Awards and Decisions

ICSID tribunal finds jurisdiction over mining license dispute involving British and Australian companies in Indonesia

Churchill Mining Plc v. Republic of Indonesia ICSID Case No. & Planet Mining Pty Ltd v. Republic of Indonesia, ICSID Case No. ARB/12/14 and ARB/12/14 and 12/40

Matthew A J Levine

An ICSID tribunal has accepted jurisdiction over the consolidated claims of affiliated coal mining companies which invested in a massive deposit on the Indonesian island of Kalimantan.

The tribunal found that the consent clause in the Australia–Indonesia BIT requires a further separate act, and that it was crystalized in regulatory approvals. In the United Kingdom–Indonesia BIT, the tribunal found a standing consent clause.

In both cases the tribunal found that the investment had been granted admission in accordance with the relevant domestic law pursuant to the BITs.

Background

Churchill, a British company, and Planet, an Australian company controlled by Churchill, own 95 per cent and 5 per cent of the shares, respectively, in the Indonesian foreign direct-invested company PT Indonesian Coal Development (PT ICD). Between 2005 and 2010 PT ICD, together with various Indonesian companies, had developed the East Kutai Coal Project (EKCP). The EKCP is estimated to contain the second largest coal deposit in Indonesia and the seventh largest in the world.

In 2005, the Indonesian Investment Coordinating Board (BKPM) authorized PT ICD to conduct business in the mining sector as a foreign direct-investment company (2005 BKPM Approval). The 2005 BKPM Approval contained an ICSID arbitration agreement.

In 2006, Churchill and Planet acquired all of the shares in PT ICD from its founders. Later in 2006, this transaction and the resulting change in PT ICD’s shareholding were approved by the BKPM (2006 BKPM Approval). The 2006 BKPM Approval incorporated by reference the terms of the 2005 BKPM Approval, including the ICSID arbitration agreement.

Between 2007 and 2009, Churchill and Planet’s Indonesian partners were granted licenses related to the surveying, exploration, and exploitation of the EKCP. At the same time, the local authority had apparently already granted exploration licenses over a substantially overlapping area to another group of companies. In May 2010, further to a letter from Indonesia’s Ministry of Forestry, the local authority revoked the exploitation licenses held by Churchill and Planet’s Indonesian partners.

Standard for finding Indonesia’s consent to arbitration

As a threshold issue, the tribunal observed that under the ICSID Convention consent must be expressed in writing but there is no additional requirement that it be “clear and unambiguous” or proven through “affirmative evidence”. The tribunal’s assessment of whether consent was expressed in either the UK-Indonesia BIT (UK BIT) or the Australia–Indonesia BIT (Australia BIT) was therefore made pursuant to the general rules on treaty interpretation found in Articles 31-32 of the Vienna Convention on the Law of Treaties (VCLT).

No standing offer to arbitrate between Australia and Indonesia

In examining whether Indonesia had consented to arbitration in the Australia BIT, the tribunal noted that “[i]n a nutshell, the question is whether paragraph 4 qualifies paragraph 2.” Taken in isolation paragraph 2 would entitle Planet to institute ICSID proceedings; however, the words “consent in writing … within forty five days” in sub-paragraph 4(a) suggested that consent is not crystallized in the treaty and that a separate act is needed. The tribunal felt that it would have to reduce sub-paragraph 4(a) to a mere administrative formality in order to find advance consent, and that this would be doing violence to the plain meaning of the treaty’s language. At this first stage in its analysis the tribunal therefore leaned towards not finding standing consent.

The tribunal found that the relevant context led to the conclusion that Article XI does not contain Indonesia’s standing consent. In doing so, it rejected the claimant’s argument regarding 4(b), which states that “if the parties to the dispute cannot agree whether conciliation or arbitration is the more appropriate procedure, the investor affected shall have the right to choose.” Planet argued that the use of “or” between sub-paragraphs 4(a) and 4(b) is consistent with 4(a) being a mere formality, because if Indonesia fails to provide consent under (a) then the investor has the right to choose between conciliation and arbitration under (b). The tribunal found the inclusion of “or” rather than “and”—which is used in every other known BIT by Australia—to be a drafting error.

