Metro de Lima Línea 2 S.A. v. Republic of Peru

Case summary

At a glance

Parties: Metro de Lima Línea 2 S.A. (Peruvian company under foreign control, treated as a foreign national under Art. 25(2)(b) ICSID Convention) v. Republic of Peru (acting through the Ministry of Transport and Communications)
Case no.: ICSID Case No. ARB/17/3
Forum and rules: ICSID Convention; ICSID Arbitration Rules 2006; place of proceeding Washington, D.C.; language Spanish
Treaty: None. Contract claim under clause 16 of the Concession Contract of 28 April 2014 (Lima Metro Line 2 and Av. Faucett–Av. Gambetta branch)
Tribunal: David J.A. Cairns (President), Guido Santiago Tawil, José Emilio Nunes Pinto
Sector: Urban rail / metro construction (public-private partnership)
Outcome: Decision on Jurisdiction and Liability (6 July 2021): Peru is liable for most of the delays and must extend the works deadlines; some claims of the concessionaire fail; Peru's counterclaim is dismissed; damages and costs are reserved for the award.
Amount: Damages not yet quantified. Peru said the claims exceeded USD 450 million. Peru ordered to refund penalties of USD 60,725.21 and PEN 146,150. Peru's counterclaim for socio-economic and environmental damage (USD 713,362,015 claimed) dismissed.

The dispute

Metro de Lima Línea 2 S.A. is the special-purpose concessionaire formed by the Consorcio Nuevo Metro de Lima (Iridium, Vialia, Cosapi, Impregilo, Ansaldo STS, Ansaldo Breda). It signed a 35-year DFBOT co-financed concession with Peru on 28 April 2014 to design, finance, build, equip, operate and maintain Lima Metro Line 2 and the Line 4 branch. The contract was amended by Addendum No. 1 (26 December 2014) and Addendum No. 2 (13 December 2018). The concessionaire claimed that the project was delayed because Peru delivered the concession areas late and obstructed the review and approval of the final engineering studies (EDIs) through the regulator OSITRAN and its supervisor CSIL2. It sought extensions of time, the refund and cancellation of penalties, and delay and change-order damages, including losses suffered by its construction contractors. Peru argued that the concessionaire caused the delays by refusing to take possession of areas, by departing from its Technical Proposal and by not correcting the EDIs. It said many delays were concurrent and objected to the claims for third-party losses. Peru also counterclaimed for socio-economic and environmental damage and for unpaid penalties.

Key holdings

The Tribunal has jurisdiction over the penalties imposed by the Regulator under clauses 17.12–17.17. These are contractual penalties, not administrative acts excluded by clause 16.2. Addendum No. 2 has no bearing on events before 13 December 2018 and cannot be used as evidence for either side. ¶¶ 216–217, 652–653
Peru breached clause 5.16 by delivering the Stage 1A areas (other than the Santa Anita yard) and the Stage 1B and 2 areas late. Its duty to clear Interferences is limited to the Concession Area. The incompatibility of the municipal road-section rules was a legal restriction that Peru had to cure, but Peru did not breach its best-efforts duty on permits. The concessionaire breached clause 5.17 by refusing without justification to take possession of stations E-20 to E-24 on specified dates. Its claims about the SET and SEAT power substation sites fail, because locating them was its own responsibility. ¶¶ 257, 305–306, 530, 544–545, 1044.2–1044.4
Peru used its EDI review powers in a way incompatible with the concessionaire's design responsibility and with the fast, limited contractual review. It made excessive and inconsistent observations, missed the 10-day deadlines, and CSIL2 misunderstood its supervisory role. The EDI deadlines are therefore unenforceable. Peru must allow the EDI Development Plan to be reformulated, refund USD 60,725.21 and PEN 146,150 in penalties, and cancel the pending and unpaid penalties. ¶¶ 645, 657–663
On delay, the Tribunal adopted PAI's P1BEG baseline and windows analysis. The parallel delays in area delivery and EDI approval were related and mutually caused, so they were not 'concurrent' in the sense of the SCL Protocol or AACE R-29. Peru must grant extensions under clause 6.42 of 1,027 days (Stage 1A), 1,444 days (Stage 1B) and 1,448 days (Stage 2). The concessionaire's own parallel delays reduce compensation under Article 1326 of the Civil Code, so damages are due for 742 days on Stage 1A and for the full delays on Stages 1B and 2. ¶¶ 722–726, 787, 792, 813, 829–831
Evacuation systems: the EDIs complied with NFPA 130, but taken together the design changes were less safe than the Technical Proposal, which is a minimum standard judged by results. The concessionaire therefore breached clause 6.3, and Peru's observations were justified, although Peru still had to meet the review deadlines. Seismic design: the original EDIs (1,000-year return period, 80 cm walls) exceeded the 475-year standard of the Technical Proposal. Peru is liable for the delay and extra cost of insisting on a 2,500-year 'essential building' standard. ¶¶ 880–881, 935–939, 946
Counterclaim dismissed. Peru had not shown that the concessionaire missed the (extended) deadlines for completing the works. In any case, the penalty clause limits recovery under Article 1341 of the Civil Code, and no wilful misconduct or gross negligence was shown. The penalties counterclaim fails because the EDI deadlines were unenforceable. The risk-study penalties had already been decided in a Lima Chamber of Commerce arbitration and fall outside the Tribunal's jurisdiction. ¶¶ 983–984, 995–998
The concessionaire has standing to claim, as its own, construction losses first suffered by the EPC consortium and its subcontractors, which pass through under clause 4.18 of the Turnkey Contract. The claims are admissible and within jurisdiction. Whether these losses are proven is left to the damages phase. Remaining damages issues and costs are reserved for the award. ¶¶ 1035–1039, 1044.17–1044.18

Procedural history

17 January 2017ICSID receives the Request for Arbitration dated 16 January 2017. It is registered on 1 February 2017.
10 July 2017Tribunal constituted. The President was appointed by the ICSID Secretary-General through a blind strike-and-rank ballot agreed by the parties.
25 September 2017Procedural Order No. 1: ICSID Arbitration Rules 2006, place of proceeding Washington, D.C., language Spanish.
30 May 2018Peru files its Counter-Memorial and Counterclaim.
1 February 2019Procedural Order No. 3 on provisional measures: the Tribunal recommends that the parties avoid measures that would aggravate the dispute and orders no other measures.
28–29 March 2019Tribunal visits the works site in Lima.
6–16 May 2019Hearing in Washington, D.C.
20 September 2019Parties file post-hearing briefs.
6 July 2021Decision on Jurisdiction and Liability: liability largely found against Peru, counterclaim dismissed, damages and costs reserved.