Latam Hydro LLC and CH Mamacocha SRL v Republic of Peru - ICSID Case No. ARB/19/28 - Claimant's Memorial - 14 September 2020
Country
Year
2020
Summary
Reproduced from www.worldbank.org/icsid with permission of ICSID.
REDACTED VERSION
INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES
LATAM HYDRO LLC, on its own behalf, and on behalf of
CH MAMACOCHA, S.R.L., and CH MAMACOCHA, S.R.L.,
Claimants
v.
THE REPUBLIC OF PERU
Respondent
CLAIMANTS' MEMORIAL
ICSID CASE NO. ARB/19/28
September 14, 2020
TABLE OF CONTENTS
I. EXECUTIVE SUMMARY
II. STATEMENT OF FACTS
A. The Co-Founders of Latam Hydro
B. Peru and the U.S. Entered Into a Trade Promotion Agreement
C. Peru Promoted Investments by U.S. Investors in Renewable Energy Projects
D. The Mamacocha and Upstream Projects Were Established in Reliance on the Incentives and Protections Guaranteed by the RER Promotion
E. Peru Modified the Rules for Projects in the Third Public Auction
F. Peru Awarded CHM an RER Contract During the Third Public Auction
G. Government Delays Before the Measures at Issue in the Instant Dispute
1. Delays Before Addendum 1 to the RER Contract
2. Delays Before Addendum 2 to the RER Contract
H. After the Execution of Addenda 2, the Mamacocha Project Was Finally Ready to Proceed in Early 2017
I. The RGA Lawsuit and Its Fallout
J. The People of Ayo Strongly Supported the Project that Its Government Was Trying to Undermine
K. The RGA Withdraws Its Lawsuit after Admitting It Was a Meritless and Discriminatory Attack on the Mamacocha Project
L. The AEP Retaliated by Bringing Unfounded Criminal Charges against CHM's Lead Peruvian Lawyer
M. Claimants Asked Peru to Reaffirm Its 20-Year Guaranteed Revenue Commitment
N. MINEM Proposed a Supreme Decree to Provide a Process for Rectifying Its Interferences with RER Projects Awarded in the Third and Fourth Auctions
O. Weeks After Acknowledging its Responsibility and Proposing a Procedure for Concessionaires to Seek Redress, Peru Abruptly Reversed Course and Enacted Measures that Killed the Mamacocha and Upstream Projects
1. MINEM Abandoned its Proposal to Establish a Process to Compensate Concessionaires for the Government's Interferences
2. MINEM Commenced an Arbitration in Lima Without Consent or Jurisdiction But Relating to the Same Dispute as Claimants Have Properly Brought before this ICSID Tribunal
3. Peru Denied CHM's Third Extension Request on the Ground that Peru's Delays Should Count Against CHM, in Contradiction to Its Earlier Statements
P. Peru's Measures Continue to Harm Claimants
Q. Latam Hydro's Investments in the Mamacocha and Upstream Projects
III. THE TRIBUNAL HAS JURISDICTION OVER THE TREATY AND CONTRACT CLAIMS
A. The Tribunal Has Jurisdiction Over This Dispute Under the TPA and the ICSID Convention
1. Latam Hydro Is a Protected Investor Under the TPA
2. Latam Hydro Can Bring Claims Under the Treaty for CHM
3. The Dispute Arises Out of Investments Protected Under the Treaty
4. Peru Has Consented to Arbitration Under the Treaty and the ICSID Convention
a. Claimants Have Fulfilled the Requirements of the Treaty
b. Claimants Have Fulfilled the Jurisdictional Requirements Under the ICSID Convention
B. The Tribunal Has Jurisdiction Under the Contract
1. The Republic of Peru is liable to CHM for Peru's breaches under the RER Contract
2. CHM brings Contract Claims on Its Own Behalf Under Clause 11.3(a) of the RER Contract
a. Clause 11.3(a) of the RER Contract Allows CHM to bring Contractual Claims before ICSID
C. The Tribunal Has Jurisdiction Under the RER Contract
1. The Republic of Peru is liable to CHM for Peru's breaches under the RER Contract
2. CHM brings Contract Claims on Its Own Behalf Under Clause 11.3(a) of the RER Contract
a. Clause 11.3(a) of the RER Contract Allows CHM to bring Contractual Claims before ICSID
IV. PERU IS LIABLE TO CLAIMANTS FOR ITS BREACHES OF THE TPA
A. Peru's Representations and Commitments Created Legitimate Investment-Backed Expectations that Peru Undermined Through Various Measures
B. Peru Failed to Accord Latam Hydro and Its Investments Fair and Equitable Treatment under Article 10.5 of the Treaty
