determined that the critical issue was the contracting state’s consent to arbitration—and any conditions placed on that consent.

The tribunal pointed to Article 26 of the ICSID Convention, which “explicitly recognises that a Contracting State may impose conditions on its consent to arbitration under the ICSID Convention.”  In the majority’s view, the domestic litigation requirement of the Turkey-Turkmenistan BIT was best understood in this light.

MFN deemed not to extend to dispute settlement

As noted, the claimant’s first line of argument hinged on the BIT’s MFN clause, which it backed up with reference to a number of cases in which tribunals have ruled that an MFN clause allows claimants to access more liberal dispute resolution provisions in treaties with third parties.

The tribunal prefaced its consideration of these cases by stressing that dispute resolution provisions should not “be presumed to fall within the scope of MFN clauses.” Rather, the tribunal would consider the treaty’s broader context, and how the MFN provision “fits into the BIT as a whole.”

The tribunal gave importance to the treaty’s structure, which separated “substantive rights in relation to investments, and remedial provisions in relation to those rights.” In the tribunal’s opinion, this “distinction suggests strongly that the ‘treatment’ of ‘investments’ for which MFN rights were granted was intended to refer only to the scope of the substantive rights …”

The tribunal also noted that Turkey had signed numerous BITs prior to its agreement with Turkmenistan, some of which did not require that disputes be submitted to local courts as a condition to its consent to arbitration. It would have made little sense, the tribunal reasoned, for Turkey to have intended the MFN clause to extend to dispute resolution in its treaty with Turkmenistan. Doing so would mean that the “carefully crafted jurisdictional preconditions” in the Turkey-Turkmenistan BIT could be immediately by-passed by a claimant.

Placing the treaty in historical context—it was signed in 1992—the tribunal concluded that it had most likely never crossed the negotiators’ minds that the MFN clause could extend to dispute resolution provisions in the treaty. It was not until the Maffezini v. Spain decision on jurisdiction in 2000 that an investment tribunal first ruled that linking the MFN to dispute resolution was appropriate.  

Turning to the decisions relied on by the claimant to bolster its claim that the MFN should extend to dispute resolution, the tribunal highlighted how the MFN clauses in those cases differed from the one found in the Turkey-Turkmenistan BIT. The treaties in these cases tended to have broader MFN clauses—for example, clauses in which MFN encompassed “all matters subject to this agreement”—compared to the clause found in the Turkey-Turkmenistan BIT.

Tribunal fails to see ‘evidence ’of futility

The claimant also failed to convince the tribunal that pursuing its claim in local courts would have been “futile.”

The claimant argued that Turkmenistan lacked an independent judiciary and had a poor track record of respecting human rights. However, in the tribunal’s view, these allegations missed the point. The relevant questions are whether: a) Turkmen courts were available; and b) whether particular failings by those courts would have made the claimant’s case futile.

In the tribunal’s words, the claimant “has apparently not taken a single procedural step [to initiate proceedings in Turkmenistan’s courts] prior to submitting this dispute to ICSID,” nor had it offered evidence to suggest that it had even investigated its options. As such, the tribunal determined that the claimant failed to prove the futility of pursuing domestic litigation in Turkmenistan.

Costs

The claimant claimed costs of approximately US$1.8 million, while Turkmenistan’s were substantially higher at US$4.2 million.

The tribunal found it reasonable for the claimant to bear some of Turkmenistan’s costs, given its apparent lack of sufficient regard for possibility that its failure to abide by the domestic litigation requirement would undermine the tribunal’s jurisdiction.

However, the tribunal sympathised with the claimant’s concern that Turkmenistan’s legal fees—based on a reported 13,415 hours of time spent by its legal team—seemed high given that the case had so far focused on relatively discreet jurisdictional issues.

The tribunal ultimately decided that US$2 million was a more reasonable cost for Turkmenistan’s expenses, and that 50 per cent of this cost should be paid by the claimant. With respect to the costs of the tribunal and ICSID’s fees, the claimant was ordered to pay 75 per cent, and Turkmenistan 25 per cent.

William W. Park’s separate opinion

In Professor Park’s opinion, the tribunal should have suspended the proceedings to allow time for the claimant to file a case with Turkmenistan’s courts. In his words: “If a timely judgement proves acceptable to the investor, proceedings end. If the investor remains aggrieved, arbitration resumes for claims falling within the scope of the BIT.”

Professor Park noted that the English translation of the BIT was clumsily translated, which made it unclear if the domestic litigation was mandatory or optional. To oblige the claimant to bear costs the costs of a failed arbitration, despite the poorly drafted treaty, runs “counter to the BIT terms and purpose,” wrote Professor William.

