A. LEGISLATION AND RULES
A.1 Legislation
International arbitration in Peru continues to be governed by Legislative Decree No. 1071 of 2008, based on the UNCITRAL Model Law; Urgency Decree No. 020-2020, which modified some articles of Legislative Decree No. 1071 related to arbitrations where the Republic of Peru (“State“) is a party; and the New York Convention.
A.2 Institutions, rules and infrastructure
Since last year’s Yearbook, there have not been many developments in the most relevant arbitration institutions in Peru:
- Proceedings of the Arbitration Center of the Lima Chamber of Commerce are still regulated under the rules in force since January 2017. In 2020, during the state of emergency because of the COVID-19 pandemic, the arbitration center issued practical notes on using virtual media and increasing clarity and efficiency. They are still in force.
Moreover, the Arbitration Center of the Lima Chamber of Commerce presented its new rules for dispute boards. These rules became effective as of 1 January 2022.
- Proceedings of the International Arbitration Center of the American Chamber of Commerce of Peru are regulated by the Arbitration Rules adopted on 1 July 2021. In addition, because of the COVID-19 pandemic, the arbitration center issued a “virtual arbitration guide” that was published on 24 April 2020.
- Proceedings of the Arbitration Center of CARC-PUCP are, since January 2024, regulated under new rules of arbitration. The new rules published by the arbitration center on 14 December 2023 made changes regarding, among other things: (i) arbitration proceedings and notifications, which now are virtual by default; (ii) the incorporation of non-signatories by the arbitration center and the arbitral tribunal; (iii) the mechanism to appoint the president of the arbitral tribunal or the sole arbitrator in the absence of an agreement between the parties; (iv) the possibility of establishing sanctions for arbitrators’ challenges that are manifestly lacking in factual basis; (v) the removal of emergency arbitration proceedings; and (vi) the implementation of express arbitration proceedings.
B. CASES
Pursuant to ICSID’s Caseload Statistics, two new cases were filed against the State in 2023: (i) TV Azteca S.A.B de C.V. and Azteca Comunicaciones Perú S.A.C. v. Republic of Peru (ICSID Case No. ARB/23/37)under the 2011 Mexico-Peru Free Trade Agreement (FTA); and (ii) Operadora Ecológica del Titicaca S.A.C. v. Republic of Peru (ICSID Case No. ARB/23/11) under a contract for water management and supply.
As of today, Peru has 22 pending and 22 concluded arbitrations before ICSID. The large number of ICSID cases against Peru is the result of many years of large amounts of foreign investment entering the country, which is illustrated by the broad range of issues involved in these investment arbitrations, and not because of a State policy known for expropriation and anti-investment measures, like in some other countries in South America. However, during the past years, political instability and certain government decisions have generated new cases. Another reason for the substantial increase in ICSID cases is that several of them are based on arbitral agreements of concession contracts.
In 2023, there were ICSID awards in two cases against the State and a decision to discontinue an arbitration proceeding:
- Sociedad Aeroportuaria Kuntur Wasi S.A. and Corporación América S.A. v. Republic of Peru (ICSID Case No. ARB/18/27) — Arbitral award of 6 December 2022 in favor of the claimant investor
- IC Power Ltd and Kenon Holdings Ltd v. Republic of Peru (ICSID Case No. ARB/19/19) — Arbitral award of 3 October 2023, partially in favor of the claimant investor
- Worth Capital Holdings 27 LLC v. Republic of Peru (ICSID Case No. ARB/20/51) — The tribunal issued a procedural order noting the discontinuance of the proceeding pursuant to ICSID Arbitration Rule 44 and a decision on costs, 8 December 2023
B.1 Sociedad Aeroportuaria Kuntur Wasi S.A. and Corporación América S.A. v. Republic of Peru (ICSID Case No. ARB/18/27)
On 22 April 2014, Consorcio Kuntur Wasi, a consortium constituted on 7 July 2011 by Corporación América and Andino for the purpose of participating in the tender process for the Chinchero Airport, submitted its technical and economic proposals. Three days later, on 25 April 2014, Consorcio Kuntur Wasi was awarded the concession.
As provided for in the consortium contract and required in the bases, on 11 June 2014, Corporación América and Andino constituted Kuntur Wasi to develop and later operate the Chinchero Airport. Corporación América and Andino each held 50% stake in the new company. Under the concession contract, Kuntur Wasi would carry out the design, financing, construction, operation and maintenance of the Chinchero Airport. The concession would last for 40 years from the date of signing.
On 12 October 2016, the Contraloría issued its report in relation to Kuntur Wasi’s permitted guaranteed indebtedness and concluded that approving it could affect the economic equilibrium of the concession contract. It recommended that the MTC renegotiate the amount of the payment for the advancement of works with Kuntur Wasi. On 3 February 2017, Kuntur Wasi and the MTC signed Addendum No. 1.
Pursuant to Addendum No. 1, the MTC would transfer the USD 40 million advance payment to Kuntur Wasi within 30 days after the addendum was signed, provided that Kuntur Wasi submitted the advance payment guarantee. However, that never occurred. In a political context in which the Congress initiated investigations of the representatives of the executive power, on 4 June 2017, the MTC announced that Kuntur Wasi would not participate in the construction and operation of the Chinchero International Airport and that Kuntur Wasi and the MTC had agreed to reach a termination agreement.
On 13 July 2017, the State notified Kuntur Wasi of its decision to unilaterally and irrevocably terminate the concession contract for public interest reasons. On the other hand, on 7 February 2018, Kuntur Wasi sent a formal letter to the MTC informing it of the termination of the concession contract due to the MTC’s breach of the contract, and on 8 February 2018, Kuntur Wasi handed over the concession area to the State.