1. Peru Acted Arbitrarily, Discriminatorily, Inconsistently, and Without Good Faith When It Filed the RGA Lawsuit, as Peru Has Admitted
2. The AEP's Criminal Investigation Is Based on the Since- Dismissed RGA Lawsuit and Separately Violates FET
3. The AAA Wrongfully Denied and Later Issued a Materially Defective Civil Works Authorization Permit in Violation of FET
4. Peru Commenced the Lima Arbitration in Violation of FET
5. By Denying CHM's Third Extension Request, Peru Also Breached FET
C. Peru's Measures Have Indirectly Expropriated the Mamacocha Project by Substantially Depriving Latam Hydro of the Value of Its Investments in Violation of Article 10.7 of the TPA
1. Indirect Expropriation Under Article 10.7 of the TPA and International Law
2. Peru Has Indirectly Expropriated Latam Hydro's Rights in the Mamacocha Project
3. Peru's Indirect Expropriation Was Unlawful and Does Not Fall Under Any Exception Under Article 10.7(1) of the TPA
D. Peru Has Treated Latam Hydro and Its Investments Less Favorably Than It Treats Investors and Investments from Other States in Violation of Article 10.4 of the Treaty
1. Peru's Conduct with Respect to the Project's Permits Constitutes a Breach of the TPA
2. Peru's Breaches of the RER Contract Trigger Liability Under the TPA as a Result of the Umbrella Clauses Contained in Other Treaties Concluded by Peru
V. PERU BREACHED ITS OBLIGATIONS UNDER THE RER CONTRACT AND PERUVIAN LAW
A. Legal Principles that Apply to Interpretation of the RER Contract
B. Peru Breached Its Direct Obligations under the RER Contract
1. Peru Breached Its Promise that CHM Would Receive Guaranteed Revenue for a 20-Year Term
a. Contractual Terms
b. The Time Periods for Achieving COS and Term of Validity Were Not Inviolable
2. Peru Breached Its Obligation under Clause 4.3 to Assist CHM in the Permitting Phase of the Project
3. Peru Breached Its Obligation under Clause 11.3 to Submit to ICSID Non-Technical Disputes Valued at More than US $20 Million
4. Peru Breached Its Guarantee under Clause 2.2.1 that Its Execution of Addenda 1 and 2 and Other Actions Taken in "Fulfillment" of the RER Contract Were in Accordance with Law and "Duly Authorized" by Peru
C. Respondent Breached Its Obligations Under the Peruvian Civil and Administrative Laws Incorporated in the RER Contract
1. Peru Breached Its Obligation of Good Faith Under the Civil Code of Peru and Peruvian Administrative Law
2. Peru Violated the Principle of Actos Propios
3. Peru Violated the Principle of Confianza Legitima
4. Peru Breached Its Obligation under Peru's Administrative Laws to Timely Decide Upon CHM's Third Extension Request and Civil Works Authorization Permit Application
D. The RER Contract Terminated as a Matter of Law in December 2018, When Peru Made It Impossible for CHM to Perform
VI. CLAIMANTS ARE ENTITLED TO COMPENSATION AND DAMAGES
A. Claimants Are Entitled to an Award of Damages in an Amount Sufficient to Wipe Out the Financial Consequences of Peru's Breaches of its TPA, International Law, Peruvian Law and Contractual Obligations
1. Legal Standard for Compensation for Breaches of the TPA and International Law
2. Legal Standard for Compensation for Breaches of the RER Contract and Peruvian Law
B. The Appropriate Valuation Date Is March 14, 2017
C. Quantum of Damages
1. Compensation for the Frustration of the Mamacocha Project
a. FMV Valuation Using the DCF Method
b. Alternate Damages Theory: Investment Value Approach
D. Costs, Fees and Expenses in These Proceedings
E. Compound Post-Award Interest
VII. REQUEST FOR RELIEF
I. EXECUTIVE SUMMARY
1. Claimants, Latam Hydro LLC ("Latam Hydro") and CH Mamacocha S.R.L.("CHM"), bring claims under the U.S.-Peru Trade Promotion Agreement ("TPA" or "Treaty") and the Concession Contract for the Supply of Renewable Energy to the National Interconnected Electric System ("RER Contract") against Respondent, the Republic of Peru ("Peru"), arising from Peru's financial destruction of a 20-megawatt hydroelectric project near the Mamacocha Lagoon in Arequipa, Peru (the "Mamacocha Project" or "Project") as well as five (5) related hydroelectric projects upstream of the Lagoon (the "Upstream Projects").
