1. Karaha Bodas Co. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara et al.

(2004)

Facts: Petitioner Karaha Bodas Co. (KBC) is a Cayman Island company that is engaged in the
business of building electric generating stations from geothermal sources. Meanwhile,
respondent Pertambangan Minyak Dan Gas Bumi Negara (Pertamina) is company owned
by the Indonesian government engaged in oil, gas, and geothermal energy. In November of
1994, KBC and Pertamina executed a Joint Operation Contract and an Energy Sales Contract
where KBC would develop geothermal energy in Indonesia on behalf of Pertamina, which
then sold the same to Perusahaan Listrik Negara (PLN), an electric utility company also
owned by the Indonesian government. Problem ensued on September 20, 1997 when the
Indonesian government suspended the projects because of its financial crisis. After four
months and with the suspension deemed as indefinite, KBC notified Pertamina and PLN
that the suspension was a fortuitous event that may justify arbitration.
The arbitration panel operating in Paris but applying Swiss procedural law issued a
Preliminary Award in rejecting Pertamina’s assertion that the Indonesian government was
a party to the contracts. Thereafter, KBC hinged its claim for damages on the ground that
third parties, like one of its direct investors FPL Energy, could have financed the project as
testified by two FPL officers. For its part, Pertamina contended that the financial crisis in
Indonesia made the project impossible and such impossibility did not prejudice KBC.
In its Final Award, the arbitration panel granted KBC $111.1 Million it had already spent
and $150 Million in projected profits since the contracts provided that Pertamina and PLN
were liable for losses caused by government related events. Pertamina then appealed to the
Supreme Court of Switzerland on the grounds of improper selection of arbitrators, undue
consolidation of claims, and its inability to present its case with the denial of its request for
discovery of FPL records. Concomitantly, KBC moved for the enforcement of the award
with the District Court of Texas. However, the Supreme Court of Switzerland dismissed
Pertamina’s claim because of untimely payment of costs while the District Court of Texas
enforced the award in favor of KBC.
With its efforts to annul the award in favor of KBC denied overseas, Pertamina secured an
annulment by an Indonesian court on the basis of FPL being indemnified by political risk
insurance policies covering losses from the KBC project. Thus, Pertamina filed a motion to
vacate the Texas judgment due to the Indonesian court’s newly discovered political risk
insurance policy. However, the Texas District Court rejected Pertamina’s motion, holding
that there was no proof that KBL deliberately omitted the political risk insurance policy
and that Pertamina was estopped from citing Indonesian procedural law since it agreed to
arbitration. Pertinently, the District Court of Texas reiterated provisions of the New York
Convention that primary jurisdiction over the review of arbitral awards rests upon the
courts of the country the award was made or where recognition and enforcement are
sought.

Issue: W/N the District Court of Texas erred in confirming the arbitration award?

Held: NO. Under the New York Convention, as affirmed by authorities and commentators,
an agreement specifying the place of the arbitration creates a presumption that the
procedural law of that place applies to the arbitration. In the instant case, under the Joint
Operation and Energy Sales contracts, KBC and Pertamina agreed that the site of
arbitration shall be Geneva and that Swiss procedural law shall govern arbitration
agreements. Reference to certain Indonesian procedural law does not undermine the
express and controlling designation of Swiss procedural law to apply. With the arbitration
panel adhering to both Swiss procedural law and the New York Convention vis-à -vis the
consolidation of claims, appointment of the panel members, and rejecting the request for
discovery of FPL, the arbitration award confirmed by the District Court of Texas must be
upheld.

Reflection: The instant case illustrated the autonomy of parties in stipulating the laws that
govern the performance of obligations under a contract and the governing procedure and
jurisdiction over arbitration and enforcement of claims in case of non-performance. The
case proved that utmost caution and definitiveness must be exercised in crafting such
seemingly secondary stipulations that have unpredictably adverse effects. Resort to
municipal law and public policy by Pertamina may seem logical to absolve itself from
liability. However, in the face of an express and completely legal stipulation in a contract,
municipal law and alleged public policy considerations are found wanting.

