AFC Investment Solutions S.L. v República de Colombia ICSID Case No. ARB/20/16:

The relevance of the distinction between “dispute” and “claim” in light of ICSID Arbitration Rule 41(5)

The tribunal accepted the preliminary objection of the Republic of Colombia (the “respondent”) after finding that the claim brought by AFC Investment Solutions S.L. (the “claimant”) was manifestly without legal merit under ICSID Arbitration Rule 41(5). As a result, the tribunal awarded the respondent USD 146,102.93 in arbitration costs.

The arbitration was conducted under the Agreement Between the Kingdom of Spain and the Republic of Colombia for the Promotion and Protection of Investments of March 3, 2005 (the BIT) and the ICSID Arbitration Rules.

Background

The dispute arose out of a series of measures adopted by the Financial Superintendency of Colombia (“SFC”) whereby it took over the assets and requested the forced liquidation of the claimant’s subsidiary companies in Colombia. The claimant characterized these measures as a violation of the obligations assumed by the respondent under the BIT.

The claimant made its investment by purchasing 80% of the stock of a financial institution in Colombia in 2010. This company was already authorized to operate in the local market, lending money and offering savings accounts to the general public. In 2015, the SFC initiated an administrative investigation and finally ordered the forced liquidation of the company, as it deemed that the company was being mismanaged, raising serious allegations about questionable practices within the institution that might have harmed clients, creditors, and the financial market of Colombia.

The claimant argued before the SFC that the seizure of the company’s assets and its forced liquidation was unfair and inequitable as the company was not being mismanaged, and it was not in default of its financial obligations to either creditors or clients. However, the SFC dismissed the claimant’s arguments and carried out the company’s forced liquidation in 2016.

Claim and preliminary objection

On 21 April 2020, the claimant submitted its request for arbitration to ICSID. The respondent filed a preliminary objection under Rule 41(5), arguing that the claimant’s claims are manifestly without legal merit because the request for arbitration was submitted more than 3 years after the “date on which it had or ought to have had knowledge of the alleged breach of this Agreement as well as of the losses or damages suffered,” in violation of one of the requirements set out in Article 10 of the BIT. For this reason, the respondent contends that the tribunal lacks jurisdiction.

The ICSID Arbitration Rule 41(5) states the following:

(5) Unless the parties have agreed on another expedited procedure for raising preliminary objections, a party may, no later than 30 days after the constitution of the Tribunal, and in any event before the first session of the Tribunal, raise an objection based on the manifest lack of legal merit of a claim. The party shall specify, as precisely as possible, the basis of its objection. The Tribunal, after giving the parties the opportunity to present their observations on the objection, shall, at its first session or promptly thereafter, notify the parties of its decision on the objection. The decision of the Tribunal shall be without prejudice to a party raising an objection under paragraph (1) or raising, in the course of the proceedings, defences that a claim is without legal merit.

According to the respondent, other tribunals have held that the expiration of a limitation period provided for in the relevant treaty can form the basis for an objection under Rule 41(5). The respondent relies on the Ansung v. China case, in which the tribunal held:

Where the objection under Rule 41(5) concerns the limitation period, as China alleges, the tribunal’s decision on that objection constitutes a decision on the Centre’s lack of jurisdiction and its own competence under Rule 41(6) as well as on the manifest lack of legal merit due to temporal lack of jurisdiction. [Translation by the tribunal]

For the respondent, only the “arbitration claim” can interrupt the prescription since it is the vehicle through which the arbitration procedure is activated. Notification is a necessary step to present a claim, but it cannot constitute or constitute a proper “claim,” as alleged by the claimant. According to Colombia, the claimant´s interpretation of Article 10 reaches an absurd extreme, as Colombia and Spain would be perpetually subject to the possibility of a claim being made with the simple notification of a dispute.

Tribunal’s analysis

To analyze the argument of the manifest lack of legal merit of the claimant’s claim, the tribunal analyzed three points: first, the preliminary exception character of the objections made by the defendant; second, the meaning of the concept of manifest lack of legal merit according to Rule 41(5) of the ICSID Arbitration Rules; and finally, the lack of legal merit of the claim in light of Article 10(5) of the BIT.

Preliminary exception character of Rule 41(5)

The tribunal agrees with the respondent that the argument submitted for its consideration is a preliminary objection that must be decided without delving into the substantive aspects that may have been included in the claimant’s request for arbitration. The parties also did not question the tribunal’s jurisdiction to determine this preliminary objection. The competence of a tribunal that hears preliminary objections of this nature has been clearly established by interpretations made by previous tribunals regarding the scope of Rule 41(5). The tribunal in the Brandes case affirmed this by stating that:

There is no objective reason why the intention not to impose on the parties the burden of a possibly lengthy and costly procedure when it comes to such unfounded claims should be limited to the assessment of the merits of the case and should not include an examination of the jurisdictional basis on which the tribunal’s power to decide is based.^[1]

The concept of manifest lack of legal merit

The tribunal, for the purpose of determining the concept of manifest lack of legal merit, cites the Trans-Global case, in which an arbitral tribunal for the first time heard an objection under Rule 41(5), on which occasion the said tribunal issued a set of interpretations and guidelines referred to by the present tribunal’s decision. With regard to the word “manifest,” the Trans-Global tribunal arrived at the following conclusions:

