Suppose for a moment that you are an investor from Country A, investing in a public works project in Country B as part of a public private partnership. In the course of your contract to build this large public works project that will contribute to the economic development of Country B, Country B enacts regulations that directly impair your ability to recoup your investment on this project.
Your local counsel in Country B advises that you have a very strong argument that these regulations are unlawful and you mount a challenge to the enforceability of these regulations through Country B’s court system. But you run into an issue you had not fully anticipated: these courts provide you with no realistic hope of getting a fair adjudication. You do your best, appealing as high as you can go, but despite your best efforts, you are faced with judicial rulings that plainly misstate both the facts of your case and the law – suggesting incompetence at best or corruption at worst. As a stranger in a strange land, you resign yourself to defeat and simply assume that you can’t fight city hall.
You may, however, have an additional avenue for relief: if Country A and Country B have entered into a Bilateral Investment Treaty (BIT) that requires each country to treat investors fairly and equitably, you may seek relief though an Investor-State Arbitration under the Rules of the International Centre for the Settlement of Investment Disputes (ICSID), fashioning your claim as that of a “Denial of Justice.”
In many modern ICSID cases dealing with claims asserting a Denial of Justice, investors seek to paint the recipient of investment (the ‘host’ country) in a light similar to Country B, above. This tactic however, has a very mixed record of success, given that a prerequisite of a Denial of Justice claim is that investors must exhaust all remedies, and that ICSID tribunals afford a high level of deference towards local courts and procedure. Recent decisions by two ICSID tribunals, however, may breathe renewed life into a claim that has rarely proven successful.
Elements Of A Denial Of Justice Claim
The generally accepted definition of a “Denial of Justice” was set forth in Elettronica Sicula S.p.A. (United States of America v Italy), 1989 ICJ 15, in which the International Court of Justice stated that a Denial of Justice is “a willful disregard of due process of law, an act which shocks, or at least surprises, a sense of juridical propriety.”
In a recent ICSID decision, Arif v. Moldova, ICSID Case No. ARB/11/23, 8 April 2013,(predictably rejecting the Denial of Justice claim), the tribunal set forth the standard as:
[T]he State can be held responsible for an unfair and inequitable treatment of a foreign indirect investor if and when the judiciary breached the standard by fundamentally unfair proceedings and outrageously wrong, final and binding decisions.
As a prerequisite to a Denial of Justice, a party must show complete exhaustion of all remedies before justice can be deemed ‘denied.’ The clearest example of this is Loewen Group Inc. v. United States, in which the tribunal found that the Mississippi Supreme Court’s requirement of a $625 million bond to secure appeal of a $100 million jury award was a procedural Denial of Justice, but that the claim failed due to the investor’s failure to seek a writ of certiorari from the United States Supreme Court. ICSID Case No. ARB(AF)/98/3, 26 June 2003
A Recent Victory For A Denial Of Justice Claim
The most recent case of a tribunal finding a Denial of Justice in this context was in Dan Cake v. Hungary. ICSID Case No. ARB/12/9, 24 August 2015. There, the tribunal’s ruling was fairly straightforward – it ruled that under the Hungary-Portugal BIT the investor had a right to a particular bankruptcy hearing under Hungarian law, and that by refusing to grant any such hearing, the Hungarian court had shocked the tribunal’s sense of judicial propriety. All parties agreed that no appeal of the court’s ruling was possible, and so the tribunal easily held that there was also a clear exhaustion of remedies sufficient for the claim.
While early arguments propounded by the investor challenged the fairness per se of Hungary’s bankruptcy laws, later arguments and the tribunal’s decision were limited only to a procedural question of whether the courts had abided by those laws.
Denial Of Justice Claim Unsuccessful In Phillip Morris v. Uruguay
In the recent conclusion to the decade-long dispute between Phillip Morris and the Republic of Uruguay regarding the latter’s enactment of strict cigarette regulations, an ICSID tribunal rejected Phillip Morris’ claims that it was denied justice in the Uruguayan court system.