2. Philippines—Taxes on Distilled Spirits (2011)

Facts: On July 29, 2009, the European Union and thereafter the United States requested
separate consultations with the Philippines vis-à -vis the latter’s imposition of tax on
imported distilled spirits in relation to the General Agreement on Tariffs and Trade (GATT).
With consultations in Manila and Geneva unfruitful, the EU and US requested the Dispute
Settlement Body (DSB) under the GATT to establish a panel to which the Philippines
adhered. The DSB shall be governed by the Understanding on Rules and Procedures
Governing the Settlement of Disputes also provided under the GATT. Meetings before the
three-person panel centered on the excise the Philippines imposed under Sec.141 (a) and
(b) of its National Internal Revenue Code along with correlative Revenue Regulations.
Particularly in question was the Philippines’ imposition of a flat tax rate based on per proof
liter on distilled spirits produced from local raw material such as nipa, camote, cassava,
coconut, or buri. As opposed to distilled spirits from other raw materials, as classified by
the Philippine Bureau of Internal Revenue, taxed in a graduated manner based on the net
retail price. The EU and US similarly averred that distilled spirits are those of higher
alcohol content falling under Heading 2208 of the Harmonized Tariff System like brandy,
gin, tequila, whisky, and vodka, with the Philippines issuing administrative orders to
govern the sale of such.
The EU averred that the Philippines is in breach of Art. III:2 of the GATT in applying higher
internal taxes for imported products to protect its domestic industry. Pertinently, the EU
posited that all distilled spirits have the same end use whether consumed ‘straight’, ‘on the
rocks’, or diluted by other liquids, with the Philippine National Internal Revenue Code
classification based on raw materials inconsequential. For the EU, the raw material used in
distilled spirits does not affect consumers’ habits, the physical properties of said spirits
wherein ethyl alcohol and water account for more than 99% of the volume, and the
inebriation caused primarily by ethyl alcohol. Moreover, the tax non-designated raw
materials may be 10.8 times, 21.62 times, or even 43.23 times higher than those imposed
on designated materials. Ultimately, similar to WTO findings in at least three cases,
Philippine authorities have provided no reason as to the discrepancy in taxing based on the
raw materials except for the apparent fact that the designated raw materials are
indigenous to the Philippines, with most imported spirits are subject to higher tax rates.
For its part, the US also cited the inconsistency of Sec. 141 (a) and (b) of the Philippine
National Internal Revenue Code with Art. III: 2 of the GATT which provides, "The products
of the territory of any contracting party imported into the territory of any other contracting
party shall not be subject, directly or indirectly, to internal taxes or other internal charges
of any kind in excess of those applied, directly or indirectly, to like domestic products”. The
US posited that even if composed of different raw materials, Philippine and imported
distilled spirits share physical characteristics, end uses, channels of distribution,
substitutability, and tariff classification. Just like the EU, the US averred that although the
Philippines have not directly acknowledged that the tax is for the protection of domestic
production, some officials and personalities have precisely conceded the same.
Lastly, the Philippines approached the controversy by alluding to its Constitutional
principles of uniform, equitable, and progressive system. According to the Philippines, its
materials-based excise tax embodied in Sec. 141 (a) and (b) of its National Internal
Revenue Code was clearly not discriminatory for the designated raw materials subject to a
flat rate tax were produced in at least 6 regions across the world. Moreover, that
designated raw materials result in sugar-based spirits while non-designated raw materials
producing imported, non-sugar-based distilled spirits is a substantial distinction that EU
and US law have distinguished and have given different rules for. Appropriately, the
rationale behind the discrepancy in taxation is that sugar-based spirits are produced for
low-income consumers while its non-sugar-based counterparts are priced out of the
budget of majority of Philippine consumers, irrespective of taxes.
The arbitration panel in answering the principal questions whether the imported and
domestic distilled spirits were like products and whether the former is taxed in excess first
compared the spirits as to their properties, end uses, consumer habits, tariff classification,
and internal regulations. Accordingly, the arbitration panel ruled that there is similarity
between all relevant imported and domestic distilled spirits among the mentioned
qualities, irrespective of the raw materials they are made from. In addition, with previous
panels interpreting the phrase ‘in excess of’ in Art. III: 2 of the GATT as to encompass even
the smallest amount of excess in taxes, the arbitration panel found that all the competitive
or substitutable types of imported and domestic spirits are taxed exorbitantly different.
Lastly, even with the protectionist intent elusive in the Philippine rhetoric, the
protectionist nature of the excise tax on distilled spirits is revealed in the structure of its
tax system. Thus, the arbitration panel recommended for the Dispute Settlement Body to
request the Philippines to bring its measures into conformity with the GATT.