“Six months means six months”

Professor Park emphasized that the BIT clearly states that disputes “can be” submitted to arbitration “within six months following the date of the written notification.” That would suggest that pursuing domestic litigation for a year is not a hard-and-fast jurisdictional requirement, wrote Professor Park.

Professor Park also anticipated a problem in cases where a dispute has been submitted to a domestic court, and a decision is rendered quickly within a year (i.e. given that the treaty states that a dispute may go to arbitration if a final award by a domestic court “has not been rendered within one year.”)

The best way to resolve these conflicts, according to Professor Park, is to interpret to text on domestic litigation as a procedural—rather than jurisdictional—requirement designed to give local courts an opportunity to resolve the dispute. That would allow the tribunal to accept jurisdiction, but only allow the proceedings to proceed to the merits if certain conditions are met. In this case that would mean giving Turkmenistan’s legal system a reasonable opportunity to address the dispute.

If Turkey and Turkmenistan intended that domestic litigation was tied to their consent to arbitration, they should have used for more direct language, wrote Professor Park. A statement like “investors are entitled to arbitrate only after going to local courts,” would have delivered a clear message to arbitrators.

The award is available here:
http://www.italaw.com/sites/default/files/case-documents/italaw1515_0.pdf

Professor William W. Park’s separate decision is available here:  http://www.italaw.com/sites/default/files/case-documents/italaw5002_0.pdf

Tribunal accepts jurisdiction over claim brought by a UK investor against Turkmenistan by the operation of MFN clause
Garanti Koza LLP v. Turkmenistan, ICSID case No. ARB/11/20

Oleksandra Brovko

The majority of a three-member tribunal has granted a UK investor access to ICSID arbitration by importing more flexible dispute resolution provisions contained in the Turkmenistan-Switzerland BIT.

The decision on jurisdiction, dated July 3, 2013, centers once again on the contentious question of whether a most-favoured-nation (MFN) clause may be used to by-pass restrictions on dispute resolution. In this case the UK-Turkmenistan BIT’s MFN clause expressly extended to dispute settlement. In the majority’s view, that allowed the claimant to avoid the BIT’s competing demand that the parties settle disputes via UNCITRAL arbitration, unless they agree to another arbitration process (such as ICSID).

Background

The claimant, Garanti Koza LLP, a limited liability company incorporated in the United Kingdom, was contracted by the state-owned Turkmenautoyollari (Turkmen Road) to construct highway bridges and overpasses. Garanti complains that Turkmenistan employed state powers to force changes to the contract, leading to losses and the eventual confiscation of its assets.

Turkmenistan counters that it terminated the contract due to Garanti’s failure to complete the work according to the agreed schedule.

Given that the proceedings were bifurcated, the present decision addresses Turkmenistan’s objections to the tribunal’s jurisdiction. Turkmenistan asserted that it did not consent to ICSID jurisdiction under the UK-Turkmenistan BIT and, moreover, such consent cannot be imported from a different BIT in the absence of the express consent in the basic BIT.

BIT stipulates that UNCITRAL arbitration is the default

The tribunal focused on the interpretation of paragraphs (1) and (2) of Article 8 of the UK-Turkmenistan BIT. Article 8(1) concerns the host state’s consent to settle disputes by means of international arbitration, and Article 8(2) provides options for the arbitration process. Notably, UNCITRAL arbitration is the default selection, while ICSID and ICC are available upon the consent of the parties.

The tribunal clarified that Article 8(1) deals with Turkmenistan’s consent to participate in international arbitration and Article 8(2) concerns the arbitration systems that may be used if the conditions of Article 8(1) are met. Giving notice to the words “shall” and “may” in Article 8(1) and 8(2) respectively, the majority of the tribunal decided that only Article 8(1) deals with the issue of consent.

As explained below, Professor Boisson de Chazournes differed on this point, concluding that Article 8(2) also concerns the host-state’s consent to arbitration. That conclusion would contribute to her decision to part-ways with the majority on the issue of whether the MFN clause could be used to access alternative dispute resolution options found in Turkmenistan’s other BITs.

Consent to ICSID arbitration via MFN clause permitted by the majority

In deciding whether the MFN clause encompasses dispute-resolution provisions—and thus would allow the claimant to by-pass the UNCITRAL-only condition in Article 8(2)—the tribunal turned to the wording of the MFN clause at stake and its coverage. Article 3(3) of the basic BIT states that the MFN clause is applicable to the provisions of Articles 1 to 11. As such, the tribunal decided that the MFN clause clearly applied to the dispute resolution provisions contained in Article 8.