2. This case involves the government's deliberate interference and ultimate destruction of the Mamacocha and Upstream Projects, which were backed by diligent U.S.investors and designed by world-class engineers and scientists to be environmentally sustainable. CHM was the concessionaire and Peru's counterparty under the RER Contract. Latam Hydro was the U.S. investor that owned and controlled CHM. Together, they poured nearly US $24 million into these Projects and expected to get sizable returns on their investments. But in a short period--between March 2017 and December 2018--Peru adopted a series of arbitrary, discriminatory, and bad-faith measures that wiped out their investments.
3. The RER Contract was the product of a years-long promotional campaign by Peru to attract foreign investment in its renewable energy sector. Those who were awarded this contract were promised key incentives, including a 20-year "Guaranteed Revenue" concession. But there was a catch. The concessionaire had to achieve commercial operation in approximately (34) months to maximize the concession. And if the concessionaire took longer than fifty-eight (58) months to achieve commercial operation, the contract would automatically terminate. Time was literally of the essence.
4. The project encountered unexpected and, ultimately, fatal roadblocks. Approximately thirty-eight (38) months of the total time of fifty-eight (58) months were lost to permitting delays caused by regional government agencies. Peru admitted it was responsible for these delays and that these delays prevented reaching "Financial Closing," a critical milestone before shovels could hit the ground on the Mamacocha Project. Peru partially cured these delays by extending the commercial operation start-up ("COS") date and reaffirming that it had a duty under the RER Contract, Peruvian law, and the TPA to protect concessionaires from delays and interferences caused by government negligence, misconduct or inaction.
5. But in March 2017, the Regional Government of Arequipa ("RGA") commenced a groundless strike-suit (the "RGA Lawsuit") to block further development by invalidating the Mamacocha Project's essential environmental permits that had been approved three years earlier. The viability of the Mamacocha Project was immediately threatened.
6. Claimants' ongoing negotiations with a majority investor, a lead bank, and a
contractor--all of which were within weeks of closing--ground to an immediate halt, due to the unexpected and unpredictable political risks created by the RGA's political opposition to the Project. Nonetheless, Claimants appeared to overcome this hurdle when a central governmental agency hired a distinguished outside law firm to assess the legality of the RGA Lawsuit. The resulting opinion confirmed what Claimants already knew: the RGA Lawsuit was meritless and had little likelihood of success. By filing its Lawsuit, the RGA had acted in bad faith to block the Project. The central government threatened the Regional Governor and RGA officials with potential civil and criminal liability, apparently causing panic inside the RGA and leading to public "finger pointing." The resulting public documents confirm that the Project was a victim of a clandestine "investigation" and trumped up charges that government officials knew would not prevail in a court of law.
7. The RGA Lawsuit was eventually withdrawn, but the whole ordeal had taken a year of precious time away from the Project. And because time was of the essence, the Mamacocha Project had no reasonable viability unless Peru restored the time the regional government had taken away. In December 2018, however, Peru implemented coordinated measures that sealed the fate of the Project. First, the government denied the concessionaire's request for an extension of the COS deadline to make up for the lengthy interruption caused by the RGA Lawsuit. By that point, only fifteen (15) months remained to undertake construction of a project which, at a minimum, required between twenty-six (26) and thirty (30) months to complete. Second, Peru circumvented the dispute resolution agreement in the RER Contract by commencing an arbitration before the Lima Chamber of Commerce to nullify the two extensions previously granted to the Project and to obtain a declaration that CHM had breached its commitment to complete the Project. These measures, like the RGA Lawsuit and criminal investigation, were unfair, arbitrary and a breach of Peru's obligations under the TPA and the RER Contract. But they succeeded in destroying the Mamacocha Project and, with it, the Upstream Projects, in one fell swoop.