The tribunal found the object and purpose of the Australia BIT to be neutral for interpretative purposes. It concluded that Article XI does not contain Indonesia’s advance consent to ICSID proceedings, and that this is confirmed by the supplementary means of interpretation raised by the Parties, i.e. doctrinal writings and treaty practice.

UK BIT contains standing offer

In Churchill the tribunal found two possible readings of the words “shall assent” in Article 7(1) of the UK BIT. As the plain meaning was inconclusive, the tribunal considered the relevant context and found it to favor Churchill’s position “without delivering a fatal blow to Indonesia’s interpretation.” It also reviewed the object and purpose of the UK BIT, which it found to be of no avail in the actual dispute.

The tribunal noted that under Article 32 of the VCLT it had latitude to consider the following materials that might shed light on the interpretation of “shall assent”: (i) doctrinal writings; (ii) case law; (iii) the treaty practice of Indonesia and the United Kingdom with third States, and; (iv) the preparatory materials regarding the negotiation of the UK-Indonesia BIT.

Indonesia had placed significant emphasis on doctrinal writings by prominent commentators, but the tribunal found these to be inconclusive.

As regards treaty practice with third States, the tribunal concluded that the UK’s practice is to secure advance consent to international arbitration, including during the 1970s; and, that Indonesia follows a similar practice but clauses adopted in the 1970s show considerable variations. On this basis, the tribunal found that third party treaty practice does not allow for a conclusion on the meaning of “shall assent.”

Finally, the tribunal reviewed the travaux préparatoire for the UK BIT, which had been found by the claimant during the hearing and placed on the record. The tribunal reached the conclusion that the treaty drafters considered “shall assent” as functionally equivalent to wording such as “hereby consents.”

The tribunal accordingly held that Indonesia’s standing consent to arbitration is found in the UK BIT.

Regulatory approvals provide consent under the BITs

The tribunal found that the separate act required by the words “shall consent in writing … within forty five days” in the Australia BIT could be found in the 2005 BKPM Approval (and then incorporated in the 2006 BKPM Approval). In doing so, it addressed each of Indonesia’s objections.

Of particular note, the tribunal found that by virtue of the word “shall,” Indonesia did not have discretion to withhold the separate act of consent. Moreover, in the tribunal’s view the relevant passage “does not exclude the possibility of providing consent in writing prior to the request for arbitration” but instead merely provides a limit.

In Churchill the tribunal observed in passing that, had it held that an additional act of consent was required under the UK BIT, it would have found this requirement to be satisfied by the 2005 BKPM Approval as incorporated in to the 2006 BKPM Approval.

Ownership of local operating company is admitted investment

The tribunal also considered the scope of Indonesia’s consent to arbitration with Churchill and Planet, specifically whether the companies’ investments had been admitted pursuant to the standard set out in the BITs.

The tribunal found both the Australia and UK BITs to require that the investment be admitted in accordance with domestic law. On the facts, the tribunal found that Churchill and Planet had obtained the necessary approval under relevant Indonesian law.

The tribunal observed that this admission requirement was specific to the moment at which the investment entered Indonesia and had no ongoing effect. It agreed with the claimants that this is “narrower than a traditional legality requirement in the sense that it only demands admission in accordance with the relevant domestic laws and not general compliance with the host State’s legislation.”

The tribunal in both Churchill Mining Plc v. Republic of Indonesia and Planet Mining Pty Ltd v. Republic of Indonesia was composed of Gabrielle Kaufmann-Kohler (president) Albert Jan van den Berg (claimant’s appointee) and Michael Hwang (respondent’s appointee).

The decision on jurisdiction in Churchill Mining Plc v. Republic of Indonesia is available at: http://www.italaw.com/sites/default/files/case-documents/italaw3103.pdf

The decision on jurisdiction in Planet Mining Pty Ltd v. Republic of Indonesia is available at: http://www.italaw.com/sites/default/files/case-documents/italaw3104.pdf

Majority considers early termination of Romanian tax incentives to have violated investors’ legitimate expectations

Ioan Micula, Viorel Micula and others v. Romania, ICSID Case No. ARB/05/20, Award

Diana Rosert

Having ruled that Romania violated the claimants’ legitimate expectations under the fair and equitable treatment (FET) standard of the Sweden-Romania BIT, the majority of an ICSID tribunal has awarded damages amounting to over US$100 million plus compound interest. While concurring with the overall outcome of the December 11, 2013 award, arbitrator Prof. Georges Abi-Saab issued a separate opinion that provided a different view on FET with respect to legitimate expectations and standards of transparency for state conduct.

