The Application for Annulment is based on the grounds enumerated in Article 52(1)(b), (d) and (e) of the ICSID Convention, namely that the Arbitral Tribunal (i) manifestly exceeded its powers, (ii) seriously departed from a fundamental rule of procedure and (iii) failed to state reasons on which the Decision on Jurisdiction and Competence or the Award are based. In the Application for Annulment, the Republic of Peru requested annulment of the Decision on Jurisdiction and Competence "zzz its entirety' with the consequent annulment of the Award "in its entirety," or in the alternative, in the event that the Committee did not grant the annulment of the Decision on Jurisdiction and Competence, the Republic of Peru asked for independent annulment of the Award in its entirety.1 The Republic of Peru later made clear that it was only seeking "partial annulment of the Decision on Jurisdiction with respect to the Tribunal’s conclusion that all of Claimant’s expropriation claims were within the scope of Article 8(3) of the BIT."2
Members of the ad hoc Committee :
Judge Dominique Hascher, President of the Committee Prof. Donald McRae, Member
Prof. David Williams, Member (joined by video conference)
ICSID Secretariat
Ms. Anneliese Fleckenstein, Secretary of the Committee
Representing Mr, Tza Yap Shum:
Mr. Carlos Paitân Contreras, Estudio Paitân & Abogados Mr. Christian Carbajal Valenzuela, Estudio Paitân & Abogados
Representing the Republic of Peru:
Mr. Stanimir A. Alexandrov, Sidley Austin LLP Ms. Marinn Carlson, Sidley Austin LLP Mr. Andrew C. Blandford, Sidley Austin LLP
Mr. Carlos José Valderrama Bernal, Ministry of Economy and Finance of Peru Ms. Yesenia Cabezas, Counselor-Diplomatic Officer Embassy of Peru
Interpreters
Mr. Charles Roberts
Ms. Nancy Rocha
Day 1
9:00 -9:30 - Introductions
9:30-12:30 - Respondent’s Opening (3 hours)
12:30 - 1:30 -Lunch
1:30-4:30 - Claimant’s Opening (3 hours or less)
4:30-6:30 - Expert Testimony of Prof. Reisman (1 hour per party)
Day 2
9:30-12:00 - Respondent’s Closing (2.5 hours)
12:00-1:00 -Lunch
1:00-3:30 - Claimant’s Closing (2.5 hours or less)
3:30-5:30 - Questions from the Committee
The Parties were invited to provide any further observations regarding the agenda for the Hearing on Annulment by 28 February 2014, and to inform the ad hoc Committee whether a teleconference on the organization of the hearing would be necessary.
Members of the ad hoc Committee:
Judge Dominique Hascher, President of the Committee Prof. Donald McRae, Member
Prof. Kaj Hober, Member
ICSID Secretariat
Ms. Luisa Fernanda Torres, Secretary of the Committee
Representing Mr, Tza Yap Shum:
Mr. Carlos Paitân Contreras, Estudio Paitân & Abogados Mr. Christian Carbajal Valenzuela, Estudio Paitân & Abogados Mr. José Salcedo, Estudio Paitân & Abogados
Representing the Republic of Peru :
Mr. Stanimir A. Alexandrov, Sidley Austin LLP
Ms. Marinn Carlson, Sidley Austin LLP
Mr. Andrew C. Blandford, Sidley Austin LLP
Mr. Gavin Cunningham, Sidley Austin LLP (support team)
Mr. Carlos José Valderrama Bernal, President of the Special Commission that Represents the State in International Investment Disputes. Ministry of Economy and Finance
Ms. Erika Lizardo, Embassy of the Republic of Peru in the United States
Experts
Professor Michael Reisman, McDougal Professor of International Law, Yale Law School, expert on behalf of the Republic of Peru
Interpreters Ms. Silvia Colla Ms. Daniel Giglio Ms. Judith Letendre
Court Reporters Mr. Leandro Iezzi Mr. Dionisio Rinaldi Ms. Gail Inghram Verbano
• "Obligation to accord investments fair and equitable treatment";
• "Obligation to protect investments";
• "Obligation to compensate in the event of adopting expropriatory or similar measures";
• "Obligation to allow the transfer of capital and returns".3
The Republic of Peru first claims that the Arbitral Tribunal committed a manifest excess of powers under Article 52(1)(b) of the ICSID Convention by finding jurisdiction. The Applicant contends that the Arbitral Tribunal disregarded the plain meaning of the Peru-China BIT to assume jurisdiction over expropriation-related claims beyond "the amount of compensation for expropriation" to which Article 8(3) of the Peru-China BIT limits the jurisdiction of the Arbitral Tribunal.4
• "ignoring the plain meaning of the text to assume jurisdiction over claims beyond ‘the amount of compensation for expropriation’;
• noting, but then disregarding, the unrebutted testimony of the Chinese and Peruvian negotiators of the [Peru-China] BIT, both of whom agreed that the Contracting Parties intended to limit ICSID jurisdiction to disputes about the ‘amount of compensation’;
• considering, but then disregarding, China’s notification to ICSID (contemporaneous with its negotiations of the [Peru-China] BIT) that confirmed the narrow scope of its consent to jurisdiction;
• misrepresenting the jurisprudence that it claimed supported its interpretation of the term ‘the amount of compensation’; and
• basing its interpretation of the arbitration clause not on the arguments developed by the parties, but rather on its own undeveloped theories that the parties had no opportunity to address -e.g., the Tribunal’s sua sponte contextual analysis of the [Peru-China] BIT’s fork-in-the-road provision, which was (mis)represented so broadly that it necessarily would have barred this very dispute (had the Tribunal applied its own logic to the case before it)."5
According to the Republic of Peru, each of these errors is manifest, and taken together, they constitute an "unmistakable case of manifest excess of powers because the [Arbitral] Tribunal founded its jurisdiction on multiple patent errors and misrepresentations"6
Second, the Republic of Peru argues that, under Article 52(1)(e) of the ICSID Convention, in the Decision on Jurisdiction and Competence the Arbitral Tribunal fails to state reasons with respect to the ordinary meaning of Article 8(3) of the Peru-China BIT for:
• "why it sua sponte decided to focus solely on a single treaty term -‘involving’- and largely ignored ‘the amount of compensation’;
• why it ignored other possible definitions for ‘involving,’ and seized on only one possible definition, ‘to include’;
• why it construed ‘including’ as ‘including but not limited to’; and
• why only expropriation claims - and not, for example, fair and equitable treatment claims - would be included in disputes ‘including but not limited to’ the amount of compensation for expropriation."7
• "why it sua sponte decided to focus on the fork-in-the-road provision when neither party had argued that the provision was relevant to the interpretation of the arbitration clause;
• why it interpreted the term ‘dispute’ so broadly that the fork-in-the-road provision would have barred even Claimant’s [Mr. Tza Yap Shum’s] claims here (if the Tribunal had considered the question) - constituting a clear contradiction in the Tribunal’s reasoning;
• why it did not consider the standard jurisprudence applying a fork-in-the-road provision to bar only an identical dispute in which the parties and claims are the same; and
• why it presumed that all disputes about compensation for expropriation necessarily involve a judicial determination of whether or not expropriation has taken place - failing to consider at all situations where, for example, an expropriation might arise from Peru’s Expropriation Act, which Claimant [Mr. Tza Yap Shum] had quoted in its written submission."8
• "taking a policy-based approach to override the plain meaning of Article 8(3);"9
• "erecting a presumption that the arbitration clause in particular, had the sole objective to benefit investors",10 or put another way, for the Tribunal’s "skepticism about whether such a [limited dispute settlement] mechanism could possibly help to attract foreign investors",11 and
• "ignoring the absurd result that either all early Chinese BITs have essentially no object and purpose or the arbitration provision in all of them must be read broadly regardless of the plain meaning of their texts."12
• "why it ignored all of the unrebutted evidence regarding the Contracting Parties’ intentions, as provided by the Chinese and Peruvian negotiators’ identical accounts of their communications and shared intention;
• contradicting itself by first emphasizing the importance of engaging the travaux and then ignoring the clear outcome of that inquiry; and
• why it refused to examine the significance of China’s 1993 notification under Article 25 of the ICSID Convention, which was the basis for the Tribunal’s own jurisdiction in this ICSID case."13
• "rejecting prior decisions cited by Peru due to lack of travaux, even while disregarding the clear and unrebutted evidence submitted to it regarding the travaux of the China-Peru BIT;
• misrepresenting three inapt decisions as supporting its interpretation of Article 8(3); and
• why it considered European Media Ventures to be persuasive when, in fact, the English High Court’s focus on the preparatory work and the term ‘amount’ favors Respondent."14
Third, the Republic of Peru claims that, under Article 52(1)(d) of the ICSID Convention, the Arbitral Tribunal committed a serious breach of a fundamental rule of procedure by assuming jurisdiction where jurisdiction was lacking.15
• "First, the Tribunal formulated its broad interpretation of the term ‘involving’ in a sua sponte manner, as Claimant [Mr. Tza Yap Shum] did not advocate such an interpretation. Instead, Claimant [Mr.Tza Yap Shum] had conceded that, in Article 8 as read literally, Peru consented only to jurisdiction over disputes about the amount of compensation for expropriation.
