Ray of hope for Reko Diq penalty being nixed
ICSID body annuls Spain award after arbitrator who also represented TCC found involved in hiding information
ICSID body annuls Spain award after arbitrator who also represented TCC found involved in hiding information. PHOTO: FILE
ISLAMABAD:
Pakistan’s chances of having its $6 billion penalty in the Reko Diq case annulled have received a boost with a committee of the International Centre for Settlement of Investment Disputes (ICSID) setting aside a €128 million arbitral award slapped on Spain after an arbitrator Stanimir Alexandrov, who had represented the claimants in the case against Islamabad as well, was found involved in concealing information.
On June 11, a three-member ICSID ad hoc committee, headed by Ricardo Ramírez-Hernández of Mexico and also comprising Makhdoom Ali Khan of Pakistan and Dominique Hascher of France, annulled the penalty imposed on Spain in favour of a solar power investor as Alexandrov had failed disclose a longstanding professional relationship with an expert witness from the law form Brattle Group.
Pakistan had applied to disqualify the Bulgarian arbitrator from hearing the case on the grounds that the claimants were relying on a rare valuation method that was also at issue in another case in which he was acting as counsel.
However, Pakistan’s legal team Allen & Overy LLP was unable to convince World Bank president, who rejected the objection.
Legal experts believe that Islamabad’s legal strategy was poor as it had raised its objection over all three members of the tribunal.
If the legal team had focused on Alexandrov alone, the objection over his conflict of interest could have been accepted.
Now Pakistan has approached the ICSID again for the annulment of the award in the Reko Diq case.
Senior international law experts say that after the ICSID committee’s decision, Islamabad should raise the same objection over Alexandrov’s inclusion in the tribunal again.
Pakistan’s foreign assets at stake in Reko Diq case: AGP
An international arbitration tribunal of the ICSID had slapped a penalty of $6 billion on Pakistan in July 12 last year for its 2011 decision to deny a mining lease for the Reko Diq project to the Tethyan Copper Company (TCC), a consortium of Chilean and Canadian companies.
The tribunal – chaired by Germany’s Klaus Sachs and including Bulgarian arbitrator Stanimir Alexandrov and the UK’s Lord Hoffmann had ordered Pakistan to pay over $4 billion in damages to the TCC in addition to $1.7 billion in pre-award interest.
The tribunal found that Pakistan had unlawfully denied the TCC a lease to mine copper and gold deposits at the Reko Diq mine, located in Chagai district of Balochistan. It held that the state had committed an unlawful expropriation under the Australia-Pakistan bilateral investment treaty.
The ICSID also declared that the Supreme Court of Pakistan’s 2012 judgment in the rental power projects case was ‘arbitrary’. Later, the TCC approached five different countries courts for the enforcement of the penalty imposed on Pakistan.
In November last year, Pakistan moved a plea before ICC for annulment of the award on several grounds. When the country’s plea registered, an interim stay was granted automatically on the enforcement proceedings initiated by the TCC.
Alexandrov had ties to the Brattle Group, a legal firm which had represented TCC in the case against Pakistan.
The ICSID committee annulled the Energy Charter Treaty award won by UK investment fund Eiser Infrastructure and a subsidiary in its entirety.
It found that Alexandrov’s failure to disclose the relationship between Carlos Lapuerta of the Brattle Group created a “manifest appearance of bias” which meant that the tribunal was not properly constituted and that there had been a serious departure from a fundamental rule of procedure – two grounds for annulment under the ICSID Convention.
It is understood to be the first time in ICSID’s history that an award has been annulled on the basis of an arbitrator’s lack of independence and impartiality.
Former Pakistan attorney general Makhdoom Ali Khan replaced original panelist Teresa Cheng, who stepped down when she became Hong Kong’s secretary for justice in 2018.
The claimant used Gibson Dunn & Crutcher for the annulment proceeding, having used Allen & Overy in the arbitration. Spain relied on government lawyers throughout the dispute, also retaining Curtis Mallet-Prevost Colt & Mosle for the annulment phase.
Eiser was one of the numerous investors to bring treaty claims in response to Spain’s reforms to its subsidy regime for renewable energy, and the first to prevail in such a claim. In its May 2017 award, a tribunal chaired by John Crook of the US ordered Spain to pay €128 million plus interest after finding that the reforms violated the ECT. Eiser’s appointee Alexandrov and Campbell McLachlan QC of New Zealand, who was chosen by Spain, joined in the unanimous ruling.
