Making sense of the Naia mess

PUZZLING IS the recent ruling of the International Center for the Settlement of International Disputes (Icsid) based in Washington, D.C. The ruling voids its earlier decision, dated August 16, 2007, dismissing the claims for compensation of Fraport AG, a German company, against the Republic of the Philippines (PH) in connection with Terminal 3 of the Ninoy Aquino International Airport (Naia 3).

Supreme Court decision. To explain simply this rather complicated problem, let me start with Agan v. Piatco (May 5, 2003). Here, our Supreme Court “set aside for being null and void” five contracts awarded by the PH to the Philippine International Air Terminal Co. Inc. (Piatco) for the construction, operation and maintenance of Naia 3 because of blatant violations of our Constitution and laws.

As a member of the Court then, I opined that—inasmuch as Naia 3 had already been partly built—the builder (Piatco) was entitled to reasonable compensation for its construction expenses, because the government should not enrich itself at the expense of Piatco.

To determine how much and to whom it should compensate (aside from Piatco, some subcontractors had also asked for compensation), the PH initiated expropriation proceedings in the Regional Trial Court (RTC) of Pasay, and took over and later started operating a part of Naia 3.

In the meantime, Fraport—a major stockholder of Piatco—filed a claim (or complaint) in the Icsid against the PH, pursuant to a treaty in which the PH and Germany agreed to have recourse to Icsid in case German investors suffer losses due to the PH’s failure to honor treaty obligations. Icsid is a forum created by the World Bank to settle investment disputes among its member-states like Germany and the PH.

WB and ICC rulings. After hearing the parties, Icsid dismissed Fraport’s claims, ruling that Fraport’s alleged investments in Naia 3 were entered into in violation of the Philippines’ Anti-Dummy and other laws. The Icsid held it had no jurisdiction because illegal “investments” were not entitled to treaty protection.

For its part, Piatco filed a separate arbitration suit before the International Chamber of Commerce (ICC) praying for the recovery of $425 million for alleged violation by the PH of the five voided contracts and for “seizing” the airport terminal Piatco had built. This arbitral suit was filed pursuant to the contracts allowing the parties to arbitrate under ICC rules.

Again after due hearing, the ICC Arbitration Tribunal in Singapore dismissed Piatco’s claim due to the illegality of the five contracts. In other words, Piatco suffered not because of PH’s malfeasance but because of Piatco’s own violations of Philippine laws.

In a strange twist, Icsid—via a new body called “Ad-Hoc Committee on Annulment”—issued on Dec. 23, 2010 the new ruling voiding the earlier Icsid decision on the ground that Piatco was denied due process allegedly because the earlier Icsid arbitral tribunal did not allow Piatco to comment on the evidence (proffered by the government before the Department of Justice) that Piatco and Fraport had violated our Constitution and Anti-Dummy Law, which prohibits foreign intervention in the management, control and operation of public utilities like Naia 3.

Some observations. Based on the above facts, let me give a few observations. First, this new Icsid ruling simply means that—if it wants to—Fraport can file a new suit before Icsid during which it will be heard on its claims against the PH and on its defense against the anti-dummy evidence proffered by the PH. The PH too could present its own side. Thereafter, Icsid may issue a new decision.

Second, the government should not have filed tedious expropriation proceedings. As a member of the Court at the time, I thought (and still do) that to enforce the Agan decision, the PH should have simply asked the Supreme Court to form a panel—as it had done in analogous cases—to hear evidence of the reasonable amount due Piatco. With the panel’s report, the Court could have promptly determined the proper compensation. As it is now, the expropriation suit is still languishing in the RTC. Its decision could be circuitously appealed to the Court of Appeals and then to the Supreme Court (again!).

Third, as a lesson learned, the present government should form a legal team of veritable experts versed not just on PH law but also on proceedings before international arbitral and judicial bodies, and on negotiating foreign agreements that impinge on PH sovereignty.

Fourth, to the best of my knowledge, Fraport was given the opportunity to oppose the anti-dummy evidence. During the last oral argument in the earlier case, the Icsid arbitral chairman gave the German claimant the full opportunity to air its side after Fraport finally produced documents, executed by Fraport and Piatco and concealed by both for years from the two arbitral tribunals. Both the PH and Fraport filed extensive post hearing memos before the Icsid. Hence, I find this new Icsid ruling exceedingly strange.

Finally, German Ambassador Christian-Ludwig Weber-Lortsch proposed a “peaceful settlement” of the mess by the PH paying Fraport a reasonable compensation. In principle, his proposal appears appropriate. However, the devil lies in the details—how much a sum can be considered “reasonable”; and to whom is how much payable? That has been the crux of this controversy from the beginning.

How do we solve this mess? See my answer next Sunday.

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