SGS v. Philippines

SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, ICSID Case No. ARB/02/6 (Decision on Objections to Jurisdiction and Separate Declaration)

(Originally published in 2011 in International Investment Law and Sustainable Development: Key cases from 2000–2010; republished on this website on October 18, 2018. Read more here.)

Decision available at https://www.italaw.com/cases/1018

Keywords

Broad dispute resolution provision, contractual forum selection clause, definition of “investment,” jurisdiction, umbrella clause

Key dates

Request for Arbitration: 6 June 2002

Constitution of Tribunal: 18 September 2002

Decision on Jurisdiction: 24 January 2004

Award: 11 April 2008 (The award embodied a settlement agreement that had been reached by the parties.)

Arbitrators

Dr. Ahmed Sadek El-Kosheri (president, appointed by the secretary–general of ICSID in the absence of an agreement between the parties)

Prof. James R. Crawford, (respondent appointee)

Prof. Antonio Crivellaro (claimant appointee)

Forum and applicable procedural rules

International Centre for Settlement of Investment Disputes (ICSID)

ICSID Rules of Procedure for Arbitration Proceedings

Applicable treaty

Switzerland–Philippines Bilateral Investment Treaty (BIT)

Alleged treaty violations

• Arbitrary and discriminatory treatment
• Fair and equitable treatment
• Full protection and security
• Most favoured nation treatment
• Umbrella clause

Other legal issues raised

• Jurisdiction—broad dispute resolution provision
• Jurisdiction—definition of “investment”
• Jurisdiction—effect of a contractual forum selection clause
• Jurisdiction—multiple/parallel proceedings
• Jurisdiction—umbrella clause

1.0 Case Summary

1.1 Factual background

On 23 August 1991, SGS Société Générale de Surveillance S.A. (“SGS”) concluded an agreement with the Republic of the Philippines regarding the provision of comprehensive import supervision services (“the Contract”). Under the Contract, SGS agreed to provide specialized services to assist in improving the customs clearance and control processes of the Philippines.

The Contract required SGS to provide pre-shipment inspection services of the Philippines’ imports in the country of export, including verification of the imports’ quality, quantity and price. Under the terms of the Contract, SGS was required to maintain a liaison office in the Philippines and to provide certain technical and training assistance to the country.

The Contract was extended three times, first in 1994 at the end of the initial three-year period, then in 1998 until 1999, and then finally from 31 December 1999 to 31 March 2000, at which point the Philippines government discontinued SGS’s services under the Contract. SGS submitted monetary claims to the Philippines government for unpaid sums under the Contract, amounting to approximately US$140 million plus interest.

1.2 Summary of legal issues and decision on jurisdiction

After unsuccessfully pursuing settlement, SGS commenced ICSID arbitration proceedings, alleging that the Philippines had violated several articles of the Switzerland–Philippines Bilateral Investment Treaty (BIT) by refusing to pay the amounts claimed under the Contract, failing to accord SGS fair and equitable treatment, unlawfully expropriating SGS’s property, and breaching the so-called “umbrella clause” (which required the host state’s observance of commitments made to specific investments).

The Philippines objected to the Tribunal’s jurisdiction over the matter, arguing that there was no “investment” in its territory as required by the BIT, that the dispute was purely contractual in character and that the issues in dispute were governed by the contractual dispute resolution clause, which referred the parties to Philippines courts.

The Tribunal ruled that SGS had made an investment in the territory of the Philippines and that both the umbrella clause and the broad dispute resolution clause in the BIT gave it jurisdiction to hear the contract claims.

The Tribunal held, however, that the contract claims were inadmissible because priority was to be given to the forum selection clause in the Contract. The Tribunal stayed the proceedings in favour of the dispute resolution forum specified in the Contract.

2.0 Select Legal Issues

The Tribunal’s decision came a few months after the SGS v. Pakistan decision, which considered similar facts and legal issues and involved the same claimant performing the same type of services for the respondent state. While SGS v. Pakistan took a restrictive view of the effects of the umbrella clause and broad dispute resolution clause, the Tribunal in SGS v. Philippines took a contrary view by deciding that it had jurisdiction based on both provisions. The apparently conflicting decisions of the two SGS tribunals have led to uncertainty regarding the impacts of umbrella clauses and broad dispute resolution provisions in investment treaties.

