Investor-State arbitral tribunals are increasingly policing the gates to investment treaty claims against States. The initiation of investment treaty claims against States remains subject to a high threshold of good faith against possible abuse of process by investors, as recently stressed by arbitrators Dr. Andres Rigo Sureda (President), Professor Christoph Schreuer, and Professor Jan Paulsson, in their 2 June 2016 Award in Transglobal Green Energy LLC and Transglobal Green Panama S.A. v. Republic of Panama. The Tribunal upheld Panama’s objection to 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.” (Transglobal Award, para. 118). The Transglobal Award was issued six months after another tribunal in Philip Morris International v. Australia [composed of arbitrators Professor Karl-Heinz Böckstiegel (President), Professor Gabrielle Kaufmann-Kohler, and Professor Donald M. McRae] issued its landmark 17 December 2015 Award on Jurisdiction and Admissibility, declaring that: “the commencement of treaty-based investor-State arbitration constitutes an abuse of right (or abuse of process) when an investor has changed its corporate structure to gain the protection of an investment treaty at a point in time where a dispute was foreseeable. A dispute is foreseeable when there is a reasonable prospect that a measure that may give rise to a treaty claim will materialize.” (Philip Morris Award, para. 585.) While to date there is scarcely any doctrinal unanimity over what comprises abuse of process, abuse of rights, or bad faith institution of investor-State claims [see for example Eric De Brabandere, Good Faith, Abuse of Process, and the Initiation of Investment Treaty Claims, 3 Journal of International Dispute Settlement 3, pp. 1-28 (2012), these recent arbitral decisions provide concrete guidance of factors that tribunals have taken into account to determine whether investor-claimants instituted investment treaty arbitration proceedings in good faith.
The reasoning in both the Transglobal and the Philip Morris decisions certainly suggests an important shift in arbitrators’ consciousness of the critical nature of their arbitral function in investment treaty disputes. While these recent decisions are not in any way the first investor-State arbitral awards to uphold objections to jurisdiction on the basis of abuse of process in trying to seek recourse through investment treaty claims (see for example the 2009 Award in Phoenix Action Ltd. v. Czech Republic), the Transglobal and Philip Morris decisions both contain more distinct elements or indicative criteria for determining whether investors instituted arbitration proceedings in good faith. To recall, the Phoenix tribunal rejected the transfer of national economic interests to a foreign company in order to avail of access to investor-State dispute resolution mechanisms in a pre-existing bilateral investment treaty. The Phoenix tribunal stressed that it was its duty “not to protect such an abusive manipulation of the system of international investment protection under the ICSID Convention and the BITs…to accept jurisdiction in this case would go against the basic objectives underlying the ICSID Convention as well as those of bilateral investment treaties.” (Phoenix Action Award, para. 144). In the 2008 Decision on Preliminary Issues in Libananco Holdings Co. Ltd. v. Turkey, the arbitral tribunal generally averred that “parties have an obligation to arbitrate fairly and in good faith and that an arbitral tribunal has the inherent jurisdiction to ensure that this obligation is complied with; this principle applies in all arbitrations including investment arbitration, and to all parties, including States.” (Libananco Decision, para. 79). In its 2014 Decision on Jurisdiction in Lao Holdings v. Laos, the Lao Holdings tribunal defined an abuse of process as a situation where an investor “manipulate(s) the nationality of a company subsidiary to gain jurisdiction under an international treaty at a time when the investor is aware that events have occurred that negatively affect its investment and may lead to arbitration.” (Lao Holdings Decision, para. 70.)
The arbitral tribunals in Transglobal and Philip Morris tested for more distinct, objective, and indicative elements (or badges of bad faith) to determine whether parties instituted arbitration proceedings in good faith, such as the timing of the alleged investment, the terms of transaction, and other relevant incidents in the course of arbitral proceedings that provide insight into the intent of the claimants in instituting investor-State arbitration proceedings. The Philip Morris tribunal stressed the high evidentiary threshold necessary to characterize a corporate restructuring or nationality planning by an investor as an abuse of process, focusing instead on proof of the foreseeability of the claim and its particular circumstances for the case. (Philip Morris Award, para. 550). On the other hand, the Transglobal tribunal examined elements such as: 1) the timing of the alleged investment; 2) the terms of the transaction in which it was to be effected, and 3) some relevant incidents in the course of the arbitral proceedings (Transglobal Award, para. 103.) to evaluate the intent of the investor in relation to the corporate restructuring.