• Second, the Tribunal decided sua sponte that the BIT’s fork-in-the-road provision required a broad interpretation of the arbitration clause, because (according to the Tribunal), it necessarily barred all ICSID arbitration after any related litigation occurred in domestic court. Had Peru been given the opportunity to address this issue, it would have pointed out the numerous flaws in the Tribunal’s haphazard interpretation of the fork-in-the-road provision."18
a. "The Tribunal did state the reasons for [its] interpretation of the terms ‘involving’ and the derived concept ‘involving but not limited to’, as had been discussed by the parties during the arbitration process;
b. The Tribunal did state the reasons for why [it] chose a broad meaning of the term ‘involving’ in accordance with a contextual and teleological interpretation of the BIT;
c. The Tribunal did state the reasons [for] why [it] is competent only for disputes concerning expropriation and not for other disputes, such as those concerning fair and equitable treatment;
d. The Tribunal did state the reasons for [its] interpretation of the ‘fork-in-the-road’ clause contained in Article 8(3) of the BIT and its relation to the arguments of both parties;
e. The Tribunal did conduct a valid interpretation of Article 8(3) of the BIT, without overlooking an alleged ‘plain meaning’ of this article [...], because the term ‘involving’ was ambiguous and needed to be interpreted by the Tribunal;
f. The Tribunal did not rely on an alleged presumption that arbitration, and the arbitration clause in particular, only benefits the investor; since it favors the promotion of investments in general, it benefits both investors and States;
g. The Tribunal stated the reasons why the various clauses in other China’s BITs may be interpreted differently, namely, because they contain a very different wording from that contained in the BIT Peru-China;
h. The Tribunal did not overlook the travaux préparatoires or the witness statements deposed by the negotiators of the BIT; in fact, they were discussed at length. They just did not persuade the Tribunal to adopt [the Republic of Peru’s] restrictive interpretation, and the Tribunal did state the reasons for such disagreement;
i. The Tribunal did not overlook China’s notification to ICSID in 1993, but the Tribunal only held, pursuant to the ICSID Convention, that such act did not condition the consent and had no direct legal consequences on the BIT signed eventually, and adequately stated the reasons;
j. Having stated that arbitral case law is not binding, the Tribunal interpreted properly the arbitration case law cited by the parties, as well as that brought by the Tribunal, and assessed them as [it] deemed appropriate and the conclusions reached had adequate grounds, wherewith [the Republic of Peru] just did not agree."
"1. Any dispute between an investor of one Contracting Party and the other Contracting Party in connection with an investment in the territory of the other Contracting Party shall, as far as possible, be settled amicably through negotiations between the parties to the dispute.
2. If the dispute cannot be settled through negotiations within six months, either party to the dispute shall be entitled to submit the dispute to the competent court of the Contracting Party accepting the investment.
3. If a dispute involving the amount of compensation for expropriation cannot be settled within six months after resort to negotiations as specified in Paragraph 1 of this Article, it may be submitted at the request of either party to the international arbitration of the International Center for Settlement of Investment Disputes (ICSID), established by the Convention on the Settlement of Investment Disputes between States and Nationals of other States, signed in Washington D.C. on March 18, 1965. Any disputes concerning other matters between an investor of either Contracting Party and the other Contracting Party may be submitted to the Center if the parties to the dispute so agree. The provisions of this Paragraph shall not apply if the investor concerned has resorted to the procedure specified in Paragraph 2 of this Article.
4. [...]."36
"Firstly, the Tribunal refers to the specific words used by the third paragraph of Article 8. The BIT uses the word ‘involucra ’, which according to the definition given by the Dictionary of the Real Academia Espanola, means ‘abarcar, incluir, comprender ’. A good faith interpretation of this term indicates that the only requirement in the BIT is that the dispute should ‘include ’ the determination of an amount of compensation and not that the dispute should be restricted to this element. Obviously, other formulations were available such as: ‘limited to’ or ‘exclusively’, but the wording used in this provision says ‘involving "’40
According to the Republic of Peru, the Arbitral Tribunal rendered meaningless the limiting words "amount of compensation for expropriation" in the arbitration clause. It also rendered meaningless the second sentence of Article 8(3) according to which arbitration for "[a]ny disputes concerning other matters" requires the consent of the parties to the dispute, because in the Arbitral Tribunal’s interpretation, such "other matters" would already be within the Arbitral Tribunal’s automatic jurisdiction so long as it was presented alongside an expropriation claim.41
In Soufraki v. UAE, the ad hoc Committee held that it saw
"no reason why the rule that an excess of power must be manifest in order to be annullable should be disregarded when the question under discussion is a jurisdictional one. Article 52(1)(b) of the Convention does not distinguish between findings on jurisdiction and findings on the merits [...]. It follows that the requirement that an excess of power must be ‘manifest ’ applies equally if the question is one of jurisdiction. A jurisdictional error is not a separate category of excess of power. Only if an ICSID tribunal commits an excess of power, whether on a matter related to jurisdiction or to the merits, is there a basis for annulment. "46
In Lucchetti v. Peru, the ad hoc Committee observed that:
"[...] the requirement in Article 52(1)(b) of the ICSID Convention is not only that the Tribunal has exceeded its powers but that it has done so ‘manifestly ’. From the writings of legal scholars it appears that there are divergent views on the impact of this additional requirement of ‘manifestness ’. On the one hand, the view has been expressed that where an ad hoc committee finds that a tribunal has wrongly either exercised or failed to exercise jurisdiction, the award should be annulled, wholly or partly, without any further examination of whether the excess was manifest. On the other hand, it has been held by others that there should be no annulment when the tribunal has wrongly assumed, or failed to assume, jurisdiction, but its decision on this point was tenable, since in such a case the tribunal would not have manifestly acted contrary to the BIT.
