Tribunal finds an abuse of process in claimants’ corporate restructuring; Peru recoups costs

Renée Rose Levy and Gremcitel S.A. v. Republic of Peru, ICSID Case No. ARB/11/17

In an award of January 9, 2015, a tribunal at the International Centre for Settlement of Investment Disputes (ICSID) dismissed on jurisdictional grounds the case of Renée Rose Levy (a French national) and Gremcitel S.A. (Gremcitel) against Peru. The tribunal found an abuse of process in the corporate reorganization carried out by the claimants, whose sole purpose was to gain access to arbitration against Peru under the France–Peru bilateral investment treaty (BIT).

Factual background

Morro Solar is a historical site in Peru, protected under Peruvian law since 1977. In 1995, the Levy Group purchased land in the surroundings of Morro Solar to develop the Costazul tourism and real estate project. Between 2003 and 2004, the land and the rights to the project were consolidated in claimant Gremcitel, a Levy Group company incorporated in Peru.

In 2001, the Levy Group submitted to the Peruvian National Institute of Culture (INC, in its Spanish acronym) a proposal for the historical delimitation of Morro Solar. The INC decided in 2003 that there were no grounds to lift the site’s protected status, requiring the Levy Group to submit a project for prospecting and excavation of its land, and stressing that any urban development plans would depend on INC approval.

The INC also created a commission to study the delimitation of the boundaries of Morro Solar. The studies were concluded by a 2005 report, and a 2007 resolution based on that report formalized the delimitation. Only one day before the 2007 resolution was issued, direct control over Gremcitel was transferred to the claimant, Ms. Levy.

Levy and Gremcitel bring FET claims

For Ms. Levy and Gremcitel, the 2007 resolution imposed on their land a status of intangibility that did not previously exist, frustrating their legitimate expectations to develop the Costazul project. They initiated arbitration in May 2011, alleging that Peru had breached the fair and equitable treatment (FET) standard under the BIT and seeking damages quantified by their expert at US$41 billion.

The status of claimants as “investors” when the dispute arose

Peru’s first objection to the tribunal’s jurisdiction was that the claimants had not demonstrated that they were “investors” within the meaning of the BIT and the ICSID Convention when the events giving rise to the dispute occurred. The tribunal reasoned that “the Treaty must be in force and the national or company must have already made its investment when the alleged breach occurs, for the Tribunal to have jurisdiction over a breach of that Treaty’s substantive standards” (para. 146). Peru also asserted that “the critical date is the one on which the State adopts the disputed measure, even when the measure represents the culmination of a process or sequence of events” (para. 146). Setting the date of publication of the 2007 resolution as the critical date, the tribunal found that both Ms. Levy (as a French national) and Gremcitel (then directly controlled by Ms. Levy) fulfilled the personal and temporal requirements to qualify as “investors.”

Abuse of process precludes tribunal from exercising jurisdiction

Peru argued that control of Gremcitel was transferred to Ms. Levy because of her French nationality, for the sole purpose of allowing the Levy Group to bring a treaty claim in a dispute that was “existing or foreseeable, and otherwise purely domestic” (para. 85). Alleging that this constituted an abuse of process, Peru objected to the tribunal’s jurisdiction.

The tribunal reasoned that a corporate reorganization to obtain treaty benefits is not illegitimate in itself. However, carrying it out to invoke treaty protections may constitute an abuse of process if a specific future dispute is “foresee[able] […] as a very high probability and not merely as a possible controversy,” according to the test in Pac Rim v. El Salvador (para. 185). It agreed with the claimants that a finding of abuse of rights was not to be presumed, but required a high threshold, to be met only “in very exceptional circumstances,” as per Chevron and Texaco v. Venezuela (para. 186). It then followed Mobil v. Venezuela in taking into account “all the circumstances of the case” (para. 186) to determine whether, when Ms. Levy acquired control of Gremcitel, the dispute was “foreseeable as a very high probability.”

For the tribunal, it was no coincidence that the transfer of Gremcitel’s shares to Ms. Levy happened “in a great hurry” and was perfected one day before the 2007 resolution was issued. The tribunal was convinced that the claimants—through an agent with connections in the INC—had knowledge of the contents of the 2005 report and could foresee that the land delimitation was to be formalized in 2007.

The claimants explained that the transfer of shares resulted from a family decision to internationalize the project. However, the tribunal did “not see how transferring shares to a family member with a foreign nationality would internationalize the project”; rather, it agreed with Peru that the only intention behind the transfer was to internationalize the “soon-to-be-crystallized domestic dispute,” to obtain access to ICSID arbitration (para. 191).

In addition, the tribunal took as “extremely serious” the claimants’ attempt to show through documents that were “untrustworthy, if not utterly misleading” that Ms. Levy had become an indirect shareholder in Gremcitel already in 2005 (par. 194). At the hearing, a notary public had admitted that twice, at the request of the claimants, she had altered the dates of notarized documents relating to the transfer of shares. The claimants later relied on these documents to attempt to establish the tribunal’s jurisdiction. According to the tribunal, the claimants’ “pattern of manipulative conduct [casted] a bad light on their actions” (para. 194).

In view of the circumstances, the tribunal held that the restructuring that made Levy the main shareholder of Gremcitel was an abuse of process, precluding the tribunal from exercising jurisdiction. Based on considerations of judicial economy, it also found that it was unnecessary to address Peru’s third jurisdictional objection—namely, that the claimants did not have an “investment,” as they could not demonstrate that they had a right to develop the Costazul project, and had not made monetary contributions or undertaken risks.

Peru obtains award on costs

Based on the finding of abuse of process against the claimants, the tribunal ordered them to pay for all costs of the proceeding, including the arbitrators’ fees.

The claimants’ legal fees and expenses amounted to more than US$1.5 million, while Peru’s amounted to roughly US$5.3 million. For the tribunal, this disparity showed that the claimants tried to minimize costs, while Peru did not. It ordered the claimants to contribute US$1.5 million toward Peru’s fees and expenses—the same amount that they had spent.

Notes: The ICSID tribunal was composed of Gabrielle Kaufmann-Kohler (President appointed by the Chairman of the Administrative Council, Swiss national), Eduardo Zuleta (claimants’ appointee, Colombian national) and Raúl E. Vinuesa (respondent’s appointee, Argentinean and Spanish national). The award is available at https://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=showDoc&docId=DC5652_En&caseId=C1640.

Martin Dietrich Brauch is an International Law Advisor and Associate of IISD’s Investment for Sustainable Development Program, based in Latin America.