Loan Agreement between Italy and Costa Rica

Facts

The dispute arose out of a loan in the amount of US$12,990,000, made to Costa Rica by Mediocredito Centrale, a public enterprise authorized by the Italian Ministry of the Treasury, as funding for development cooperation. The transaction formed part of a Framework Agreement for Technical Cooperation concluded between the two Governments on 24 October 1983, which was followed, on 20 June 1984, by an Executive Protocol for Development Cooperation. Among the priority projects referred to in this Protocol was the installation and putting into service of a facility (streamlining basin) at Puerto Caldera on Costa Rica's Pacific coast. In order to finance this project, the Italian Government provided a loan of approximately US$ 13 million, whereas other projects had been financed by Italian contributions in the form of gifts.

As a result of these inter-State contracts, a number of contracts for the furnishing of goods and services were entered into between Italian and Costa Rican entities. Costa Rican legislation delegated the management of the project to INCOP (Instituto Costaricense de Puertos del Pacífico) and authorized it to enter into agreements on behalf of the State. On 1 August 1985, the duly authorized Executive President of INCOP entered into a Financing Agreement in Rome with the Italian Mediocredito Centrale for the financing of the facility at Puerto Caldera, following which, with the cooperation of an Italian bank designated by INCOP as its agent, four successive transfers of funds were made, and used to pay Italian suppliers. The Puerto Caldera project was completed during the second half of 1986, but in February 1988, after the installations had been in use for several months, the Costa Rican operating company, Denasa, became insolvent, and a court-appointed appraiser valued the property and installations of the basin at approximately US$ 9 million. Having proven unable to find, through direct negotiations, a legal solution to the various problems created by the failure to repay the development loan, the two Parties agreed to submit these questions to arbitration pursuant to the Permanent Court of Arbitration Optional Rules for Arbitrating Disputes Between Two States, stipulating that the arbitrators were to apply various sources of international law, in particular the 1969 Vienna Convention on the Law of Treaties.

Questions Submitted to Arbitration

1. Whether the Financing Agreement was valid and binding on all the Parties.

2. In the affirmative, whether the Parties in dispute had performed their obligations under that Agreement.

3. Whether Costa Rica had the obligation to repay Mediocredito Centrale and, if so, on the basis of which legal principles.

Award of the Tribunal

After a detailed analysis of the existing general principles and case law in the field, as well as scholarly writing, and following a close critical analysis of the respective arguments of the Parties, the Arbitral Tribunal found that the Financing Agreement of 1 August 1958 was not an independent contract under Italian law, but rather an international agreement, entered into pursuant to the 1983 Framework Agreement for Technical Cooperation and the 1984 Executive Protocol for Development Cooperation between the two States.

Affirming the primacy of international law over national law, the Arbitral Tribunal rejected arguments based on Costa Rica's alleged lack of valid consent, which was claimed to result from the invalidity or ineffectiveness of its parliamentary ratification of the Framework Agreement, or from constitutional or legal irregularities affecting either the Framework Agreement, or its implementing instrument, the Financing Agreement. Taking into account the various intervening acts of performance or ratification between the Parties, the Tribunal held that the doctrine of estoppel prevented a State from raising, at a latter stage, irregularities that were attributable to it and which it alone could have prevented. The Award emphasizes that there was no doubt as to the intent of Costa Rica's legislative and executive branches to authorize, approve, or ratify the various agreements comprising the facility project at Puerto Caldera, which was considered of national interest. The same applied to the authorization validly conferred on the President of INCOP to enter into the Financing Agreement on behalf of the State. According to the Tribunal, the Financing Agreement was therefore entirely valid and binding on both Parties, and the Italian Party had performed all of its obligations arising under that Agreement, as well as under the Executive Protocol for Development Cooperation. This was not true of the Costa Rican Party, which had not, in fact, argued that it had performed, as it did not consider itself bound by the provisions of the agreements concerned.

The Arbitral Tribunal unanimously held that the Republic of Costa Rica had undertaken an obligation to repay to Mediocredito Centrale and/or the Italian Government the development loan made in 1985.

Nevertheless, the Tribunal found that the amount to be repaid was not to be determined solely by a strict, formal application of the installment scheme set forth in the Financing Agreement, but had to be established according to the rules of international law, including the equitable principles, flowing from the concept of justice, that permeate international judicial and arbitral practice. These principles led the Tribunal to consider all of the circumstances of the case; the benefit obtained by the Italian suppliers as well as the enrichment of Costa Rica as a result of the Puerto Caldera installations. The operative part of the award therefore fixes the amount of the loan to be repaid to Italy and/or Mediocredito as a comprehensive lump-sum, including principal and interest, to be paid by a method to be determined directly between the Parties, in the general context and spirit of their development cooperation agreements, and taking into account the traditional bonds of friendship between them, specifically referred to in the Arbitration Agreement of 11 September 1997.

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