The Ad hoc Committee, for its part, attaches weight to the fact that the wording of Article 52(1) (b) is general and makes no exception for issues ofjurisdiction. Moreover, a request for annulment is not an appeal, which means that there should not be a full review of the tribunal's award. One general purpose of Article 52, including its sub-paragraph (1)(b), must be that annulment should not occur easily. From this perspective, the Committee considers that the word ‘manifest’should be given considerable weight also when matters of jurisdiction are concerned. "47
Deference to the legal and factual findings of an arbitral tribunal is the same for any decision. It follows that the standards of the review are the same for competence as those which ad hoc committees apply when they review any other matters decided by an arbitral tribunal.48
"When a tribunal engages in interpretation of a written instrument of consent in light of the surrounding circumstances or in the context of other documents, its final construction of the meaning of the document in the light of all the evidence and submissions of the parties is unlikely to amount to a manifest excess of powers. Interpretation, which leaves room for discussion [...], is not likely to give rise to a manifest excess of powers. "50
Among the annulment cases which have been cited by the Parties in their respective submissions, the Committee identifies the decision of the Klockner v. Cameroon I Committee which early on underlined that:
"since the answers seem tenable and not arbitrary, they do not constitute the manifest excess of powers which alone would justify annulment under Article 52(1)(b)."51
The CDC v. Seychelles Committee confirmed that:
"Any excess apparent in a Tribunal’s conduct, if susceptible of argument ‘one way or the other’, is not manifest."52
And the Lucchetti v. Peru Committee stressed that an ad hoc committee should not substitute its own decision for that of the arbitral tribunal:
"[...] The interpretation [...] adopted by the Tribunal is clearly a tenable one. Clearly also there are other tenable interpretations. The Committee is not charged with the task of determining whether one interpretation is ‘better’ than another, or indeed which among several interpretations might be considered the ‘best’ one [...]"53
In a similar vein, the Duke v. Peru Committee expressed that:
"An ad hoc committee will not therefore annul an award if the tribunal’s disposition on a question of law is tenable, even if the committee considers that it is incorrect as a matter of law. The existence of a manifest excess of powers can only be assessed by an ad hoc committee in consideration of the factual and legal elements upon which the arbitral tribunal founded its decision and/or award based on the parties ’submissions. Without reopening the debates on questions of fact, a committee can take into account the facts of the case as they were in the record before the tribunal to check whether it could come to its solution, however debatable. Is the opinion of the tribunal so untenable that it cannot be supported by legal arguments? A debatable solution is not amenable to annulment, since the excess of powers would not then be ‘manifest’."’54
The Fraport v. Philippines Committee was also:
"convinced that the jurisprudence of ICSID ad hoc Committees on the ‘tenable ’ standard for review on issues of jurisdiction is to be interpreted to like effect. "55
The existence of a clear and unambiguous textual meaning must be evident, in compliance with the standards adopted by decisions of ad hoc committees for manifest excess of powers. As remarked, "manifest" does not refer to the gravity of the excess but to the clarity with which the excess of powers can be ascertained. The Committee in Soufraki v. UAE held that "a manifest excess of power implies that the excess of power should at once be textually obvious and substantively serious."56 The prevailing practice of ad hoc committees is explicit as appears from the decisions which the Parties have brought forward in support of their argumentation. In Wena v. Egypt, the ad hoc Committee ruled that:
"[t]he excess of powers must be self-evident rather than the product of elaborate interpretations one way or the other. When the latter happens the excess of powers is no longer manifest. "57
In CDC v. Seychelles, the ad hoc Committee similarly reminds us that:
"the term ‘manifest ’ means clear or ‘self-evident.’ Thus, even if a Tribunal exceeds its powers, the excess must be plain on its face for annulment to be an available remedy."58
The same approach has been adopted by the ad hoc Committee in Patrick Mitchell v. Congo:
"[i]f an excess of powers is to be the cause of an annulment, the ad hoc Committee must so find with certainty and immediacy, without it being necessary to engage in elaborate analyses of the award."59
The Committee in MCI v. Ecuador underlined that:
"the manifest excess requirement in Article 52(1)(b) suggests a somewhat higher degree of proof than a searching analysis of the findings of the Tribunal."60
"A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. "62
"[i]n fact, the last sentence [of Article 8(3)] leaves no doubt that an investor (of any Contracting Party), when trying to choose a course of action to settle a dispute in accordance with Article 8, finds himself with an irrevocable forum selection clause, also known by the phrase fork in the road’. An investor ‘shall be entitled to submit the dispute to the competent court of the Contracting Party’ (emphasis added) in accordance with Paragraph 8(2), but if the investor does so, in accordance with Paragraph 8(3), such investor could not under any circumstances resort to ICSID arbitration to settle a dispute ‘involving the amount of compensation for expropriation. "’65
"Presumably, in conformity with the wording of the preamble of the BIT, the objective sought when including the right to refer certain disputes to ICSID arbitration is to confer certain benefits for investment promotion. In the event that the Contracting Parties really had the intention to exclude the important issues listed in Article 4 from the arbitration process, the Tribunal of course would so determine, although with a certain level of scepticism [sic] about whether such a mechanism could possibly help to attract foreign investors. "68
According to the Republic of Peru, the Tribunal’s analysis leads to an absurd result because either all Chinese BITs have essentially no object and purpose, or the arbitration provision in all of them must be read expansively regardless of the plain meaning of their texts. The Applicant notes that until 2003, most Chinese contemporaneous BITs restricted jurisdiction of investment arbitration tribunals to disputes concerning the amount of compensation for expropriation.69
"Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31: (a) leaves the meaning ambiguous or obscure; or (b) leads to a result which is manifestly absurd or unreasonable. "72
"‘I remember that we gave [to the Peruvian negotiators] a clear and straightforward example, which we used in a number of negotiations: ‘you can submit a dispute to arbitration without our consent in the event that our courts decide that there has been an expropriation of your investment and that you are owed $ 6 but you think that the debt is $ 10 ’. This example reflects the outer limit of the consent of the Republic of China regarding international arbitration. "’74
"Honestly, though China is a signatory to the ICSID Convention, the reality is that at this moment it is not able to agree to submit all disputes between a foreign investor and the Chinese Government in accordance with its laws and we believe that you can understand our position. "76
"Although this exchange shows that China was not willing to accept the proposal of Peru on ICSID arbitration on all matters that might have arisen between a foreign investor and the Government of China (and clearly the position of China was in this sense more restrictive than that of Peru), this is not conclusive evidence of the scope of paragraph three of Article 8 of the BIT. In particular, it does not establish clearly if China’s consent was limited to disputes about the amount of compensation for expropriation or if according to the final wording of the BIT it would include disputes involving other topics as well under Article 4 of the BIT. "78
"‘Pursuant to Article 25 (4) of the Convention, the Chinese Government would only consider to submit itself to the jurisdiction of the International Centre for Settlement of Investment Disputes with respect to disputes arising in relation to the compensation that results from expropriation and nationalization. "’82
Instead, the Republic of Peru argues, the Arbitral Tribunal ignored this evidence by holding that:
"it would be questionable to interpret the consent of the Parties to the BIT in Article 8, based on a notification that deals with a completely different Treaty such as the ICSID Convention, and which does not even condition the consent of China in the Convention. "83
The Republic of Peru criticizes the Arbitral Tribunal for failing to state reasons in the analysis of Article 8(3) of the Peru-China BIT, which led to the conclusion that this provision should receive a broad interpretation.94 The Republic of Peru essentially challenges the incompatibility between the Arbitral Tribunal’s analysis of Article 8(3) and the ordinary meaning of this same provision as well as of the other terms of the BIT. In its challenge under Article 52(1)(e) of the ICSID Convention, the Applicant essentially reiterates the grievances against the reasoning of the Arbitral Tribunal which it already made in the context of Article 52(1)(b). As already stated, the Committee reserves for discussion under Article 52(1)(d) the arguments of the Republic of Peru concerning the Arbitral Tribunal’s sua sponte approach to the interpretation of the term "involving" in Article 8(3) of the Peru-China BIT and of the "fork-in-the-road" provision of the same treaty.95
The Committee in Klockner I recognized that:
