THE AUTHORS:
Aaron Tan, Associate at Holman Fenwick Willan (HFW)
Benjamin Bay, LL.B. Candidate at Singapore Management University
Executive Summary
Witness evidence plays a vital role in the fact-finding process for arbitration, and understanding how tribunals assess credibility is key. In Odyssey v. Mexico, the Tribunal shed important light on the different ways that witness credibility will be assessed particularly in circumstances where there are contemporaneous disputes involving the same witnesses. Moving forward, parties can expect their witnesses to be assessed against the totality of their circumstances, both present and in the past, and potentially to the extent of their previously assessed credibility in prior hearings.
The Facts
The present case involved a dispute under the North American Free Trade Agreement (1992) (“NAFTA“) between Odyssey Marine Exploration (“Odyssey“), a U.S.-incorporated company, and the United Mexican States (“Mexico“). The arbitration proceedings against Mexico were initiated on 5 April 2019, and the final award (“Award“) was released on 17 September 2024.
Although Odyssey’s core business is in deep-ocean exploration, it decided to enter the business of the discovery, exploration, and development of marine minerals. On 7 March 2012, Odyssey caused the incorporation of Exploraciones Oceanicas S.de R.L. (“ExO“), a Mexican company, with the intention of exploiting the sedimentary phosphate sand deposits discovered off the coast of the Baja California Peninsula, Mexico. ExO was granted the relevant concessions between 2012 to 2014 to begin with the initial stages of the project, developing the engineering solution to extract the ore using dredging techniques.
On 3 September 2014, ExO filed a Manifestación de Impacto Ambiental or Environmental Impact Statement (“MIA”) with the Secretariat of Environment and Natural Resources (“SEMARNAT“). MIAs are the first step in the environmental impact assessment process established by Mexican regulatory authorities.
After a series of events in which ExO had withdrawn its initial MIA and restarted a new MIA (“New MIA“) in the second half of 2015, SEMARNAT issued a letter denying ExO’s MIA on April 7, 2016 (“First Denial”). SEMARNAT stated that a local endangered species of sea turtles was in danger. Having regard to ExO’s proposed mitigation and compensation measures, SEMARNAT determined that such measures were based on technical information that was not unsatisfactory. In relation to their rejection, ExO presented the testimonies of two former officials of SEMARNAT, Mr Alfonso Flores (“Mr Flores“) and Mr Alberto Villa (“Mr Villa“), who both served as former officials of SEMARNAT’s General Directorate of Impact and Environmental Risk. Mr Flores and Mr Villa stated that they were in charge of reviewing the MIAs submitted by ExO and that, in their opinion, the MIA complied with the requirements to be approved with conditions. They pointed out that when they were already working on the decision to approve the MIA, they received instructions from the Secretary of SEMARNAT, Mr Rafael Pacchiano (“Mr Pacchiano“), ordering them to reject ExO’s Project. Mr Pacchiano categorically denied having given any such instruction and stated he was not involved in evaluating the MIAs submitted by ExO.
A request for review that was initiated by ExO on 29 April 2016 was rejected on 27 February 2017. Before the rejection of the review, ExO had already demanded annulment of ExO’s decisions before the Federal Administrative Tribunal (“TFJA“). On 21 March 2018, the TFJA issued a decision annulling both the First Denial and the denial of the request for review. They ruled that SEMARNAT had not substantiated its findings.
In the same year of the TFJA’s ruling, SEMARNAT issued another letter denying ExO’s MIA again. Regarding this second rejection, Mr Flores and Mr Villa claimed that they again received instructions to deny the ExO Project, an order that came once more from Mr Pacchiano. Mr Flores and Mr Villa concluded that there was no technical environmental basis to this new denial. Mr Pacchiano again rejected any intervention in ExO’s MIAs evaluations and denied involvement in any of the decisions to reject ExO’s project.
On 19 August 2019, ExO filed an appeal before the TFJA seeking the annulment of SEMARNAT’s Second Denial. At the time of the Award, the TFJA had not yet ruled on ExO’s second appeal.
The Tribunal’s Findings
The Tribunal had to decide on three issues:
- Mexico’s jurisdictional objection under NAFTA Article 1117;
- The breach of the FET standard under NAFTA Article 1105; and
- The assessment of damages.
The rulings may be summarised as follows:
First, in relation to the issue of jurisdiction: the Tribunal concluded that it had jurisdiction over Odyssey’s claim, both under NAFTA Article 1116 and Article 1117. Mexico did not rebut the presumption that Odyssey controls ExO (para. 187).