The tribunal therefore entitled the claimant to invoke more favourable dispute resolution provisions (i.e., those allowing for ICSID arbitration) which were found in Turkmenistan’s treaties with Switzerland, France, Turkey, India, and under the Energy Charter Treaty.

In doing so, the tribunal rejected Turkmenistan’s argument that the application of the MFN clause to the dispute resolution provision would deprive the basic BIT of its effet utile (practical effectiveness). Turkmenistan noted that in 1995 (the date of signature of the UK-Turkmenistan BIT) the UK was already a party to other treaties that provided consent for ICSID arbitration. As such, a conscious decision to extend the MFN clause to dispute settlement, while simultaneously carefully restricting consent only to UNCITRAL arbitration, would have been contradictory.

However, the tribunal stated that the MFN clause’s own ‘practical effectiveness’ was at stake. In the tribunal’s words “the MFN clause itself would be deprived of effet utile if it could never be used to override another provision of the treaty.”  

A choice is better than no choice

Finally, the tribunal considered whether the Switzerland–Turkmenistan BIT, on which the claimant relied upon in particular, did in fact provide for more favorable treatment than in the basic BIT by providing a choice between ICSID and UNCITRAL arbitration.

The tribunal did not delve into the procedural differences between UNCITRAL and ICSID rules, but instead decided that the mere fact that a treaty provides a choice is more favourable than one that does not.

Laurence Boisson de Chazournes’ dissent

In Professor Boisson de Chazournes’ view, the function of the MFN clause is to guarantee balanced and coherent treaty relations between the members of the international community. She asserted that BITs were never concluded by sovereign states with the idea to allow “consent shopping.” Therefore, the primary task of the tribunal is to establish, without any presumptions, whether consent to ICSID arbitration is provided under the UK-Turkmenistan BIT. If not, the lack of consent cannot be remedied by importing consent from a different treaty.

Interpretation of Article 8 of the UK-Turkmenistan BIT

Professor Boisson de Chazournes disagreed with the majority’s interpretation of Article 8 of the UK-Turkmenistan BIT. In her view, the conditions that Article 8(1) sets with respect to consent to international arbitration must be read in light of the specific conditions listed in Article 8(2). In other words, it is not only Article 8(1) that deals with the issue of consent; the initiation of investment arbitration in a chosen forum is also subject to consent under Article 8(2).

MFN clause and dispute settlement provision of the UK-Turkmenistan BIT

The dissenting opinion states that the MFN clause only applies if a foreign investor is already in a dispute-settlement relationship with the host state; if that relationship has not been formed, there is no ground to raise the question of more or less favorable treatment.

On this basis, Professor Boisson de Chazournes emphasized that the application of MFN clause is subordinated to the prior application of Article 8(2) of the UK-Turkmenistan BIT. Given that Turkmenistan had not provided its consent to ICSID arbitration as required by Article 8(2), Professor Boisson de Chazournes concluded that the claimant should not be entitled to invoke more favorable treatment with regard to ICSID arbitration under other BITs agreed to by Turkmenistan.

In Professor Boisson de Chazournes’s opinion, the MFN clause is not “a form of acceptance through which ICSID jurisdiction can be satisfied.”

There award is available here:

http://www.italaw.com/sites/default/files/case-documents/italaw1541.pdf

The dissenting opinion of Laurence Boisson de Chazournes is available here:

http://www.italaw.com/sites/default/files/case-documents/italaw1540.pdf

Arbitrator in sovereign bonds claim suggests majority decision exceeded jurisdiction
Ambiente Ufficio S.p.A. and others (Case formerly known as Giordana Alpi and others) v. Argentine Republic, ICSID Case No. ARB/08/9, Dissenting opinion

Diana Rosert

An arbitrator has made a strong case for why an ICSID tribunal should not have assumed jurisdiction in one of several claims over security entitlements related to Argentina’s sovereign debt restructuring.

Mr. Santiago Torres Bernárdez’s 160-page dissenting opinion in Ambiente Ufficio S.p.A. and others vs. Argentine Republic, filed on May 2, 2013, critiques the interpretative approach adopted by his two colleagues on the tribunal, Judge Bruno Simma and Professor Karl-Heinz Böckstiegel.[1]

At the outset, Mr. Torres Bernárdez stated that the majority decision showed “an excessive zeal in the protection of the interests of alleged foreign investors (noticeable also in several other investor-host State arbitral decisions).” He maintained that his co-arbitrators incorrectly interpreted the ICSID Convention and crucial parts of the Argentina-Italy bilateral investment treaty (BIT), and thereby overstepped the tribunal’s jurisdictional limits.