"Interpretation of the concept of failure to state reasons’is therefore decisive. It is especially delicate because of the absence of any previous interpretations of the Washington Convention and the lack of sufficiently clear or consistent indications from prior international practice. [...] The text of [Article 52(1)(e)] requires a statement of reasons on which the award is based. This does not mean just any reasons, purely formal or apparent, but rather reasons having some substance, allowing the reader to follow the arbitral tribunal’s reasoning, on facts and on law."96
This Committee notes that the reasons of the Arbitral Tribunal for its construction of Article 8(3) of the Peru-China BIT can be read in paragraphs 143 to 188 of the Decision on Jurisdiction and Competence. The Republic of Peru objects to the quality of the reasoning rather than a quantitative absence of reasons. Indeed, control over a tribunal’s reasons would be pointless if it did not involve a minimum of control over the relevance of the reasons of the decision or award. As remarked by the CDC v. Seychelles Committee, Article 52(1)(e) of the ICSID Convention requires that the reasons of the Arbitral Tribunal not be frivolous.97
Contradiction in the reasoning was approached by the Klockner I Committee in a manner which has been accepted by subsequent ad hoc committees:98
"[a]s for ‘contradictory reasons,’ it is in principle appropriate to bring this notion under the category of failure to state reasons ’for the very simple reasons that two genuinely contradictory reasons cancel each other out. Hence the failure to state reasons. The arbitrator’s obligation to state reasons which are not contradictory must therefore be accepted.99
The Committee in Vivendi v. Argentina cautioned, however, that:
"[i]t is frequently said that contradictory reasons cancel each other out, and indeed, if reasons are genuinely contradictory so they might. However, tribunals must often struggle to balance conflicting considerations, and an ad hoc committee should be careful not to discern contradiction when what is actually expressed in a tribunal’s reasons could more truly be said to be but a reflection of such conflicting considerations."100
In the present matter, the Arbitral Tribunal concluded its analysis of Article 8 of the Peru-China BIT with the following words:
"in order to give meaning to all elements of the Article, the words ‘involving the amount of compensation for expropriation ’ must be interpreted to include not only the mere determination of the amount but also other issues that are normally inherent in an expropriation, including whether the property was actually expropriated in accordance with the standards and requirements of the BIT, and the determination of the amount of compensation due, if applicable. In the opinion of the Tribunal, a contrary conclusion would undermine the provision for arbitration before ICSID since according to the final sentence of Article 8(3), to submit the investment dispute to the courts of the host State would definitely preclude the possibility of access to arbitration under the ICSID Convention. Therefore, since Claimant has filed a prima facie claim for expropriation, the Tribunal, in accordance with Articles 25 and 41 of the ICSID Convention and Rule 41 of the Rules of Arbitration, believes it has jurisdiction to hear, on the merits, the claim filed by Claimant."101
The Committee finds that this is a reasoned conclusion within the meaning of Article 52(1)(e) of the ICSID Convention. The Arbitral Tribunal reached its conclusion after having noted at paragraph 150 of the Decision on Jurisdiction and Competence that the phrase " ‘involving the amount of compensation for expropriation’ is susceptible to a variety of possible meanings." The Arbitral Tribunal interpreted this first sentence of Article 8(3), which "presents the central problem of interpretation,"102 with the grammatical inference to be given to the word "involving". It held:
"The BIT uses the word ‘involucra’, which according to the definition given by the Dictionary of the Real Academia Espanola, means ‘abarcar, incluir, comprender’. A good faith interpretation of this term indicates that the only requirement in the BIT is that the dispute should ‘include ’ the determination of an amount of compensation and not that the dispute should be restricted to this element."103
Although the Republic of Peru says that it is not necessary for the Committee to weigh the evidence on the record, the Committee finds that this is precisely what the Applicant is seeking. The Arbitral Tribunal did not reach its decision without considering the evidence submitted by the Republic of Peru, it simply was not convinced by the evidence put forward by the Republic of Peru. The relevance and weight of evidence before the Arbitral Tribunal cannot be reevaluated by the Committee which is not an appellate body. The Republic of Peru, therefore, cannot criticize the Arbitral Tribunal for (i) considering that the letter from Mr. Fan, which showed that China was not willing to accept Peru’s proposal of ICSID arbitration on all matters, was not conclusive evidence of the scope of Article 8(3) of the Peru-China BIT, or (ii) for failing to make that determination with respect to all other pieces of evidence it had before it.113 Article 52(1)(e) of the ICSID Convention does not require that an arbitral tribunal explains itself in respect of each piece of evidence adduced by either party which is not outcome determinative or to give reasons for preferring some evidence over other evidence. Rather, the award has to enable the reader to see the reasons upon which the award itself is based.114
The Republic of Peru finally contends that the Arbitral Tribunal only asserted jurisdiction over expropriation-related claims and declined jurisdiction over other claims without giving any explanation for why those other claims were not covered by the wording "disputes involving, but not limited to, the amount of compensation for expropriation."115 However, in the context of its demonstration that Article 3 of the Peru-China BIT could not be interpreted so as to extend the jurisdiction of the Centre, the Arbitral Tribunal stated its view that:
"[...] the literal wording of Article 8 reflects that the Contracting Parties reached an agreement on two fundamental issues. First, as indicated above, they agreed to submit expropriation disputes to ICSID arbitration. Secondly, they specifically considered the possibility of submitting other types of disputes to ICSID arbitration and specifically reserved the right to do it only ‘if the parties to the dispute so agree.’ [...] As a result, the Tribunal hereby determines that the specific wording of Article 8(3) should prevail over the general wording of the MFN clause in Article 3 and Claimant’s arguments on the contrary must be dismissed."116
The reasoning of the Arbitral Tribunal meets, in the Committee’s opinion, the requirement of Article 52(1)(e) of the ICSID Convention which, as explained in the MINE Decision:
"is satisfied as long as the award enables one to follow how the tribunal proceeded from Point A to Point B and eventually to its conclusion, even if it made an error of fact or of law."117
It is generally understood that one of the major purposes for giving reasons in a decision, apart from assuring the parties that the issues before the tribunal were considered and understood, is to serve as a basis for review of the decision. In the context of the ICSID Convention, the purpose of the review is, however, constrained by Article 52(1)(e) which only provides for a limited scope of review, as is confirmed by a line of decisions of ad hoc committees. For example, in CDC v. Seychelles, the Committee held that:
"[...] Article 52(1)(e) [...] does not provide us with the opportunity to opine on whether the Tribunal’s analysis was correct or its reasoning persuasive."118
The same conclusion was reached by the Committee in Wena v. Egypt:
"[...] Article 52(1)(e) does not allow any review of the challenged Award which would lead the ad hoc Committee to reconsider whether the reasons underlying the Tribunal’s decision were appropriate or not, convincing or not."119
In the Committee’s view, examination by the arbitral tribunal of the evidence adduced by the parties is one of the fundamental rules of procedure protected by Article 52(1)(d) of the ICSID Convention to achieve a fair trial. The Decision of the ad hoc Committee in Wena v. Egypt notes that Article 52(1)(d):
"refers to a set of minimal standards of procedure to be respected as a matter of international law. It is fundamental, as a matter of procedure, that each party is given the right to be heard before an independent and impartial tribunal. This includes the right to state its claim or its defense and to produce all arguments and evidence in support of it. This fundamental right has to be ensured at an equal level, in a way that allows each party to respond adequately to the arguments and evidence presented by the other."122
This is without prejudice to an arbitral tribunal’s assessment of whether such evidence is relevant to its decision.
It is undisputed that all the evidence put forward by the Parties was discussed before the Arbitral Tribunal. China’s notification under Article 25(4) of the ICSID Convention, the expert witness’s testimony of Professor Chen, as well as the witness testimony of the negotiators of the BIT, Mr. Fan and Ms. Vega, were discussed and considered by the Arbitral Tribunal.123 The Republic of Peru contends that the Arbitral Tribunal decided to ignore this evidence without explaining why.124 But the Republic of Peru does not identify with regard to the unrebutted evidence it claims to have placed before the Arbitral Tribunal any grievance that could be a serious breach of the fairness of the arbitral proceedings, other than its dissatisfaction with the Decision on Jurisdiction and Competence. The Applicant’s argument, which turns solely on the evaluation made by the arbitrators of such evidence, fails again in the context of Article 52(1)(d) of the ICSID Convention. Failing to assess evidence in the way that the Republic of Peru sets out in its submission does not constitute a serious departure from a fundamental rule of procedure.