Spain filed for annulment soon after, arguing that Alexandrov had violated his obligation of independence and impartiality by failing to disclose a 15-year relationship with the Brattle Group and Lapuerta, who had been retained by Eiser as experts in the arbitration.
At the time of the Eiser arbitration, Alexandrov was a partner at Sidley Austin in Washington, DC. Spain argued that during his time at the firm, Alexandrov’s team had appointed the Brattle Group in nine investor-state arbitrations and that in four of those cases Lapuerta was the testifying expert – including cases that were pending at the same time as the Eiser arbitration.
The state said this relationship only became public after the Eiser award was issued, when Pakistan challenged Alexandrov in an unrelated ICSID arbitration brought by TCC on the basis of his ties to Brattle. Alexandrov retired from Sidley Austin soon after that to set up an independent practice.
In its decision, the committee concluded that a tribunal may be held to have been improperly constituted for annulment purposes where an arbitrator lacked independence or impartiality at any time during the arbitration.
The committee also dismissed Eiser’s contention that the proper remedy for Spain would be to seek revision of the award. It said revision proceedings were primarily concerned with the substance of the award, whereas an annulment committee is tasked with protecting the “integrity of the proceedings.” The fact that Alexandrov would have no opportunity to respond to allegations of bias against him in an annulment proceeding was thus “of little consequence.”
It also said Spain had not waived its right to raise the allegations, observing Eiser had not shown a clear instance where Spain was or reasonably ought to have been aware of Alexandrov’s relationship with Brattle before the Eiser award was issued – despite the existence of public information about the connection, including in GAR articles.
The committee went on to examine whether a third party would find an “evident or obvious appearance of lack of impartiality or independence” on the part of Alexandrov based on a reasonable evaluation of the facts of the case – the disqualification standard espoused by former World Bank president Jim Yong Kim in the Blue Bank case.
The committee said the evidence was unequivocal that before and during the Eiser case there were several past and present professional connections and interaction between Alexandrov as counsel and member of Sidley Austin on the one hand and Lapuerta and the Brattle Group on the other.
It noted that Alexandrov had been challenged over his ties to Brattle in other arbitrations. In the TCC case, the challenge was rejected by Alexandrov’s co-arbitrators following an opinion from the secretary general of the Permanent Court of Arbitration. In the SolEs Badajoz v Spain case, Alexandrov resigned after his co-arbitrators said they were divided on the challenge.
However, the tribunal said there were key differences with the present case, including the fact that the co-arbitrators in the TCC case were aware of the Brattle Group relationship, while the other Eiser tribunal members were not. Alexandrov was also not simultaneously acting as counsel with Lapuerta during the SolEs Badajoz case.
By contrast, Alexandrov and Lapuerta were working together as counsel and expert in two other pending arbitrations at the same time as the Eiser case. Simultaneously, Alexandrov was acting as counsel with other Brattle experts in Bear Creek v Peru.
The committee said it did not matter that Alexandrov “may not even have been conscious of the insidious effects of this association” with Lapuerta. An independent observer would “conclude that there was a manifest appearance of bias” on the part of Alexandrov.
The committee said Alexandrov had a duty to disclose the relationship and had failed to do so. It declined to rule on Spain’s submission that Lapuerta was also under a duty to disclose the relationship under the IBA rules on the taking of evidence.
By depriving Spain of the opportunity to challenge him, the committee said Alexandrov had also deprived the state of seeking the benefit and protection of an independent tribunal, thus affecting its right of defence and right to a fair trial. The failure to disclose could not be regarded as an inconsequential error.
The committee said the non-disclosure had resulted in the tribunal deliberating without any knowledge of the relationship. The fact that the award was unanimous was no bar to annulment. Each tribunal member could be expected to have influenced the others with his views and analysis. It further noted that the tribunal adopted the damages model proposed by Lapuerta in its entirety.
While it was possible the arbitrators would have adopted the model in any event, the committee said that “Spain lost the possibility of a different award”.
The tribunal therefore concluded the failure to disclose could have had a “material effect” on the award, thus amounting to a serious departure from a fundamental rule of procedure.
It said that annulment committees are “guardians of the ICSID system” and “must set the bar high” regarding disclosure obligations. This included addressing conflicts of interests of arbitrators who also choose to act as counsel in investment disputes.