8. This ICSID arbitration will evaluate Peru's wrongdoing in turning its back on the commitments made to Claimants, despite their diligence, persistence, and commitment to Peru. Latam Hydro was a model foreign investor for Peru. It is owned and controlled by Messrs. Michael Jacobson and Gary Bengier, former eBay, Inc. senior executives who have the business acumen, financial resources, and business relationships to oversee environmentally responsible projects that would improve the country's electricity supply and, in the process, reduce global warming. They chose the Mamacocha and Upstream Projects not only based on their profitability, but also with an eye to improving the living standards in the remote communities in which they were investing. And they hired approximately thirty (30) businesspeople, economists, engineers, environmental experts, social workers and others to ensure these projects were developed, constructed, and operated in accordance with the highest environmental standards, best industry practices, and with the interests of the neighboring communities in mind.
9. Claimants answered Peru's call for private foreign investors in Peru's renewable energy sector. In 2008, Peru promulgated a new regulatory framework to encourage private investments, including foreign investment, in its renewable energy sector by offering significant financial incentives, guarantees, and legal protections designed to attract long-term investment in its renewable energy sector (the "RER Promotion"). The RER Promotion was established to further Peru's national goal of increasing the generation of electricity using renewable energy resources ("RER"), including "small hydroelectric" projects of twenty (20) megawatts or less of installed capacity. Peru also created the RER Promotion to "facilitate the implementation" of Peru's recent accession to the TPA by, inter alia, "eliminating barriers" for U.S. investment in Peru through key "incentives" under its energy laws.
10. Peru embodied these "incentives" and the TPA protections in the RER contracts that it awarded in public auctions under the RER Promotion. As noted above, the sine qua non of these incentives was Peru's sovereign guarantee that it would pay "Guaranteed Revenue" over a period of up to twenty (20) years, which significantly reduced the economic risks and uncertainties that had historically impeded development of RER projects. The RER contracts also offered concessionaires a unique risk-allocation scheme whereby Peru, through MINEM, committed to assist concessionaires cut through government "red tape" during the permitting phase. This incentive was just one example of the "public-private" nature of the RER Contract, in which Peru and the concessionaire were supposed to be "partners" with the shared goal of ensuring the success and viability of RER projects.
11. The RER Contract also promised foreign investors that any significant dispute under the RER Contracts would be resolved by an impartial and independent ICSID tribunal seated outside Peru, due to the involvement of a foreign investor on the one side and a State counterparty on the other. Combined, these incentives and protections were designed to make the RER Contracts "bankable" investment agreements--i.e., acceptable to institutional lenders-- thereby, providing the concessionaire with commercially competitive non-recourse financing to construct and operate a generation plant and transmission line and supply electricity to the national energy grid.
12. The RER Contracts also incorporated by reference numerous other protections under Peruvian law and the TPA on which Claimants reasonably relied. Peru, for example, promised to adhere to the administrative procedural laws and regulations, including those that imposed on Peru fixed review periods for Peruvian authorities at all levels of government to grant permits, concessions, and applications related to the RER and other projects. Peru also committed to treat concessionaires fairly, consistently, in good faith, and without discrimination. Accordingly, Peru committed to protect Claimants' legitimate, investment-backed expectations and honor prior interpretations and positions taken by Peru under these contracts.
13. Because every day literally mattered under the RER Contract, it was incumbent on the concessionaire to manage diligently everything under its control, such as compliance with the applicable laws and regulations. It was then up to Peruvian government authorities to grant all necessary permits, property rights and legal authorizations "in due time" so the project could achieve COS on time. That was the bargain that Peru offered foreign investors under the RER Contracts.