Secondly, in relation to the Fair and Equitable Treatment (“FET“) standard: the Tribunal concluded that the breach alleged by Claimant did exist and that it constitutes a violation of the FET standard provided for in NAFTA, according to the interpretation that should be given to such standard of treatment (para. 333). Specifically, the facts showed that the denial of the MIA was based on the extraneous and personal motives of Mr. Pacchiano, which can only be qualified as seriously arbitrary, lacking in transparency, and contrary to the administrative due process (para. 335).
Lastly, in relation to damages, The Tribunal awarded Odyssey $37.1 million in sunk costs, which corresponds to the costs calculated by Quadrant Economics (based on ExO’s financial statements) as of that date (para. 759).
The Issue of Witness Credibility
On the issue of whether the FET standard was breached, the Tribunal identified four main pillars pointing towards a breach (para. 336):
- The declarations of Mr Flores and Mr Villa regarding the rejection of ExO’s New MIA;
- The basis for SEMARNAT’s decision to reject ExO’s Request for Review;
- The TFHA’s decision on the lack of merit behind the First Denial; and
- The swift reaction of SEMARNAT after TFJA annulled the First Denial.
The Tribunal spent considerable attention on establishing their grounds of reasoning for the first pillar. Specifically, the Tribunal focused on the issue of witness credibility to ascertain the veracity of Mr Flores and Mr Villa’s statements in stating that the rejection of ExO’s New MIA was motivated by Mr Pacchiano’s personal agenda. The same issue of witness credibility also determined whether Mr Pacchiano’s statements in stating to the contrary (that the rejection of the New MIA was not motivated by external factors) could credibly rebut the testimonies of Mr Flores and Mr Villa.
The Tribunal concluded that Mexico failed to present a compelling reason to justify disregarding or denying the value of Mr Flores and Mr Villa’s statements (para. 358), and in turn ruled that the statements were a genuine description of the events that occurred (para. 361). Mr Flores and Mr Villa’s testimonies were also not credibly rebutted by the opposing statements from Mr Pacchiano (para. 361).
In assessing Mr Flores and Mr Villa’s credibility, the Tribunal considered the fact that both witnesses were previously presented by Mexico as witnesses in the 2013 ICSID Award of Abengoa v. Mexico regarding a hazardous waste landfill in Hidalgo. Although their statements were not specifically referred to in the final award issued in Abengoa v. Mexico, Mexico argued that their role as witnesses for Mexico should constitute the present circumstances (of testifying for Odyssey) as contradicting their earlier decisions and now “blaming their superiors for their own actions” (para. 270). Odyssey countered that their earlier participation, despite the risk they had taken to testify in the political climate, enhanced their credibility instead of undermining it (para. 219). Ultimately, the Tribunal agreed with Odyssey’s line of reasoning and found Mexico’s allegation to be inconsistent with their previous position on Mr Flores and Mr Villa’s credibility and consequently, a groundless claim (para. 350).
Of Mexico’s remaining arguments, two were noteworthy. First, Mexico contended that Mr Flores and Mr Villa’s agreement to a payment contract with Odyssey would undermine their credibility (para. 338). The Tribunal disagreed and did not find any extraordinary or abnormal circumstances in this respect that would justify disregarding their statements or undermining their credibility (para. 341). For instance, the amounts paid by Odyssey were not disproportionate to their salary (para. 342).
Secondly, Mexico contended that Mr Flores and Mr Villa were subject to different administrative sanctions, thereby questioning their credibility as witnesses (para. 348). Again, the Tribunal ruled that the assertions do not constitute sufficient grounds to disqualify the witness or undermine his credibility because the investigative authority had ordered the aforementioned proceedings to be closed due to a lack of evidence of any wrongdoing (para. 349).
In assessing Mr Pacchiano’s witness credibility, the Tribunal attributed their doubt of Mr Pacchiano’s credibility to Mexico not presenting as witnesses any of the other officials mentioned by Mr Flores and Mr Villa as involved in assessing the MIAs. If Mr Flores and Mr Villa’s testimonies were indeed an ex post facto fabrication, the Tribunal noted Mexico would be expected to obtain the testimony of the remaining public officials involved who would have no difficulty in disproving the allegedly false accounts (para. 379). While the absence of such statements would not be conclusive by itself, the Tribunal ruled that the absence of rebuttal testimony, in the context of the entirety of the evidence on the record, was at a minimum surprising, thereby undermining the credibility of Mr. Pacchiano’s testimony (para. 385).
