Arbitration: Recent Trends in Latin Americaand Challenges Aheadby C.J.L Varelas

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ISSN : 1875-4120 Issue : Vol. 13, issue 5 Published : November 2016

This article is part of the TDM Latin America (volume 2) special edited by:

Dr. Ignacio Torterola GST LLP

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Quinn Smith GST LLP

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Arbitration: Recent Trends in Latin America and Challenges Ahead

Christian Josué Leo Varelas*

Abstract

Recent amendments in Latin American legislation seem to be “encouraging” parties to initiate arbitration proceedings either in commercial scenarios or as an alluring process to promote investment in the region.

Arising from countries with recent Energy amendments (in particular Mexico), the proposal to arbitrate might seem to a commercial entrepreneur or investor as a positive sign from the host country. However, one might be too close to the image to see the entire picture. Despite what the legislation may state, civil law countries can effectively “control” the tone of arbitration through case law. More often than not, courts seem to bypass the entire nature of arbitration and render decisions that not only undermine the arbitration procedure but also actually render the whole procedure as obsolete, leaving investment arbitration as the only real possibility.

In the commercial context in particular, courts have gone so far as to renege or practically impede the kompetenz-kompetenz principle, denying arbitration one of its most important tools for effectiveness. At the review stage, courts have consistently bypassed the New York Convention’s provisions through elaborate schemes to review the merits of tribunal´s decisions.

Recently, in the case of Commissa v. Pemex (hereinafter, the Commissa Case), Mexican courts annulled an arbitral award through what Justice Hellerstein called a violation of basic notions of justice, leaving as only viable options either to seek enforcement elsewhere or to possibly consider the award an “investment” justifying the filing of an Investor-State arbitration, in this case under the NAFTA provisions (KBR v. Mexico).

Under the recent energy reforms, termination due to administrative rescission cannot be submitted to arbitration, foreign law will not apply, and the applicable law must be the Mexican Federal Law. Given these provisions an investor might be better off with an investment arbitration rather than commercial arbitration and employ such concepts as “denial of justice”, “fair and equitable treatment”, or “full protection and security” rather than actually employing a one-sided clause in a contract.

This paper will explore the perception of alternative dispute resolution procedures and the control exercised by local Courts and arbitral tribunals in Latin America. To what extent is a State’s excessive “control” of arbitral awards a response to practitioners interpreting bilateral investment treaties (“BITs”) or the Vienna Convention too broadly or to arbitral tribunals going beyond the Vienna Convention`s rules of interpretation as it pertains to treaty arbitrations? How precisely have Latin American tribunals interpreted BIT or multi-lateral agreements in recent cases? Could the divergence be solved by BIT interpretation guidelines? Also, we will see if the perceived “pro-arbitration” policy is accurate in * The views expressed in this article are those of the author alone and should not be regarded as representative of, or binding upon the author’s law firm.

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commercial and investment matters or if, on the other hand, States continue to hide behind domestic law provisions to evade international obligations by handcuffing investors through contractual commitments.

Deference to Arbitrator´s Views

Much has been said about the Commissa Case, so I will not get too much into the particulars, for a more complete and fuller discussion of the details1, as well as for an interesting position on the matter, I will defer to more specialized texts.2 But a brief description of the facts is necessary to better understand the various court decisions and instances of state action.

Pemex, a Mexican state-owned oil and gas company executed contracts with Commisa, a subsidiary of KBR in 1997 and 2003. Disputes were subject to arbitration. Pemex administratively rescinded the contracts, and Commisa initiated ICC arbitration proceedings. Pemex tried to execute the bond granted on its favor, so Commisa sought assistance from local courts through a Mexican constitutional trial (amparo) while the arbitration proceedings were pending; a step Commisa later would regret because it changed the act from iure de gestionis to iure de imperii. In a nutshell, in Mexico an amparo is filed against acts of authority, by seeking an amparo Commissa itself argued that rescission was not a commercial act but rather an act of State, this had the effect of defining administrative rescission as an act of authority, which was in turn used by the Supreme Court to upheld the rescission as a special entitlement of the administration.

