By: J. Gozali
Hi there, this is my first post in my blog and I am going to make a disclaimer: first of all, I wrote this blog purely out of interest and in no way I mean to offend anyone or any party and the name was just out of fun, I don’t intend to copy or imitate a certain party with a similar name and I have no intention in offending anyone with the name.
My first post is about a case that I have previously read, concerning foreign investment. Mind you, I am new to the subject, which is why I find several parts of foreign investment interesting; one being the fact that a state’s economy plays a role in determining a certain case’s judgment. To prove my point, below is the summary of a case that reflects that.
Olguín v. Paraguay is a case that reflects an individual whom made investments in hoping to gain means or interests, but due to an economic crisis resulted otherwise loss. Mr Olguín then tries his case for claiming his loss against that particular state, but the Tribunal’s final decision made him unable to claim his prize.
This all started when an official of the Central Bank of Paraguay sent a letter in November 1993 to Mr. Eudoro Armando Olguín about dealings with La Mercantil SA de finanzas (La Mercantil); a finance company that would give rates of interests from 11% to 33% annually if Mr. Olguín would deposit his US dollars or Guaranís. The official also mentions sending official reports of the Central Bank of Paraguay on La Mercantil’s position in the financial corporation in Paraguay.
By December 1993, after being interested by the information, Mr Olguín made transfers amounting to USD 1.254.500,- which were then converted to Guaranís and deposited in La Mercantil. He was then sent investment bonds continuously from early August 1994 until early July 1995 amounting to 7 investment bonds in the value of Guaranís. The first bond was issued in the name of Mr. Angel Canziani Zuccarelli and the rest in Mr. Olguín’s name which bore the seal of the clerk of the Central Bank of Paraguay amounted to 2.407.057.500,- Guaranís. The interests were paid on August 26th 1996 for each bonds except of that issued in the name Mr. Canziani. The funds mentioned were used to finance the installation of “Super Snacks of Paraguay Inc.” (Super Snacks), a factory specializing in maize products.
The granting to the deed of incorporation of Super Snacks were witnessed by Mr. Olguín, Juan Luis Olselli Pagliaro and Tomas Gumerindo Rouira Barchello before the Public Notary on May 25th 1994. Mr Olselli approved the legal personality of this corporation on July 26th 1994; was registered on August 22nd 1994 in the Registry of Public Commerce of the Republic of Paraguay and was granted tax incentives on the 22nd September 1994.
By December 18th 1994, The Convention between the Republic of Peru and the Republic of Paraguay on the Reciprocal Promotion and Protection of investments came into force.
Finally, the big hit happened. An economic crisis in Paraguay happened in mid-July 1995, causing substantial damage to the financial system resulting la Mercantil to close its operations and defaulted on payments of the investment bonds, including Mr. Olguín’s.
To counter the economic crisis in Paraguay, several laws came into force, one of them being Law No. 417/73 in July 1995 which regulated banks and other financial bodies which offers certain financial assistance; and law no. 797 which approved the financial stabilization and reactivation which mentions the central bank of Paraguay’s guarantee of deposit payment duly registered in the liabilities of the body, by whatever method in national or foreign currency, incurred by natural or legal persons, in bonds, financial corporations and other credit bodies, up to the equivalent of one hundred minimum monthly salaries per account.
Being financially disadvantaged of the situation, Mr. Olguín, holding both nationalities of Peru and United States of America requests for arbitration on October 27th 1997 against the republic of Paraguay. Through this dispute, Mr. Olguín, as the representative of Super Snacks attempts to recover funds deposited in la Mercantil which had increased to 2.407.057.500 Guaranís by 30th of June 1995.
Mr Olguín’s (Hereinafter referred to as Claimant) arguments were based on 4 factors: firstly, the underwritten investment bond; the negligence of Paraguay in their supervision towards La Mercantil; the discrimination act of Paraguay and its organs that breached provisions of the CPI; and lastly the conduct of expropriation.
In Paraguay’s response, by May 21st 1998, Paraguay challenged the request for arbitration by reasons such as: contradicting the operations performed by claimant as “investment”; rejects to motion the guaranty against “investment”; affirmed payment made by the central bank; points out a written waiver by the claimant to institute his right any further against the Paraguayan authorities; the settlement unable to be settled through CPI as claimant has previously chosen the jurisdictional route therefore waiving international arbitration; the non-existent form of dispute, and finally the lack of consent of the parties to submit the dispute through arbitration before ICSID.
By August 26th 1998, the request had been registered. The arbitrators presented were Professor Dale Beck Furnish, a national of USA; Justice Fransisco Rezek, a national of Brazil and Mr. Rodrigo Oreamuno Blanco a national of Costa Rica as President of the Arbitral Tribunal but in March 17th 1999, Professor Furnish resigned as arbitrator due to nationality issues in which later was replaced by Dr. Eduardo Mayora Alvarado, a national of Guatemala.
During the first session held at the seat of ICSID in Washington DC, Paraguay objected its Jurisdiction by stating that jurisdiction are based by expressed acceptance. Respondent’s arguments continues by reasoning that speculative financial investments are not protected by the CPI; Protected investment under the convention has a requirement to have been accepted in advance in the state being made; and that The Claimant’s judicial Claims in the Respondent’s courts prevents him from requesting arbitration for the same purpose and even if the Respondent were liable, the liabilities performed shall not be direct, but subsidiary.
By August 31st 1999, Claimant gave their response in stating that: Since the Respondent had concluded to the Convention, Paraguay had submitted implication to the jurisdiction of ICSID; that the operations conducted by the Claimant are considered as investment under ICSID convention and the CPI; and that Claimant denied any judicial claims in Paraguay.
The Arbitral Tribunal then delivers their considerations and finds that it has the powers of competency, contradicting to Respondent’s objections on ICSID’s jurisdiction since Paraguay is a contracting state to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States and that both Parties concluded to the CPI on 31st of January 1994.
Moving on to the merits, which commenced on February 11th 2001, the Tribunal analyzes the arguments set out by the Claimant, one being about investment bonds in which the seal that was previously argued as underwritten, its purpose was solely to administer the bonds. The Tribunal, by not considering the judicial system in Paraguay, finds that Mr. Olguín, an experienced businessman must have acknowledged and considered the situation in Paraguay and was willingly (without naivety) to invest in Paraguay through La Mercantil. It is unacceptable for him to seek indemnified losses, which he suffered after making speculated investments. The Tribunal also finds that there are unproven statements made by Claimant such as in which Paraguay paid the entire investment of Hamilton Bank of the United States of America nor discriminatory conduct and finally, the Tribunal does not understand Claimant’s conclusion in which his investment was made into expropriation.
The Tribunal unanimously decides in rejecting all submissions of the Claimant; and secondly, the parties therefore are to divide half the expenses of this case and the entire costs of their own representation.
(This summary is based on the texts in ICSID Reports, Volume 6 by James Crawford, edited by Karen Lee, Cambridge University Press, 2004, pages 154-180).