Mr. Torres Bernárdez considered that the majority decision departed from a “good faith” interpretation of the BIT as prescribed by the Vienna Convention on the Law of Treaties (VCLT) in that provisions were misread or omitted and case law selectively cited. More generally, Mr. Torres Bernárdez stressed that investment tribunals were “international tribunals of limited jurisdiction” and that, as a default rule, they should reject jurisdiction where doubts existed concerning a state party’s consent. He saw it as the role of states, but “not the task of individual ICSID arbitral tribunals, established to adjudicate a given case, to assume general legislative tasks.”

The majority decision’s “special relationship” with Abaclat and others v. Argentina

Mr. Torres Bernárdez criticized his co-arbitrators for “endorsing from the outset to the end the conclusions of the Abaclat majority decision independently of its objective law merits.” The Abaclat case involves over 60,000 Italian claimants with similar grievances against Argentina over the country’s sovereign debt restructuring. As in the present case, the majority of the Abaclat tribunal accepted jurisdiction, while the third member of the tribunal delivered a fierce dissent.

However, Mr. Torres Bernárdez emphasized that the similarity between the disputes deserved scrutiny, even though both cases related to sovereign bond instruments and were brought under the same BIT. In his opinion notable factual differences existed between the two cases that called for an autonomous assessment, as required by the ICSID Convention in any case. Besides the number of claimants (90 in the present and some 60,000 in the Abaclat case), differences also included the type of economic transactions involved, the role of the respective third party and the claimants’ fulfillment of jurisdictional preconditions.

Sovereign bond instruments not a “protected investment”

In the first place Mr. Torres Bernárdez found that the ICSID tribunal had no jurisdictional basis to adjudicate the case because neither sovereign bond instruments or any “of the economic transactions at stake qualified as a protected investment under the ICSID Convention and/or the Argentina-Italy BIT.”

He considered that, independent of the wording of the BIT and the question of the parties’ consent, the ICSID Convention provided objective “outer limits” for the Centre’s jurisdiction. He deemed that the present case involved “mere commercial transactions,” not protected investments under the ICSID Convention. Furthermore, Mr. Torres Bernárdez held that the transactions in the primary and secondary markets did not constitute a “single economic operation” or a single investment, as alleged by the majority, but were “unconnected” and created different financial instruments.

Mr. Torres Bernárdez also disagreed with the finding of the majority that the so-called Salini criteria were fulfilled. In his view, the Salini criteria were of jurisdictional nature and determined whether or not a “protected investment” under the ICSID Convention existed. He insisted that the security entitlements met “none of those criteria.” Amongst other reasons, he considered that security entitlements related to bonds did not possess the characteristic of “duration” necessary to manifest the existence of an investment operation due to the “speeded placement and circulation of the bonds in the markets” and their nature as “volatile capital transactions.”

Mr. Torres Bernárdez further opined that his co-arbitrators “misread” the relevant BIT provision (Article 1) when they decided that the BIT covered the claimants’ sovereign bonds instruments. He explained that the majority found “bonds” to be among a non-exhaustive list of examples provided in an unofficial English translation of the BIT supplied by the claimants. Mr. Torres Bernárdez not only contended that the words used in the original Spanish and Italian versions were incorrectly translated into English, he also maintained that the tribunal overlooked the chapeau of the provision, a crucial element requiring that the listed examples constituted an “investment” in the first place. Based on the “correct good faith interpretation” of the term “investment” as used in the BIT, the security entitlements fell outside its coverage, Mr. Torres Bernárdez asserted.

He confirmed Argentina’s claim that the provision contained a clear requirement for protected investment to be made in the country’s territory and in accordance with its laws and regulations. Since Mr. Torres Bernárdez was of the opinion that “[s]overeign bonds are intangible capital flows without physical implantation in a given host country’s territory,” he considered that they did not constitute investments made in Argentina’s territory. He found it even more difficult to see how the security entitlements at issue in the case fulfilled the territorial requirement.

Mr. Torres Bernárdez did not agree that Argentina was the beneficiary of the alleged investment in its territory or that the entitlement had contributed to its economic development, as had been asserted by the majority. He criticized Judge Simma and Prof. Böckstiegel for applying these criteria to establish territoriality while disregarding the “ordinary meaning” of the territory requirement. Furthermore, he maintained that since “the Respondent has not hosted anybody or anything” the requirement for investment to be made in accordance with host state laws and regulations could not have been fulfilled.

