Winter 2013

Partial Annulment of Pey Casado Award against Chile could create yet another chapter in the long-running ICSID saga

On 18 December 2012, an ad hoc annulment committee (the “Committee“) rendered its decision (the “Decision“) in the case of Víctor Pey Casado and Foundation “Presidente Allende” v. Republic of Chile (the “Pey Casado” case) being heard under the auspices of the International Centre for the Settlement of Investment Disputes (“ICSID“). In an Award rendered on 8 May 2008 (the “Award“), an ICSID arbitral tribunal (the “Tribunal“) ordered Chile to pay damages of over US $10 million to Mr. Victor Pey Casado and the Foundation “President Allende” (the “Claimants“) for violation of the fair and equitable treatment standard provided for in Article 4 of the Spain-Chile Bilateral Investment Treaty (the “BIT“).

The Committee annulled the part of the Award addressing the issue of damages. It did so on two grounds: first, for a serious departure from a fundamental rule of procedure; and second, for a failure to state the reasons on which the Award was based. The Decision now creates the possibility of further arbitral proceedings, this time focussed upon the issue of damages.

Factual Background

The Pey Casado case is one of the longest running in the history of ICSID, concerning factual events spanning a period of more than forty years. The request for arbitration was registered on 20 April 1998.

Mr. Victor Pey Casado, a Spanish national, moved to Chile in 1939 and lived there for 34 years, until 1973. In the early 1970s, Mr. Pey became associated with “El Clarín”, a left-leaning newspaper which was a key supporter of former President of Chile, Salvador Allende, who was also a friend of Mr. Pey. The newspaper was controlled by a company called Consorcio Periodístico y Publicitario, S.A. (“CPP“), through a wholly-owned subsidiary called Empresa Periodística Clarín, Ltda. (“EPC“).

On 11 September 1973, as is well known, President Allende was overthrown in a coup d’état by General Augusto Pinochet. That same day, military troops occupied the premises of the “El Clarín” newspaper and seized papers from Mr. Pey’s office. The newspaper premises thereafter remained under military control, formalised by way of Decree (No. 165 of 1975).

Following the coup, Mr. Pey left Chile in 1973, moving to Venezuela then Spain. In 1994, the BIT entered into force. Mr. Pey subsequently returned to Chile, filing a request for compensation to the Chilean domestic courts in 1995 for the confiscation of a printing machine seized by the military during the coup. In 1998, Chile passed Law 19.568, which was designed to compensate those who had suffered confiscations of property by the military. However, having been informed of his right to recover under this law, Mr. Pey waived his right to seek compensation for the expropriation of CPP and EPC. In April 2000, Chile rendered Decision No. 43, authorising compensation to four individuals for the expropriation of CPP and EPC.

The Tribunal’s Award

In the Award of 8 May 2008, the Tribunal concluded that Mr. Pey had, in 1972, purchased all of the shares of CPP and that this acquisition constituted an “investment” under Article 25 of the ICSID Convention. The Tribunal held that Chile had violated the fair and equitable treatment standard of the BIT through its failure to compensate the Claimants for the expropriation of the “El Clarín” newspaper, controlled by CPP, in a similar fashion to that given to the four individuals under Decision No. 43. The Tribunal awarded the Claimants damages in the sum of US $10 million.

ICSID Annulment Proceedings

The ICSID annulment process is distinct from an appeal. Article 52(1) of the ICSID Convention contains an exhaustive list of five grounds on which annulment of an ICSID arbitral award may be sought. These are:
(a) that the Tribunal was not properly constituted;
(b) that the Tribunal has manifestly exceeded its powers;
(c) that there was corruption on the part of a member of the Tribunal;
(d) that there has been a serious departure from a fundamental rule of procedure; and
(e) that the award has failed to state the reasons on which it is based.
Chile founded its application for annulment upon grounds (b), (d) and (e).

Decision on Annulment

The Committee condensed the lengthy factual record of the case into eleven specific areas including, inter alia, the issues of nationality, investment, denial of justice, discrimination and damages. The Committee scrutinised each of these eleven areas against the three grounds for annulment which Chile had invoked.

