1 Introduction
(a) The recent decision in Teco Guatemala Holdings LLC and Republic of Guatemala[1] offers important clarification on the operation of the doctrine of res judicata in international arbitration.
2 Why Do You Care?
(a) Imagine you have an arbitral award which you’re unhappy with. You successfully get some of the nasty parts of it annulled, but not all of them. You take it to arbitration again. At the second arbitration, what can the arbitrator decide on and what parts is the arbitrator prevented from deciding on? Are they only allowed to make an award on the parts of the original decision which were specifically annulled? The answer depends on the application of res judicata.
3 What is Res Judicata?
(a) According to Google Translate “non possum loqui Latine” means “I am not able to speak good Latin.” This is a true statement. Thankfully, res judicata is quite a simple concept. Basically, it means that once a matter has been decided, you cannot decide it again.
(b) The specific operation of res judicata is more technical. That was the focus of Teco and Guatemala.
4 A Short History of a Long Arbitration: The Background to Teco and Guatemala
(a) Teco and Guatemala related to an earlier decision. The procedural history is fiendishly complex, but for our purposes we can boil things down to a few essentials.
(b) Teco had an interest in a Guatemalan company. Then the Guatemalan government set a tariff in breach of their agreement with Teco. Teco commenced arbitration and the award was handed down in late 2013.
(c) Teco was unhappy with some of the results of this first arbitration so they applied to have it partially annulled. In 2016, a committee annulled some of the first award. This opened the door for Teco to commence a second arbitration. This second arbitration is the one we’re focused on.
5 The Second Arbitration
(a) A critical part of this second arbitration was the application of res judicata. The basic problem was that the committee had only annulled part of the first arbitral award. In particular, the committee annulled the decision on ‘Loss of Value Damages Claim’[2] However they were not asked to annul the first arbitral decision on ‘Historical Damages Claim.’[3]
(b) What was the Loss of Value Damages Claim? Teco sold their interest in the Guatemalan company after the Guatemalan government implemented tariffs in breach of their agreement. Teco’s interest was worth less because of Guatemala’s tariffs. The Loss of Value Damages Claim wa34s for compensation in respect of this depreciation of value.
(c) What was the Historical Damages Claim? These were simply damages Guatemala payed Teco to compensate for direct economic damage caused by their breach.
(d) The important thing to note about these two claims is that even though only one of them was annulled, they were both based in very similar facts. They stemmed from the same breach.
(e) Teco argued that because the Historical Damages Claim was excluded by res judicata, the Loss of Value Damages claim should be too. This argument was ultimately rejected.
6 So, what is the scope of Res Judicata?
6.1 The Basic Test: Material Difference and The Triple Identity Test
(a) To determine if something is subject to the doctrine of res judicata depends on the concept of ‘material difference.’[4] If there was a material difference between the issues decided in the Original Award and the issues considered at the second arbitration, then res judicata did not bar those issues from being considered.[5]
(b) There would be a ‘material difference’ if there is a rational basis for distinguishing between the way the determination was made in the first arbitration and the way the determination would be made in the second arbitration.[6]
(c) To determine if there is a rational basis for distinguishing, the tribunal invoked the ‘triple identity test.’[7] This test involves an assessment of: the identity of the parties, the causes of action and the objects to ascertain if there is a rational distinction between questions before the tribunals.[8]
6.2 Applying the Test
(a) Teco argued that
(i) as the Historical Damages Claim was excluded by res judicata, it followed that the facts which founded the Historical Damages Claim were also res judicata;
(ii) the Historical Damages Claim and the Loss of Value Claim relate to the same breach and were based in very similar facts; and
(iii) therefore, the doctrine of res judicata prevented making a new decision on the Loss of Value Claim even though the Loss of Value Claim had been annulled. Instead, the tribunal only needed to decide a new valuation on the Loss of Value Claim, not a wholly new decision.
(b) The Tribunal rejected this approach. They found that it is wrong to ask “whether findings relate to claims that emanate from the same breach.”[9] Instead, the correct focus is “whether there has been a clear determination by the first tribunal of a specific cause of action pleaded in the case” and whether “that same cause of action is again before the second tribunal.”[10]
(c) The tribunal found the Historical Damages Claim and the Loss of Value Damages Claim were different causes of action for several reasons.
(d) First, the facts which founded the Historical Damages Claim did not inevitably resolve the Loss of Value Damages Claim by a process of simple arithmetic.[11] It would be wrong to assume that historical losses by Teco would be exactly reflected in a reduction of the value of Teco’s interest in the Guatemalan company.
(e) Second, they found the tribunal for the first arbitration had decided it “did not have sufficient evidence” to calculate the size of the Loss of Value Claim.[12] Res judicata would not bar a claim which had been undermined by insufficient evidence in the earlier decision.
(f) Third, if the first tribunal did not have sufficient evidence, then in the face of new evidence, they might have decided differently.[13]
(g) Accordingly, the tribunal decided the Loss of Value Damages Claim was not excluded by res judicata and could be subject to a determination at the second arbitration. It did not matter that the Loss of Value Damages Claim was based on similar facts to the Historical Damages claim because they were clearly different causes of action.
7 Summary
(a) The tribunal’s approach to res judicata is pragmatic and not overly technical. As the tribunal itself emphasised, “doctrines such as res judicata are aids and not obstacles to the administration of justice.”
(b) More specifically, Teco and Guatemala clarifies what happens when an arbitration makes two decisions and only one of the decisions is annulled. Even if the two decisions relate to the same breach and will be decided based on similar facts, this does not mean the annulled decision is excluded from consideration by res judicata.
(c) Res judicata will not exclude a determination on the annulled decision where it is a different cause of action. In determining whether the annulled decision is a different cause of action, the tribunal may consider
(i) whether the facts which form the basis of the decision which was not annulled inevitably resolve the decision which was annulled;
(ii) whether the original tribunal had sufficient evidence to determine the issue which was annulled; and
(iii) whether the original tribunal might have decided differently if they were presented with different evidence.
[1] Teco Guatemala Holdings LLC and Republic of Guatemala (Award, International Centre for Settlement of Investment Disputes, Case No. ARB/10/23, 13 May 2020) (Teco and Guatemala).
[2] [12].
[3] [80].
[4] [71].
[5] [71].
[6] [71].
[7] [71]; see also Apotex Holdings Inc and Apotex Inc. v United States of America, ICSID Case No. ARB(AF)/12/1, Award, 25 August 2014, paras. 7.10–7.36; cited by Claimant, Tr. Day 4, 904. Cf., Decision on Annulment, para. 58.
[8] [71].
[9] [82]
[10] [82].
[11] [81]
[12] [83].
[13] [84].