While the arbitral tribunal upheld jurisdiction and rendered an award in favor of Commissa, the Mexican Courts confirmed the rescission of the contracts and subsequently annulled the award on public policy grounds and retroactively applied a 2009 law that held administrative rescission non-arbitrable.

Commissa sought recognition in the US where TermoRio SA ESP v Electranta S.P.3 and Chromalloy Aeroservices vs Arab Republic of Egypt4 came into play. Essentially the Eleventh Collegiate Court confirmed that the decision vacating the award violated basic notions of justice and recognized the award.

Pemex appealed the recognition of the award. The United States Court of Appeals for the Second Circuit heard oral arguments from both parties and requested amicus curiae from the US government to express its views. At the moment of writing the decision was still pending. The final decision is subject to much speculation but the Court of Appeal will certainly have in mind the Pertamina case 5 where a series of injunctions where rendered in different countries but with little effect on the other.

Several papers have been written about the rights and wrongs of the Commissa decisions, especially in light of the international perception that Mexico is an arbitration friendly

1 http://kluwerarbitrationblog.com/blog/2014/10/15/the-pemex-case-the-ghost-of-chromalloy-past/ 2 http://kluwerarbitrationblog.com/blog/2014/11/07/arbitration-under-the-mexican-energy-reform-the-lessons-of-commisa-v-pemex/ 3 487 F.3d 923, 938 (D.C. Cir. 2007) 4 939 F. Supp. 907 (D.D.C. 1996) 5 Karaha Bodas Co. LLC (KBC) v Perusahaan Pertambangan Minyak Dan Gas Bumi Negara (Pertamina) and PT, PLN (Persero), Decision of 18 December 2000, 16(3) Mealey’s IAR C-2 (2001).

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jurisdiction, reinforced by recent constitutional and legislation amendments. But there is an old phrase that states, “[t]he closer you look the less you will see,” and this certainly fits the Mexican paradigm.

Comparing the text of the law with court decisions can prove to be a challenging endeavor. For example, article 1432 of the Mexican Commerce Code enshrines the kompetenz-kompetenz principle as law. But a binding decision rendered by the Mexican Supreme Court states that there is an exception to this principle when a party alleges the nullity of the arbitration clause6. The reader should feel perplexed now; this was a clear misunderstanding of the principle. One can only guess that Mexican courts intention at the time was to mirror US case law on arbitrability, but the northern neighbor’s case law is much more complex to be mirrored and understood in one random decision.

In fact, with the 2001 amendment to the Mexican Commercial Code it is questionable whether this decision still applies7. The 2001 amendments constitute a legislative approval of arbitration and appear to clarify the kompetenz-kompetenz question once and for all by referring the parties to arbitration and let the tribunals deal with these questions.

The fact that the Mexican legislative power “corrected” a Supreme Court precedent is both a showing that Mexico is leaning towards a pro-arbitration policy while at the same time carrying a judiciary that still has a long way to go in terms of understanding the commercial intentions and expectations behind commercial arbitration.

Then we move to the parochial and archaic statement from the Mexican legislative authorities that essentially are saying with the recent administrative law amendments (paraphrasing of course): “you can arbitrate with us, the administration; however, you are bound to forego arbitrating the rescission question”. There is, of course, the possibility that a judge could stay any rescission question until the arbitral tribunal decides on the commercial aspect of the breach so as to provide guidance8. However, would a Mexican Court grant res iudicata effect to an arbitral award when it has full jurisdiction to decide on the matter? It seems it comes within the discretionary faculties on the judge. This is a scenario that could go all the way to the Supreme Court after long and burdensome proceedings.

Other proposals invoke further questions. The proposed arbitration clause of the National Hydrocarbons Provision9 calls for arbitration in The Hague under UNCITRAL Rules and the President of the International Court of Justice (“PICJ”) as appointing authority. The decision to appoint The Hague as arbitral seat is good news. The award would be made in The Hague, making enforcement slightly easier in Mexico with all the benefits from the New York Convention. The PICJ appointment is baffling. The UNCITRAL Rules call for the Secretary-General of the Permanent Court of Arbitration as default appointing authority, a decision that makes much more sense given its expertise in the chosen field. Moreover, the decision might still end up with the Secretary-General should the PICJ fails to appoint an arbitrator. In other words, even the legislative proposals seem to create hurdles where none should exist.