Previously, the tribunal’s jurisdictional decision of September 2008 dismissed all of Romania’s objections as to the claimants’ fulfillment of the nationality requirement, the nature and existence of a dispute, as well as the temporal coverage of the dispute by the treaty.

Background

Two Swedish nationals, Ioan and Viorel Micula, and three Romanian food and manufacturing companies—European Food, Starmill, and Multipack—owned by Ioan and Viorel Micula, submitted the dispute with Romania to ICSID arbitration. The claimants alleged that Romania’s decision to prematurely revoke tax incentives for investors in disfavored Romanian regions breached the umbrella clause, the FET obligation and expropriation provisions contained in the BIT.

The tax incentive scheme was put in place by Romania’s Emergency Government Ordinance 24/1998 (EGO 24) which included exemptions from customs duties on imported machinery and raw materials, and exemptions from the payment of corporate profit tax. However, Romania eliminated the incentives in February 2005 before they had reached the 10-year period of validity, specified as April 2009 in government decisions implementing EGO 24. This step was taken in the run-up to Romania’s 2007 EU accession, after the EU Commission determined that the incentive were incompatible with EU law on state aid and made the scheme’s termination a pre-condition for accession. The European Commission, which was given permission to participate in the proceeding as amicus curiae, submitted comments on the relationship between the incentive scheme, EU law and BIT obligations and testified on related issues.

Majority dismisses umbrella clause claim for lack of proof

The claimants argued that the incentive scheme fell under the umbrella clause contained in Article 2(4) of the BIT, which elevated the violation of “any obligation” by Romania to a treaty breach. They maintained that the scope of the umbrella clause not only covered obligations arising from contracts, but also those from regulations and legislation. According to the claimants, the incentive scheme gave rise to a “specific obligation” vis-à-vis the claimants, since it applied explicitly to investors in disfavored regions which had to undergo a certification process and assume certain duties themselves (e.g., employing persons from this region). In the claimants’ view, there was “a clear and unambiguous commitment from the Romanian State that the incentives would be granted for 10 years.”

Romania, on the other hand, argued that the umbrella clause was “one of the narrowest used in investment treaties,” since it did not cover mere “undertakings” and did not contain stabilization wording that guaranteed regulatory freeze. The respondent considered that under Romanian law no obligations arose from general legislation such as the incentive scheme, and as such, none could have existed or be violated in the sense of the umbrella clause. The respondent’s main argument was that “[u]nilateral instruments such as laws and regulations, which are per se liable to change, cannot be understood to have been “entered into” with anyone.” It added that the main legislative document— EGO 24—did not even specify the duration of the scheme.

However, the tribunal favored the claimants’ arguments, which asserted that the incentive framework under EGO 24 in conjunction with related government decisions “created a specific entitlement for the Claimants … to receive the incentives until 1 April 2009.” It then pointed out that the umbrella clause broadly referred to “any obligation” and refrained from defining what was meant by the term. However, the tribunal sided with the respondent in that the interpretation of the term “obligation” in the treaty depended on whether the incentive framework at issue established obligations under domestic law. The tribunal held that the claimants failed to prove this was the case, even though the framework created an “appearance” of “a vested right giving rise to the corresponding obligation.” Consequently, a majority of the tribunal (Laurent Lévy and Georges Abi-Saab) rejected the claim that Romania violated the umbrella clause.

However, the tribunal also tested a different interpretative approach, which was eventually dismissed by the majority but favored by arbitrator Stanimir A. Alexandrov. That approach assumed that the incentive scheme established a relationship between both parties that implied mutual rights and duties. In other words, it created a legal commitment or obligation, which “by definition” was based solely on Romanian law. The commitment of specific incentives for a specific time “would necessarily be understood as including a promise of stabilization.”

