SBCA ADR 3A-1

Group Homework

SUBMITTED BY:
Ablang, Rohanne Karolle D. Ajas, Marnelli Joy P.
Cumpio, Mary Clare Therese I. Navelgas, Alejandro Roman B.
Pahayahay Maria Karen A. Samaniego, Honey Rose B.

FRAPORT AG FRANKFURT AIRPORT SERVICES WORLDWIDE vs.

REPUBLIC OF THE PHILIPPINES (ICSID CASE No. ARB/11/12)

1. Give a coherent digest of the case. (25%)

FACTS: Fraport AG Franfurt Airport Services Worldwide, hereinafter
referred to as Fraport for brevity, is an experienced airport company based in
Germany which made investments in a Philippine company called Philippine
International Air Terminals Co., Inc (PIATCO). PIATCO acquired the concession
rights for the construction and operation of Ninoy Aquino International Airport
Passenger Terminal III (Terminal 3). The Concession Agreement was entered into
on July 12, 1997 between PIATCO and the Philippine government where PIATCO
was allowed upon further negotiations to obtain financing from certain
interested lenders. Hence, the signing of The Amended and Restated Concession
Agreement (ARCA) on November 26, 1998. Three supplements to the ARCA
were executed between 1999 and 2001. Fraport‘s investment started in 1999
and entered into four agreements (Share Purchase Agreements and Share
Subscription Agreements) whereby it acquired direct and indirect interest in
PIATCO as follows: 25% of PIATCO, 40% of Philippine Airport & Ground Services
Terminals, Inc. (PTI) and 40% of PAGS Terminal Holding, Inc. (PTH);
The construction of Terminal 3 commenced on June 15, 2000 to be
completed in 30 months, by late 2002. Due to scarce financial resources, Fraport
decided to increase its shareholdings pursuant to two agreements dated 5 May
2000 (Share Purchase Agreements) and thus it acquired an additional 5% of
PIATCO, and PTI acquired another 24% of PIATCO. In 2001, Fraport acquired a
40% stake in the Philippine Airport & Ground Service, Inc. (PAGS), thus having
an additional 9.04% indirect interest in PIATCO. Further supplements were
desired by parties that resulted in several negotiations. The Republic negotiated
to surrender the exclusivity of Terminal 3 for international passenger operations
at Ninoy Aquino International Airport (NAIA). While negotiations were ongoing,
the same concession sought to be supplemented became the subject of a Senate
investigation which is recommended for nullity. According to the report, the
concession agreement is void because it did not comply with the required
signatures; substantial deviations from the bid documents were noted and the
contracts contained disadvantageous provisions. Furthermore, there are
allegations of buying favors from the government and violation of the Build-
Operate-Transfer (BOT) law.

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In 2002, the Philippine President declared that the Government will not
honor the Terminal 3 contracts considering that all contracts are null and void.
Several petitions for prohibition against PIATCO and others were filed in the
Supreme Court. In its decision on May 5, 2003, the Supreme Court held that
there were serious violations of Philippine law and public policy and concluded
that the concession agreements in the Terminal 3 projects were null and void ab
initio. The Supreme Court further held that PairCargo was not a qualified bidder
and therefore the award of the Terminal 3 concession contract to PairCargo was
null and void.
Fraport initiated arbitral proceedings against the Philippines by
submitting its Request for Arbitration to ICSID, pursuant to 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 (BIT Treaty). While arbitration progressed, the respondent took
possession of Terminal 3 and instituted domestic court expropriation
proceedings. After the parties were given time to argue their cases and upon
their submissions, the Arbitral Tribunal rendered an award. By a majority vote,
the Tribunal held that the Centre does not have jurisdiction to hear the dispute
and incompetent to resolve the raised matters. The claim of Fraport was
dismissed. Fraport initiated an Annulment Proceeding on the award issued by
the Arbitral Tribunal. The ad hoc committee ruled in favor of Fraport and
annulled in its entirety the award.
Fraport filed a new request for arbitration with ICSID. Meanwhile, the
expropriation court approved the Philippines’s request to exercise full rights of
ownership over Terminal 3, upon placing the remaining US $116 million due as
compensation in escrow, with such funds to be released only if PIATCO assumed
all responsibility for claims related to the Terminal 3 facilities and transferred
full title, free from all liens and encumbrances, to the Philippines. Later on, the
Court of Appeals modified its May 23, 2011 decision and fixed just compensation
US $240 million with legal interest at 6% ordering the Philippines to pay PIATCO
US $371 million as of July 31, 2013. The second arbitration proceeded wherein
parties are given opportunities to file memorials, submissions and pieces of
evidence. On December 10, 2014 the arbitration was declared closed.

ISSUE: Whether the Arbitral Tribunal has jurisdiction?

HELD: None, the Arbitral Tribunal has no jurisdiction. The Tribunal in its
analysis came up with the award by explaining the following objections:

a. Jurisdictional Objection 1: Fraport Violated the Anti-Dummy Law

On the part of the respondent, BIT contains an explicit or implicit
requirement that the investor comply with the laws and regulations of the host