The Republic of Peru next contends that the Arbitral Tribunal’s failure to provide reasons for its Decision on Jurisdiction and Competence is also a serious breach of a fundamental rule of procedure.125 The ground of Article 52(1)(d) of the ICSID Convention must be distinguished from other grievances concerning jurisdiction of the arbitral tribunal and from the relevance of the legal foundation of the decision. Professor Reisman, the expert witness for the Applicant, reminds us in his Opinion of 27 June 2012 on "Annulment on the Grounds of Excès de Pouvoir and Failure to State Reasons of the Decision on Jurisdiction" that the presence of reasons was important for the drafters of the Washington Convention, which they identified as an independent requirement for the validity of awards under Article 52 of the Convention:
"[t]he preliminary draft of Article 52(1) (Document 24) simply reproduced Professor Scelle’s formula, which, it will be recalled, did not make express the need for reasons but, as Scelle’s commentary makes clear, included the requirement among minimal procedural standards. The first ICSID Convention draft (Document 43) disaggregated the minimum procedure requirement by turning a failure to state reasons for the award, unless the parties have agreed that reasons need not be stated’into an express ground of annulment. In other words, at that stage, the drafters were sufficiently concerned about the need for reasoned awards to require them explicitly but they treated that requirement as dispositive: reasons were required unless the parties decided to dispense with them. But the Revised Draft (Document 123), which became Article 52(1) of the Convention, suppressed the dispositive option and transformed the need for reasons into an explicit requirement that the parties could not opt out of, even by private agreement. Hence, whatever general international law may be on the matter, the ICSID Convention seems to make the requirement of a reasonedjudgment a lex specialis."126
Professor Reisman underlines that:
"Scelle understood ‘a serious departure from a fundamental rule of procedure ’ implicitly to cover a tribunal’s failure to state reasons, whereas the ICSID Convention makes that requirement express and installs it in a separate section, Article 52(1)(e)."127
The Committee is of the opinion that the right to a reasoned and final determination of the dispute by an arbitral tribunal is one of the aspects of the right of access to an arbitral forum. As such, it is also a fundamental rule of procedure protected by Article 52(1)(d) of the ICSID Convention. The existence of reasons ensures that there has been a minimum respect of the fundamental exigencies of justice by the tribunal, which would not square with an arbitrary decision, and is consonant with Article 52 of the ICSID Convention which serves as a safety valve against aberrant awards.128 Assuredly, the obligation to provide reasons does not require that a detailed answer be given to each of the parties’ arguments. This has been expressed in numerous decisions of ad hoc committees. As the ad hoc Committee in Klockner I explained, an arbitral tribunal is under no obligation to answer every argument of the parties when they are of no relevance to the outcome of the case:
"These reasons must therefore be able to serve as a basis of the decision of the Tribunal and be ‘sufficient ’ in this sense. The test of sufficiency must obviously be evaluated with especial care lest the request for annulment under Article 52 serve as a disguised appeal."129
The Vivendi v. Argentina Committee clarified, in a holding which has since been confirmed by a line of other ad hoc Committee decisions,130 that an arbitral tribunal only has to address the parties’ arguments which:
"are themselves capable of leading to the conclusion reached by the tribunal and that all questions submitted to a tribunal are expressly or implicitly dealt with."131
However, the Republic of Peru cannot simply assume that one count of annulment is met by establishing that another has been met, as it does with its allegation that the failure by the Arbitral Tribunal to state reasons for its Decision on Jurisdiction and Competence constitutes a breach of a fundamental rule of procedure that the Tribunal must address the material questions posed by the Parties, in violation of Article 52(1)(d) of the ICSID Convention.132 There has to be a proper demonstration of the violation of each ground listed in Article 52(1) of the ICSID Convention.133 Such demonstration is absent here. Further, the Republic of Peru did not establish a failure to state reasons and in consequence it cannot succeed in its related argument that such alleged failure also amounts to a serious departure from a fundamental rule of procedure. The Applicant’s grievance complaint is unfounded.
The Republic of Peru finally argues that the Arbitral Tribunal committed a serious departure from a fundamental rule of procedure by denying the Republic of Peru the opportunity to express its views on (i) the Tribunal’s broad interpretation of the term "involving" in the first sentence of Article 8(3) of the Peru-China BIT and (ii) the interpretation of the fork-in-the-road provision in the last sentence of Article 8(3), which were the dispositive issues of the Decision on Jurisdiction and Competence.134 The Applicant alleges that this is a serious violation of the adversarial nature of the procedure because the Arbitral Tribunal decided these matters "sua sponte".135
"it would force a foreign investor affected by ’de facto’ expropriation to turn to Peruvian Courts of Justice, since indirect expropriation is not addressed by Peruvian material and procedural law, thus impairing his right to defence, and the guarantee for his rights and interests."139
Mr. Tza Yap Shum alleged the following:
"A literal and formalistic approach of the Peru-China BIT may lead to a number of conclusions that divert from the spirit of this instrument, which is to be applied with an integral and systematic interpretation of the will of the Contracting States, in the context of a global system of foreign investments, to address, protect and guarantee a number of investors’ rights in the host State. [...]
In addition, applying Article 31 of the Vienna Convention to the declaration of the Contracting Parties of the Peru-China BIT, the interpretation must be based on ’good faith, attributing to the terms of the Treaty their regular meaning in context, and taking into account their objective and purpose ’, and therefore the Claimant concludes that the determination of the legality of an action of indirect, de facto expropriation may not be left to the decision of a Court of Justice of the host State, but submitted to the competence of international Arbitral Tribunals, as they constitute the international guarantee in favour of investors, which both Contracting Parties of the BIT explicitly recognise in its preamble. "140
"So, we have analyzed whether a controversy involves the amount of expropriation or whether the legality of the expropriation act is also something that needs to be dealt with here. We were able to verify that Respondent reads the BIT in a literal manner [...]";141
"So, the legality of the acts of expropriation is something that needs to be interpreted in a comprehensive manner142
"The conclusions here, we analyzed the offer made by the State, which is comprehensive compensation and legality of the expropriaton act. "143
"[...] will be conductive to stimulating investments, on the basis of equality and mutual benefits, as recognised in the preamble of the BIT in question. "144
"So, if I invite foreign investors to come to my country, well, we have to have mechanisms that would perhaps help us solve problems because of differences that may arise amongst the parties. And, of course, if that doesn’t happen, there is a vacuum that goes against the rights of the investor. "145
"I cannot go to the market and attract foreign investors and say, look, you know, you cannot access arbitration. You have to go the courts, the local courts of the judiciary of my country. This is a policy [which] is contradictory to the statement that was made, and it is also contradictory to most of ICSID arbitrations that have to do with indirect expropriation. "146
"There is no ‘dispute involving the amount of compensation for expropriation ’ between the parties. Since there has been no finding of wrongful expropriation on the part of Peru, there cannot be a dispute concerning the ‘amount of compensation for expropriation ’ in this proceeding.
The dispute that Claimant wants to submit to arbitration does not fall within the scope of Peru’s offer to arbitrate in the Peru-China BIT, and thus no agreement to arbitrate was perfected. Claimant’s purported acceptance of Peru’s offer to arbitrate is a nullity and cannot serve as a basis for exercising jurisdiction."147
"The BIT uses the word ‘involucra ’which according to the definition given by the Dictionary of the Real Academia Espanola, means ‘abarcar, incluir, comprender ’. A good faith interpretation of this term indicates that the only requirement in the BIT is that the dispute should ‘include ’ the determination of an amount of compensation and not that the dispute should be restricted to this element [...]. "
"As for the Tribunal itself when in the course of its deliberations it reached the provisional conclusion that the true legal basis for its decision could well be different from either of the parties’ respective arguments, it was not, subject to what will be said below, in principle prohibited from choosing its own argument. Whether to reopen the proceeding before reaching a decision and allow the parties to put forward their views on the arbitrators’ ‘new ’ thesis is rather a question of expedience. The real question is whether, by formulating its own theory and argument, the Tribunal goes beyond the ‘legal framework’ established by the Claimant and the Respondent [...] Within the dispute’s ‘legal framework, ’ arbitrators must be free to rely on arguments which strike them as the best ones, even if those arguments were not developed by the parties (although they could have been). Even if it is generally desirable for arbitrators to avoid basing their decision on an argument that has not been discussed by the parties, it obviously does not follow that they therefore commit a ‘serious departure from a fundamental rule of procedure ’. Any other solution would expose the arbitrators to having to do the work of the parties’ counsel for them and would risk slowing down or even paralysing the arbitral solutions to disputes. "153
"[a]ny dispute between an investor of one Contracting Party and the other Contracting Party in connection with an investment in the territory of the other Contracting Party shall, as far as possible, be settled amicably through negotiations between the parties to the dispute ".