Romania’s violation of legitimate expectations and FET ascertained by majority

Based on the same facts, the claimants alleged that Romania failed to deliver on the claimants’ legitimate expectations of regulatory stability, acted unreasonably and in bad faith when it decided to terminate tax incentives, and failed to act transparently and consistently during this process.

The tribunal first pointed out that the FET standard “does not give a right to regulatory stability per se”; rather, the investor “must” expect regulatory changes if no explicit assurances were given by Romania. It confirmed, in line with Saluka v. Czech Republic, [1] that the host state’s right to regulate should be taken into account. The tribunal also noted that arbitral practice supported the doctrine of legitimate expectations and agreed with the tribunal in Duke Energy v. Ecuador, which deemed legitimate expectations to be an “important element” of FET, but placed under specific limitations (e.g., reasonableness in the broader context).[2]

To determine whether in the present case legitimate expectations were frustrated, the tribunal assessed the fulfillment of three conditions: first, that the incentive scheme could “reasonably be understood” to have created a promise or assurance by Romania, irrespective of whether this was intended; secondly, that the claimants relied on the incentive scheme “as a matter of fact” when making their investment decisions; and thirdly, that it was “objectively reasonable” for them to do so.

The arbitrators Laurent Lévy and Stanimir A. Alexandrov considered that the incentive scheme indeed created a promise or assurance under the FET clause and implied an element of stabilization, giving rise to investors’ legitimate expectations. The majority reasoned that the scheme involved a “quid pro quo” for investors, since they had to meet conditions to receive tax incentives. It further explained that Romania diverted from its intention to keep the incentive scheme in place for 10 years only due to pressure from the EU. The majority also determined that the incentive scheme was not merely “amended,” but effectively eliminated. Despite the existence of a general right to regulate, the majority determined that Romania was bound to keep its promise to the investors, but its conduct breached it.

Next, the majority found evidence that a “significant part” of the claimants’ investments, particularly those related to the expansion of business, relied on the incentives. It considered this reliance to be reasonable, as the incentives were believed to be “valid regional operating aid under EU law,” even though this belief turned out to be incorrect at a later stage, namely when the scheme was terminated for its incompatibility with EU state aid law. As all three conditions had been met, the tribunal concluded that Romania’s early termination of the incentive scheme violated the claimants’ legitimate expectations and therefore its actions were “unfair or inequitable.”

However, Romania argued that for a breach of FET to exist it would need to be demonstrated that it acted unreasonably rather than showing that the claimants’ reliance was reasonable. Romania asserted that the termination of the scheme was a reasonable decision taken to comply with EU law. Indeed, the tribunal found that Romania acted reasonably in “pursuit of a rational policy,” responding to the EU’s demands, and not in bad faith. Nonetheless, the majority noted one exception. It deemed it unreasonable that Romania terminated incentives, while it maintained investor duties under the scheme. The tribunal also concluded that Romania’s conduct lacked sufficient transparency to satisfy the FET standard, because Romania failed to alert the investors affected by the termination in a timely fashion.

However, arbitrator Georges Abi-Saab disagreed with some of the majority’s findings. He held that the tax incentive scheme did not “by itself” constitute a legal commitment and that it did not contain a stabilization element, whereas both were necessary to substantiate legitimate expectations.

Abi-Saab also pointed out that the incentive scheme was not completely eliminated, since a profit tax exemption continued to be in force until 2009, while the duties of the beneficiaries were, as Romania contended, not implemented. However, he took note of the “legitimate” argument that a radical reduction of the scheme could potentially raise issues of liability.

Furthermore, the dissenting arbitrator suggested Romania’s assertion that it acted reasonably, and in response to the necessities arising out of EU accession, could have received more weight as a factor “precluding responsibility” for what the majority considered a frustration of legitimate expectations. Abi-Saab also disagreed that the government was guilty of a “lack of transparency,” rather considering it “slackness” or “negligence” in communicating with the investors.

Having found a breach of FET, the tribunal found it redundant to assess whether Romania also violated BIT Article 2(3) through unreasonable and discriminatory measures or Article 4(1) through expropriation without compensation, explaining that these alleged breaches relied on the same facts and, if proven, would lead to the same damages calculations.