Over the past decade, many countries have taken regulatory steps in an attempt to curb tobacco use. These regulations most visibly take the form of packaging restrictions that specify the type, size, and content of warning labels to be printed on those products. At issue in the dispute between Phillip Morris and Uruguay were two novel restrictions on cigarette marketing in Uruguay. One restriction required that 80% of all cigarette packaging be devoted to health warnings, leaving only 20% for trademarks, logos, and any other information. The other was a “Single Presentation Requirement” (SPR), which required each cigarette brand to have a single presentation and prohibited different packaging for different “variants” of a particular brand. With regard to the SPR, Marlboro would be limited to one “variant” from among its many types (e.g., Marlboro Red, Blue, Gold, etc.).
Phillip Morris claimed that these restrictions unduly expropriated the trademark rights that they held under Uruguayan law. It also claimed that the provisions were inherently unfair and inequitable as the regulations were arbitrary and unlikely to achieve the goals of the state. With regard to the expropriation claims, the tribunal ruled in favor of Uruguay, finding that Phillip Morris’ trademark rights did not bestow any particular right to use those trademarks, but only a right to keep others from infringing on them.
As to the unfairness and inequity of the restrictions themselves, the tribunal held in favor of Uruguay, though Phillips Morris’ arbitrator choice did offer a compelling dissent to this particular ruling with regard to the SPR – finding the regulation to be arbitrary and lacking any rational basis for implementation.
- Phillip Morris’ Denial Of Justice Claims Narrowly Defeated
In addition to Phillip Morris’ claims challenging the laws as a ‘regulatory taking’ of its trademark rights, Phillip Morris also initiated litigation in Uruguay arguing that the law containing the 80% packaging requirement contained an unconstitutional grant of authority to the executive branch.
Phillips Morris appealed to the Supreme Court of Uruguay regarding the constitutionality of the law, while contemporaneously filing an action to nullify the executive’s regulation under the law before the Tribunal de lo Contencioso Adminstrativo (TCA). The TCA stayed its proceedings pending the Supreme Court’s decision.
The Supreme Court ruled that the law was constitutional because it did not authorize the executive to actually require warning labels covering more than 50% of the packaging. The Supreme Court stated that a delegation of power to the executive to require warning labels beyond 50% would indeed be unconstitutional.
Phillip Morris then returned to the TCA, which seemingly disagreed with the Supreme Court’s interpretation of the law, finding that the regulation requiring 80% warning labels was indeed permitted by the law.
No appeal was possible between the two courts, and so Phillip Morris initiated its claim for Denial of Justice under the applicable BIT. The tribunal in a 2-1 decision ruled that this was merely a “quirk” of the Uruguayan system. They reasoned that the Supreme Court’s interpretation of an administrative act was merely dicta and imposed no obligation on the TCA. In support, the tribunal referred to other cases that have dealt with court systems that have multiple strata of courts and jurisdictions that may render contradictory interpretations of a law.
- Dissenting Opinion – More Than “Just A Quirk”
Phillip Morris’ appointed arbitrator, Professor Gary Born, dissented, thoroughly rejecting the majority’s ruling that Uruguay’s system in this case was merely a quirk. He noted that while conflicts and jurisdictional splits regarding interpretation may exist in other countries, the particular situation in Uruguay was unique as it offered a conflict of interpretations within the same case. The ultimate issue was not the way in which Uruguay has chosen to set up its courts, but the fact that there is no mechanism to resolve this particular inconsistency within the system and that the TCA refused to follow the ruling of the Supreme Court.
While the result relegates Phillip Morris v. Uruguay to the long litany of cases where a Denial of Justice claim was denied, Professor Born’s reasoned argument for the appropriateness of it under these circumstances may fuel the hopes of other parties with regard to this tactic. Ultimately, unless you are faced with a clear case that “shocks…the senses of judicial propriety,” the chances of success on a Denial of Justice claim remain slim. And even in such a shocking case, arbitrators are particularly sensitive about condemning their judicial colleagues.