A serious departure from a fundamental rule of procedure (Article 52(1)(d))
The Committee agreed with Chile that this ground of annulment is composed of a three-part test, namely: (i) the procedure rule must be fundamental; (ii) the Tribunal must have departed from it; and (iii) the departure must have been serious. In the Committee’s view:
“Fundamental rules of procedure are procedural rules that are essential to the integrity of the arbitral process and must be observed by all ICSID tribunals. The parties agree that such rules include the right to be heard, the fair and equitable treatment of the parties, proper allocation of the burden of proof and absence of bias.” (Paragraph 73)

Under this annulment ground, Chile argued that the only discussion of damages by the parties in the whole proceeding related solely to damages arising from the Claimants’ expropriation claim. Thus, Chile contended, the Tribunal had never afforded it the opportunity to be heard regarding the calculation of damages for breaching the fair and equitable treatment standard.

Having reviewed the entire record of proceedings, the Committee held that neither of the parties ever pleaded the damages claims arising from the breaches of Article 4 of the BIT. The Committee observed that the only occasion on which this issue had arisen was at a jurisdictional hearing held in January 2007 where the President of the Tribunal had posed a question to the parties regarding damages. The Committee agreed with Chile that this was an insufficient opportunity for Chile to adequately respond and address the consequences of breaching a substantive provision of the BIT.

In the Committee’s view, Chile’s right to be heard on the issue of damages was “substantial and outcome-determinative”. The denial of the opportunity to present its arguments on the standard applicable to the calculation of damages for breaching the fair and equitable treatment standard had “materially prejudiced” Chile. Thus, in light of these facts, the Committee held that this aspect of the Tribunal’s Award must be annulled.

Failure to state the reasons on which the award was based (Article 52(1)(e))
With regards to this annulment ground, the Committee observed that:
“… as long as there is no express rationale for the conclusions with respect to a pivotal or outcome-determinative point, an annulment must follow, whether the lack of rationale is due to a complete absence of reasons or the result of frivolous or contradictory explanations … the purpose of the requirement to state reasons – is to permit the parties to understand the decisions of ICSID tribunals.” (Paragraph 86)

Chile submitted that the Tribunal had adopted a restitution standard in the Award which made no sense in light of the BIT violations which it had found. The Committee agreed with Chile and held that the Tribunal’s usage of an expropriation-based damages calculation in respect of a violation of the fair and equitable treatment standard was “manifestly inconsistent”. It directly contradicted the Tribunal’s earlier finding in the Award that such a damages calculation was irrelevant as the alleged expropriation occurred in 1975, thus falling outside the temporal scope of the BIT. Whilst the Committee acknowledged that the determination of damages was an issue on which arbitral tribunals were allowed a considerable amount of discretion, in the present case it was the “plainly contradictory” reasoning followed by the Tribunal which was at issue.

Analysis

The Committee’s Decision marks the latest development in a long-running case which has been dogged by procedural delays, including multiple arbitrator resignations and the first and only disqualification of an arbitrator in ICSID’s history.
The issue of damages aside, the Committee’s Decision leaves the previous Award intact. In so doing, the Committee endorsed a conservative view of the role of the annulment mechanism available under the ICSID Convention and was keen to distance itself from any accusations of “activism” levelled at previous ad hoc committees:
“It is clear that Chile is here seeking in effect to appeal the Tribunal’s decision and is asking the Committee to substitute its decision for that of the Tribunal. As is well established, that is not the remit of an Annulment Committee. An ad hoccommittee is not an appeal body.” (Paragraph 129)

However, and paradoxically perhaps, the Committee’s Decision to partially annul the Award leaves open the possibility that the parties may choose to commence arbitral proceedings in order to resolve the issue of damages. This outcome once again demonstrates the underlying tension existent in the ICSID system, and arbitration more generally, between achieving finality and maintaining the integrity of the arbitral process.