Disputes and arbitration

THE GROWING number of disputes between the government and private-sector investors who complain of rules changing in midstream is getting to be alarming. A study by the ICC (International Chamber of Commerce) International Court of Arbitration in Singapore showed the Philippines as not far behind more developed economies in terms of the number of arbitration cases, especially in the past five years. The total is now at 104. ICC Philippines observed that in the Association of Southeast Asian Nations (Asean), there were two countries that were ahead of us—Singapore and Malaysia—but that there would be more disputes to arise as more investors come to our shores.

Just last week, Manila Water Co. Inc. announced that it has filed a “notice of arbitration” with the Permanent Court of Arbitration in Singapore, after the Aquino administration failed to honor the “notice of claim” it filed last April 23. Through the notice, Manila Water called on the government to reimburse its losses arising from a significant reduction in the rate of return committed under its concession contract. The losses were estimated at P79 billion for the entire concession period from 2015 to 2037.

The government is in international arbitration proceedings with another water concessionaire, Maynilad Water Services Inc., relating to the Metropolitan Waterworks and Sewerage System’s reinterpretation of its concession contract to disallow the company from recovering corporate income tax. There is also the dispute with the Malampaya consortium led by Shell Philippines Exploration stemming from the Commission on Audit’s recalculation of how much the consortium should be paying the national government. The COA, in decisions dated April 6 and May 11, 2015, ordered the Department of Energy to collect income taxes of about $2.9 billion from the Malampaya consortium on the grounds that this should be paid on top of the government’s 60-percent share in the net proceeds. Then there is the dispute between state firm Power Sector Assets and Liabilities Management Corp. (PSALM) and San Miguel Corp. over the latter’s power administration contracts for the Ilijan and Sual power plants. PSALM was set to terminate San Miguel’s contract but was taken to court by the latter. The Department of Finance is set to intervene in the case, which is likely to reach arbitration as well.

Among the most controversial arbitration cases involving the government is that against Philippine International Air Terminals Co. Inc. (Piatco) and its German partner Fraport AG, which won the contract to build the controversial Naia Terminal 3 in 1997. In 2002, the government nullified the contract due to allegations that the consortium violated the Anti-Dummy Law. Earlier, in 2000, the government became similarly embroiled in an arbitration dispute with SGS S.A. after it terminated a contract that started in 1991 in which SGS provided preshipment inspection services for the Philippines’ imports. SGS submitted claims to the Philippines totaling $140 million plus interest.

There is another problem besetting private-sector investors aside from the government reneging on or changing contract provisions. This relates to the intervention of courts and local governments in purely business deals, such as what happened to the privatization of the Manila Hotel in the 1990s. The bidding was won by a Malaysian investor, but a losing bidder ran to the Supreme Court and had it disqualify the foreign bidder by virtue of an obscure “Filipinos First” law. Then there is the similarly controversial Tampacan gold project in Cotabato, which was allowed by the national government through the Mining Act but was stymied by a local government ordinance that bans open-pit mining in the locality.

At the rate private companies are locked in disagreements with the state on important projects, there is an urgent need for both the government and the private sector to look with favor on dispute settlement mechanisms and arbitration. It has been suggested that not only lawyers but also judges (whose role in implementing arbitration results is crucial) should be exposed to arbitration forums. This should push the legal advisers of companies to be more careful in crafting contracts, to avoid potential disputes. When an investor has spent money on a project and then the government changes the rules or the courts stop the undertaking, the repercussions will be enormous.