14. After careful due diligence, Claimants decided to invest in the Mamacocha and Upstream Projects in reliance on the legitimate expectations they formed from the promises and commitments offered under the RER Promotion, RER Contract, the TPA, and Peruvian law. Claimants assembled a team with more than 150 years of experience in bringing renewable energy projects to fruition. They relied on leading energy lawyers who had personally been involved in the creation of the RER Promotion and had shepherded dozens of other projects through this legal framework. They commissioned voluminous studies to ensure the Project's feasibility and minimal environmental impact. They opened a central office in Lima and several satellite offices in the region where the Project would be located. They worked closely with these communities to educate them about the myriad economic and social benefits that the Project would bring. They completed many social development programs as a sign of goodwill. And they began the permitting process a full year in advance of the public auction under which they were awarded the RER Contract.
15. Through no fault of its own, the Mamacocha Project encountered strong opposition from regional government officials. As explained earlier, the regional opposition came to a head in March 2017 when the RGA filed its Lawsuit. But there is more to this story. In May 2017, the regional water authority denied the Mamacocha Project's last-remaining permit on its critical path--the "civil works authorization"--purely to appease political allies on the Regional Council that wanted to block the Project, as the regional branch of the national water authority ("AAA") later admitted. This measure alone was back-breaking because without this permit the banks would not finance and the Project could not get built. When the RGA folded its Lawsuit, the AAA followed suit shortly thereafter by issuing CHM's long-delayed permit.
16. The Regional Governor's order to dismiss the Lawsuit had the opposite effect on the AEP's criminal investigation. Because it was based entirely on the RGA Lawsuit's allegations, it was reasonable to expect that it would have ended as soon as the Regional Governor disclosed that the RGA's Lawsuit was wholly without merit.
17. Peru's combined assault on the Mamacocha Project had its intended effect. Without the requested extensions to compensate for the RGA Lawsuit interferences and facing a new unauthorized arbitration brought by Peru to nullify extensions previously granted, it became impossible to attract financing, commence construction, or achieve commercial operation in the short time remaining before the COS deadline was to elapse. The Mamacocha and Upstream Projects were rendered impossible to complete and the RGA Contract was terminated as a matter of law. But Claimants' damages continue to increase because the Lima Arbitration and the criminal proceeding against their legal representative are ongoing.
18. As described more fully below, these measures against the Projects are wholly attributable to Peru and, separately and cumulatively, violated the protections set forth under the TPA, including the Fair and Equitable Treatment standard under Article 10.5, the Expropriation protections under Article 10.7, and the prohibitions against discriminatory treatment under Article 10.4. Additionally, these measures breached Peru's obligations under the RER Contract as well as the Peruvian law principles of good faith, actos propios, and confianza legitima.
19. This case is unique because Claimants intend to prove their claims principally through public admissions by Peruvian government officials. These admissions include, but are not limited to, the following:
a. Peru's admissions in Addenda 1-2 of the RER Contract that government entities exclusively delayed the Project by three years and these delays made it impossible for the Mamacocha Project to advance;
b. Peru's admission in the Sosa Report discussed below that Peru has a duty under the Peruvian and international law to hold CHM harmless from interferences by government entities;
c. Peru's admission in Addenda 3-6 of the RER Contract that CHM's obligations and work schedule were suspended to allow the Peruvian government to convince the RGA to dismiss its lawsuit and then to permit negotiations with MINEM to approve a third extension to the RER Contract;
d. Peru's admission from public disclosures by RGA officials that: (i) the RGA always knew the RGA Lawsuit was meritless; (ii) it was "highly likely" that the RGA Lawsuit would result in the RGA paying millions of dollars to Claimants in an ensuing arbitration; and (iii) the RGA officials who recommended the RGA Lawsuit acted in bad faith and could be criminally prosecuted for their actions; and
e. Peru's admissions in November 2018 that Peru had failed in its domestic and international legal duties to protect the RER Projects from government delays and interferences.
20. Claimants seek the following relief: (i) damages in a quantum required to fully compensate Latam Hydro and CHM for their lost investments and costs proximately caused by Peru's breaches under the TPA and RER Contract; (ii) return of the US $5 million performance bond deposited under the RER Contract and the bond for the transmission line; (iii) a declaration that the RER Contract is terminated and CHM has no further obligations arising from the RER Contract; (iv) a recommendation for Peru to terminate the criminal investigation against CHM's legal representative; and (v) such other relief as the Tribunal determines is just and proper.