Compensation awarded for investors’ increased costs and lost profits

The tribunal awarded to all five claimants collectively 376 million Romanian Leu (approximately US$117 million) for increased costs of raw materials and lost profits on sales of finished goods, plus compound interest. The tribunal ordered each party to bear half of the arbitration costs and its own legal costs. While the investor claimed damages of up to 2.7 billion Romanian Leu (US$836 million), the tribunal rejected several items in the calculation of damages for lack of sufficient evidence andcame to a lower estimation of lost profits than claimed by the investors.

The tribunal was composed of Laurent Lévy (presiding arbitrator), Stanimir A. Alexandrov (claimants’ nominee) and Georges Abi-Saab (respondent’s nominee).

The award is available at http://italaw.com/sites/default/files/case-documents/italaw3036.pdf

The separate opinion of Georges Abi-Saab is available at http://italaw.com/sites/default/files/case-documents/italaw3037.pdf

Guatemala found liable for breaching minimum standard of treatment under CAFTA-DR

Teco Guatemala Holdings LLC v. Guatemala, ICSID Case No. ARB/10/17, Award

Yalan Liu

An ICSID tribunal has found Guatemala liable under the free trade agreement between the Dominican Republic, the United States and Central American countries (CAFTA-DR) for failing to accord the minimum standard of treatment to a US investor. In the December 19, 2013 award, Guatemala was ordered to pay US$21.1 million in damages plus compounded interest, as well as the claimant’s legal costs valued at US$7.5 million.

The claimant, Teco Guatemala Holdings LLC (Teco), complained of the treatment received by a local company (EEGSA), in which it held a 30 per cent stake, at the hands of the National Commission of Electric Energy (CNEE), Guatemala’s state electricity regulator.

In addition to Teco’s ICSID case, earlier claims had been brought based on similar facts: EEGSA initiated several cases against CNEE in the Guatemalan courts, alleging CNEE breached the domestic electricity laws. While the last two court decisions were rendered in favour of EEGSA, the Constitutional Court later reversed them. Also, Teco’s consortium partner, Iberdrola, filed an ICSID case against Guatemala under the Spain-Guatemala BIT, which the tribunal rejected for jurisdictional reasons.

Background

The dispute between EEGSA and CNEE related to the procedure and methodology for calculating electricity tariffs, which EEGSA argued had been set too low, causing it economic damage.

CNEE sets the electricity tariffs applied to end consumers, which in turn determines how electricity distributors like EEGSA are reimbursed. According to the General Electricity Law, the key component for calculating tariffs for each distributor is through a study prepared by the distributor’s consultant. The studies apply the terms of reference, containing guidelines on methodology and deadlines for delivery, which CNEE prepares and reviews every five years. In case of disagreements between CNEE and a distributor, an expert commission is to be established to advise on a resolution.

In 2007 and 2008, EEGSA and CNEE disagreed at various steps of the process. First, EEGSA objected to the terms of reference submitted to it by CNEE, claiming that they were in breach of the electricity law. Conflicts also arose when EEGSA’s consultant was preparing the tariff study and when the expert commission was being set up. After the delivery of the expert commission’s report, CNEE dissolved the commission against the protest of EEGSA. CNEE then adopted tariffs based not on the EEGSA revised consultant’s study, but at a lower level based on the recommendation of its own consultant.

EEGSA brought several court actions against CNEE; however it withdrew the first case and the court suspended another. The last two cases were decided in favour of EEGSA in the first instance, but the Constitutional Court later reversed those decisions. In the present ICSID case, the claimant alleged that Guatemala’s conduct violated its obligation to afford minimum standard of treatment, in particular fair and equitable treatment, under the CAFTA-DR.

Guatemala’s jurisdictional objections not upheld by the tribunal

Guatemala challenged the tribunal’s jurisdiction on the grounds that the claim was a “mere regulatory disagreement” over the interpretation of Guatemalan laws, which had already been resolved by the Guatemalan courts. According to Guatemala, the claimant was asking the tribunal to “act as an appellate court of third or fourth instance in matters governed by Guatemalan law.”