6 Jurisprudence 25/2006 7 The dissenting opinion from two Supreme Court justices eventually led to the Commerce Code amendment. 8 http://www.woessetpartners.com/BackOffice/manager/pdf/120_4.pdf 9 http://ronda1.gob.mx/wp-content/uploads/2015/12/R01L01_Individual-contract_20150609.pdf

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Back to the Commisa case, the grounds for review that the Mexican Courts employed and retroactive application of the law aside; it seems that the decision was a matter of public policy. Normally, most court decisions favor arbitral proceedings, and there is a current flow of decisions that construe a pro-arbitration policy. But in some cases, the prevailing trend is not followed. Perhaps, the main problem is the level shown to the arbitrator´s findings of fact, potentially a response to the Courts entering a topic with a predisposed opinion on the arbitral process in certain cases. Maybe the solution can come in the nature of specialized tribunals that would limit themselves only to arbitration-related cases due to the amount of workload from Courts.

National courts should provide different levels of review when asked to vacate an award that show a high degree of deference to the arbitrator´s findings irrespective of the proceedings being of commercial or investment nature.10

Latin American scenarios

Mexico is not alone in this conspicuous and inconsistent standard towards arbitration. However, the current Mexican evolution leans towards commercial cases. We are about to see that in Latin America there are diverging views mainly arising from investment treaty arbitrations.

One of the most telling examples relates to treaty claims brought by dual nationals. Recently, in Serafin García Armas and Karina García García Gruber v Venezuela11 a new scope for rights of citizens with dual-nationality was established 12 , and its repercussions will be followed with interest. The case is currently pending under the auspices of the Permanent Court of Arbitration, and a decision on jurisdiction has been rendered. Two Spanish nationals who also held Venzuelan nationality commenced investment arbitration proceedings against Venezuela claiming an illegal expropriation. The Venezuelan government claimed the Spanish nationality was a mere formality used only with the intention of suing under the Spain-Venezuela BIT. The tribunal13 upheld jurisdiction based on the fact that no limitation was established for claims coming from dual nationals in the BIT, citing Pey Casado v. Chile among others14, and that reference to the possibility of ICSID arbitration is not evidence of the exclusion of a dual-national´s claims. The proceedings are currently ongoing.

The resolution will come as a surprise to South American countries who denounced ICSID. Ironically the ICSID convention expressly forbids tribunals to hear claims from nationals against their home State. By not relying on the “real and effective nationality test”, UNCITRAL-based BIT claims may now open a new way to investors with dual nationality to sue a State from which they hold nationality.

Certainly, a legitimate argument can be made that this could be seen as forum shopping and one may be right in stating this goes directly against the nature of treaty arbitration. Notwithstanding, this is a trend that started in Latin America and one that interested parties should monitor closely. 10 Young Arbitration Review “"Transnational Standard of Review in International Arbitration" p.23-40 11 PCA Case 2013-3 Decision on Jurisdiction 12 Although Pey Casado v. Chile, Saluka v Czech Republich and Siag v Egypt also provide guidance on the topic. 13 Mr. Rodrigo Oreamuno, Prof. Guido Santiago and Prof. Eduardo Grebler as chairman. 14 Saluka v. Czech Republic and Siag v. Egypt

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Other examples include different interpretations of seemingly similar terms. Let us not look any further than the Enron 15 arbitration where claimant’s common law interpretation of “public order” confronted Argentina´s civil law concept. In relation to international commercial contract or investment arbitration the need for a truly international or transnational public policy must be accepted in order for the international legal system to flourish.16

The inconsistencies referred above and found in many orders to vacate awards has led to investors seeking the protection of umbrella clauses and the appointment of international law experts and their interpretation of treaty standards of protection, such as fair and equitable treatment, denial of justice and most favored nation.

But justice has never been about finding the truth rather it is about fairness and investment arbitration allows the international community to take notice of foreign government´s actions and have a clear panorama of the local standards before investing and being given what is fair.

The appearance of the umbrella clauses in BITs was a much-needed response for fairness. It can be easier to define fair and equitable treatment or measures tantamount to expropriation than to understand what “public order” entails.