The tribunal in Philip Morris International v. Australia stressed that abuse of rights did not amount to “a showing of bad faith…abuse is subject to an objective test and is seen in the fact that an investor who is not protected by an investment treaty restructures its investment in such a fashion as to fall within the scope of protection of a treaty in view of a specific foreseeable dispute.” (Philip Morris Award, para. 539.) The tribunal found in this case that the “principal, if not sole, purpose of the [corporate] restructuring was to gain protection under the Treaty in respect of [Australia’s Tobacco Plain Packaging Measures] that form the subject matter of the present arbitration…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 materialize and as it was carried out for the principal, if not sole, purpose of gaining [investment] treaty protection.” (Philip Morris Award, paras. 587-588).
Transglobal v. Panama, on the other hand, involved a claim brought by an American company (Transglobal Green Energy LLC or “TGGE LLC”) and its Panamanian counterpart (Transglobal Green Panama S.A. or “TGGE Panama”). The American company (TGGE LLC) had entered into a Partnership and Transfer Agreement (PTA) with Panamanian national Mr. Lisac, after which the Panamanian company (TGGE Panama) was incorporated. Under the PTA, Mr. Lisac purportedly assigned his rights to a hydroelectric power concession contract with Panama, notwithstanding the pendency of various domestic judicial actions instituted by Mr. Lisac in Panama to recover the concession. After a Panamanian court judgment found against Mr. Lisac, Mr. Lisac entered into the Partnership and Transfer Agreement with TGGE LLC, which established TGGE Panama as the purported concession holder, an assignment to which Panama’s regulators strenuously objected.
Panama raised several preliminary objections to jurisdiction, such as: 1) the absence of an investment; 2) the claimants’ abuse of the international investment treaty system; 3) their waiver of the right to bring a dispute at ICSID, 4) lack of merit in the MFN claim; and 5) the actual domestic control over Transglobal. (Transglobal Award, pp. 15-23). The Transglobal arbitral tribunal focused on the second question, finding ultimately that the “voting arrangements in [Transglobal Panama] and the principle of exclusive execution by Mr. Lisac [a Panamanian national] of acts agreed by the shareholders provided in the [Partnership and Transfer Agreement] revealed that Mr. Lisac’s intent to remain in de facto control of TGGE Panama irrespective of the percentage of shares held and at the same time to benefit from the foreign nationality of [Transglobal] for the purpose of pursuing this arbitration.” (Transglobal Award, para. 111.) The tribunal found that Mr. Lisac had intended to “internationalize his domestic dispute with Panama.” (Transglobal Award, para. 113), and that “Mr. Lisac inserted TGGE and TGGE Panama into the process of pursuing the execution of the [Panamanian court judgment] at a time when it was clear that there was a problem with its implementation…” (Transglobal Award, para. 117). The tribunal found that “Mr. Lisac had already pursued the domestic remedies at the [Panamanian] Supreme Court level and now sought international remedies with the Claimants’ assistance…[thus] attempting to create artificial international jurisdiction over a pre-existing domestic dispute.” (Transglobal Award, paras. 117 to 118).
Both the recent Philip Morris and Transglobal arbitral awards suggest that, despite the high threshold for proving abuse of process committed by investors that made use of corporate restructuring strategies to avail of investment treaty protections, arbitral tribunals will not hesitate to examine the ostensible, as well as actual, purposes of corporate restructurings; the context in which they occur in relation to pending or anticipated disputes; and the foreseeability of alleged deprivatory State measures for which investors seek to open international recourse through investor-State arbitration. Despite ongoing debates over criticisms against investor-State arbitral tribunals in recent days, it must be acknowledged that they may – as in the recent cases of Philip Morris and Transglobal – also be perfectly capable of gatekeeping against the misuse of the investment treaty system through vigilant, professional, and principled use of arbitral controls over the proceedings.