The tribunal disagreed, however, explaining that there was an “international dispute,” rather than only a domestic one, over which it had jurisdiction. The tribunal further explained its task was not to review the rulings of Guatemalan courts under Guatemalan law but rather apply international law to the facts in dispute.

As such, the tribunal ruled that the Guatemalan courts’ proceedings could not deprive it of jurisdiction to decide an international dispute under international law. However, it acknowledged that it would have to apply Guatemalan law to some of the regulatory aspects of the dispute and “may have to” defer to the decisions of the Guatemalan courts. The tribunal nevertheless emphasized the distinctive nature of its task: to assess CNEE’s conduct under CAFTA-DR.

Guatemala also pointed out that Iberdrola’s ICSID claim against Guatemala—based on similar facts—was declined on jurisdiction,[3] and argued that the Iberdrola decision should be given deference. However, the tribunal emphasized that it “cannot and will not” rely on the findings of the Iberdrola tribunal for deciding its jurisdiction because the present dispute involved different parties, treaties as well as differently presented legal arguments and evidence.

CAFTA’s minimum standard of treatment is given content

The merits phase of the arbitration centered on CAFTA-DR’s minimum standard of treatment (MST), which equates fair and equitable treatment with MST under customary international law.

Guatemala argued that only “extreme and outrageous” state conduct could contravene the MST. However, the tribunal, nodded instead to the claimant’s interpretation of MST, which drew from Waste Management v. Mexico (II).[4] Accordingly, the tribunal ruled that the MST in the CAFTA-DR is “infringed by conduct attributed to the State and harmful to the investor if the conduct is arbitrary, grossly unfair or idiosyncratic, is discriminatory or involves a lack of due process leading to an outcome which offends judicial propriety.” It explained that this interpretation had been confirmed by other arbitral tribunals, including Waste Management v. Mexico (II) and Glamis Gold v. US,[5] as well as “authorities” (three literatures in international law).[6] In addition, the tribunal considered that the principle of good faith was also a part of MST.

The claimant argued that fair and equitable treatment under the MST was breached if its legitimate expectations were frustrated by state actions. Guatemala contended that legitimate expectations did not apply in the MST context. The tribunal did not deem investors’ legitimate expectations to be an independent component of MST, but rather implied by non-arbitrary state conduct. What mattered was whether the challenged conduct was arbitrary, opined the tribunal. As such, the tribunal considered there was no need to deal with the claimant’s argument on legitimate expectations.

CNEE’s disregard of the expert commission’s report and imposed tariffs found arbitrary and contrary to due process

Turning to the facts of the dispute, the tribunal found that CNEE had acted arbitrarily and contrary to the fundamental principles of due process in administrative proceedings when it unilaterally fixed the electricity tariff based on a study of its own consultant without providing reasons for disregarding the expert commission’s report.

In assessing the CNEE’s administrative conduct under the CAFTA-DR, the tribunal nevertheless turned to examining whether the conduct was consistent with Guatemalan law. The tribunal found that CNEE had violated Guatemala’s regulatory framework for setting and reviewing tariffs. Specifically, the tribunal determined that Guatemalan law required disagreements between the regulator and distributor should be resolved with regard to the advisory view of an independent expert commission. Such an interpretation of Guatemalan law, noted the tribunal, was also held by the Guatemalan Constitution Court in the previous domestic proceedings.

Next, the tribunal explained how the breaches of domestic law related to international treaty obligations, stating that “both the regulatory and the minimum standard of treatment in international law obliged the CNEE to act in a manner that was consistent with the fundamental principles on the tariff review process in Guatemalan law.” The tribunal then ruled the CNEE’s conduct was arbitrary and breached the due process in administrative matters, which repudiated the fundamental principles in the domestic law and, as a result, constituted a breach of MST in CAFTA-DR.

The tribunal was composed of Mr. Alexis Mourre (president), Prof. William W. Park (claimant’s nominee), and Dr. Claus von Wobeser (respondent’s nominee).