21. With this Memorial, Claimants present witness statements from: (i) Claimants' founder, co-owner, and co-Sponsor, Mr. Michael Jacobson ("Jacobson I"); (ii) Latam Hydro's former CEO and President, Mr. Stefan Sillen ("Sillen I"); (iii) Latam Hydro's former Project Manager and Technical Consultant, Mr. Andrés Bartrina ("Bartrina I"); (iv) CHM's former Manager, Mr. Carlos Diez Canseco ("Canseco I"); (v) Claimants' lead energy lawyer, Dr. Roberto Santiváñez ("Santiváñez I"); and (vi) CHM's legal representative, Dr. Licy Benzaquén ("Benzaquén I").
22. Claimants also rely upon independent expert opinions by:
a. Dr. Maria Teresa Quiñones, a prominent Peruvian administrative law expert, who opines that Peru has breached its obligations under Peruvian administrative law ("Quiñones Report I");
b. Dr. Eduardo Benavides, a pre-eminent Peruvian civil law expert, who opines on Peru's numerous breaches of the RER Contract and Peruvian civil law ("Benavides Report I");
c. Mr. John McTyre, Partner at HKA Global Ltd., an internationally respected construction and delay claim consultancy firm, who opines after independent review that Peru was responsible for 1742 days of delays to the Project ("HKA Report I"); and
d. Messrs. Santiago Dellepiane and Andrea Cardani, Managing Director and Director, respectively, at Berkeley Research Group, who conclude after independent review that Claimants suffered damages exceeding US $47 million, inclusive of pre-award interest calculated to the date of this submission ("BRG Report I").
23. This Memorial is structured as follows: Section II describes the factual background of this dispute; Section III establishes the jurisdictional bases for Latam Hydro and CHM's claims; Section IV demonstrates that Peru is liable for violations of the TPA and international law; Section V proves Peru's breaches of its obligations under the RER Contract and Peruvian Law; Section VI explains the quantification of damages that Latam Hydro and CHM have suffered as a direct result of Peru's wrongful conduct; and Section VII sets out Claimants' Request for Relief.
...
VII. REQUEST FOR RELIEF
547. On the basis of the foregoing, without limitation and reserving their right to supplement or revise these prayers for relief, including any further actions taken by Peru against Claimants, Claimants respectfully request that the Tribunal:
a. DECLARE that Peru has breached Articles 10.4, 10.5 and 10.7 of the TPA;
b. DECLARE that Peru has breached its obligations under the RER Contract, including Peru’s obligations: (i) under Clauses 1.4.26, 1.4.37, 2.2.1, 4.3, 6.3, and 11.3; (ii) to adhere to the review periods under the GLAP and TUPA, which form part of the governing law under the RER Contract; and (iii) to execute the RER Contract in accordance with the doctrines of good faith, actos propios, and confianza legitima;
c. DECLARE that the RER Contract is terminated and, with it, all of CHM’s obligations and duties owed thereunder;
d. DECLARE that all bonds put up by either Claimant as part of the Mamacocha and Upstream Projects be returned to CHM, including the US $5 million performance bond under the RER Contract;
e. ORDER Peru to compensate Claimants for their losses resulting from Peru’s breaches under the TPA, the RER Contract, Peruvian law, and international law, which, as of the date of this Memorial, amount to at least US $47,049,000 but continue to increase due to the ongoing nature of Peru’s unlawful breaches;
f. ORDER Peru to pay all costs and expenses of this arbitration, including Claimants’ legal and expert fees, the fees and expenses of any experts appointed by the Tribunal, the fees and expenses of the Tribunal, and ICSID’s other costs;
g. [redacted]
h. ORDER the parties to protect the status quo and not aggravate the dispute pending resolution of the ICSID arbitration;
i. ORDER Peru to cease its pursuit of the Lima Arbitration pending resolution of the ICSID arbitration;
j. ORDER that Peru may not call or collect any bond put up by either Claimant in relation to the Mamacocha and Upstream Projects, including the performance bond under the RER Contract;
k. ORDER further relief as counsel may advise or the Tribunal may deem just and appropriate; and
l. AWARD such other relief as the Tribunal considers appropriate.