## Facts

- Duke Energy International Peru Investments No. 1 Ltd. (a Bermuda company indirectly owned by a U.S. parent) made an indirect investment in Peruvian electricity company Egenor S.A.A. during Peru’s power-sector privatization.
- Peru and Egenor executed a legal stability agreement in 1996 providing regulatory and tax stability for 1996–2006.
- Peru and the investor executed a separate legal stability agreement on July 24, 2001 granting the investor a ten-year tax and legal stability regime in relation to its investment.
- Peru’s tax authority (SUNAT) issued a tax assessment for tax years 1996–1999 totaling about US$48.3 million (principal, interest, and penalties).
- The assessment had two components: (1) a “merger revaluation” component treating a series of transactions as sham tax-driven steps and denying tax benefits; and (2) a depreciation component alleging improper depreciation rates.
- The investor commenced ICSID arbitration in 2003 under the arbitration clause in the 2001 legal stability agreement, asserting breaches of tax stability, good faith/actos propios, and non-discrimination.
- The tribunal issued a jurisdiction decision in 2006, a merits award in 2008 (with partial dissents), and an ad hoc committee rejected Peru’s annulment application in 2011.

## Issues

1. Whether ICSID jurisdiction existed under Article 25 of the ICSID Convention for a contract-based claim arising from a legal stability agreement (including jurisdiction ratione personae, materiae, and temporis).
2. Whether the tax stability clause stabilized only the text of tax law or also its established interpretation and administrative application, and whether arbitrary application could breach stability.
3. Whether Peru breached good faith/actos propios by reversing prior conduct and administrative practice on which the investor reasonably relied.
4. Whether Peru’s tax treatment was discriminatory as compared with similarly situated taxpayers.
5. What damages were caused by any breach, including whether reduced dividends at the subsidiary level were compensable.

## Decision

- The tribunal upheld jurisdiction, finding (i) a qualifying foreign investor and contracting state, (ii) a qualifying investment and consent via the legal stability agreement, and (iii) jurisdiction ratione temporis because the relevant date is when the dispute crystallized, not when underlying facts occurred.
- On the depreciation assessment, the tribunal found no breach of tax stability, good faith/actos propios, or non-discrimination; Peru was not liable.
- On the merger revaluation assessment, the tribunal found Peru liable for breach of the legal stability agreement’s tax stability guarantee and breach of good faith/actos propios.
- The tribunal awarded US$18,440,746 plus interest for harm caused by the unlawful merger revaluation assessment and rejected damages tied to the depreciation assessment.
- In annulment proceedings, the ad hoc committee denied annulment, holding it could not function as an appellate body and finding no manifest excess of powers, failure to state reasons, or serious procedural departure.

## Legal Principles

- Contract-based consent in a legal stability agreement can ground ICSID jurisdiction over a dispute arising directly out of an investment, even without a treaty claim.
- Jurisdiction ratione temporis focuses on when the dispute arises; earlier factual background does not bar jurisdiction if the dispute crystallizes after consent becomes effective.
- A tax stabilization commitment may protect: (i) against adverse legal amendments, (ii) against adverse changes in established interpretation or consistent administrative application, and (iii) against patently unreasonable or arbitrary interpretation or application even absent a formal legal change.
- Good faith and actos propios under applicable domestic law may be implied contractual obligations, restricting the state from contradicting prior conduct that created investor expectations relied upon in structuring the investment.
- Losses reflected through reduced dividends may be compensable if causally linked to the state’s breach.

## Conclusion

The tribunal sustained ICSID jurisdiction over a contract-based dispute and held Peru liable for breaching tax stability and good faith by imposing an arbitrary, retroactive merger-related tax reassessment inconsistent with the stabilized framework, while rejecting liability on depreciation; it awarded $18.44 million plus interest, and annulment was denied.


Duke Energy Int’l Peru Invs. No. 1 Ltd. v. Republic of Peru, ICSID Case No. ARB/03/28 (Award Aug. 18, 2008)