The decision is available here: http://www.italaw.com/sites/default/files/case-documents/italaw3035.pdf

Bolivia found in breach of UK-Bolivia BIT for nationalizing an electricity generator without compensation

Guaracachi America, Inc. (U.S.A.) and 2. Rurelec plc (United Kingdom) v. Plurinational State of Bolivia, UNCITRAL, PCA Case No. 2011-17, Award

Oleksandra Brovko

In a January 31, 2014 ruling a tribunal has found Bolivia in breach of the UK-Bolivia BIT and liable for some US$35.5 million in damages in a case involving the nationalization of an electricity generator. The case also included a claim by a US claimant under the US-Bolivia BIT; however, that claim was dismissed for lack of jurisdiction, after the tribunal found that the claimant could be denied benefits under the treaty.

Background

In the early 1990sBolivia introduced a number of reforms to its energy sector, including changes to its legal framework which resulted in the privatization of small state-owned enterprises through international public tenders.

In this context, a US company , Guaracachi America, Inc. (GAI), and a British company, Rurelec Plc., invested in the Bolivian state-owned company Empresa Electrica Guaracachi S.A. (EGSA). The new legal framework stipulated the reorganization of vertically integrated companies into generation, transmission and distribution companies, and EGSA was one of the three new generation companies.

In 2007, however, Bolivia abruptly changed course and moved to nationalize the entire electricity sector. As a result, the claimants’ 50.0001 per cent shareholding in EGSA was nationalized.

“Joinder” v. “consolidation” of claims

Bolivia objected to the consolidation of GAI and Rurelec’s claims given that they fell under different BITs. Bolivia argued that neither the dispute resolution clauses of the US-Bolivia BIT nor the UK-Bolivia BIT contain Bolivia’s consent to settle disputes jointly on the basis of a treaty other than the one applicable to such foreign investors. Thus, the tribunal lacks “rationae voluntatis” on the grounds that no two claims can be joined or consolidated without the express consent of the State.

However, the claimants drew a distinction between “consolidation” and “joinder” of claims. Specifically, the claimants argued that the consolidation of claims is a procedural device that provides for combining two or more proceedings with the result that the other tribunal ceases to exist. From the claimants’ standpoint, in the present proceedings claims were not “consolidated” given that the two claimants decided to jointly submit several claims in the context of single proceeding. In addition, the claimants argued that in multi-party arbitrations claims are often submitted jointly under different legal instruments. It is therefore a procedural rather than jurisdictional question, argued the claimants.

Siding with the claimants, the tribunal decided that the submission of identical claims under different BITs in a single arbitration does not require the express consent of Bolivia; the key point is that Bolivia has provided its consent to arbitration in the case of disputes involving investors from both the US and the UK.

Protection of Rurelec’s indirect investment

Rurelec made its investment via intermediaries incorporated under the laws of the British Virgin Islands. Bolivia argued that firstly, such indirect investments are not protected by the UK-Bolivia BIT and, secondly, Rurelec must prove that it acquired an indirect ownership interest in EGSA prior to the dispute.

The tribunal decided that Rurelec had made an indirect acquisition of EGSA before the date of nationalization. Moreover, indirect investments are also protected under the UK-Bolivia BIT given its broad definition of investment. As such, the tribunal concluded that the fact that Rurelec does not directly own shares of ESGA does not mean that it does not own such shares within the meaning of the BIT.

Lack of jurisdiction due to the exercise of the denial of benefit clause

Article XII of the US–Bolivia BIT provides for the denial of the treaty’s benefits to a company in case two conditions are met: 1) companies owned by nationals of a third state (GAI’s shareholder has always been domiciled in the British Virgin Islands); and 2) companies that do not carry out any substantial business activities in the territory on the US. Referring to this article, Bolivia asserted that GAI is no more than a “mailbox company” and as such does not benefit from the BITs protections.

The claimants’ countered that a denial of benefits in this case would run contrary to the principles of stability, certainty and good faith. Furthermore, the claimants argued that the denial of benefits clause cannot be applied retroactively, i.e., once the investment has been made, since the purpose of such provision is to give the host State the opportunity to alert investors in advance that they are no longer granted protection under the BIT, thereby protecting their legitimate expectations.

With regard to the second requirement of Article XII, GAI emphasized that it had conducted substantial commercial activities in the US, having maintained offices and held meetings in the country.

