gaela gehring flores: what to consider when initiating an investment arbitration

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What to Consider When Preparing an Investment

Arbitration

Gaela K. Gehring FloresEighth Investment Arbitration

Forum: Investment Protection and the Mexican Energy Reform8 November 2016

Transglobal Green Energy v. Panama “[T]he Tribunal upholds Respondent’s objection to its jurisdiction on the ground of abuse by Claimants of the investment treaty system by attempting to

create artificial international jurisdiction over a pre-existing domestic dispute.”

Philip Morris v. Australia“In light of the foregoing discussion, the Tribunal cannot but conclude that the initiation of this

arbitration constitutes an abuse of rights, as the corporate restructuring by which the Claimant

acquired the Australian subsidiaries occurred at a time when there was a reasonable prospect that the dispute would materialise and as it was carried out for the principal, if not sole, purpose of gaining Treaty protection. Accordingly, the claims raised in this arbitration are inadmissible and the Tribunal is

precluded from exercising jurisdiction over this dispute.”

Jurisdiction: Rationae Personae

Jurisdiction Ratione Materiae: An “investment” that satisfies the requirements the investment agreement (and the ICSID Convention).

The term “investment” is usually broad, e.g., “every kind of asset owned or controlled, directly or indirectly, by an investor of one Contracting Party in the territory of the other Contracting Party . . . .”

Certain investment agreements include “shall admit such investments in accordance with its laws and regulations.”

Jurisdiction: Rationae Materiae

Sociedad Anonima Eduardo Vieira c.

Republica de Chile

“[L]a controversia objeto de este arbitraje surgió

con anterioridad al 29 de marzo de 1994 y la misma

se proyectó en el tiempo hasta el año de 2001 . . . ,

por ende, el Centro carece de jurisdicción ratione

temporis para conocer del presente caso.”

Jurisdiction: Rationae Temporis

Corona Materials v. Dominican Republic

“The record shows that the Claimant had actual knowledge of the alleged breach

and of the corresponding damage or harm before the critical date. It derives from the

evidence reviewed above that Claimant concluded well before the critical date that DR-CAFTA had been effectively breached and that such breach had produced substantial loss or

damage. As a matter of fact, the Claimant did not submit its Request for Arbitration until June 10, 2014, which is 3 years, 3

months, and 19 days later. As a consequence, its claims are timebarred by

DR-CAFTA Article 10.18.1.”

Jurisdiction: Rationae Voluntatis

Pey Casado y Fundación Presidente Allende v. República de Chile (2016)

“The Tribunal regrets that the Claimants did not set themselves to the specific task of showing what particular injury and damage could be proved to have

been caused to them by the breach of the guarantee of fair and equitable treatment under Article 4 of the BIT . . . . There was thus no other course open to it than to

dismiss, virtually in their entirety, the Claimants’ monetary claims.”

Proof of Damages: Causation and Quantum

AES v. Hungary

“[It] is not every process failing or imperfection that will amount to a failure to provide fair and equitable treatment. The standard is not one of perfection. It is only when a state’s acts or procedural omissions are, on the facts and in the context before the adjudicator, manifestly unfair or unreasonable (such as would shock, or at least surprise a sense of juridical

propriety) . . . that the standard can be said to have been infringed.”

“[T]he fact that an issue becomes a political matter . . . does not mean that the existence of a rational policy is erased.”

Fair & Equitable Treatment

Nominating an Arbitrator: Do Your Research – Know Your

Procedure

o Governing Investment Agreement Provisions

o Institution Rules, e.g., o ICSID Convention

Articles 37 -40o ICSID Rules 2-4

An investor Nationality of investor? Definition of “investor” under relevant investment

agreement? What is the corporate structure of investor and

affiliates/parent? signs a gas exploration and production agreement for 25

years What type of contract? Administrative contract? What is the relevant legal regime? Administrative law? Are there any exclusions in the investment agreement

for this type of contract? Does the contract comply with all formal local law

requirements, e.g., registration?

Hypothetical Case

It invests US$30 million How was $30 million invested? What evidence do you

have to prove it? What entity executed the investment? A subsidiary or

affiliate? and finds gas reserves

Under the existing hydrocarbon law, does the state own all natural resources regardless of entity that made discovery?

What were the terms of ownership and exploitation of reserves under the Agreement?

with a value of several billion USD. According to whom? Is this a speculative assessment? Based on DCF analysis?

What assumptions go into this valuation? This will be subject of great debate for damages experts.

Hypothetical Case (Cont.)

Due to the market situation, it does not obtain the financing to start drilling, According to whom/what evidence is the failure to

obtain financing due to market situations and not fault of investor and its own financial situation?

incurs considerable delay and, violates the corresponding milestone in the project agreement Was this foreseen in the financing terms of the

agreement? Any communications with government officials that

could be taken to imply that the government was aware of the difficulties and gave even tacit acceptance of the delay?


After a change of governments, the Mexican Hydrocarbon Commission Any evidence that the new administration and/or Hydrocarbon

Commission is anti foreign investor? Any public statements by new administration to establish

hostile animus? initiates the administrative rescission of the gas exploration and

production agreement and terminates it Were all formalities followed, e.g., was proper notice of the

rescission given (under local law)?Does the Agreement provide for a different mechanism for

termination?Did investor appeal the decision? Fork in the road, exclusivity

and exhaustion of local remedies provisions in the investment agreement. (or ICSID Convention)


without paying any compensation. Would compensation be required per the terms of the

agreement and/or the Hydrocarbon Law or Administrative Law?

Any conflicts between the laws? The Hydrocarbon Commission re-awards the gas

production contract for the multi-billion gas reserves Was re-awarding the contract permissible under the

Hydrocarbon Law and administrative law? to a political crony

What is the proof of cronyism? Beware of speculation and conspiracy theories.


The original investor is left with a sunk investment lost of US$30 MM and does not receive any compensation for having discovered proven reserves of oil with a value of several billion US$, or its sunk investment What is the evidence of the loss? What is contemplated in the

Investment Agreement in terms of compensation post termination? Do theories of unjust enrichment exist under governing local law?

Is there any reason why this investor might have believed that it was guaranteed specific return on its investment?

due to the express prohibition in the Mexican Hydrocarbons Law to pay any kind of compensation Was the Hydrocarbon Law in existence at the time of the

agreement? If not, are there any grandfather rules that would exempt this

investor from the applicability of the HC law?