SGS v. Philippines raises critical concerns about how broad interpretations of these common provisions may elevate commitments states have made to investors under contracts or national laws to commitments enforceable under international law. The SGS v. Philippines Tribunal mitigated the impacts of its broad interpretation to some degree, however, by finding that, although it had jurisdiction to hear the contract claims under both the umbrella clause and the broad dispute resolution clause, it would give effect to the forum selection clause in the contract between the claimant and respondent and therefore stay the proceedings.

The Tribunal’s findings on the impact of the umbrella clause and broad dispute resolution provision in the BIT are analyzed below, as is (albeit more briefly) another aspect of the Tribunal’s decision impacting the scope of the BIT—the definition of a covered “investment.”

2.1 Broad interpretation of “investment” as including a contract for the provision of services performed mostly outside the territory of the host state

The BIT required that the investment be made in the territory of the host state, in accordance with its laws and regulations. SGS’s commitments under the Contract required the provision of services both within and outside the Philippines, although the majority of these were abroad. The Tribunal found that even though SGS carried out pre-inspection shipment services abroad, its liaison offices in the Philippines were a “substantial and non-severable aspect of the overall service” (para 102). It further stated that there “was no distinct or separate investment elsewhere than in the territory of the Philippines but a single integrated process of inspection arranged through the Manila Liaison Office, itself unquestionably an investment ‘in the territory of ’ the Philippines” (para. 112). The Tribunal also placed emphasis on the scale and duration of SGS’s activity in the territory. It concluded that SGS’s activities constituted an investment made in the territory of the host state and in accordance with the BIT.

Similar to the tribunal’s decision in SGS v. Pakistan, the SGS v. Philippines Tribunal’s liberal interpretation of the requirement that the investment should be made in the territory of the host state means that even those activities that are primarily carried out abroad may still be covered under the BIT, provided they are connected to some activities in the host state’s territory. One effect of this interpretation is that it provides only a weak filtering mechanism to help limit the scope of a BIT’s protection to those investments that meaningfully contribute to host states’ economic developments.

2.2  The power of umbrella clauses to transform purely contractual claims into treaty claims

SGS argued that the Philippines’ failure to pay for services under the Contract constituted a breach of the BIT’s umbrella clause, Article X(2), which provides, “Each Contracting Party shall observe any obligation it has assumed with regard to specific investments in its territory by investors of the other Contracting Party” (emphasis added).

TheSGS v. PhilippinesTribunal agreed, holding that the umbrella clause in the Switzerland–Philippines treaty meant what it said: that the host state would have to observe any legal obligation that the host state had or would assume with respect to specific investments covered by the BIT (para. 115).

The Tribunal set forth a number of arguments to support that finding, as well as to support its decision to deviate from the “highly restrictive interpretation” given to the umbrella clause by the SGS v. Pakistan Tribunal (noting that there was no doctrine of binding precedent under international law requiring it to adhere to the other SGS decision) (para.120). First, the Tribunal looked at the concrete wording of the clause in the Switzerland–Philippines BIT, which it held to “say, and to say clearly” that the host state would have to observe any legal commitment it had or would in the future assume with respect to any specific covered investments (para. 115). The Tribunal then pointed out that the language of the Switzerland– Pakistan BIT was “formulated in different and rather vaguer terms than [the umbrella clause] of the Swiss–Philippines BIT” (para. 119). Further significant to the SGS v. Philippines Tribunal was the text of the preamble, from which it concluded that any uncertainty regarding the scope of the clause should be resolved in favour of protecting investment. This underlines the importance of using broader preambular objectives in treaties, to avoid interpretations by tribunals that the singular objective of the BIT is the protection of foreign investment.

TheSGS v. PhilippinesTribunal also addressed the concern raised by the SGS v. Pakistan Tribunal that giving the umbrella clause the effect of bringing contract claims under a treaty tribunal’s jurisdiction would override the forum selection clauses negotiated by parties to applicable investor–state contracts. TheSGS v. Philippines Tribunal found that while this was a valid concern, assuming jurisdiction over contract claims through the umbrella clause does not necessarily have to override contractual forum selection clauses.