Having annulled the award on this basis, the committee said it saw no need to address the other grounds for annulment raised by Spain. The state had contended that it had made no commitments to provide a stable regulatory environment to renewables investors and that the tribunal had improperly awarded damages for certain claims. It had argued that the tribunal had failed to provide reasons and manifestly exceeded its powers.
The committee ordered Eiser to pay the full costs of the proceeding, US$560,000, and all of Spain’s legal fees and expenses, which came to roughly US$3.5 million.
Curtis partners Gabriela Alvarez Avila and Benard Preziosi said the decision was the “first time in ICSID history that an award has been annulled for improper constitution of the tribunal and a serious departure from a fundamental rule of procedure”.
9:44
The decision of the committee is particularly timely in light of the serious concerns by states regarding double-hatting, an issue that has been the subject of a lot of talk but little action to date.
Squire Patton Boggs partner Miriam Harwood, who was part of the Curtis team in the annulment bid and continues to defend Spain in US enforcement proceedings relating renewables awards, said: “This is a historic decision, one that should have lasting, positive impact. The annulment committee has taken a clear and firm stand, upholding the fundamental principles of transparency and trust that anchor the investor-state arbitration system. If those principles are lost, the system is lost. Its reputation as a fair and impartial forum hangs in the balance.”
Karel Daele, partner at Mishcon de Reya, also called the decision groundbreaking, saying it highlighted the fundamental importance of independence and impartiality and also parties’ right to “challenge and disqualify arbitrators who do not meet them”.
He said the decision should send a “clear message to the drafters of the revised ICSID Rules who are currently looking into several proposals to limit and restrict the right to challenge”.
“This ad hoc committee of three senior arbitrators and international judges sets the bar high and warns the arbitrators' community: where you may not be perceived as impartial or independent by a fair-minded and informed third-party observer, either do not sit, be prepared to be challenged and disqualified or have your awards annulled. Whereas conflicts of interest have been increasingly raised as an annulment ground over the last five years, the ICSID jurisprudence is still unsettled and hopefully this decision will set the standard going forward.”
The Federal Court of Australia enforced the Eiser award in April this year. Enforcement proceedings in Washington, DC, were stayed in February pending the ICSID annulment proceedings.
Pakistan’s chances of having its $6 billion penalty in the Reko Diq case annulled have received a boost with a committee of the International Centre for Settlement of Investment Disputes (ICSID) setting aside a €128 million arbitral award slapped on Spain after an arbitrator Stanimir Alexandrov, who had represented the claimants in the case against Islamabad as well, was found involved in concealing information.
On June 11, a three-member ICSID ad hoc committee, headed by Ricardo Ramírez-Hernández of Mexico and also comprising Makhdoom Ali Khan of Pakistan and Dominique Hascher of France, annulled the penalty imposed on Spain in favour of a solar power investor as Alexandrov had failed disclose a longstanding professional relationship with an expert witness from the law form Brattle Group.
Pakistan had applied to disqualify the Bulgarian arbitrator from hearing the case on the grounds that the claimants were relying on a rare valuation method that was also at issue in another case in which he was acting as counsel.
However, Pakistan’s legal team Allen & Overy LLP was unable to convince World Bank president, who rejected the objection.
Legal experts believe that Islamabad’s legal strategy was poor as it had raised its objection over all three members of the tribunal.
If the legal team had focused on Alexandrov alone, the objection over his conflict of interest could have been accepted.
Now Pakistan has approached the ICSID again for the annulment of the award in the Reko Diq case.
Senior international law experts say that after the ICSID committee’s decision, Islamabad should raise the same objection over Alexandrov’s inclusion in the tribunal again.
Pakistan’s foreign assets at stake in Reko Diq case: AGP
An international arbitration tribunal of the ICSID had slapped a penalty of $6 billion on Pakistan in July 12 last year for its 2011 decision to deny a mining lease for the Reko Diq project to the Tethyan Copper Company (TCC), a consortium of Chilean and Canadian companies.
The tribunal – chaired by Germany’s Klaus Sachs and including Bulgarian arbitrator Stanimir Alexandrov and the UK’s Lord Hoffmann had ordered Pakistan to pay over $4 billion in damages to the TCC in addition to $1.7 billion in pre-award interest.