He also considered that sovereign debt restructuring was “not prima facie an internationally wrongful act.” It was therefore “unjustified and premature” of his co-arbitrators to rule on the issue in favour of the claimants. In his words, the majority disregarded that “Argentina’s 2005 restructuring of its sovereign debt follows the principles, steps and methods generally applied at the relevant time by the international community to this kind of sovereign financial operation with international overtones.”

Multi-party proceedings “fall outside” the tribunal’s jurisdiction

Mr. Torres Bernárdez agreed with the majority decision that the case was best characterized as a multi-party proceeding rather than a “mass claim,” and it was therefore “not unmanageable” for the tribunal. However, he contended that the ICSID Convention nonetheless required explicit consent by the respondent state for such proceedings. As such, he did not share the majority’s finding that the Convention provided scope for allowing the proceeding through its silence on the matter. Rather, he insisted that, based on general rules contained in public international law, the default rule in case of silence should be to not assume jurisdiction.

He further argued that the arbitration offer contained in the BIT did not contain consent to multi-party proceedings. Mr. Torres Bernárdez noted that, on the contrary, the “Respondent manifested its opposition from the very outset.” In his view it was a “fallacy” to decide that Argentina’s consent was provided in this specific case.

He also challenged his co-arbitrators’ interpretative approach, alleging that they made selective use of case law to show that multi-party arbitration was a generally accepted practice that did not require the respondent’s explicit consent.

Majority “prejudged” on ratione personae jurisdiction

Mr. Torres Bernárdez considered the nationality of the claimants to be another crucial jurisdictional issue, yet he argued that it should have been assessed at the merits stage in a thorough and definite way, not at the preliminary phase. According to Mr. Torres Bernárdez the majority “prejudged” when it confirmed to have prima facie jurisdiction over the claimants. In particular, the majority’s finding that the claimants met the nationality requirement on a prima facie basis should be seen as a “presumption in favour of Claimants in matters of nationality and domicile,” since at that point the tribunal had not verified the nationality of individual claimants. He took it as another sign of the majority’s lack of neutrality that it had partly shifted the burden of evidence away from the claimants to Argentina, while in his opinion “by the operation of international law” the complete burden of proof related to nationality and consent should lie with the claimants.

In addition, Mr. Torres Bernárdez drew attention to the territoriality requirement that existed for investors, but was allegedly omitted by the majority. For Mr. Torres Bernárdez this was “but one example of the Majority Decision tendency to sidestep jurisdictional requirements as much as possible or to keep them in the dark.”

“Crystal clear” conditions for Argentina’s arbitration offer

Mr. Torres Bernárdez noted that Argentina’s consent to arbitration contained two mandatory preconditions—prior amicable consultations and 18 months of recourse to domestic courts—that foreign investors had to meet before they could initiate international arbitration. He argued that there was no jurisdiction over the matter, because the claimants failed to fulfill either condition; a fact the claimants admitted in their arbitration request. He rejected the claimants’ attempt to import more favourable dispute settlement provisions from other treaties through the BIT’s most-favoured-nation clause, since he deemed that the clause did not extend to such matters.

The majority had ruled that despite the absence of consultations, the claimants did not violate the requirement for amicable consultations because no prospects for actual settlement existed. It further determined that an exception to the 18-month domestic court requirement was justified because the effort would have been “futile.”

Mr. Torres Bernárdez countered that, as a general rule, foreign investors had no right to alter or waive the conditions for states’ offers of consent to arbitration. More specifically, he found that there was no legal basis for a “futility exception.” The majority decision was said to be based on “speculative” arguments advanced by the claimants.

In addition, Mr. Torres Bernárdez asserted that the claimants’ arbitration request was “vitiated by incongruity in many essential respects” which rendered it inadmissible. Not only did the request for arbitration miss the signatures of the claimants, but in his opinion it also lacked factual evidence to prove the existence of a prior “legal dispute” in the sense of the ICSID Convention and the BIT. Overall, Mr. Torres Bernárdez agreed with “most of the preliminary objections submitted by the Respondent.”

The dissenting opinion of Santiago Torres Bernárdez is available here: http://www.italaw.com/sites/default/files/case-documents/italaw1487.pdf

Philip Morris passes the jurisdictional test in a claim against Uruguay
Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay, ICSID Case No.ARB/10/7 (formerly FTR Holding SA, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay) 

Yalan Liu

In a decision dated July 2, 2013, an ICSID tribunal has affirmed its jurisdiction over claims by Philip Morris against Uruguay in a high-profile dispute over restrictions to the marketing of tobacco products.