Second, in the event the dispute is not settled accordingly, Article 8(2) opens an option to the investor to submit the dispute to the courts of the host State:
"[i]f the dispute cannot be settled through negotiations within six months, either party to the dispute shall be entitled to submit the dispute to the competent court of the Contracting Party accepting the investment. "
Third, according to the Republic of Peru, once the state court has found a wrongful expropriation, if the "dispute involving the amount of compensation for expropriation" still cannot be settled, the investor may then access international arbitration in accordance with Article 8(3).
"However, beyond the possible effects of such a provision, the Tribunal considers that if it were to accept Respondent’s interpretation of Article 8(3), a contextual interpretation of the BIT would lead to an incoherent conclusion - namely that the investor, in fact, could never have access to arbitration. "159
"The Tribunal recognizes that Prof. Chen’s Opinion argues and attempts to address the problem presented in the final sentence of Article 8(3). Prof. Chen states the following:
‘If the dispute cannot be settled amicably, either the investor or the host State can submit to a competent court in the State hosting the investment. If, after such court finds that the investment has been expropriated, a dispute arises between the investor and the State with respect to the amount of compensation owed to the investor for the value of the expropriated investment, either party may submit such dispute to ICSID arbitration. The treaty notes, however, that resort to international arbitration shall not be available to either party if they previously submitted the dispute involving the amount of compensation for expropriation to the local courts. "160
"directly contrary to the last sentence of Article 8(3). In fact, the last sentence leaves no doubt that an investor (of any Contracting Party), when trying to choose a course of action to settle a dispute in accordance with Article 8, finds himself with an irrevocable forum selection clause, also known by the phrase fork-in-the-road’. An investor ‘shall be entitled to submit the dispute to the competent court of the Contracting Party’ [...] in accordance with Paragraph 8(2), but if the investor does so, in accordance with Paragraph 8(3), such investor could not under any circumstances resort to ICSID arbitration to settle a dispute ‘involving the amount of compensation for expropriation ’. Therefore, in accordance with the interpretation stated by Respondent, in the event that one Party requests to submit the dispute to ICSID arbitration for the purposes of dispute resolution ‘involving the amount of compensation for expropriation ’, it would be informed that the parties have not consented to submit themselves to such arbitration since the investor has been requested to first settle the dispute before the courts of the corresponding Contracting Party ".
"[t]he Tribunal unfortunately does not consider that the wording used in the final sentence of Article 8(3) of the BIT justifies differentiating between claims ‘involving the amount of compensation for expropriation ’ and other claims. The sentence is categorical. It refers to any claim subject to ’the competent court of the other Contracting Party’. Therefore, this argument does not persuade the Tribunal. "162
The Republic of Peru first alleges that the Arbitral Tribunal manifestly exceeded its powers (Article 52(1)(b) of the ICSID Convention) by deciding different claims than the claim of expropriation, when it had ruled in its Decision on Jurisdiction and Competence that the claim for expropriation was the only claim the Arbitral Tribunal was entitled to entertain. According to the Applicant, notwithstanding that decision, the Arbitral Tribunal adjudicated the reasonableness and propriety of the Peruvian tax authorities’ actions beyond their allegedly expropriatory nature, thereby deciding the claims of Mr. Tza Yap Shum on fair and equitable treatment, arbitrary and discriminatory measures, and denial of justice that it had agreed were outside its jurisdiction. For the Republic of Peru, the Arbitral Tribunal also exceeded its powers by ignoring general principles of law requiring that the damage for which a State is held liable must be caused by the conduct of that State.164
The Republic of Peru next contends that the Arbitral Tribunal failed to state reasons (Article 52(1)(e) of the ICSID Convention) for:
• "ignoring Peru’s arguments regarding Claimant’s [Mr. Tza Yap Shum’s] failure to prove that the precautionary measures, rather than Claimant’s [Mr. Tza Yap Shum’s] own business and legal choices, caused the alleged harm to his investment;
• failing to recognize that TSG chose preventive bankruptcy, even though the Tribunal conceded that the full amount of SUNAT’s tax resolutions was more than matched by the GST refunds that SUNAT paid to TSG and that, rather than use the refunds to pay its taxes or to provide collateral in order to lift the precautionary measures, TSG found it [at paragraph 249 of the Award] ‘more beneficial from a financial standpoint to repay short term, high interest creditors’;
• why it was appropriate for an expropriation analysis to decide, in effect, whether Claimant [Mr. Tza Yap Shum] had been granted fair and equitable treatment, had been subject to arbitrary and discriminatory measures, or had been denied justice; and
• relatedly, how it could rely on legal sources with respect to its ‘arbitrary’ and denial of justice standards that had nothing to do with expropriation claims."165
• "finding that TSG was somehow [financially] devastated when the precautionary measures froze the sum of USS 172 for less than six months, even while finding that TSG made almost no use of the banking system, and that it may not have been mandatory to use the banking system in Peru;"166
• "purporting to apply [at paragraph 160 of the Award] the rule from LG&E that ‘where the investment continues to operate, even its profits are diminished’ then an expropriation has not occurred, then acknowledging [at paragraphs 165 and 166 of the Award] TSG ’s retention of control over its operations albeit with diminished profits, and yet concluding that the precautionary measures were expropriatory;"167
• "citing ADM and Tate & Lyle [at paragraph 162 of the Award], where the tribunal had concluded that there was no expropriation because the investment continued to operate, conceding that SUNAT’s precautionary measures did not cause Claimant [Mr. Tza Yap Shum] to lose its capacity to operate, but concluding that the precautionary measures were nevertheless expropriatory;"168
• "citing S.D. Myers [at paragraph 163 of the Award] ‘in which the closing of the Canadian border to exports of hazardous waste for 18 months was not considered to be an expropriatory measure,’ yet concluding that SUNAT’s precautionary measures - which were in effect for less than six months - were expropriatory;"169
• "reasoning [at paragraph 173 of the Award] that, ‘under international law, a State is not liable for the loss of value of property or for other economic disadvantages that result from good faith imposition of general taxes... or other conduct commonly accepted as part of the police powers of the state,’ but then holding that a state is liable for alleged economic disadvantages resulting from taxation - so long as its internal decision-making can be described as ‘arbitrary’ or the Tribunal purports to find a denial of justice;"170
• "stating [at paragraph 95 of the Award] that ‘the exercise of administrative and regulatory powers of a State carries with it a presumption of legitimacy,’ which is ‘especially true where the State is acting in pursuit of an important public interest,’ but applying no such presumption in favor of Peru’s legitimate exercise of its taxation powers."171
The Republic of Peru finally argues that the Arbitral Tribunal seriously breached a fundamental rule of procedure (Article 52(1)(d) of the ICSID Convention) by exercising jurisdiction beyond the scope of the Parties’ consent to arbitration and by failing in multiple respects to state reasons for its Award.172
"under international law, a State is not liable for the loss of value of property or for other economic disadvantages that result from the good faith imposition of general taxes, regulations, or other conduct commonly accepted as part of the police powers of the state. The creation, administration, and collection of taxes form part of the taxation power of the states. "179
Having underlined earlier that States are not exempt from responsibility and from the obligation to pay compensation if their actions are arbitrary or discriminatory,180 the Arbitral Tribunal ended the discussion with a declaration that arbitral awards involving allegations of indirect expropriation resulting from the actions of tax authorities:
"reveal a substantial consensus that the imposition of taxation measures or their enforcement may be expropriatory if they are confiscatory, arbitrary, abusive, or discriminatory. "181
"[h]aving studied numerous arbitral awards involving allegations of indirect expropriation resulting from the actions of tax authorities, the Tribunal recognizes that most have been rejected. These awards however also reveal a substantial consensus that the imposition of taxation measures or their enforcement may be expropriatory if they are confiscatory, arbitrary, abusive, or discriminatory. "192
The Republic of Peru finally argues that the Arbitral Tribunal exceeded its powers by ignoring "general principles of law"204 identified in the Articles on Responsibility of States for Internationally Wrongful Acts (the ILC Articles). In particular, the Applicant refers to Article 31 of the ILC Articles, requiring that the damage for which a State is held liable must be caused by the conduct of that State. The Republic of Peru asserts that, although the harm to TSG was caused by the investor’s choice not to lift the preliminary precautionary measures instead of deciding to initiate preventive bankruptcy, the Arbitral Tribunal held the host State liable.205 The Committee notes that in the usual practice of ad hoc committees, failure to apply the applicable law has been considered as a manifest excess of power.206 However, a violation of Article 52(1)(b) of the ICSID Convention requires an egregious misinterpretation or misapplication of the applicable law.207 A mere error of law does not equal to an excess of powers, let alone a manifest excess of powers. The Committee finds that the Republic of Peru does not identify such a violation of Article 52(1)(b). Its objection relates more to a claim that the Tribunal failed to explain its reasoning or that there was a contradiction in the reasoning, which will now be examined.