Fairness works both ways. Recently, the tribunal in Iberdola v. Guatemala17 dismissed most of the claims for failure to show how the state’s regulatory actions under domestic law breached the substantive protections of the Spain-Guatemala BIT. Should substantive protection be construed under a particular BIT or should it be encompassed under the Most Favored Nation or Fair and Equitable Treatment (Gold Reserve v. Venezuela) provisions and look upon how these terms have been interpreted?

The permanent attention to commercial and investment arbitrations in the Latin American area does not relate to the economic attractiveness of the area but rather to the political reasons behind any governmental decision.

Nations should not shy away from participating in investment treaties or seek to establish vague clauses in legislation, umbrella clauses are a deterrent to these tactics which more often than not bring the wrong kind of attention to a country whose action are held under international scrutiny.

To mention that interpretation problems arise only in Latin America would fall short of international reality. Overall States seem to seek a narrow interpretation of BIT provisions. As a general principle of international law a State cannot use its internal law for non-compliance of international obligations. But is a narrow interpretation appropriate? How then, are countries in Latin America seeking to protect their legitimate interests against what they consider pro-investor interpretations?

15 Enron Corp. Ponderosa AssetS L.P. v Argentine Republic, ICSID Case N° Arb/01/3 16 Pierre Mayer “Pervasive problems in International Arbitration” Kluwer Law International p. 67 “Transnational public policy is not a definite part of a legal system, which the arbitrator would have the duty to uphold; it is a device which allows the arbitrator to refuse to enforce a contract, or to apply a law, which contravenes values, which he, in accordance with a view shared by the community of men and endorsed by legislators (national or international), deems to be essential.” 17 ICSID Case N° Arb/09/5

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State´s Defense Against Broad Interpretation

Is it possible that the States’ antagonistic response to arbitration can be the divergence of interpretations? An example of this is a comparison between the Iberdrola v. Guatemala case and TECO Guatemala Holdings LLC v. The Republic of Guatemala18.

In both cases Guatemala raised a domestic law defense (tariffs related to electricity). The Iberdrola tribunal declined jurisdiction stating it only had authority to evaluate actions that relate to treaty breaches. The TECO tribunal declined to follow the decision in Iberdrola and decided to evaluate Guatemalan law19 and upheld jurisdiction.20

In Abaclat. the majority´s decision was not to follow the perceived accepted Salini21 criteria for definition of “investment” when deciding whether mass claims were compatible within the ICSID framework.

Perhaps in response to this divergence, States in the region may be asking if it is better not to engage in investor-State arbitration at all. For instance, Brazil signed its third investment agreement of 2015, this time with Mexico. 22 For this purposes Brazil uses the term Cooperation and Investment Facilitation Agreements (“CIFA”). Under these agreements cooperation and investment facilitation are paramount as well as an amicable process of solving disputes. However, they do not include provisions about investor-state arbitration.

Should a dispute arise, it is laughable that an investor will feel a joint committee23 will be impartial enough to decide its case. Moreover, the provisions establish that “only if the dispute is not resolved by the recommendation, the two parties may resort to state-state arbitration” 24 . Rather than progress it seems Brazil is resorting to those days where diplomatic channels where deemed an appropriate way from solving a dispute. Be that as it may, only the Agreement with Mexico provides of the process of how State-State arbitration would actually work.25

Why would Brazil agree now to subscribe these types of agreements? Why now after 15 years since its last signed but never ratified BIT? Critics of investment protection state 3 points: no obligations on investors, more favorable interpretation to investors and lack of interpretation rules.26 But questions remain if these points are convincing. Investors insert their capital into the economy of the State, pay taxes, and create jobs. Is it too much to expect a fair and equitable treatment from States? On the other hand, the system, through experts and professional arbitrators can control frivolous claims and unfounded arguments.

