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Fraportís Request for Arbitration

(Article published in the Oct 20,2003 issue of TODAY, Business Section)

            A number of people who were not distracted by attributions of wrong doing on the part of Gloria Tan Climaco and unsavory references to the law firm of Villaraza and Angangco, were nevertheless perplexed with the news that Fraport AG Frankfurt Airport Services Worldwide (Fraport) had, in a letter last month, requested arbitration by the World Bankís International Centre for Settlement of Investment Disputes (ICSID) of its dispute with the Philippine government over its investments in the Philippine International Air Terminal Co., Inc. (PIATCO).   

The World Bank has an arbitration center? A mere letter was used to lodge the request?  Can the Philippines, a sovereign state, dragged into arbitration by a private entity?  For those who wish to understand the legal framework of what will undoubtedly hug the headlines for many days to come, here are some facts and figures as well as unsolicited comments and observations.

It was not just a letter, as we generally under what a letter is, but instead a formal 35-page (exclusive of cover and attachments) request for arbitration, replete with lawyerly prose and ringing with media manís spin, that was lodged with the ICSID.  The ICSID, on the other hand, is not a department, a subsidiary, or a part of the World Bank.  It is an autonomous body established under an international convention, but, undoubtedly, it has strong links with the World Bank. 

Before 1966, the World Bank and its President have often been asked to assist, and have in fact assisted, in the settlement of disputes among the bankís member countries, on the one hand, and nationals of other member countries, on the other regarding the investments of the latter in the former.  One of the major reasons for the establishment of the ICSID is to enable the World Bank and its staff avoid being involved in such disputes. 

Thus, after a number of consultations with member countries, the executive directors of the World Bank submitted, on March 18, 1965, for consideration and eventual signature and ratification of, a convention, or a multinational agreement, that would provide facilities for conciliation and arbitration of investment disputes between a contracting state and the nationals of another contracting state.  The convention, establishing the ICSID, was ratified, initially, by 20 countries and thus entered into force on October 14, 1966.  Other countries since then have ratified the convention and by December 15, 2002, 136 countries have become contracting states. 

The Philippines signed the convention September 26, 1978.  It deposited the instrument of ratification on November 17, 1978, and the entry into force of the convention, with respect to the Philippines, was one month thereafter.  Germany, of which Fraport is a national, signed on January 27, 1966; deposited ratification on  April 18, 1969 and was bound on May 18, 1969. 

Article 25(1) of the Convention describes the jurisdiction of the centre as extending to any legal dispute arising directly out of an investment, between a contracting state and a national of another contracting state which the parties consent in writing to submit to the centre.  Hence, voluntary submission is a key to invoking the involvement of the centre in the resolution of the dispute.   

The rules are loose about the existence of consent.  For instance, consent may be given in an investment agreement providing for the submission to the centre of future disputes arising out of that investment agreement.  The consent need not be made in a single instrument.  The offer to submit disputes to the centre may be made in an investment promotion legislation of a contracting party and the consent of the investor of another country may be made by an acceptance in writing. 

In Fraportís request for arbitration, the German company invokes Article 9 of the Agreement between the Republic of the Philippines and the Federal Republic of Germany for the Promotion and Reciprocal Protection of Investments.  Section (2) provides that, in case divergencies are not resovled amicably through negotiations, the investor may submit the dispute to (a) the competent court of the contracting state; (b) the ICSID.  Curiosly, the Section does not say whether it is (a) and (b) or whether it is (a) or (b). 

For its own consent, Fraport submits its own request for arbitration as manifestation of its consent.  That is why in the opening paragraph of Fraportís request for arbitration, it states that it ďhereby accepts the offer of the Republic of the PhilippinesĒ for arbitration in the centre of its legal dispute. 

The Office of the Solicitor General is reported to have stated that it intends to block the arbitration and it will be interesting to watch how the governmentís counsel would argue that the Philippines has not given its consent to submit to the ICSID.  That position will impact not only this case of Fraport but also the way the international community would look at stipulations may be the Philippine government in other agreements where it has agreed to have disputes submitted to the decision of third parties. 

The other interesting development to watch is how the Philippines would treat an arbitral award, for or against it.  Article 53 of the convention provides that the award is to be considered binding on the parties and Article 54 binds the contracting state to recognize an award as binding and enforce the pecuniary obligation within its boundaries as if it were a final judgment of a court in that state.  Article 54(3) provides that execution of the award shall be governed by the laws concerning the execution of judgments in force in the state in whose territories such execution is sought.  But  what if, in the contracting state, judgments cannot be executed against the government? 

It seems that, in many cases, the sought after result of submitting a case to the ICSID is to bring the contracting state to the negotiating table.  Thus, about 40 percent of the cases concluded at the ICSID from 1976 to 2003 ended with the termination of the proceedings on account of the settlement between the parties.  This explains, in my view, the show-biz tenor in which the Fraport complaint makes references to Gloria Tan Climaco and Pancho Villaraza.   

       It could be Fraportís thinking, and I am definitely speculating here, that targeting personalities close to the President would be perceived as a shot across the bow, a warning shot that speaks both a resolve to go to war and at the same time a signal that doors to peace are not yet closed.  For the good of the country, I hope that Fraportís suit goes the way of the 40 percent of ICSIDís casesóand as soon as possible, too.