More particularly, the Republic of Peru characterizes as an "annullable error" the application by the Arbitral Tribunal of contradictory standards concerning substantial deprivation and permanence for the finding of an expropriation at paragraph 168 of the Award.217 This paragraph reads:
"[t]he Tribunal has studied the Respondent’s arguments to effect that TSG might have operated without making use of its bank accounts, or that TSG’s decision to seek protection through a reorganization proceeding resulted from financial difficulties which had nothing to do with the actions of SUNAT; and also that Claimant has failed to demonstrate that the impact of the measures was more than temporary. Additionally, during the bankruptcy proceeding, the company appears to have received a dramatically decreased amount of income (apparently from prior sales) and still somehow managed to repay some of its debts. By themselves, these events do not show that the company continued to exist and to operate as it had prior to the measures."
As the Republic of Peru correctly reminds the Committee,218 contradictory reasons constitute one of the aspects of the absence of reasons according to the consistent practice of ad hoc committees which has already been referred to.219 It has already been mentioned that the Klockner v. Cameroon I Committee identified an obligation on the part of the arbitrator to set forth reasons which are not contradictory.220 However, the ground for annulment of Article 52(1)(e) is limited to discordance in the reasons which a reading of the award should make apparent.
But rather than focusing on a contradiction in the reasons, the Republic of Peru’s argument is more concerned with an application of the law that is different from its own interpretation. Reopening the discussion of the L&G E Energy and S.D. Myers awards as interpreted by the Arbitral Tribunal in the context of a challenge under Article 52(1)(e) of the ICSID Convention would serve no purpose other than transforming the annulment review into an appeal. The Arbitral Tribunal simply drew from the analysis of the above cited cases the following conclusion, which is not the one the Republic of Peru wished to have been drawn:
"[i]n contrast to the cases cited, SUNAT’s actions not only reduced the company’s rate of return, but instead also eliminated or substantially frustrated the operational capacity of the business."221
"[i]n our analysis of the character of SUNAT’s measures, we have examined the parties’ arguments and sources of law that emphasize that the effects of the measures on the investment must be of a severe nature.
For example, it has been drawn to our attention that the tribunal in LG&E Energy Corp, et al. v. Argentine Republic indicated that ‘[i]terference with the investment’s ability to carry on its business is not satisfied where the investment continues to operate, even if profits are diminished’. In this case as in other awards in which no expropriation was found to have occurred, the investment in question maintained some level of operational viability though with its profitability comparatively lower.
According to TSG’s financial statements, however, this was not the case with the investment in the instant case. Even with the protection of the bankruptcy proceeding that the company itself initiated, net sales of the company dropped from an average of approximately S/.80 million before the measures in 2003-2004, to approximately S/.3.4 million in 2005-2006. "225
The Republic of Peru also criticizes the Arbitral Tribunal for dismissing in one sentence the ADM and Tate & Lyle award which had held that there was no expropriation because the investment continued to operate.226 However, the Republic of Peru fails to explain how footnote 124 of paragraph 162 of the Award, which reads "[u]nlike the investment in the case of Archer Daniels Midland the measures in question affected the only business activity of TSG", would constitute insufficient justification in itself for the solution reached by the Arbitral Tribunal regarding the indirect expropriation of the investment. The Committee recalls that the Vivendi v. Argentina ad hoc Committee has already pointed out that:
"[a] greater source of concern is perhaps the ground of failure to state reasons’, which is not qualified by any such phrase as ‘manifestly ’ or ‘serious ’. However, it is well accepted both in the cases and the literature that Article 52(1)(e) concerns a failure to state any reasons with respect to all or part of an award, not the failure to state correct or convincing reasons. It bears reiterating that an ad hoc committee is not a court of appeal. Provided that the reasons given by a tribunal can be followed and relate to the issues that were before the tribunal, their correctness is beside the point in terms of Article 52(1)(e). Moreover, reasons may be stated succinctly or at length, and different legal traditions differ in their modes of expressing reasons. Tribunals must be allowed a degree of discretion as to the way in which they express their reasoning.
In the Committee’s view, annulment under Article 52(1)(e) should only occur in a clear case. This entails two conditions: first, the failure to state reasons must leave the decision on a particular point essentially lacking in any expressed rationale; and second, that point must itself be necessary to the tribunal’s decision [...]."227
The Committee also takes the view that contradiction in the reasoning arises under Article 52(1)(e) when the conflicting reasons are substantial. Further, the requirement to state reasons (which purpose is to enable the parties, and more particularly the losing party, to understand the decision) applies only to reasons which constitute the basis for the conclusions of the Arbitral Tribunal. Peru’s challenge to the Arbitral Tribunal’s treatment of the ADM and Tate & Lyle award is unsupportable under either of these standards.
"[t]he Peru-China BIT, unlike other foreign investments treaties or agreements, does not include a provision expressly requiring proof of the causal connection between a certain measure and the resulting damage. International tribunals have generally addressed the issue based on general principles of international law, which, in this case are the ones applicable under Article 42 of the ICISD Convention."234
Furthermore, the declarations of the Arbitral Tribunal in paragraph 168 of the Award, which refute the arguments of the Republic of Peru, must be read in conjunction with the reasoning in the section of the Award on the expropriatory effects of the preliminary precautionary measures and in light of footnote 139 of the Award at the end of the last sentence of paragraph 168.237 In the opinion of the Committee, the factual elements on which an arbitral tribunal relies in a chain of causality to reach its conclusion are not subject to review by an ad hoc committee because of its limited remit under Article 52(1)(e) of the ICSID Convention. This would otherwise transform the annulment procedure into an appeal.
"[a]dditionally, during the hearing it was suggested that the investor showed bad faith after the measures were imposed by SUNAT. Specifically, the Respondent questioned the decision to use the funds generated by TSG’s tax rebates to repay third party creditors rather than to make payment of the tax claims of the SUNAT. It is not surprising that the investor might opt for this course of action in order to mitigate the damages caused to his investment. In effect, because of the way that the investment was financially structured, it was more beneficial from a financial standpoint to repay short term, high interest creditors. The other alternative (to use the rebates to pay off or guarantee its tax debt) would have required him, probably, to offer these funds as a guarantee to SUNAT for an indeterminate time. [...]"241
"[e]ven though the request [...] served to have the freezing of bank accounts and third parties’ withholding lifted in the short term in June 2005, the bankruptcy proceeding did not conclude until June 2006. It was not until the bankruptcy proceedings concluded in June 2006, at the behest of the company itself, that it regained its original operating capacity.