In July 2018, Kuntur Wasi initiated an arbitration before ICSID claiming, among other things, that: (i) the State’s unilateral termination of the concession contract was contrary to the terms of the contract and Peruvian law; (ii)Kuntur Wasi’s termination of the concession contract was valid and had consequences under Peruvian law; (iii)the State breached the concession contract; (iv)the State’s requests that Kuntur Wasi return the concession area were wrongful; (v)the State’s actions caused damage to the image, honor and good reputation of Kuntur Wasi and its shareholders.
Kuntur Wasi also asserted that the BIT had been breached by the respondent’s failure to provide fair and equitable treatment to their investment; by the respondent’s unjustified conduct in violation of the second sentence of Article 2(3) of the BIT; by the respondent’s expropriation of the concession contract and the EDI; by the respondent’s failure to provide legal security for their investment; and finally, by the respondent’s contractual breaches, actionable under the BIT by virtue of its MFN clause, Article 3(1), through which an umbrella clause from another treaty can be imported.
The tribunal concluded that the State breached the concession contract as a result of the manner in which it decided to terminate it, that such conduct also constituted a breach of the guarantee agreement and that the respondent’s termination of the contract constituted a violation of the FET standard set forth in Article 2(3) of the BIT, first sentence, as well as the proscription against unjustified treatment set forth in Article 2(3) of the BIT, second sentence.
Accordingly, the tribunal determined that the amount of USD 42.5 million, plus the value of the performance bond, USD 8,687,826, with interest from the date of valuation (i.e., 13 July 2017), shall be recoverable by the claimants.
B.2 IC Power Ltd and Kenon Holdings Ltd v. Republic of Peru (ICSID Case No. ARB/19/19)
The claimants, IC Power and Kenon, are holding companies incorporated in Singapore. Until 2017, both controlled three Peruvian companies: Kallpa Generación, Cerro del Águila and Samay I, which in turn owned and operated five power plants. Through the plants, the subsidiaries operate in the Peruvian electricity system, transmitting power through the network and providing certain ancillary services, such as the secondary frequency regulation (SFR) service.
The dispute arose in relation to two regulatory measures adopted by OSINERGMIN, a public decentralized agency attached to the Presidency of the Council of Ministers, whose mission is to regulate, supervise and monitor the functioning of Peru’s electricity system.
The first measure concerned Resolution OSINERGMIN No. 141-2016-OS/CD (“Resolution 141“), which regulates the provision of the SFR service for the Peruvian electricity system. According to the claimants, OSINERGMIN had declared that the SFR provider would obtain preferential access. In 2016, Kallpa was granted an exclusive right to provide SFR for three years, but two months later, OSINERGMIN issued Resolution 141 retroactively, taking away that right and causing profits to be lost.
According to the claimants, this measure violated Fair and Equitable Treatment and Full Protection and Security obligations in changing the terms of the SFR services by introducing retroactive modifications to the bases. For the claimants, OSINERGMIN’s adoption of Resolution 141 caused damages of USD 110.7 million.
On the other hand, the second measure consisted of OSINERGMIN Resolution No. 164-2016-OS/CD (“Resolution 164“), whereby the methodology for the allocation of costs for power generators’ use of transmission lines of the electricity system was modified. Among other things, the claimants alleged that OSINERGMIN charged companies to use a certain number of electricity transmission lines, regardless of the actual number of lines they used. This allegedly benefited state-owned electricity companies to the detriment of private investors.
The claimants contended that through Resolution 164, the State breached Article 10.5 of the Peru-Singapore FTA, as it was impermissibly arbitrary, discriminatory and in breach of its obligation to maintain the stability and predictability of the legal and business environment, thereby causing damages to the claimants’ investments of USD 84.6 million.
The tribunal dismissed the claimants’ allegations of breaches of the Full Protection and Security standard of the Peru-Singapore FTA, as the latter is limited to providing protection against physical harm and does not provide protections with respect to legal certainty.
On the other hand, the arbitral tribunal determined that the State had acted in a grossly arbitrary manner by issuing Resolution No. 141 (the first measure on SFR service), thus violating the standard of Fair and Equitable Treatment provided for in the Peru-Singapore FTA. Therefore, it awarded the claimed damages. However, the arbitral tribunal dismissed the claimants’ claim for USD 84.6 million related to the second measure, i.e., for the electricity transmission line charges, as it did not consider that the Fair and Equitable Treatment standard was violated.
As a result, the tribunal ordered the State to pay the claimants the sum of USD 110.7 million plus interest as compensation for the damages caused. It also ordered the claimants to bear the costs of the arbitration, as well as the costs of the tribunal and ICSID.
B.3 Worth Capital Holdings 27 LLC v. Republic of Peru (ICSID Case No. ARB/20/51)
In May 2018, Worth Capital initiated an investment arbitration against the State for alleged breaches of obligations under the 2006 US-Peru Trade Promotion Agreement. Specifically, the claimant alleged that the State adopted measures, such as the frustration in obtaining the license for the exploitation of Block 126, which caused it damages amounting to USD 136.3 million.
However, during the arbitration proceedings, Worth Capital failed to file its response to the State’s counter-memorial. Consequently, the arbitral tribunal issued a resolution of termination and decision on costs. Thus, the arbitration was terminated, although without the effect of res judicata, and the investor was ordered to assume all the costs of the arbitration, the State’s legal defense and the costs of the proceeding, plus interest.
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