Issue: W/N the arbitration panel erred in finding that the Philippines acted inconsistently
with the Art. III: 2 of the GATT?

Held: NO. Under Art. 11 of the Understanding on Rules and Procedures Governing the
Settlement of Disputes (DSU) also provided under the GATT, the arbitration panel must
consider all evidence but it is within the panel’s discretion which evidence it chooses to
utilize in making findings. In the instant case, it was in the arbitration panel’s discretion to
put little weight in the Philippines’ division of distilled spirits into sugar-based and non-
sugar-based. Thus, it was within the panel’s duty to conclude that for each type of distilled
spirit—gin, brandy, vodka, whisky, tequila and tequila-flavored spirits—there is similarity
in physical characteristics between imported distilled spirits and domestic distilled spirits,
irrespective of the raw materials from which they are made. It was also within the panel’s
discretion to give more weight to the spirits' physical characteristics, end-uses, consumers'
tastes and habits, and tariff classification.
Similarly, under Art. 11 of the DSU, the arbitration panel was proper in adjudging the
imported and domestic spirits were directly competitive or substitutable and that the
dissimilar taxation of said spirits is a protectionist scheme of the Philippines. In the instant
case, the arbitration panel considered all positions, studies, and previous cases including
those cited by third parties in determining that the Philippines indeed violated the second
sentence of Art. III: 2 of the GATT. Thus, the Appellate Body upheld the questioned
conclusions by the arbitration panel, except for its treatment of the EU’s claim as made in
the alternative.

Reflection: Although the case did not directly discuss the most-favored-nation and national
treatment obligations, it impliedly saw through the Philippines’ raw material main
argument in requesting the Philippines to make its tax equitable for foreign distilled spirits.
Specifically, the Philippines’ protectionist tax scheme related to its distilled spirits is
inimical to the national treatment obligations implied in the GATT. This case reinforced
that inasmuch as states exercise sovereignty over its country, mere membership in the
family of nations and execution of international instruments restrict the absoluteness of
sovereignty.

