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Focus on Regulation

First Investor-State Dispute Decided under the Dominican Republic-Central America Free Trade Agreement

An International Centre for Settlement of Investment Disputes (ICSID) tribunal has issued the first-ever arbitral award under the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR).  The case, Railroad Development Corporation v. Guatemala, involved Guatemala’s 1997 concession to U.S.-based Railroad Development Corporation (RDC) to restore and develop Guatemala’s rail system.  After Guatemala’s president invoked a Guatemalan administrative procedure – known as “lesivo” – in 2006 to nullify the railway concession agreement, RDC filed claims pursuant to the CAFTA-DR’s investment chapter seeking damages of $65 million.

The ICSID Tribunal’s decision is the culmination of a five-year arbitral dispute, and resulted in a finding that Guatemala had violated the minimum standard of treatment set forth in Article 10.5 of the CAFTA-DR.  The Tribunal concluded that Guatemala’s actions were “arbitrary, grossly unfair, [and] unjust” and emphasized that the lesivo procedure may be easily abused by Guatemala, as the procedure allows the government to ex post facto declare its own regulations illegal.  RDC thus had no opportunity to be heard before the President nullified its railway concession agreement.

On the other hand, the Tribunal stopped short of finding that the lesivo procedure constituted an indirect expropriation on the part of Guatemala.  CAFTA-DR Annex 10‑C.4 defines indirect expropriation as “where an action or series of actions by a Party has an effect equivalent to direct expropriation without formal transfer of title or outright seizure.”  Annex 10-C also provides a number of factors for a Tribunal to consider in determining whether an indirect expropriation has occurred, including: (1) the economic impact of the government action; (2) the extent to which the government action interferes with distinct, reasonable investment-backed expectations; and (3) the character of the government action.  In analyzing RDC’s indirect expropriation claim, the Tribunal framed the inquiry as “whether, if mistakes are made, other parties who had acted on such mistakes in good faith and to their own detriment, should have the right to expect that the party who made the mistake would bear the consequences.”  The Tribunal adopted the standard applied in previous ICSID cases – i.e., whether an investor has been “deprived substantially of the use and benefits of the investment” – and concluded that the effect on RDC’s investment does not rise to the level of an indirect expropriation.  The Tribunal specifically noted that the contracts related to the investment were still in effect, that RDC continues to possess and receive rents from the railway equipment, and that such rents amount to 92% of revenues of RDC’s Guatemalan subsidiary.

The Tribunal awarded $12 million in damages to RDC in order to provide full reparation for its injury.  The Tribunal also determined that Guatemala’s payment of damages should be conditioned on RDC relinquishing all of its constactual rights vis-a-vis Guatemala.  The final amount of the award remains undetermined until Guatemala pays the award.