Commentary
Testimonial and documentary evidence are both universal means of achieving fact-finding in international arbitration. What is not easily resolved for testimonial evidence is the credibility of the witness, which usually includes an assessment of the witness’s truthfulness and objectivity (Robert Pietrowski, Evidence in International Arbitration, Arbitration International, 2006).
In situations where a tribunal must place significant weight on testimonial evidence to reach a decision (arising from either the absence of documentary evidence and/or where the circumstances find it especially relevant), witness credibility is pivotal to a successful case (Ragnar Harbst, Chapter 10: Witnesses in Franco Ferrari and Friedrich Rosenfeld, Handbook of Evidence In International Commercial Arbitration: Key Issues and Concepts). This holds greater significance when the decision to be made is one that pertains to the very essence of the claims on the merits and is therefore likely to be determinative of the party’s alleged liability, as was the case in Odyssey v. Mexico. In such a scenario where the quantum at stake is high (as is the average quantum for investor-state disputes), it would be challenging if one’s entire case is derailed entirely because the witness giving testimonial evidence is strategically discredited by the opposing counsel, to the credit of the latter’s dispute resolution strategy.
In this regard, Odyssey v. Mexico sheds light on the various grounds that a witness’s credibility may be reviewed on by tribunals and provides clarity on the level of scrutiny applied to allegations that attack witness credibility before they are sufficiently persuasive. For instance, the Tribunal in Odyssey v. Mexico observed that a witnesses’ previous involvement before a separate tribunal could affect a witnesses credibility before the present tribunal. This stance provides clarity to parties that tribunals will continue to, in accordance with past cases (See OPIC Karimum v. Venezuela, Award 28 May 2013, paras 112, 164), apply a holistic assessment towards witness credibility to prevent viewing the witness in isolation which includes but is not limited to witnesses involved in prior cases.
In our view, there are two practical takeaways for parties.
First, parties may find it advantageous to identify and select witnesses that can be expected to testify on multiple conjunctive or successive matters (should the party be involved in multiple ongoing arbitrations). It may prove to be:
- As a matter of strategy, a potential guarantee of witness credibility if the established credibility from a previous case carries over; and
- As a matter of practicality, it is more straightforward and time-cost effective insofar as only one witness needs to be communicated with and strategized with.
Secondly, it would be prudent for parties embroiled in multiple arbitration proceedings to keep track of how their witnesses in past cases were assessed. Prudent checks would prevent futile arguments from being made, where such prevention itself has the potential to build credibility (or at least deter the lack thereof). While it is recognised that parties cannot fully anticipate whether witnesses used in the past may testify against them in the unknown future (as may have been the case in Odyssey v. Mexico), an organised track record and internal coordination will nevertheless be useful for dealing with clients prone to multiple proceedings such as sovereign states in the investor-state arbitration context.
However, a follow-up observation to be made is whether the tribunal in Odyssey v. Mexico had oversimplified the involvement of a witness across different arbitrations. While it did not arise in the case, it is entirely plausible that a witness can be deemed as credible in one case but have their credibility be validly attacked in another. This may occur in two situations:
- When the witness makes a statement on a certain issue in one case but then goes on to make a statement to the opposite effect of their original statement regarding the same issue in another case, thereby hinting at a direct inconsistency that cannot be reconciled; or
- When the latter case involved an act of misconduct from the witness that operated during a time frame that occurred specifically after the hearing of the first case but yet prior to the second case.
While there are no apparent records where a tribunal has encountered one of the two scenarios, parties should still not be overly eager in assuming that the credibility of their witness from an existing decision will fend off all attacks of credibility in subsequent cases. What they can know with greater certainty, however, is that making an allegation on the sole ground of participation in a previous hearing will not be sufficient to discredit witnesses who then appear on the opposing end in a separate hearing (as Mexico had insufficiently attempted to argue).
ABOUT THE AUTHORS
Aaron Tan is an associate at Holman Fenwick Willan (HFW) Singapore, specializing in arbitration, general disputes, commodities, and technology law. He has experience in arbitration cases under SIAC, ICC, and LCIA Rules, achieving successful outcomes in complex matters, including expedited procedures and disputes in shipping, commodities, and carbon markets. Aaron has also assisted and advised on AI regulation and technology bylaws. Passionate about the intersection of law and technology, he is a frequent speaker at technology and AI-related events, sharing insights on the future of legal technology and its impact on the industry.
Benjamin Bay is an undergraduate at the Singapore Management University, Yong Pung How School of Law. He is interested in international commercial arbitration and has gained exposure by participating in the FDI Investment Arbitration Moot. Benjamin has also undertaken internships with international arbitration teams such as HFW and is presently working on other arbitration research projects.
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