Let us compare this situation with what happens in the commercial sector, especially the new amendment to the Brazilian Arbitration Law that came into force at the end of July 2015. Article 33.4 allows parties to request a supplementary award should the tribunal fail to decide

18 ICSID Case No. ARB/10/17, Award of 19 December 2013 (“TECO”). 19 ICSID Convention Article 42(1) 20 Teco para 454 to 458 21 Salini Costruttori S.p.A. and Italstrade S.p.A. v. Morocco 22 Angola and Mozambique were the other two. 23 Article 15 of the Angola-Brazil CIFA 24 Id. 25 Article 19 Mexico-Brazil CIFA 26 http://kluwerarbitrationblog.com/blog/2015/06/16/brazils-new-investment-treaties-outside-looking-out-2/

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all of the claims whereas previously this was used as a ground to set aside an arbitral award. With the amendment, public entities are now allowed to enter into binding arbitration agreements and the restriction on the constitution of the arbitral tribunal in relation to the choice of arbitrators has now been lifted. By-laws can now include arbitration clauses which will be deemed binding on all shareholders as well as confirming the power of the arbitrators to render partial awards and precautionary measures.27

While on the one hand it certainly looks like Brazil is opening up to the idea of commercial arbitration, on the other they are closing themselves in a nutshell in relation to investment arbitration. This stand is not new, but is it a problem of protecting national boundaries? An excessive need for control? Fear of their acts being subject to international scrutiny?

A case in point is the now famous “Lago Agrio” Litigation. A group of plaintiffs from Ecuador filed a class action against Texaco before the New York Courts. The case was dismissed on the grounds of forum non conveniens28, expressly argued by Texaco.29

Since Chevron acquired Texaco in 2001, claimants sued Chevron as the legal successor before the Lago Agrio courts. After eight years, judgment was given in favor of claimants on the amount of 18 billion dollars which were subsequently lowered on appeal to 9.5 billion. The final resolution is still pending before the Constitutional Court of Ecuador.

Chevron initiated two actions. On the first one, the RICO Act was deemed applicable to claimant´s counsel and co-counsel who attempted or committed acts such as extortion, forgery of documentation, fraud, and blackmail, among others.30 An appeal was filed and is currently pending before the Second Circuit in the United States. Notwithstanding, a first judgment based on illegal acts will certainly raise eyebrows in any jurisdiction where the Lago Agrio judgment is sought.

The second action entailed investor-State arbitration under the USA-Ecuador BIT on the grounds of denial of justice before the Permanent Court of Arbitration. The arbitral tribunal decided to divide the matter at hand: (i) whether the release agreements entered into by Texaco and Ecuador deemed the claims in the Lago Agrio litigation precluded31; (ii) denial of justice.

Arbitral tribunal ruled that the Release Agreements precluded individual claims but not collective claims such as the Lago Agrio litigation32. Ecuador´s partial victory was celebrated by its President33. However, the decision on denial of justice grounds is still pending.34

27www.mayerbrown.com/files/uploads/Documents/PDFs/2015/May/Arbitration_Update_002_English.pdf 28 Aguinda v. Texaco, Inc., 303 F.3d 470, 473 (2d Cir. 2002) ("In November1993,Ecuadorian plaintiffs filed the first of two class action lawsuits against Texaco in the Southern District of New York on behalf of some 30,000 inhabitants of the Oriente region."). 29 Ironically, at the time Texaco argued the Ecuadorian Courts were perfectly able of conducting fair proceedings. 30 Chevron Corporation v. Steven Dozinger et. al., S.D.N.Y., 4 March 2014 31 Texaco executed Release Agreements with Ecuador that released the company from any environmental obligation. 32 http://www.italaw.com/sites/default/files/case-documents/italaw4222.pdf 33 http://www.andes.info.ec/en/news/president-rafael-correa-highlights-ruling-international-court-favor-ecuador.html

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Argentina is not far from trouble. The BG Group PLC v Republic of Argentina was a paramount case in relation to the domestic court exhaustion requirement. In short, BG Group started arbitration based on the UK-Argentina BIT arguing on the topic that the requirement to submit disputes to the host state courts was a non-mandatory step. The award was rendered in favor of BG Group which was confirmed by the District Court in Washington DC but set aside by the DC Circuit Court of Appeal.

The decision was reversed by the Supreme Court which held the award valid and enforceable.35 Interestingly the issue before the Supreme Court was whether the tribunal exceeded its powers in interpreting article 8 of the BIT. For this purposes the court relied on the Federal Arbitration Act. However, Professor Maxi Scherer 36 stated that the more fundamental question was the standard of review employed by the court.

