Investor's claims against Peru thrown out due to abusive corporate restructuring to acquire treaty rights

In an award rendered on 9 January 2015, an ICSID tribunal (Gabrielle Kaufmann-Kohler (presiding), Eduardo Zuleta, and Raúl Vinuesa), determined that one of the Claimants had acquired shares in a Peruvian company only for the purpose of obtaining treaty rights, in relation to a foreseeable dispute and less than two weeks before the announcement of the State measures at issue in the case. The Tribunal concluded that the only plausible reason for the restructuring was to provide an investment treaty claim against Peru. The restructuring was therefore abusive. On that basis, the Tribunal declined to rule on the merits of the case, dismissed the claims, and ordered the Claimants to pay the Republic of Peru more than US$1.5 million in costs.

Investors are increasingly alive to the investment protections offered by bilateral and multilateral investment treaties.  Not all structuring (or re-structuring) of investments will constitute an abuse of process and with careful advance planning, investors can make their investments using the right vehicle and transaction structure to ensure the best treaty protections possible. For more information on this topic, please contact Prudence Heidemans to access our webinar on Structuring Investments and Maximising Treaty Protection.

Background and decision

The Claimants (Gremcitel S.A. (a Peruvian company) and Ms. Renée Rose Levy (a French national and owner of Gremcitel S.A.)) owned three parcels of land on the Pacific coast of Peru, on which they planned to build the Costazul Project – a "tourism and real estate 'urban megaproject'". The parcels of land were adjacent to the "Morro Solar", a historically significant area in Peru claimed to be the site of a major battle in the 1879-1883 war between Peru and Chile. On 18 October 2007, Peru's National Institute of Culture published a Resolution delimiting the precise boundaries of the Morro Solar, which encompassed the Claimants' land. The Claimants initiated proceedings under the France-Peru BIT in 2011, claiming that the 2007 Resolution had destroyed the Claimants' investment in the Costazul Project.

Peru raised several objections to the claims, including that the corporate restructuring by which Ms. Levy acquired shares in Gremcitel was an abuse of process.

The doctrine of abuse of process rests upon the inherent discretionary power of an investment treaty tribunal to decline to hear a case in order to preserve the integrity of its process.

The Tribunal considered it "now well-established, and rightly so, that an organization or reorganization of a corporate structure designed to obtain investment treaty benefits is not illegitimate per se, including where this is done with a view to shielding the investment from possible future disputes with the host state". It added, however, that corporate restructuring with the purpose of seeking treaty protection when a dispute is anticipated may constitute an abuse of process. In this regard, the Tribunal endorsed the test from Pac Rim Cayman LLC v. Republic of El Salvador: a restructuring to obtain treaty protection will be an abuse of process if undertaken at a time when “a specific future dispute” is “foresee[able] […] as a very high probability and not merely as a possible controversy".

In assessing the foreseeability of the dispute, the Tribunal found that "the acts that set in motion Ms. Levy's investment in Gremcitel occurred just over a month before [the Resolution] … The actual transfer of the shares occurred on 9 October 2007, only one day before the [Resolution] was issued and 9 days before it was published". The Tribunal reasoned that whether the restructuring was an abuse of process turned not simply on whether it had been completed before the Resolution was published, but whether it had been done after the threshold of foreseeability established in the Pac Rim Cayman case had been reached. In the Tribunal's opinion, the Claimants could foresee that the Resolution was forthcoming, noting the following circumstances:

• One of the Claimants' expert witnesses admitted that it was possible he had passed on to the Claimants confidential information pertaining to the Resolution before it was issued; and
• The Claimants failed to present any credible alternative explanation for the corporate restructuring, which lead the Tribunal to conclude that "the only reason for the sudden transfer of the majority of the shares in Gremcitel to Ms. Levy was her [French] nationality".

Furthermore, in considering the totality of the circumstances, the Tribunal referred to corporate documents adduced by the Claimants that turned out to be "untrustworthy, if not utterly misleading." The documents had been produced in support of the Claimants' argument, rejected by the Tribunal, that Ms. Levy had acquired indirect ownership in Gremcitel in 2005. It is clear from the Tribunal's Award that the Claimants' reliance upon these documents coloured its perception of the Claimants' case more generally, saying that a "global evaluation of the facts relating to the Claimants' attempts to establish jurisdiction thus evinces a pattern of manipulative conduct that casts a bad light on their actions."

For all these reasons, the Tribunal upheld Peru's abuse of process objection and declined to exercise jurisdiction.

Comment

Corporate structuring (or restructuring) for the purpose of obtaining treaty protection against the risk of future unlawful State action is not necessarily illegitimate. However, a restructuring may be regarded as abusive if it occurs after a specific future dispute becomes foreseeable as a "high probability". Re-affirming the findings of Mobil v Venezuela, the Levy Tribunal made clear that “[u]nder general international law as well as under ICSID case law, abuse of right is to be determined in each case, taking into account all the circumstances of the case”.

Further, as the Levy case demonstrates, the consequences of a finding of an abuse of process may be severe, including an adverse costs award.

Renée Rose Levy and Gremcitel S.A. v. Republic of Peru, ICSID Case No. ARB/11/17, Award, 9 January 2015.

For further information, please contact Christian Leathley, Partner, Antony Crockett, Senior Associate or Timothy Hughes, Associate or your usual Herbert Smith Freehills contact.