The tribunal found that Pakistan had unlawfully denied the TCC a lease to mine copper and gold deposits at the Reko Diq mine, located in Chagai district of Balochistan. It held that the state had committed an unlawful expropriation under the Australia-Pakistan bilateral investment treaty.
The ICSID also declared that the Supreme Court of Pakistan’s 2012 judgment in the rental power projects case was ‘arbitrary’. Later, the TCC approached five different countries courts for the enforcement of the penalty imposed on Pakistan.
In November last year, Pakistan moved a plea before ICC for annulment of the award on several grounds. When the country’s plea registered, an interim stay was granted automatically on the enforcement proceedings initiated by the TCC.
Alexandrov had ties to the Brattle Group, a legal firm which had represented TCC in the case against Pakistan.
The ICSID committee annulled the Energy Charter Treaty award won by UK investment fund Eiser Infrastructure and a subsidiary in its entirety.
It found that Alexandrov’s failure to disclose the relationship between Carlos Lapuerta of the Brattle Group created a “manifest appearance of bias” which meant that the tribunal was not properly constituted and that there had been a serious departure from a fundamental rule of procedure – two grounds for annulment under the ICSID Convention.
It is understood to be the first time in ICSID’s history that an award has been annulled on the basis of an arbitrator’s lack of independence and impartiality.
Former Pakistan attorney general Makhdoom Ali Khan replaced original panelist Teresa Cheng, who stepped down when she became Hong Kong’s secretary for justice in 2018.
The claimant used Gibson Dunn & Crutcher for the annulment proceeding, having used Allen & Overy in the arbitration. Spain relied on government lawyers throughout the dispute, also retaining Curtis Mallet-Prevost Colt & Mosle for the annulment phase.
Eiser was one of the numerous investors to bring treaty claims in response to Spain’s reforms to its subsidy regime for renewable energy, and the first to prevail in such a claim. In its May 2017 award, a tribunal chaired by John Crook of the US ordered Spain to pay €128 million plus interest after finding that the reforms violated the ECT. Eiser’s appointee Alexandrov and Campbell McLachlan QC of New Zealand, who was chosen by Spain, joined in the unanimous ruling.
Spain filed for annulment soon after, arguing that Alexandrov had violated his obligation of independence and impartiality by failing to disclose a 15-year relationship with the Brattle Group and Lapuerta, who had been retained by Eiser as experts in the arbitration.
At the time of the Eiser arbitration, Alexandrov was a partner at Sidley Austin in Washington, DC. Spain argued that during his time at the firm, Alexandrov’s team had appointed the Brattle Group in nine investor-state arbitrations and that in four of those cases Lapuerta was the testifying expert – including cases that were pending at the same time as the Eiser arbitration.
The state said this relationship only became public after the Eiser award was issued, when Pakistan challenged Alexandrov in an unrelated ICSID arbitration brought by TCC on the basis of his ties to Brattle. Alexandrov retired from Sidley Austin soon after that to set up an independent practice.
In its decision, the committee concluded that a tribunal may be held to have been improperly constituted for annulment purposes where an arbitrator lacked independence or impartiality at any time during the arbitration.
The committee also dismissed Eiser’s contention that the proper remedy for Spain would be to seek revision of the award. It said revision proceedings were primarily concerned with the substance of the award, whereas an annulment committee is tasked with protecting the “integrity of the proceedings.” The fact that Alexandrov would have no opportunity to respond to allegations of bias against him in an annulment proceeding was thus “of little consequence.”
It also said Spain had not waived its right to raise the allegations, observing Eiser had not shown a clear instance where Spain was or reasonably ought to have been aware of Alexandrov’s relationship with Brattle before the Eiser award was issued – despite the existence of public information about the connection, including in GAR articles.
The committee went on to examine whether a third party would find an “evident or obvious appearance of lack of impartiality or independence” on the part of Alexandrov based on a reasonable evaluation of the facts of the case – the disqualification standard espoused by former World Bank president Jim Yong Kim in the Blue Bank case.
The committee said the evidence was unequivocal that before and during the Eiser case there were several past and present professional connections and interaction between Alexandrov as counsel and member of Sidley Austin on the one hand and Lapuerta and the Brattle Group on the other.
