Think Before You Elevate: Why Treaty Arbitration Should Not Be Considered a Second Chance

The International Centre for Settlement of Investment Disputes (ICSID) has issued its final award in the long running dispute between international construction contractor Sacyr S.A. (Sacyr) and the Republic of Panama (Panama)¹.

The landmark investment treaty arbitration, arising from the Panama Canal Expansion Mega Project, followed multiple arbitrations brought under the contract and offers valuable lessons for contractors considering treaty arbitration against nation states when earlier contractual claims have failed. It is also a valuable reminder of the importance of validating site data and establishing a clear allocation of risk in construction contracts as to unforeseen site conditions.

Factual background and Sacyr’s claims

This dispute arose out of the Panama Canal Expansion Project, specifically the Third Set of Locks Project (TLP). The TLP was a critical component of the canal’s development, necessary for it to accommodate so called ‘New Panamax’ vessels. The TLP effectively doubled the canal’s capacity. 

Sacyr was part of a joint venture (GUPC) that entered into a design and build contract for the TLP works with the Panama Canal Authority (ACP). The TLP faced significant delays and cost overruns, reportedly driven by, amongst other things, unforeseen geotechnical conditions. Multiple ICC Arbitrations followed between GUPC and ACP, with ACP being successful in the majority of cases.

In 2018, Sacyr brought a claim of US$2.4 billion under UNCITRAL Rules through its minority interest in GUPC against Panama under the Spain-Panama Bilateral Investment Treaty of 1997 (BIT). Sacyr alleged that Panama – acting through ACP – breached key treaty obligations, including by failing to provide fair and equitable treatment and full protection and security for Sacyr’s investment. Webuild, another GUPC partner, is currently involved in separate investment treaty proceedings against Panama in relation to the TLP worth US$2.2 billion.

Sacyr argued that Panama (acting through ACP) provided inaccurate and incomplete information at tender stage, specifically relating to geotechnical and seismic data. For example, Sacyr alleged that Panama withheld key documents recording previous dredging activity and which were necessary for Sacyr to establish its geotechnical assumptions for its cofferdam designs. 

Sacyr also sought damages arising from Panama’s post-tender conduct, alleging that these actions impaired its investment in breach of the BIT. Specifically, Sacyr claimed that Panama enacted arbitrary and discriminatory measures, such as increasing the minimum wage in a way that unfairly impacted Sacyr. Sacyr further argued that Panama failed to provide assistance during periods of civil unrest and industrial action, which contributed to additional delays and costs. According to Sacyr, this conduct amounted to Panama’s failure to provide fair and equitable treatment and full protection and security of Sacyr’s investment as required by the BIT.

Decision

In 2022, the arbitral tribunal found on a preliminary basis that the actions of ACP could be attributed to Panama as a matter of international law. 

In the final award (which has yet to be published) the Tribunal appears to have reversed its preliminary decision and determined that Sacyr had failed to prove on the merits that ACP’s actions could be attributed to Panama. The Tribunal has dismissed Sacyr’s claims in their entirety.

It found that Sacyr’s claims were inadmissible as they were rooted in contractual disputes under the design and build contract rather than treaty breaches to be addressed in investment treaty proceedings. The Tribunal emphasised that the conduct complained of was commercial rather than sovereign and therefore Sacyr’s claims could not be brought under the BIT. The actions of ACP could not be attributed to Panama as sovereign acts.

In any case, the Tribunal found that Sacyr did not prove its claims on the merits. In particular, it found that Sacyr’s allegations of misrepresentation and the concealment of geotechnical and seismic data were unsubstantiated. The Tribunal also rejected Sacyr’s position as regards Panama’s failure to provide fair and equitable treatment; it said that, for example, Panama’s increasing of the minimum wage was not discriminatory to Sacyr as other contractors on the TLP had not been treated more favourably.

The Tribunal ordered that Sacyr pay Panama’s costs in the arbitration, totalling over US$6 million. 

Comment

Large infrastructure and building projects are often cross-border in nature, involving parties from different jurisdictions. A key risk in such projects is exposure to actions by the host state where the project is located. In addition to pursuing claims under the construction contract, contractors may also bring claims under an investment treaty against the state or its state-owned entities, where appropriate. This may be possible, depending on the terms of the applicable investment treaty, if the contractor can demonstrate that the state (or state-owned entity) has:

• failed to fulfil its contractual obligations; and/or
• taken actions through public authorities that adversely impact the project; and/or
• expropriated property, assets, or the company; and/or
• through its courts, refused to enforce a valid commercial arbitration award without legitimate justification.

Construction contracts are generally considered to be “investments” under major bilateral investment treaties. However, whether an action exists under the investment treaty against the state entity would depend on the specific provisions of that treaty and whether the action taken by the entity is sovereign in nature or simply a contractual decision under the construction contract.

In this case, Sacyr failed to prove that the actions of ACP could be attributed to Panama. Further, the Tribunal determined that the actions of ACP were commercial in nature, and thus considered inadmissible as a treaty claim.

This award serves as a reminder to contractors pursuing claims in relation to state funded projects that the presence of an investment treaty will not necessarily allow it a second opportunity to pursue a contractual claim. In particular, if the contractor wishes to bring an investment treaty claim, it needs to prove that the actions of the state entity were in a sovereign capacity, rather than acting on a commercial basis under a contract.

This award is also a helpful reminder that contractors should carry out their own due diligence to verify the accuracy and robustness of site data provided by employers, particularly at the tender stage, and provide for appropriate contractual relief where actual conditions differ from the data provided during tender. Clear contractual drafting is essential in allocating responsibility for unforeseen site conditions and mitigating exposure to costly disputes.

Footnote:

1. UNCT/18/16. The Award has not been made public. For the purposes of drafting this article, we rely solely on media reports, the public statements of the Republic of Panama and other open-source information.