Illustrating this theory, the Tribunal accepted jurisdiction under the umbrella clause over contract claims, but decided to give effect to the forum selection clause in the Contract, which mandated that domestic Philippine courts would have exclusive jurisdiction over contract disputes. The Tribunal emphasized that “a binding exclusive jurisdiction clause in a contract should be respected, unless overridden by another valid provision” (para. 138, emphasis added). The Tribunal decided that the BIT did not override the forum selection clause in the Contract, reasoning that general provisions such as the umbrella clause are generally not interpreted as overriding specific provisions of particular contracts freely negotiated between the parties.

By staying the proceedings in favour of the parties’ chosen forum in the Contract, the Tribunal addressed the concerns of the SGS v. Pakistan Tribunal over the impact broad interpretations of umbrella clauses would have on existing forum selection clauses in investor–state contracts. The dissenting arbitrator, however, disagreed with this particular aspect of the decision, finding that the Tribunal should have issued a decision on the merits, based on the broad scope of the umbrella clause and consent to ICSID arbitration under the BIT. This dissenting view leaves the door open for future decisions permitting the umbrella clause to effectively rewrite the dispute resolution clause in investor–state contracts.

TheSGS v. Philippinesand SGS v. Pakistan decisions are often cited as examples of ICSID decisions that result in divergent findings on similar treaty provisions. While some tribunals have followed the restrictive reading of the umbrella clause in SGS v. Pakistan, in decisions such as Eureko B.V. v. Poland[1]and Noble Ventures v. Romania[2]tribunals favour the SGS v. Philippines findings on the effect of the umbrella clause regarding jurisdiction over contract claims.

2.3 Does the general description of a “dispute concerning an investment” in the BIT’s investor– state arbitration clause encompass claims of an essentially contractual character?

Article VIII(1) of the Switzerland–Philippines BIT provides for settlement of “disputes with respect to investments between a Contracting Party and an investor of the other Contracting Party” (para. 130). Like its broad view of the umbrella clause, the Tribunal took a broad view of this dispute resolution clause by finding that the phrase “disputes with respect to investments” could apply to an expropriation claim under the BIT as well as to a dispute arising from an investment contract such as the SGS– Philippines Contract. Specifically, the Tribunal stated that “the phrase‘disputes with respect to investments’ naturally includes contractual disputes” (para. 132, emphasis added).

The Tribunal went on to discuss the impact its assertion of jurisdiction over contract claims would have on the exclusive jurisdiction clauses in such contracts. And as noted above, it concluded that it was possible “for BIT tribunals to give effect to the parties’ contracts while respecting the general language of BIT dispute settlement provisions” (para. 134). The Tribunal ruled that the dispute resolution clause in the BIT provided it jurisdiction over the contract claims arising out of the SGS–Philippines Contract, but that it would nevertheless respect the exclusive forum selection clause in the Contract because that provision could not be waived or overridden by the broad dispute resolution clause in the BIT or by the consent to arbitration under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States.

TheSGS v. PhilippinesTribunal took a different view than the SGS v. Pakistan Tribunal, which held that a similarly drafted dispute resolution clause in the applicable BIT did not give that tribunal jurisdiction over contract claims. The two conflicting interpretations in SGS v. Pakistan and SGS v. Philippines on this issue create significant uncertainty regarding hundreds of broad dispute resolution clauses in BITs and their impacts upon forum selection clauses in an unknown, but likely extensive, number of investor–state contracts.[3]

Notes

[1] Partial Award and Dissenting Opinion dated 19 August 2005, available at http://ita.law.uvic.ca/documents/Eureko-PartialAwardandDissentingOpinion.pdf.

[2] ICSID Case No. ARB/01/11, Award dispatched to the parties 12 October 2005, available at http://ita.law.uvic.ca/documents/Noble.pdf.

[3] While some treaties’ dispute resolution provisions specifically indicate that they cover breaches of treaty obligations, a large number (including the treaties at issue in the SGS cases) more generally state that they cover disputes “relating to investments,” without clarification regarding the inclusion—or, for that matter, exclusion—of contract claims.