3. United States—Section 211 Omnibus Appropriations Act of 1998

Facts: On July 7, 1999 the European Communities requested consultations with the United
States in relation to Sec. 211 of its Omnibus Appropriations Act (OAA) of 1998. Particularly,
the European Communities took offense to Sec. 211 pertaining to trademarks, trade manes,
and commercial names similar to those of businesses or assets that were confiscated by the
Cuban government in 1959. The said section prohibited entities that had interest in such
intellectual property rights in relation to businesses or assets confiscated by the Cuban
government from registering or renewing the same without the original owner’s consent.
For its part, the European Communities averred that the OAA was inconsistent with
provisions of the TRIPS Agreement and the Paris Convention and ultimately prejudicing the
rights of owners or those interested in the intellectual property rights who come from Cuba
or any foreign successor-in-title. In conjunction, Sec. 211 (a) (2) and Sec. 211 (b)
respectively prohibits US courts from enforcing US trademarks and treaty rights related to
intellectual property owned by Cuban nationals or any foreign successor-in-title.
Specifically, the European Communities claimed that Sec. 211 of the OAA had already
affected the Havana Club trademark for spirit drinks, which is owned by a Cuban enterprise
but was licensed to a joint venture with a European Community company. Lastly, the
European Communities posited that although Cuba indeed confiscated tangible assets,
Cuba never seized and possessed intellectual property rights over the assets it had
confiscated.
Meanwhile, the United States contended that the uncompensated confiscation by the Cuban
government cannot give rise to claims of intellectual property rights as affirmed by the
WTO, TRIPS Agreement and Paris Convention. According to the United States, it has the
sovereign right not to acknowledge foreign confiscations with the TRIPS Agreement and
Paris Convention leaving to its member parties the right to acknowledge and confer rights
to foreign owners of trademarks and other intellectual property rights. Even though the
United States conceded that Art. 6quiquies A(1) of the Paris Convention and Art. 15.1 of the
TRIPS Agreement limited the ability of member parties to reject trademark registrations
based on formal infirmities, the same provisions did not limit the substantive right of
members to reject registrations by applicants that are not the true owner of the intellectual
property right.
The arbitration panel organized by the Dispute Settlement Body and guided by information
from the International Bureau of the World Intellectual Property Organization, the
provisions of the TRIPS Agreement, and provisions of the Paris Convention concluded that
Sec. 211 (a) did not violate said international instruments. The arbitration panel held that
under Art. 15.1 of the TRIPS Agreement, member parties are afforded ‘other grounds’ to
reject trademark registration with Art. 15.2 expressly recognizing the right of member
parties to deny trademark registration by reason of the applicant not being the owner
under domestic law. For the alleged violation of Art. 6quinquies A (1) of the Paris
Convention, the arbitration panel held that the provision merely pertained to the form of
the trademark and Sec. 211 (a) (1) of the OAA did not violate the same. The arbitration
panel also upheld the validity Sec. 211 (b) on the prohibition against US courts from
enforcing treaty rights related to intellectual property owned by Cubans or their foreign
successor-in-title However, the arbitration panel found that Sec. 211 (a) (2) on the
prohibition of US courts from enforcing US trademarks to Cuban owners or any foreign
successor-in-title is inconsistent with the Art. 42 of the TRIPS Agreement on the right of
holders of intellectual property rights to civil judicial remedies. Thus, with the
inconsistency of Sec.211 (a) (2) of the OAA with Art. 42 of the TRIPS Agreement, the
arbitration panel requested the United States to take measures to conform to its obligations
under such agreement. Notably, the arbitration panel refrained from making findings vis-à -
vis Sec. 211 (a) (2) and the national treatment obligation adhered to by both the TRIPS
Agreement and the Paris Convention and even found that Sec. 211 (a) (2) and (b) was
consistent with the most-favored-nation obligation under the TRIPS Agreement.

Issue: W/N the arbitration panel erred in upholding the validity pertinent parts Sec. 211 of
the OAA of 1998 against most of the provisions cited under the TRIPS Agreement and Paris
Convention?

Held: YES. The Appellate Body found that Sec. 211 (a) (2) of the OAA prohibiting US courts
from enforcing treaty rights related to intellectual property owned by Cuban nationals or
any foreign successor-in-title, without the original owner’s consent violated both the TRIPS
Agreement and the Paris Convention. Pertinently, Art. 2(1) of the Paris Convention and Art.
3.1 of the TRIPS Agreement, mandating member parties to confer identical intellectual
property rights to citizens of other member nations was violated. Sec. 211 (a) (2) of the
OAA imposed an extra procedural hurdle on Cuban nationals and their successors-in-title
to not only undergo proceedings before the Office of Foreign Assets Control (OFAC) but to
also undertake another measure they are mandated to comply with. Hence, the national
treatment obligation enshrined in Art. 2(1) of the Paris Convention and Art. 3.1 of the
TRIPS Agreement was breached.
Moreover, the Appellate Body also declared that that Sec. 211(a)(2) and (b) of the OAA
violated the most-favored-nation obligation. Under Art. 4 of the TRIPS Agreement, any
advantage, privilege, or immunity granted by a member party to the nationals of any other
country shall be accorded unconditionally to the nationals of all other Members. In the
instant case, Sec. 211 (a) (2) and (b) unduly discriminates against Cuban holders of
intellectual property rights by providing measures that they have to comply with that other
foreign nationals need not undergo. However, in its concluding remarks, the Appellate
Body clarified that its findings are not controlling and mandatory upon the World Trade
Organization and its member parties and that the Body merely requests the United States
to take measures to conform to its obligations under such international instruments.

Reflection: This case demonstrated that even a global superpower may be trumped by
other influential countries that correctly reference obligations under international treaties
and agreements. Even a clandestine extra procedural hurdle based on an occurrence 40
years before can be flagged as violation of overarching obligations. Even if the Appellate
Body merely requests compliance, to gain access and continue to reap benefits from
treaties and agreements, nations must be transparent as there are mechanisms in place to
hold them accountable.