It noted that Alexandrov had been challenged over his ties to Brattle in other arbitrations. In the TCC case, the challenge was rejected by Alexandrov’s co-arbitrators following an opinion from the secretary general of the Permanent Court of Arbitration. In the SolEs Badajoz v Spain case, Alexandrov resigned after his co-arbitrators said they were divided on the challenge.
However, the tribunal said there were key differences with the present case, including the fact that the co-arbitrators in the TCC case were aware of the Brattle Group relationship, while the other Eiser tribunal members were not. Alexandrov was also not simultaneously acting as counsel with Lapuerta during the SolEs Badajoz case.
By contrast, Alexandrov and Lapuerta were working together as counsel and expert in two other pending arbitrations at the same time as the Eiser case. Simultaneously, Alexandrov was acting as counsel with other Brattle experts in Bear Creek v Peru.
The committee said it did not matter that Alexandrov “may not even have been conscious of the insidious effects of this association” with Lapuerta. An independent observer would “conclude that there was a manifest appearance of bias” on the part of Alexandrov.
The committee said Alexandrov had a duty to disclose the relationship and had failed to do so. It declined to rule on Spain’s submission that Lapuerta was also under a duty to disclose the relationship under the IBA rules on the taking of evidence.
By depriving Spain of the opportunity to challenge him, the committee said Alexandrov had also deprived the state of seeking the benefit and protection of an independent tribunal, thus affecting its right of defence and right to a fair trial. The failure to disclose could not be regarded as an inconsequential error.
The committee said the non-disclosure had resulted in the tribunal deliberating without any knowledge of the relationship. The fact that the award was unanimous was no bar to annulment. Each tribunal member could be expected to have influenced the others with his views and analysis. It further noted that the tribunal adopted the damages model proposed by Lapuerta in its entirety.
While it was possible the arbitrators would have adopted the model in any event, the committee said that “Spain lost the possibility of a different award”.
The tribunal therefore concluded the failure to disclose could have had a “material effect” on the award, thus amounting to a serious departure from a fundamental rule of procedure.
It said that annulment committees are “guardians of the ICSID system” and “must set the bar high” regarding disclosure obligations. This included addressing conflicts of interests of arbitrators who also choose to act as counsel in investment disputes.
Having annulled the award on this basis, the committee said it saw no need to address the other grounds for annulment raised by Spain. The state had contended that it had made no commitments to provide a stable regulatory environment to renewables investors and that the tribunal had improperly awarded damages for certain claims. It had argued that the tribunal had failed to provide reasons and manifestly exceeded its powers.
The committee ordered Eiser to pay the full costs of the proceeding, US$560,000, and all of Spain’s legal fees and expenses, which came to roughly US$3.5 million.
Curtis partners Gabriela Alvarez Avila and Benard Preziosi said the decision was the “first time in ICSID history that an award has been annulled for improper constitution of the tribunal and a serious departure from a fundamental rule of procedure”.
9:44
The decision of the committee is particularly timely in light of the serious concerns by states regarding double-hatting, an issue that has been the subject of a lot of talk but little action to date.
Squire Patton Boggs partner Miriam Harwood, who was part of the Curtis team in the annulment bid and continues to defend Spain in US enforcement proceedings relating renewables awards, said: “This is a historic decision, one that should have lasting, positive impact. The annulment committee has taken a clear and firm stand, upholding the fundamental principles of transparency and trust that anchor the investor-state arbitration system. If those principles are lost, the system is lost. Its reputation as a fair and impartial forum hangs in the balance.”
Karel Daele, partner at Mishcon de Reya, also called the decision groundbreaking, saying it highlighted the fundamental importance of independence and impartiality and also parties’ right to “challenge and disqualify arbitrators who do not meet them”.
He said the decision should send a “clear message to the drafters of the revised ICSID Rules who are currently looking into several proposals to limit and restrict the right to challenge”.
“This ad hoc committee of three senior arbitrators and international judges sets the bar high and warns the arbitrators' community: where you may not be perceived as impartial or independent by a fair-minded and informed third-party observer, either do not sit, be prepared to be challenged and disqualified or have your awards annulled. Whereas conflicts of interest have been increasingly raised as an annulment ground over the last five years, the ICSID jurisprudence is still unsettled and hopefully this decision will set the standard going forward.”
The Federal Court of Australia enforced the Eiser award in April this year. Enforcement proceedings in Washington, DC, were stayed in February pending the ICSID annulment proceedings.