On 18 August 2021, HSBC Latin American Holdings announced that it had launched arbitration proceedings before the International Centre for Settlement of Investment Disputes (ICSID) against the Government of El Salvador for breach of the El Salvador - United Kingdom BIT.
HSBC's decision was triggered by the Supreme Court of El Salvador’s June 2019 judgement which ordered it to pay coffee wholesalers Ingeniero José Antonio Salaverría y Compañía de Capital Variable (hereinafter IJASAL) $49.3 million in damages.
On 27 July 2007, IJASAL entered into an agreement with Banco Cuscatlán El Salvador, S.A., Banco HSBC Salvadoreño, S.A., (from 2012 onwards referred to as "Banco Davivienda Salvadoreño, Sociedad Anónima") and Banco Hipotecario El Salvador, S.A in order to regulate their financial and legal relationships.
In the agreement, the HSBC Salvadoreño undertook to make certain disbursements to IJASAL, and committed itself not to bring executive proceedings against IJASAL without the other two banks’ prior written authorisation.
Despite the agreement, HSBC Salvadoreño not only failed to make the promised disbursements but also foreclosed and seized IJASAL.
So, on 7 October 2009, IJASAL began summary trial proceedings against HSBC before the Fifth Commercial Court of San Salvador claiming consequential damages and loss of profits in the amount of $ 22,727,764.32. However, this claim was dismissed on 1 November 2017.
In response, IJASAL appealed to the First Civil Chamber of the Court of Appeal of the First Section of the Centre Region. However, in another blow to IJASAL, the appeal was dismissed on 29 June 2018.
Still dissatisfied, IJASAL appealed to the Civil Chamber of the Supreme Court of El Salvador, who – in a judgment handed down on 5 June 2019 – annulled the Court of Appeal’s judgment and ordered HSBC Salvadoreño to pay IJASAL $49,314,303.55.
So, in June 2019, HSBC Salvadoreño filed an amparo action before the Constitutional Chamber of the Supreme Court requesting the annulment of the Civil Chamber's judgment on the grounds that it violated constitutional principles. According to HSBC, the main purpose of the amparo was to obtain a stay of execution and to ask the Constitutional Chamber to issue a new ruling that respects the rules.
In December 2020, in the throes of the global Covid-19 pandemic, HSBC sent a letter to El Salvador’s President, Attorney General and the Supreme Court of Justice’s president citing "unusual delays" and threatening to institute arbitration proceedings before ICSID the Constitutional Chamber of the Supreme Court failed to resolve its claim within three months.
According to local reports, HSBC alleged in its letter that due to the amparo procedure’s inherent urgency, the Constitutional Chamber normally admits requests within four to eight months but that, in this instance, 17 months had elapsed without a response from the Constitutional Chamber.
In its initial response to HSBC’s letter, however, the Constitutional Chamber clarified that the case was not inactive and that the request’s admissibility was being considered in accordance with applicable jurisprudence and procedural laws.
In this regard, Article 18 of Legislative Decree No. 2996 of 1960, "Law of Constitutional Procedures", which regulates, among other things, the amparo procedure, provides that "once the application has been received, the Chamber will admit it if the requirements of Article 14 have been fulfilled" – without establishing a time limit for doing so.
However, on 3 February 2021, the Constitutional Chamber of the Supreme Court of Justice eventually dismissed the amparo "on the grounds that the claim lodged in relation to the contested acts is based on questions of strict legality and merely disagreement with the contested decisions."
In response, HSBC made good on its threats to institute arbitration proceedings before the ICSID.
Denial of Justice?
HSBC alleges that the Supreme Court's decision, and other irregularities in the judicial process, violated El Salvador's obligations under the El Salvador - UK BIT in which the states agreed to give each other's investors "fair and equitable treatment" and to protect them against "immoderate or discriminatory measures.”
In this regard, HSBC alleges that the Supreme Court's decision amounts to a "denial of justice" and a failure “to protect HSBC's fundamental rights as a UK investor in El Salvador." The financial group also alleges that it sought an amicable settlement with the government of El Salvador, to which no substantive response was received, before bringing the case to ICSID.
