Gramercy Funds Management LLC and Gramercy Peru Holdings LLC v. Republic of Peru

At a glance

Parties

Gramercy Funds Management LLC and Gramercy Peru Holdings LLC (Delaware, USA) v. the Republic of Peru

Case no.

ICSID Case No. UNCT/18/2

Forum and rules

UNCITRAL Arbitration Rules 2013, ICSID as Administering Authority; seat Paris

Treaty

United States–Peru Free Trade Agreement (signed 12 April 2006, in force 1 February 2009)

Tribunal

Prof. Juan Fernández-Armesto (President), Mr. Stephen L. Drymer, Prof. Brigitte Stern (dissenting)

Sector

Finance; sovereign debt (agrarian reform land bonds)

Outcome

By majority (6 December 2022): jurisdiction upheld; Peru breached the minimum standard of treatment (Art. 10.5) through the arbitrary revaluation method of Supreme Decree 242/2017; all other claims dismissed. Brigitte Stern dissented on jurisdiction.

Amount

Claimed: about USD 1.8 billion (alternatives from USD 550 million). Awarded to Gramercy Peru Holdings: USD 33,222,630 plus 7.22% interest a year, compounded annually from 1 January 2009 until payment (about USD 88 million at the award date). Costs: Peru pays USD 9,860,000 of the claimants' legal costs and USD 771,388.92 of tribunal and ICSID costs, plus 7.22% compound interest.

The dispute

Peru issued Agrarian Reform Bonds (Bonos Agrarios) in the 1970s to compensate landowners whose land was expropriated under Decree Law 17716 of 1969. Hyperinflation made the bonds worthless, and payments stopped in 1992. Between 2006 and 2008 Gramercy Peru Holdings bought 9,656 bonds from Peruvian holders for about USD 33.2 million. In July 2013 the Constitutional Tribunal ordered that the bonds be revalued by dollarization. The Ministry of Economy and Finance then issued Supreme Decrees in 2014 and 2017 (DS 17/2014, DS 19/2014, DS 34/2017, DS 242/2017) to set the revaluation and payment procedure. Under that procedure Gramercy's bonds were worth about USD 33.57 million. Gramercy claimed that these measures breached the minimum standard of treatment (arbitrariness and denial of justice), expropriated its investment, breached national treatment, and breached an "effective means" clause imported from the Peru–Italy BIT through the MFN clause. Peru raised eight objections, including that the bonds are not an investment, that the claim was an abuse of process over a pre-existing dispute, and that the claimants' waiver was defective, the claims time-barred and the benefits of the Treaty deniable. On the merits Peru argued that its measures gave the bonds a value for the first time.

Key holdings

1. Jurisdiction upheld. The Tribunal dismissed all of Peru's objections. It held that the claims did not apply the Treaty retroactively and were not an abuse of process. The Second Waiver of 18 July 2016 complied with the Treaty. No claim was time-barred. Both claimants are investors, and Peru's denial of benefits was time-barred and in any case without merit. Award ¶ 146
2. The Bonos Agrarios are "bonds" under Art. 10.28(c) of the FTA and so a form of investment. Their domestic issue, currency and origin in land expropriation do not change their character. Had Peru wished to exclude them, it could have done so in Footnote 13 or Annexes I/II. Award ¶¶ 187–197
3. Breach of Art. 10.5 (main claim). DS 242/2017 is arbitrary in three respects. Its parity exchange rate contradicts the Constitutional Tribunal's mandate and minimizes payments. It converts back into Soles at the lower market rate. It stops interest accruing at the date of revaluation rather than the date of payment. The Constitutional Tribunal's July 2013 order itself is not a denial of justice. Award ¶¶ 1289–1293
4. No indirect expropriation. Gramercy paid USD 33.2 million, and under the impugned measures the bonds were worth USD 33.57 million. Gramercy remained their owner, so there was no substantial deprivation. Effective means claim dismissed: bondholders can challenge the Ministry's decisions in the courts. National treatment claim dismissed: the priority rule for "speculative" holders in Art. 18 of the Texto Único is arbitrary, but it does not turn on nationality. Award ¶¶ 1207–1216, 1230, 1239
5. Damages are based on full reparation, not fair market value. The Tribunal rejected all five of the claimants' methods. It adopted Peru's first proposal: the purchase price of USD 33,222,630, brought forward at Prof. Edwards' 7.22% average real return on debt in Peru, compounded annually from 1 January 2009. The whole sum is payable to GPH. On payment, GPH must deliver the original bonds on request, and the bonds then lose validity. Award ¶¶ 1316–1325, 1339–1341, 1353
6. Costs. Reasonable legal costs were capped at USD 17 million. Peru pays 100% of the jurisdictional-phase share (USD 4.25 million) and 60% of the merits and quantum share (USD 5.61 million). Each side bears its own document-production costs. Peru also bears all tribunal and ICSID costs. Award ¶¶ 1381–1390
7. Dissent (Brigitte Stern). The Tribunal lacked jurisdiction. In her view Gramercy bought worthless bonds that were already burdened by a long-standing domestic dispute, in order to acquire a claim. It never intended any economic activity in Peru. The bonds lack the contribution and investment risk that characterize an investment, so the case is an abuse of process. Dissenting Opinion ¶¶ 2–4, 114