Background

The dispute arises out of three regulations by Uruguay relating to tobacco packaging and marketing: 1) a requirement that tobacco packages include “pictograms” to illustrate the adverse health effects of smoking; 2) a requirement that each cigarette brand have a “single presentation” which prohibits marketing more than one tobacco product under one brand; 3) and finally a requirement to feature health warnings on 80 per cent of the front and back of tobacco packages.

Philip Morris argues that these requirements are not intended to promote legitimate health polices, but rather are designed to undermine its legally protected trademarks, causing substantial losses to its investment in Uruguay.

Specifically, Philip Morris is alleging that Uruguay breached the Switzerland–Uruguay bilateral investment treaty (BIT) by subjecting its investments to “unreasonable” measures, expropriating its trademarks, and failing to provide fair and equitable treatment. In addition, Philip Morris alleges that Uruguay failed to observe its commitments under the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights and the Paris Convention for the Protection of Industrial Property, which, it argues, amount to treaty breaches byway of the BIT’s umbrella clause.

Pre-arbitration requirements: six-month amicable settlement and eighteen-month domestic litigation

The BIT stipulates that, prior to initiating international arbitration, disputes shall be subjected to amicable settlement for 6 months and subsequently to domestic litigation for 18 months.

With respect to the 6-month settlement requirement, the tribunal found the claimants’ compliance on the grounds that Abal Hermanos S.A. (Abal), Philip Morris’ Uruguayan subsidiary, had sought to challenge the disputed regulations through administrative channels.

Regarding the 18-month litigation requirement, Uruguay raised jurisdictional objections based on two grounds: 1) despite the fact that the claimants sought annulment of the regulations in a local court, this did not involve the “same dispute” as the one brought to international arbitration; 2) even if considered the same dispute, the 18-month period had not yet expired when the arbitration was initiated. Uruguay emphasized that the 18-month domestic litigation requirement was a jurisdictional precondition that must be fully met before initiating arbitration. In other words, non-compliance at the moment of instituting arbitration should result in the deprivation of the tribunal’s jurisdiction over the claim.

As for the first objection, the tribunal stated that the domestic litigation does not need to have the same legal basis or cause of action as the dispute brought in arbitration. Rather, it need only be based on “substantially similar facts and subject matter as the BIT claim subsequently submitted by the investor to arbitration.” In this case, the tribunal was satisfied the dispute brought before Uruguay’s courts was sufficiently aligned with the dispute being arbitrated at ICSID.

Uruguay’s second objection, based on the fact that Philip Morris had not litigated the dispute for a full 18-month period before initiating arbitration, was also turned down by the tribunal.

Here the tribunal decided that while the domestic litigation requirement was not satisfied at the time of instituting arbitration proceedings, the requirement could nonetheless be met subsequently. Turning to the facts, the tribunal found that a Uruguayan court rendered decisions after the expiry of the 18-month period but before the tribunal decided on its jurisdiction. Taking into account the objective of this requirement (i.e. to give the domestic court system an opportunity to consider the dispute), the tribunal considered that “to require Claimants to start over and re-file this arbitration now that their 18 months have been met would be a waste of time and resources.”

Lastly, in response to the claimants’ invocation of the MFN clause, the tribunal, having found the satisfaction on both requirements, held no need to further examine the MFN clause.

Public health measures not excluded from the scope of the protections afforded investors

Uruguay contended that Article 2 (1) of the BIT excluded public health measures, to which the challenged regulations belonged, from the scope of investment protection.

However, the tribunal determined that Article 2 (1) only applied to the pre-establishment phase of an investment (i.e. the carve out permitted Uruguay to block new investments based on public health considerations, but did not extend to investments that were already in place). As a result, the tribunal ruled Article 2 (1) did not create an exception to the BIT’s substantive obligations with respect to investments that had already been legally admitted.

The claimants’ activities in Uruguay constitute an “investment”

Uruguay, insisting on the Salini test, argued that the claimants’ activities should not be considered an “investment” on the basis of their alleged failure to contribute to the economic development of Uruguay. Specifically, the direct health-care costs incurred from the consumption of tobacco products overweighed their contribution to the country’s economic development, according to Uruguay.