In addition to alleging “unusual delays” in support of its ‘denial of justice’ claim, HSBC criticises the Court of First Instance’s decision to grant IJASAL’s request for an expert opinion that the Civil Chamber of the Supreme Court later used as a basis for increasing the plaintiff’s claim for damages from $22,727,764.32 to $49,314,303.55.
HSBC has repeatedly alleged that the ‘fair and equitable treatment’ standard has been breached by the Supreme Court’s decisions. So it will be interesting to see what approach the Arbitral Tribunal will take when dealing with this case.
Over the years, several Investment Arbitration Tribunals have found that the concept of denial of justice forms part of the fair and equitable treatment standard (see Jan Oostergetel and Theodora Laurentius v. Slovak Republic, UNCITRAL, Final Award, 23 April 2012; and Companía de Aguas del Aconquija S.A and Vivendi Universal S.A v. Argentine Republic, ICSIO Case No. ARBI97/3, Award, 20 August 2007).
However, while a breach of the ‘fair and equitable treatment’ standard could indeed support an investor’s denial of justice claim, claims that a state’s courts are not impartial or render decisions that defy the basic notion of justice, for example, must pervade the judicial system as a whole.
For example, in Rupert Joseph Binder v. Czech Republic (UNCITRAL, Final Award, 15 July 2011) it was found that:
“[t]he fair and equitable treatment standard thus protects the investor from manifest maladministration of justice, which may take the form of, inter alia, lack of due process, lack of a fair trial, undue delay and obstruction of access to justice, as well as grossly unjust judgments. Accordingly, while a denial of justice normally relates to egregious procedural impropriety, it will also be triggered when the decision of a court or an administrative organ is, as the tribunal in the Mondev v. USA case noted, so "clearly discreditable and improper" that it cannot but imply manifest deficiency in the judicial or administrative process […]. What is required, however, is evidence of failure of the judicial or administrative system as a whole. For example, an isolated instance where a judicial or administrative organ has committed a gross error and an adequate and effective remedy to redress such error existed will not meet the test.”
In light of the above, it seems unlikely that an ICSID Tribunal would construe HSBC’s mere dissatisfaction with two decisions delivered by the Supreme Court as evidence of the occurrence of a ‘denial of justice’.
For example, HSBC had, and made use of, the apparently ‘adequate and effective’ remedy to review the constitutionality of the Civil Chamber of the Supreme Court’s decision before the Constitutional Chamber of the Supreme Court of Justice – notwithstanding the fact that it was unsuccessful.
In addition, while a “denial of justice could be pleaded if the relevant courts refuse to entertain a suit, if they subject it to undue delay, or if they administer justice in a seriously inadequate way […] (Azinian v. United Mexican States), this does not seem to have happened here.
In this regard, the the Constitutional Chamber’s ruling in the amparo proceedings brought by HSBC is apposite:
"the alleged inconsistency in the rulings delivered by the Court is not apparent, but instead, it is rather obvious that the interested party does not agree with the contested decisions, since, as has been stated, the bank, through its lawyers, has not alleged that it was denied the opportunity to intervene in the trial and, therefore, that the procedural acts produced were not recognized […] the way in which the plaintiff was constitutionally affected is not evident, but rather its contentions reflect a mere discrepancy with the manner in which its claims and objections were substantiated and dealt with in the trial, given that the lawyers themselves have stated that their client has taken part throughout the process, being aware of the procedural acts and their results, challenging them at the time of their production and obtaining the corresponding rulings from the judge who heard the case at first instance.”
And even if – for the sake of argument – these decisions were regarded as ill-founded, HSBC would still have the burden to prove that El Salvador’s judicial system as a whole has failed.
It will also be interesting to see what weight, if any, the Covid-19 pandemic is given in the Arbitral’s Tribunal’s treatment of HSBC’s “unusual delays” claim.
To date, the ICSID website shows no record of any request for arbitration filed by HSBC against the government of El Salvador.
The last registered request for arbitration against El Salvador dates from 21 August 2013, "Enel Green Power S.p.A. v. Republic of El Salvador" (ICSID Case No. ARB/13/18), proceedings which were finally concluded on 14 September 2015.