Procedural history

1. 1 February 2016Claimants serve a Notice of Intent under Art. 10.16.2 of the FTA; amended on 15 April 2016.
2. 2 June 2016Notice of Arbitration and Statement of Claim filed; amended on 18 July and 5 August 2016.
3. 13 February 2018The ICSID Secretary-General, as appointing authority, appoints Prof. Fernández-Armesto as presiding arbitrator after the list procedures fail.
4. 29 June 2018Procedural Order No. 1 sets the timetable; Procedural Order No. 2 fixes Paris as the seat.
5. 29 August 2018Procedural Order No. 5 orders both Parties to refrain from aggravating the dispute and to use the designated channels of communication.
6. 21 June 2019The United States files a non-disputing party submission under Art. 10.20.2.
7. 7–14 February 2020Hearing on jurisdiction and merits held in Washington, D.C. Claimants disclose a 2017 purchase of further ("Tranche 2") bonds by a Gramercy entity.
8. 16 April 2020Procedural Order No. 11 orders limited production of documents on the 2017 purchase and sets the post-hearing schedule.
9. 17–18 November 2020Post-hearing oral arguments held by videoconference.
10. 6 December 2022Final Award by majority, with Prof. Stern's dissenting opinion.

Tribunal, counsel and experts

Decided by

• Juan Fernández-Armesto President — appointed by the appointing authority (appointed by the ICSID Secretary-General)
• Stephen L. Drymer Co-arbitrator — appointed by the claimant
• Brigitte Stern Co-arbitrator — appointed by the respondent (dissented)

For the claimant

Debevoise & Plimpton LLP · Rodrigo, Elías & Medrano

For the respondent

Comisión Especial que Representa al Estado en Controversias Internacionales de Inversión, Ministerio de Economía y Finanzas · Arnold & Porter Kaye Scholer LLP · White & Case LLP · Rubio Leguia Normand

Experts

Sebastian Edwards (claimant) · Delia Revoredo Marsano de Mur (claimant) · Peter Allgeier (claimant) · Rodrigo Olivares-Caminal (claimant) · Mario Castillo Freyre (claimant) · Alfredo Bullard (claimant) · W. Michael Reisman (respondent) · Oswaldo Hundskopf (respondent) · Norbert Wühler (respondent) · Pablo E. Guidotti (respondent) · Brent C. Kaczmarek (respondent) · Isabel S. Kunsman (respondent) · Eduardo García-Godos (respondent)

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Keywords

• Peru land bonds
• agrarian reform bonds
• Bonos Agrarios
• sovereign debt
• US–Peru Trade Promotion Agreement
• minimum standard of treatment
• arbitrariness
• denial of justice
• indirect expropriation
• judicial expropriation
• national treatment
• MFN effective means clause
• abuse of process
• definition of investment
• Annex 10-F public debt
• dollarization revaluation
• compound interest
• non-aggravation

Summary generated with AI from the published documents — refer to the award for the authoritative text.