The Tribunal considers that these legal materials confirm that the ordinary meaning of the word requires the respondent to establish its objection clearly and obviously, with relative ease and dispatch. The standard is thus set high. Given the nature of investment disputes generally, the Tribunal nonetheless recognizes that this exercise may not always be simple, requiring (as in this case) successive rounds of written and oral submissions by the parties, together with questions addressed by the Tribunal to those parties. The exercise may thus be complicated; but it should never be difficult.^[2]

In conclusion, as regards the word “manifestly,” the Tribunal requires the Respondent’s Objection to meet the test of clarity, certainty and obviousness discussed above.^[3]

Regarding the lack of legal merit, the Trans-Global tribunal reasoned as follows:

In applying Rule 41(5), the Tribunal accepts that, as regards disputed facts relevant to the legal merits of a claimant’s claim, the Tribunal need not accept at face value any factual allegation which the Tribunal regards as (manifestly) incredible, frivolous, vexatious or inaccurate or made in bad faith; nor need a tribunal accept a legal submission dressed up as a factual allegation.^[4]

The Tribunal considers that the adjective “legal” in Rule 41(5) is clearly used in contradiction to “factual” given the drafting genesis of Rule 41(5) […] Nonetheless, the Tribunal recognizes that it is rarely possible to assess the legal merits of any claim without also examining the factual premise upon which that claim is advanced.^[5]

The tribunal then cites the Brandes case, which corresponds to the second opportunity in which a tribunal ruled on the scope of Rule 41(5), in which it was stated that the concept of legal merit has the virtue of being comprehensive, stating that “legal merit covers all objections to the effect that the proceedings should be discontinued at an early stage because, for whatever reason, the claim can manifestly not be granted by the tribunal.”^[6]

Therefore, the court concludes that the determination of the legal merit of a claim cannot and should not be adopted in a good number of cases without a rigorous appreciation of the facts that are the substrate of a claim, especially when it directly affects the court’s jurisdiction to hear the case submitted.

Lack of legal merit due to expiration of the deadline established in the BIT

The respondent argued in its preliminary objection that AFC’s claim manifestly lacks legal merit, as the request for arbitration was submitted when the 3-year term provided for in Article 10(5) of the BIT had already expired.

In its analysis of Article 10(5) of the BIT, the court analyzes the meaning of the word “claim,” concluding that it is equivalent to “complaint.” Article 10(5) of the BIT provides that “[t]he investor cannot submit a claim if more than three years have passed since the investor knew or must have known of the alleged breach of this Agreement, as well of losses or damages suffered” [free translation].

The claim is the act by which the investor not only expresses that there is a dispute and that, in its opinion, the BIT has been violated, but also actively demands before a competent tribunal that the controversy be resolved, and that the investor be granted the compensation it demands. As Colombia points out, the claim is the vehicle through which the arbitral process is activated.

To reach this conclusion, the tribunal analyzes the documents submitted by the parties to the process, which confirm that, at the time of sending the notice of dispute in accordance with Article 10(2) of the BIT, the claimant fully understood that this was a different step from the submission of a claim in accordance with Article 10(4) of the same BIT.

Indeed, in its letter of January 12, 2019, the claimant expressly acknowledged that its letter of November 16, 2018, constituted a “notice of dispute” in accordance with Article 10(2) of the BIT, and stated that such notice contained the information required at that procedural moment. The claimant clearly indicated that “the information and degree of detail” referred to in its letter of November 30, 2018, were “proper to the notice of the claim to arbitration contemplated in paragraph 4) of the aforementioned Article 10, which, by its nature and purpose, has nothing to do with the initial notification of the dispute.”

To arrive at this interpretation, the tribunal also relies on the jurisprudence established by the case of Marvin Feldman v. United Mexican States, in which the court determined that the term “presenting a claim” had the following meaning:

“Presenting a claim” is used to refer to the definitive activation of an arbitration proceeding […] Consequently, it is the moment when the notification of arbitration was received by the Secretary-General, rather than the moment of sending the notification of the intention to submit the claim to arbitration, that can interrupt the prescription period in accordance with Article 1117(2) of NAFTA.

Conclusion

Thus, the tribunal concludes that the period indicated in Article 10(5) of the BIT corresponds to the submission of the claim to arbitration, and not to the notification of the dispute to the state, as argued by the claimant. In the ICSID system, the presentation or submission of a claim to arbitration is made by submitting a request for arbitration in accordance with Article 36 of the ICSID Convention. A different interpretation would not only render paragraph (5) of Article 10 meaningless and ineffective, as mentioned above, but would also result in Colombia and Spain being subject, without time restrictions, to arbitration claims between the investor and the state.

In this way, the tribunal concludes that the claimant’s claim is effectively without legal merit, as it was submitted after the 3-year period established by the BIT, which is why it upheld the respondent´s preliminary objection.

Note

The tribunal was composed of Juez Bernardo Sepúlveda Amor (president), Dyalá Jiménez Figueres (appointed by the respondent), and Sabina Sacco (appointed by the claimants).

Author

Sergio Cifuentes Vergara has an LL.M. from Harvard Law School and is a former International Law Fellow at IISD Economic Law & Policy program.

Notes

[1] Brandes Investment Partners, LP v. The Bolivarian Republic of Venezuela, ICSID Case No. ARB/08/3, Decision on the Respondent’s Objection Under Rule 41(5) of the ICSID Arbitration Rules, para. 52.

[2] Trans-Global Petroleum, Inc. v. The Hashemite Kingdom of Jordan, ICSID Case No. ARB/07/25, para. 88.

[3] Ibid., para. 105.

[4] Idem.

[5] Ibid., para. 97.

[6] Brandes, para. 55.