The Supreme Court determined: (i) this was a question based on a procedural issue such as admissibility and not jurisdiction, a de novo review was out of the question; (ii) parties intentions are to be assessed in the same way as in private agreements37. Moreover, since the litigation requirement was not expressly stated as a condition to arbitration then the non-fulfillment of it was not a bar to arbitration.

Could Mexico be on its way to a possible Lago Agrio scenario with their current legislative provisions? Should investors avoid Brazil as an investment option given that promoting investments and protecting investments are to very different things? Would treaty interpretation rules solve the issue? Should a BIT be interpreted as an ordinary contract?

From a civil law perspective judges look for the law in order to apply it, there is no room (in general) for equity. Common law judges seek for the rule and apply it to the relevant facts; there is more room for maneuver. Treaty interpretation is mainly about standards. It is reasonable to conclude that a common law judge would be more welcoming to understand treaty standards than a civil law judge. Could that be the answer as to why Latin American countries are repudiating the ICSID convention or like Mexico they have never been part of it?

In Giovanni Alemanni v. The Argentine Republic38 the 18 months litigation requirement arose again. In construing the rules of interpretation, the tribunal stated as follows:

“The Ambiente Ufficio tribunal begins by drawing attention to the different, and in some respects inconsistent, approaches taken by investment tribunals, and in international dispute settlement more generally, towards preconditions of the kind contained in Article8, paragraphs (1) and (2),of the BIT, before recalling that the task of each individual tribunal or judicial body is to apply the particular legal provisions governing the case before it, and to do so within the context of those provisions, including the specific institutional and procedural framework within which they are embedded. The present Tribunal agrees. Its task is not to establish

34 For a brief and very complete overview of these whole proceedings please see Daniela Paez-Salgado´s article in http://kluwerarbitrationblog.com/blog/2015/06/12/track-1b-one-step-further-in-the-chevron-saga/ 35 http://www.supremecourt.gov/opinions/13pdf/12-138_97be.pdf 36 WilmerHale and Queen Mary University of London 37 Focal point in the matter, the BIT was viewed as an ordinary contract. 38 ICSID CASE N° ARB/07/8

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any general legal regime for provisions of this kind, but to decide the very specific question whether Argentina has or has not given its irrevocable consent to arbitrate in the circumstances in which the present Claimants have brought the present arbitration.”39

The argument is strong and persuasive yet, those ideas are not reflected in treaty interpretation. But is that a threat to States? An illegal advantage afforded to investors? Investment Arbitration requires by implication the merger of laws be it the host State, the investor law or the law from the place of enforcement and perhaps this is trend that Latin American governments do not seem to fully grasp.

Conclusion

In Latin America the pro-arbitration principle, even if embedded in legislation, is still a work in progress. Courts are in an evolving process of embracing and adapting their decisions to the dispute resolution methods that permeate elsewhere. The statutes and principles are there, but as most things, it will take time for a jurisdiction to form a unitary perception from its Court as to raise a uniform interpretation.

As mentioned earlier, perhaps the solution for some jurisdictions will be specialized courts. Professionals with a clear understanding of the main procedural and substantive differences between arbitration and litigation and the necessary support they bring to one another.

In the investment treaty arena, ICSID is still perceived in Latin America as a system designed to solely protect investors where tribunals are harsh on governmental policies. However, the denunciation of the Convention by Venezuela, Bolivia and Ecuador rather than promote investment could shield the country of all the major economic benefits of foreign investment. Rather than denunciation being a “business decision” it may be a regression to times where the Calvo doctrine prevailed over the region.

The perception that treaty arbitration is a system that favors the investor from the outset is ill-conceived. According to the annual review published by the United Nations Conference on Trade and Development of investor-State Dispute Settlements, more often than not States prevail on such proceedings.

The fact that some of the cases evaluated on this work will have a deep impact in investment and commercial arbitration shows that Latin America has much to offer to the arbitration community. The evolving nature of arbitration should be seen in Latin America not as a threat but rather as an opportunity to permeate the community with different standards that could afford new ways of interpreting activities under the scope of international principles.

39 Id. Para 304.