The tribunal dismissed this objection by holding the contribution-to-development criterion was not a mandatory legal requirement of an investment under the ICSID Convention. The tribunal noted that the four constituent elements of the Salini test were merely the “typical features of investments under the ICSID Convention,” but not “a set of mandatory legal requirements.” Therefore, they could “assist in identifying or excluding in extreme cases the presence of an investment,” but should not be used to defeat the broad and flexible notion of the term investment under the ICSID Convention.

The tribunal noted that the relevant treaty could place limits on the definition of investment, but in this case the Switzerland-Uruguay BIT did not feature  definitional restrictions that posed a problem to the ‘investment’ that Philip Morris referred to in its claim.

Jurisdiction over the denial of justice claim upheld 

In its counter-memorial, Philip Morris raised an additional claim, arguing that a decision by a Uruguayan court to reject its request for annulment of one of the challenged regulations and the subsequent request to correct the previous decision amounted to a denial of justice in breach of the BIT’s provision on fair and equitable treatment. In determining its jurisdiction over this claim, the tribunal held three conditions had to be met pursuant to Article 46 of the ICSID Convention: 1) be present no later than in the reply; 2) arise directly out of the subject matter of the dispute; 3) be within the scope of the consent of the parties and within the jurisdiction of ICSID.

The tribunal swiftly found that Philip Morris satisfied the first two conditions of time limit and subject matter. With respect to the question of consent, the tribunal considered whether Philip Morris needed to abide by the two pre-arbitration requirements (i.e., the 6 months of amicable settlement and 18-months domestic litigation). The tribunal concluded that referring the court’s decision to 6-months of amicable settlement was futile, given that the executive had no power to revoke the court’s decision. As such, there was “no real prospect for an amicable settlement of the dispute.” The same conclusion was drawn with respect to the 18-month domestic litigation requirement due to the fact that any decisions by this Uruguayan court were final and non-appealable. Therefore, the tribunal ruled that the denial of justice claim, having met the pre-arbitration requirements, fell within the scope of Uruguay’s consent and ruled in favour of its jurisdiction accordingly.

The arbitrators in the case are Prof. Piero Bernardini (president), Mr. Gary Born (claimant’s nominee), and Prof. James Crawford (respondent’s nominee).

The decision is available here: http://www.italaw.com/sites/default/files/casedocuments/italaw1531.pdf

Canadian pharmaceutical company loses NAFTA investment claim against the United States; claimant lacks an investment in the United States
Apotex Inc. v. The Government of the United States of America, UNCITRAL

Damon Vis-Dunbar

An UNCITRAL tribunal has accepted all three jurisdictional objections raised by the United States, therefore dismissing two NAFTA Chapter Eleven arbitrations initiated by a Canadian producer of generic drugs.

In siding with the United States, the tribunal would ultimately determine that the claimant lacked an “investment” in US territory, and was better understood as a Canadian-based exporter to the United States.

The claimant, Apotex, was frustrated in its efforts to sell two types of drugs to the US market as it navigated the complicated procedures that govern the introduction of generic drugs in the United States.

The two arbitrations were held concurrently, but were not consolidated. The first relates to Apotex’s efforts to bring to market a generic version of the antidepressant medication commonly known as Zoloft, or sertraline hydrochloride by its generic name. The second relates to a similar attempt to market pravastatin sodium, a heart medication that has been sold under the name brand Pravachol.

In both cases, Apotex applied for an “Abbreviated New Drug Application” (ANDA); essentially an application to market a generic version of a drug that has already been approved by the Food and Drug Administration (FDA).

Part of the process can include initiating an ‘artificial’ act of patent infringement, in an effort to draw the patent holder into a dispute that would provide a judgment, one way or the other, on the legality of introducing a generic version of the drug in question.

In the case of the sertraline dispute, Apotex filed for a declaratory judgment—a common legal tactic in patent litigation. However, U.S. Federal Courts refused to rule on the matter, citing a lack of “reasonable apprehension” that the copy-right holder (in this case Pfizer) would launch a suit for patent infringement. Apotex’s efforts to convince the Supreme Court to overturn the Federal Court decisions have also failed. The scenario played out somewhat differently in the pravastatin dispute, although the end result was the same: a lack of legal certainty over whether it could market the drug.

Is Apotex an ‘investor’ with an ‘investment’?

The United States challenged Apotex’s assertion that it was an investor with an investment in the United States, as defined by NAFTA’s investment chapter. The US described Apotex as, essentially, a Canadian exporter of generic drugs—a characterization that would ring true for the tribunal.

Based on Apotex’s submission, the tribunal surmised that the claimant asserted three distinct ‘investments’: the development and manufacture of approved generic drugs for sale in the United States; the preparation of ANDAs (and related expenses); and various other expenditures in the US, such as the use of a US affiliate and the purchase of raw materials.