However, the tribunal ultimately decided that it lacked jurisdiction to consider GAI’s claim in light of conditions set out under Article XII. The tribunal was not persuaded that Bolivia in the course of the privatization imposed any requirement to establish GAI as a single purpose vehicle for public tender of EGSA. Moreover, GAI was not precluded to own any other assets other than EGSA shares. Finally, insufficient evidence was provided that GAI carried out substantial business activities in the US.

The tribunal noted that Bolivia denied the benefits of the BIT after both parties had given their consent to arbitration; however, in tribunal’s point of view, the denial of benefits cannot be equated to the withdrawal of prior consent to arbitration.

With regard to the timing of the denial of benefits, the tribunal agreed that the denial would usually be notified whenever an investor decides to invoke one of the benefits under BIT, commenting that it would be ODD for a State to scrutinize whether the requirements of the above Article XII are met in relation to an investor with whom it has no dispute.

Finally, the tribunal understood that such a ruling put an investor in a fragile position, since the investor would never know at which point the benefits would be denied. However, in the tribunals’ view, such denial would not come as a total surprise given that the investor was cognizant of Article XII and anyway used an investment vehicle controlled by the third state with no substantial business activities.

Failure to pay just and effective compensation

The claimants also argued that Bolivia violated Article 5(1) of the UK-Bolivia BIT, which stipulates the conditions for lawful expropriation. These requirements are promptness, adequacy and/or fairness of compensation and due process.

The claimants asserted that the valuation process of EGSA was neither transparent nor participatory. The claimants’ financial statements, approved by the Board of Directors following the positive assessment of PWC, showed EGSA’s profits amounted to US$5.8 million in 2010. However, Bolivia retained an independent consulting firm to perform the statutory audit. This audit determined that EGSA had a $2.3 million loss—and it was on the basis of this audit that Bolivia maintained it had no obligation to provide compensation. In the claimants’ view, the audit arranged by the Bolivian government had the sole purpose of reducing EGSA’ apparent value.

However, the tribunal was not convinced that Bolivia acted willfully and intentionally to obtain an expert valuation with negative values for EGSA. Moreover, the tribunal concluded that there is no rule of customary international law obliging an expropriating state to grant the expropriated investor a right to take part in the valuation process. However, the expropriation was still found unlawful since no compensation was paid. Therefore, the main question before the tribunal was the quantum of the compensation.

Following the discussion of different valuation methods, the tribunal also considered the issue of interest rates. The claimants relied on Article 5 of the UK-Bolivia BIT, which establishes the standard of compensation for lawful expropriation, and required to apply the principle of “full reparation” (i.e., the interest at a normal commercial or legal rate). However, the tribunal rejected to apply the EGSA’ weighted average cost of capital (WACC) as of May 2010 as the applicable rate given that post-May 2010 period was marked with negative changes to fundamentals that make up the WACC. Instead, the tribunal used the annual interest rate reported on the Bolivian Central Bank website for commercial loans in May 2010.

As the result, the amount of compensation constitutes USD 28,927,582 increased by annual composed interest rate of 5.6% on that amount since May 2010 until the date of payment in full. Each party bears its own legal costs.

Dissenting opinion of co-arbitrator Manuel Conthe

In the view of arbitrator Conthe, Bolivia failed to comply with due process requirement. In his view, expropriation is an administrative act that limits the rights of an investor. Therefore, it must meet three minimum procedural requirements: it must be reasoned; these reasons must be formally communicated to the investor; and the investor, having being notified of such reasons, has a right to be heard.

In Conthe’s opinion, Bolivia breached the UK-Bolivia BIT not because it underestimated the value of EGSA, but because it failed to comply with the minimum requirements of due process. Given valuation report was never communicated to Rurelec, it was deprived of its right to make comments on it. Moreover, in arbitrator’s Conthe view, due to the violation of due process requirements, the tribunal should have ordered Bolivia to pay legal costs, at least partially.

The tribunal was composed of Dr José Miguel Júdice (president), Mr. Manuel Conthe (claimants’ appointee) and Dr. Raúl Emilio Vinuesa (respondent’s appointee).

The award is available at: http://www.italaw.com/sites/default/files/case-documents/italaw3051.pdf

Dissenting opinion of Manuel Conthe is available at: http://www.italaw.com/sites/default/files/case-documents/italaw3059.pdf