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State with respect to its investment and that Fraport failed to do so. The BIT is
limited in its application to investments accepted in accordance with host State
law. Since Claimant’s investment was made in violation of the Philippine Anti
Dummy Law and because its investment was in an enterprise that had been
awarded concession agreements in violation of the Philippine BOT law, its
investment falls outside of the BIT’s protection.
On the contrary, claimant argues that the investments made by it meet
the requirements of the BIT, are legal under Philippine law and were accepted,
indeed encouraged, by the Philippine Government. Fraport’s acquisition of
shares in PIATCO, PTI, PTH and PAGS was made in accordance with the foreign
ownership restrictions under the Philippine Constitution which require that at
least 60% of the capital of corporations engaged in the operation of a public
utility be owned by Philippine nationals.
In applying the rules on Treaty Interpretation, the Tribunal ruled in favor
of the respondent. According to Article 31(1) of the VCLT A treaty shall be
interpreted in good faith in accordance with the ordinary meaning to be given
to the terms of the treaty in their context and in the light of its object and
purpose. In Article 1(1) of the BIT provides, it provides that “the term
‘investment’ shall mean any kind of asset accepted in accordance with the
respective laws and regulations of either Contracting State […]” In interpreting
the word “accepted” the Tribunal is in agreement with the respondent that it
must be an investment which is deemed “satisfactory,” “acceptable” and
“generally recognized as correct or valid. It must be in accordance with the laws
and regulations of the Host State. Investment treaty cases confirm that such
treaties do not afford protection to illegal investments. In light of the foregoing
analysis, the Tribunal concludes that Article 1(1) of the BIT requires that an
investment comply with the laws of the host State at the time it is made in order
to be accorded protection under the BIT.

b. Jurisdictional Objection 2: There is no Jurisdiction and all of Fraport’s

Claims are Inadmissible as a Result of Fraport’s Corruption and Fraud
Respondent’s submissions on the subject reveals that the alleged
“corruption and fraud” relate to a phase of the implementation of the NAIA
Terminal Project after the time of Fraport’s Initial Investment. According to
Respondent’s first submission, Fraport and PIATCO engaged in a range of illicit
activities including hiring a “consultant” to bribe officials, engaging in an
elaborate kickback scheme of overbilling the Government and laundering funds
allegedly paid as project expenses in order to conceal their actual destinations
and uses.
Claimant argues that despite all power and resources to investigate its
allegations of corruption, Respondent has been unable to proffer direct

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evidence of corruption. As held by other investment treaty tribunals, evidence

of corruption must be clear and convincing.
The Tribunal holds that considering the difficulty to prove corruption by
direct evidence, the same may be circumstantial. However, in view of the
consequences of corruption on the investor’s ability to claim the BIT protection,
evidence must be clear and convincing so as to reasonably make-believe that
the facts, as alleged, have occurred. Having reviewed the Parties’ positions and
the available evidence related to the period prior to Fraport’s Initial Investment,
the Tribunal has come to the conclusion that Respondent has failed to provide
clear and convincing evidence regarding corruption and fraud by Fraport.
Therefore, this jurisdictional objection is dismissed.

c. Jurisdictional Objection 3: Fraport Knew of PIATCO’s Misrepresentations

to Obtain the Concession Award
According to Respondent, PIATCO made material misrepresentations
regarding its identity and financial qualifications and obtained the concession by
deceit. Neither at the time of the bid nor after PIATCO was incorporated did
PAIRCARGO & Associates, PAGS and Security Bank meet the 30% minimum
amount of equity required to undertake the Terminal 3 Project.
Claimant asserts that it reasonably relied on assurances and other actions
by the Philippine Government repeatedly approving the Project. They also
argued
that the risk of investment with PIATCO is a business and explained that the
discrepancy with the bid documents and concession agreement was all in favor
of the respondent.
After deliberating on the factual circumstances, arguments and the
related evidence, the Tribunal concludes that Jurisdictional Objection 3 is to be
dismissed for lack of evidence of Fraport’s knowledge at the time of its Initial
Investment of Respondent’s alleged misrepresentations by PIATCO to obtain the
Concession.
In sum, Claimant’s claims are dismissed for lack of jurisdiction of the
Centre and competence of the Tribunal.

2. If your team were the tribunal in the Fraport II case, would you have
resolved the same issues the way the tribunal did? (75%)

Yes, we would have resolved the same issues in the Fraport II case the
way the Tribunal did.
In the first jurisdictional objection, we concur with the tribunal that Article
1(1) of the BIT requiring an investment to comply with the laws of the host State
at the time it is made before it can be accorded protection under the BIT must
be applied.

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Here, the law alleged to have been violated was the Anti-Dummy Law, a
statute enacted to mandate foreign investors from complying with the
nationality restrictions in the management, operation, administration or control
over a Philippine public utility provided under the 1987 Philippine Constitution.
Without this prohibition, foreigners would be able to dominate the operations
of the public utility.
In this case, it was clearly shown that Fraport’s investment to PIATCO and
other Philippine companies violated the Anti-Dummy Law of the host state, the
Philippines, thus excluding such investment from the protection provided for
under the ICSID dispute settlement mechanism.
The fact that Fraport made its investment by acquiring shares in PIATCO
and the “cascade companies” while simultaneously establishing binding
arrangements designed to ensure that Fraport could intervene in the
management, operation, administration and control of PIATCO and PTI is not an
investment permitted by the law.
This, through a series of contemporary agreements, including the Pooling
Agreement and other agreements with PIATCO’s other shareholders and an
interest-free Loan Agreement with PAGS, one of PIATCO’s shareholders were
made despite warnings from a law firm as early as 1999.
Also, PIATCO/Fraport‘s representatives were involved in numerous
negotiations on the two further supplements to the ARCA. It cannot be gainsaid
that Fraport unknowingly and unintentionally circumvented the Anti-Dummy
Law. As a consequence, it cannot claim to have made an investment "in
accordance with law". An investment made in another state must be in
accordance with the host state’s laws as it would leave an economic impact to
that State. Respect for the integrity of the law of the host state is also a critical
part of development and a concern of international investment law.
If Fraport was in good faith, it would not have engaged in several schemes
just to end up circumventing the law. Verily, the illegality of Fraport’s actuations
consequently removes its investment from protection of the law it vehemently
asserts.

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