On the first, the tribunal concluded that Apotex’s development, manufacture and testing of generic drugs was wholly a Canadian activity, and therefore could not be considered an investment in the United States.

On the second, Apotex argued that the expense of preparing an ANDA, and the ANDA itself (as an item of property) could be considered a protected investment under NAFTA. The tribunal would respond, however, that Apotex prepared its ANDAs in Canada, and in any case is this an exercise that either an ‘investor’ or ‘exporter’ would need to perform in order to market generic drugs in the US. The tribunal added that regulatory costs, “however extensive,” could not transform the costs of developing the regulated products into investment in the United States. As a final point, the tribunal noted that regulatory costs do not fall within NAFTA’s list of investments.

The tribunal also reject Apotex’s assertion that its ANDA submissions could be considered “property” in the United States. NAFTA considers an investment to include “property … acquired in the expectation or used for the purpose of economic benefit or other business purposes.” In the tribunal’s view, an ANDA is basically an application to sell a product in the United States—and as such does not fall within the scope of what NAFTA considers “property.” The tribunal would also emphasise that the ANDAs “were only tentatively” approved by the FDA. “Whether or not each of Apotex’s ANDA’s would have been granted final approval is by no means certain on the evidence,” wrote the tribunal.

Apotex’s claims to “other significant” investments in the United States would also fail to convince the tribunal. These included costs associated with its US affiliate, which it used as a conduit for its correspondence with FDA. The tribunal agreed with the United States that this was essentially a “commercial contract for the sale of … services.” Nor could Apotex’s purchase of raw materials in the US amount to an investment, given that these were used for manufacturing in Canada.

Having not made an “investment” in the United States under NAFTA, the tribunal concluded that Apotex could also not claim to be an “investor.”

While that conclusion shut the door on Apotex’s claims, the tribunal nonetheless considered two other jurisdictional objections raised by the United States. These two objections related only to the pravastatin claim.

Apotex failed to fulfill judicial finality

In contrast to the sertraline claim, in which Apotex sought a review by the U.S. Supreme Court, Apotex did not pursue all available judicial avenues for its pravastatin claim. Apotex and the United States agreed that NAFTA required that a claim related to a judicial act required that the claimant had exhausted all judicial remedies (i.e. judicial finality) before resorting arbitration, unless doing so was “obviously futile.”

Apotex argued that its remaining judicial options in the pravastatin dispute should be considered futile—while the United States disagreed.

Setting a high bar for what it considers “obviously futile,” the tribunal stated that the issue hinges on whether judicial options were available, not whether they “would have granted the desired relief.” Given that judicial options were available—such as a petition to the Supreme Court—the tribunal was not satisfied that Apotex had proven judicial finality.

Claimant over-reaches NAFTA’s three-year time bar

Under NAFTA an investment claim must be made no more than three years “from the date on which the investor first acquired, or should have first acquired, knowledge of the alleged breach and knowledge that the investor incurred loss or damage.”

In this case, a key decision by the FDA occurred more than three years before Apotex filed its notice of arbitration. Apotex attempted to link the FDA decision together with subsequent court cases, to paint a picture of a “single, continuous set” of events that led to the alleged breach of NAFTA.

However, the tribunal made clear that any claim based solely on the FDA decision was time barred, and that the claimant could not buy more time by resorting to court proceedings. “Any conclusion otherwise would provide a very easy means to evade the clear rule in NAFTA Article 1116(2) in most cases (i.e. by filing any court action, however hopeless).”

The tribunal accepted that claims related to the decisions by US courts were not time barred, as these occurred within three years of Apotex’s notice of arbitration. Thus the tribunal distinguished between two types of claims—one linked to the FDA decision, and a second linked to US court decisions—which may have had implications for Apotex’s case had it proceeded to the merits stage.

Apotex must reimburse the United States for legal expenses and half of the arbitration costs

Apotex was ordered to pay the United States’ legal expenses (amounting to US$ 525, 814) and 50 per cent of the cost of the tribunal.

In explaining that decision, the tribunal wrote that the United States “raised entirely appropriate objections, and … ought never to have been embroiled in this process.”

The arbitrators in the case are Mr. Toby T. Landau QC (president), Hon. Fern M. Smith (respondent’s nominee), and Mr. Clifford M. Davidson (claimant’s nominee).

The award on jurisdiction and admissibility is available here: http://www.italaw.com/sites/default/files/case-documents/italaw1550.pdf