6 Fraport v Philippines Introductory Note

Fraport AG Frankfurt Airport Services Worldwide v. Republic of the Philippines (ICSID Case No. ARB/03/25)

Introductory Note

The award was rendered on 16 August 2007, in the proceeding initiated by Fraport AG Frankfurt Airport Services Worldwide (“Fraport” or “the Claimant”) against the Republic of the Philippines (“the Respondent”). The case was brought p ursuant to the ICSID arbitration

provisions contained in the "Agreement between the Federal Republic of Germany and the Republic of the Philippines on the Promotion and Reciprocal Protection of Investments" dated 18 April 1997 and in force since 2 February 2000 (“the BIT”). The dispute arose out of the annulment of the concession contract for the construction and operation of an international passenger terminal at Ninoy Aquino International Airport in Manila (“Terminal 3”). On 12 July 1997 the Concession Agreement was concluded between the Philippine International Air Terminals Co. (“PIATCO”) and the Philippine Department of 

Transportation and Co mmunication (“DOTC”). In July 1999, Fraport, a German company in international airport business, became a shareholder in PIATCO and various related Philippine companies that had ownership interests in PIATCO, and increased its shareholdings in May 2000 and again in 2001. By such ways, it directly and indirectly owned 61.44% of PIATCO. Fraport also entered into confidential shareholder agreements to exercise managerial control over PIATCO. In 2002, Philippine Supreme Court decided that the Terminal 3 concession agreement was null and void ab initio because of serious violations of Philippine law and public policy. At the time of this decision, Terminal 3 was almost fully built. After failed negotiations for compensation, on 17 September 2003, Fraport filed its request for arbitration with ICSID, alleging that the Respondent violated its obligations towards Fraport as an investor in the Philippines. The Tribunal was constituted on 11 February 2004 with three members: Dr. Bernardo M. Cremades, a national of Spain, Professor W. Michael Reisman, a national of the United States of America and Mr. L. Yves Fortier, a national of  Canada, as President of the Tribunal. The proceedings were conducted under the ICSID Convention and Rules. The Respondent challenged the Tribunal’s jurisdiction on the basis that the Claimant’s investment was not accepted in accordance with the laws of the Philippines as required under 1

Article 1(1) of the BIT. The Terminal 3 concession was a public utility subject to the nationality restrictions of the Philippine Constitution and the prohibitions imposed by the Anti-Dummy Law (ADL) and Fraport openly sought to evade the nationality requirement limiting foreign ownership of the capital of a public utility to 40% through the device of “indirect” ownership

coupled with the secret shareholder agreements. The Tribunal agreed with the Respondent. It observed that the Philippine Constitution and ADL prohibited foreign investor’s the managerial control of public utility. Fraport’s

ostensible purchase of shares in the Terminal 3 project concealed a different type of unlawful investment, but not an “investment” which was covered by the BIT. It also held that the secret

shareholder agreements evidenced that Fraport elected to proceed with the investments by secretly violated Philippine law. In other words, it planned and knew that its investments was not “in accordance” with Philippine law. The Respondent was not stopped from raising

violations of its own law as a jurisdictional defense since there was no indication in the record that the Respondent knew, should have known or could have known of the covert arrangements which were not in accordance with Philippine law when Fraport first made its investment in 1999. The Respondent also contended that even once admitted an investment might fall outside the scope of the BIT’s protections where it was implemented in a manner that materially violates the host State’s law that directly regulate the investment or the investment

activities. The Tribunal opined that subsequent violations of domestic law might be a defense to claimed substantive violations of the BIT, but could not deprive a tribunal acting under the authority of the BIT of its jurisdiction. However, the problem before it in this case was the entry of  the investment. Because of no “investment in accordance with law”, the Tribunal decided that it did not have jurisdiction ratione materiae to rule on the Claimant’s allegations of  breaches by the Respondent of certain provisions of the BIT and dismissed th e case. On the costs of the arbitration, in the Tribunal’s view, each party should share one half 

of the arbitration costs, including the administration fees and bear in full its own legal costs. An arbitrator in the Tribunal, Mr. Bernado M. Cremades, in his dissenting opinion appended to the Award, considered that the Tribunal had jurisdiction over the dispute for the reasons, inter alia, that these shareholdings are a kind of asset accepted in accordance with the respective of whether the Claimant is guilty of any breach of the Philippine Anti-Dummy Law. The text of the Award is http://ita.law.uvic.ca/documents/FraportAward.pdf .

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Bibliography: Bjorklund, Andrea K, Mandatory Rules of Law and Investment Arbitration, 18 Am. Rev. Int'l Arb. 175, 2007. Douglas, Zachary, The International Law of Investment Claims, Cambridge: Cambridge University Press, 2009, 54, 72. M. Sornarajah, The international law on foreign investment, Cambridge : Cambridge University Press, c2010, 318 Salacuse, Jeswald W., The law of investment treaties , Oxford ; New York : Oxford University Press, 2010. (LW Books - KG3830 Sal 2010), 198-199.

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