Berkowitz v. Republic of Costa Rica, No. 17-148 (D.D.C. Jan. 20 2018) [click for opinion]

In the early 1990s, the government of Costa Rica became increasingly concerned that tourist development near the country’s beaches would seriously affect the nesting of leatherback turtles in that area. Costa Rica enacted legislation to establish a marine park, but the measures taken were contradictory, and generated uncertainty regarding the boundaries of the park.

In 2003 the Berkowitzes began to purchase land along the Pacific coast of Costa Rica, hoping to build luxury homes on that land in the future. While the Berkowitzes claim they were given assurances by the Minister of the Environment and Energy that they would be permitted to develop the real estate, in 2005 the government deemed some of the Berkowitzes’ land to be located within the marine park and began proceedings to expropriate that land.

The Berkowitzes, and five other individuals whose properties were subject to the expropriation, initiated proceedings at the International Centre for Settlement of Investment Disputes (the “Tribunal”), alleging violations of Chapter 10 of the Central America Free Trade Agreement (“CAFTA”). Specifically, the claimants alleged that: (i) Costa Rica failed to provide prompt and adequate compensation for its de facto and de jure takings in violation of CAFTA Article 10.7; and (ii) that Costa Rica failed to provide access to the necessary administrative/judicial means for the prompt review of the expropriation in violation of CAFTA Article 10.5.

On October 25, 2016, the Tribunal issued an interim award regarding its jurisdiction to hear the claims. The Tribunal concluded that, because the alleged expropriations occurred before the effective date of CAFTA and because the claimants knew about the alleged breach over three years before they sought arbitration, it lacked jurisdiction to hear any claims under CAFTA Article 10.7. However, the Tribunal stated that the claimants could pursue claims under CAFTA Article 10.5 provided that: (i) the judgments assessing compensation for the expropriated property was entered within the limitations period; and (ii) there was evidence that the judgment was made with manifest arbitrariness and/or blatant unfairness. The Tribunal thereafter found that the Berkowitzes could pursue claims for two of the lots because judgment was entered prior to the commencement of arbitration and within the limitations period. With respect to the other three Berkowitz lots, the Tribunal sought further argument and information to determine its jurisdiction.

The Berkowitzes immediately filed a petition to vacate the interim award pursuant to Section 10 of the Federal Arbitration Act (the “FAA”) on the grounds that the Tribunal exceeded its authority in issuing the award. On April 20, 2017, the Berkowitzes sought default judgment, claiming that Costa Rica had been served on either January 23, 2017, when a copy of the petition was delivered to a law firm said to be representing Costa Rica, or on January 25, 2017, when a copy of the petition was delivered to the Ministry of Foreign Trade and the Embassy of Costa Rica in Washington, D.C. Only later, on March 28, 2017, did the Berkowitzes serve Costa Rica under the Hague Service Convention, by serving the Ministry of Foreign Affairs and Worship, the authority designated by Costa Rica to receive foreign judicial documents.

The court held that the Foreign Sovereign Immunities Act (the “FSIA”), provides the “sole basis for obtaining jurisdiction over a foreign state in federal court.” Under the FSIA, a foreign state must ordinarily be served by delivery of a summons and complaint in accordance with any special arrangement between the plaintiff and the foreign state, or by delivery of a copy of the summons and complaint in accordance with an applicable international convention on service of judicial documents, such as the Hague Service Convention. Because the CAFTA service provisions dealt with service of arbitral documents, and not service of documents regarding judicial enforcement proceedings, they could not be considered a “special arrangement” between the Berkowitzes and Costa Rica. The court held that service under the Hague Service Convention was required, and that Costa Rica had responded within the 60 days of such service provided for in the FSIA.

Turning to the merits, the court noted that it is improper for a court to interfere with an international arbitration before the tribunal issues a final ruling. The key question, therefore, was whether the interim award was final and thus reviewable. In making this determination, the court referred to the “complete arbitration rule” which states that, for an arbitration to be final, “the arbitrators must have decided not only the issue of liability of a party on the claim, but also the issue of damages.” Further, the court noted that, when a substantive task remains for the arbitrator to perform, an award is not final.

The Berkowitzes conceded that the interim award was not the ultimate and conclusive award on all claims, but argued that it was sufficiently final because it resolved claims as to some of the property lots in dispute. The court considered this a mischaracterization. The interim award principally addressed the Tribunal’s jurisdiction and justiciability under CAFTA and made no final rulings as to liability or damages. Further, the award expressly contemplated further consultation with the parties to decide outstanding issues.

The court therefore ruled that the evidence clearly demonstrated that the Tribunal did not believe that its assignment was complete. As a result, the interim award could not be considered a final, appealable judgment.

A version of this post originally appeared in the March 2018 edition of Baker McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.

 

 

 

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