It is true, as the Respondent notes, that during the proceeding no legal impediment existed that precluded TSG from carrying on its business activity. The voluntary reorganization proceeding did not deprive the shareholders of control; although the business was subject to reorganization, it retained control of its operations. As an effect of the declaration of reorganization, the Bankruptcy Law requires the lifting of all preliminary precautionary measures so that SUNAT was forced to lift its measures, which occurred on July 11, 2005. The Tribunal, however, is convinced that the request for reorganization was the only effective remedy available to the Claimant to achieve, within a reasonable time period, the lifting of the preliminary precautionary measures that were stifling its ability to develop its business activity. As a result, the Tribunal finds that TSG’s decision to seek bankruptcy protection was reasonable and appropriate under the circumstances. "244
"[t]he Respondent, based on the report and testimony of its tax law expert, José Galvez, suggests that TSG could have resorted to cash transactions such as account deposits with no need to use its bank accounts [...] This alternative would not have served SUNAT’s interest in this instance nor was it viable. To the contrary, channelling [sic] TSG’s financial operations through its bank accounts is far from incidental, and it allowed it to comply with the Peruvian ‘bankerization’ rules, to facilitate its operation of the business and even SUNAT’s audit operations. "
"[...] should have understood that the bank withholding measure would be a fatal blow on TSG’s ability to operate, choking off its normal sources of working capital and precluding it from resort to the banking system for processing of its letters of credit and repayment of its debts. "
"[i]n carrying out its operations, TSG made use of the Peruvian banking system. In so doing, TSG complied with the norms of ‘banker ization’ (‘Bancarizacion’ [i.e., a policy in favor of using the formal banking system]). While the use of the banking system may not have been mandatory, the ‘bankerization ’ of TSG’s operations allowed it to irrefutably certify expenses, costs or credits in order to deduct them on its tax statements. "248
"[t]he freeze in the form of bank withholdings was an utter failure. As a result of it, a total of approximately US $172 was collected compared to a tax debt of approximately US $ 4 million. In similar form, the withholding measure to third parties did not result in any collections whatsoever. "250
"[...] TSG’s principal role [...] was a financial one. Despite having a modest capital, TSG had access to short-term international financing, principally from business associates, friends and relatives of the investor. During the 2002-2004 period, these funds amounted to approximately US $ 59 million. In a period when liquidity was scarce and business loans from Peruvian financial institutions were difficult to obtain, TSG used these funds not only to purchase raw fish and fish flour, but also to provide advances to fishing companies for fuel or equipment and to processing companies for refurbishing equipment and facilities. These advances were generally repaid, with interest, by deducting the payments due from the amounts payable by TSG to the fishing or processing companies.
In carrying out its operations, TSG made use of the Peruvian banking system. [...] "251
The Arbitral Tribunal further stated in relation to the efficacy of SUNAT’s measures:
"[a]s indicated previously, the measures, in contrast, did have an impact on the operational capacity of the business. During the period immediately after their imposition (2005-2006), a business whose previous revenues had reached S/. 90 million, reported average income of barely S/. 766,941 per year and essentially disappeared from the tax rolls.
As indicated previously, it is true that TSG later continued operating in Peru. However, this was the product of a preventive bankruptcy proceeding initiated by the company itself, that culminated in late 2006 and because of it, TSG was able to restructure its finances, access the banking system, and operate free of precautionary measures affecting its assets. Specifically, it initiated the proceeding to recover the operating conditions that it had lost for a considerable period of time as a result of SUNAT’s actions. It would thus be illogical to allow SUNAT to benefit from these efforts of the taxpayer, in order to justify or minimize the impact of its own conduct."252
It is worth recalling an often cited passage of the decision of the ad hoc Committee in MINE v. Guinea which clarifies with respect to the reasoning of an award that:
"[...] the requirement that an award has to be motivated implies that it must enable the reader to follow the reasoning of the Tribunal on points of fact and law. It implies that, and only that. The adequacy of the reasoning is not an appropriate standard of review under paragraph (1)(e), because it almost inevitably draws an ad hoc Committee into an examination of the substance of the tribunal’s decision, in disregard of the exclusion of the remedy of appeal by Article 53 of the Convention. A Committee might be tempted to annul an award because that examination disclosed a manifestly incorrect application of the law, which, however is not a ground for annulment.
In the Committee’s view, the requirement to state reasons is satisfied as long as the award enables one to follow how the tribunal proceeded from Point A to Point B and eventually to its conclusion, even if it made an error of fact or of law. This minimum requirement is in particular not satisfied by either contradictory or frivolous reasons."253
"[a]s argued by the Respondent, the exercise of administrative and regulatory powers of a State carries with it a presumption of legitimacy. This is especially true where the State is acting in pursuit of an important public interest like the protection of public policy, health or public morality (known as the ‘police powers’of the State). In this sense, the taking or seizure of property for failure to pay taxes is recognized as a legitimate tool of tax administration, provided, however, that such actions are carried out pursuant to reasonable legal procedures and where such actions are not confiscatory, abusive or discriminatory. "262
However, the Republic of Peru complains, the Tribunal applied no such presumption in favor of Peru’s legitimate exercise of its taxation powers.263 Such a basic principle, the Republic of Peru argues, "cannot hinge on trivia such as the formatting of drafts of SUNAT’s internal reports or whether SUNAT personnel followed every step of nonbinding departmental guidelines"264
"[e]ven though the Tribunal recognizes that the regulatory authority of the State deserves deferential treatment, it is essential to do so without losing sight of the reasons why such deference is accorded. "265
The Arbitral Tribunal concluded from the examination of SUNAT’s conduct that:
"[...] even recognizing the importance of the functions that SUNAT exercises in tax administration and collection, SUNAT’s behaviour in imposing the preliminary precautionary measures on TSG, particularly the failure to observe its own procedures, must be considered arbitrary. "266
The Committee finds that Peru’s challenge based on the Arbitral Tribunal’s failure to state reasons is in effect a legal and evidentiary appeal which is impermissible under Article 52(1)(e) of the ICSID Convention and is accordingly dismissed.
The Republic of Peru contends that the same arguments supporting its challenge to the Award for manifest excess of powers under Article 52(1)(b) of the ICSID Convention also support a challenge for serious departure from a fundamental rule of procedure under Article 52(1)(d).267 The Applicant argues that the Tribunal in fact adjudicated claims for fair and equitable treatment, arbitrary and discriminatory measures and denial of justice, which were beyond its jurisdiction, thereby breaching a fundamental rule of procedure.268
The Applicant’s arguments have already been rebutted under Article 52(1)(b). Essentially for the same reasons set out in the previous section of this decision,270 the Committee denies the Applicant’s challenge for serious breach of a fundamental rule of procedure. There must be a proper demonstration of the violation of each ground listed in Article 52(1) of the ICSID Convention, which is lacking here.271
Finally, the Republic of Peru also argues, generally, that the same arguments giving rise to its challenge to the Award for failure to state reasons under Article 52(1)(e) also support a challenge to the Award for serious departure from a fundamental rule of procedure under Article 52(1)(d).274
The Committee recognizes that the same defects in an award may fall under several grounds of Article 52. However, this does not relieve an applicant of the obligation to demonstrate that it has a valid complaint under each separate ground. It is necessary to distinguish between the different grounds. Here, the grounds of annulment of Article 52(1)(b) and (e) are simply subsumed by the Republic of Peru in the ground of Article 52(1)(d). Its challenge is therefore denied.
• The Republic of Peru’s Application for Annulment is dismissed in its entirety;
• The Republic of Peru shall bear 80% of all the costs of the proceedings incurred in connection with the Annulment proceeding and Mr. Tza Yap Shum 20% of the said costs;
• Each Party shall bear its own Party costs incurred in connection with the Annulment proceeding;
• Pursuant to Article 52(5) of the ICSID Convention and ICSID Arbitration Rule 54(3), the stay of enforcement of the Award is terminated.
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