Awards and Decisions
ICSID tribunal awards damages for Venezuela’s indirect expropriation of steel industry investment
Tenaris S.A. and Talta-Trading e Marking Sociedade Unipressoal LDA v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/11/26
Matthew Levine [*]
An arbitration tribunal at the International Centre for Settlement of Investment Disputes (ICSID) has issued its award on the nationalization of a foreign-owned company producing hot briquetted iron (HIB) for the steel industry in Venezuela. The sum of damages and pre-award interest awarded by the tribunal totals US$172,801,213.70.
The tribunal found jurisdiction under the Venezuela–Luxembourg bilateral investment treaty (Luxembourg BIT) and the Venezuela–Portugal bilateral investment treaty (Portugal BIT).
On the merits, the tribunal dismissed claims that pre-expropriation interference with the investment resulted in international liability. However, it agreed that Venezuela had unlawfully nationalized the claimants’ investment resulting in an indirect expropriation.
Background
The claimants are a company incorporated under the laws of the Luxembourg (Tenaris) and a company incorporated under the laws of Portugal (Talta). Talta is wholly owned by Tenaris through an intermediary company.
Through the privatization of Venezuela’s steel industry in the 1990s, an affiliate of Tenaris (SIDOR) came to control that country’s, and South America’s, main finished steel exporter, which was a major consumer of HBI. Subsequently, Tenaris together with SIDOR incorporated a Venezuelan company known as Matesi to acquire certain HBI-production capacity (PosVen). Among the conditions precedent to this transaction was that Matesi enter into contracts for the supply of raw materials crucial to the production of HBI with a number of state-owned entities on terms no less favourable than those enjoyed by its predecessor. Tenaris’ majority shareholding in Matesi was later transferred to Talta.
In 2008, Venezuelan President Hugo Chávez announced that SIDOR was to be nationalized, a decision that was subsequently ratified by parliament. In 2009, President Chávez announced an intention to nationalize Matesi and other HBI producers. Formal confirmation was set out shortly thereafter. In 2010, President Chavez announced that Matesi was to be expropriated, as it had not proved possible to reach an agreement with shareholders on the terms of nationalization. The arbitration concerns the circumstances whereby the claimants lost the use and enjoyment of their investment in Matesi.
BITs’ “siège social” and “sede” require effective management, which claimants demonstrated
The primary issue for the tribunal’s determination was whether the claimants had established a “siège social” and “sede” in Luxembourg and Portugal, respectively, as per the specific terms of the BITs.
Venezuela argued that the BITs required not only incorporation but also the place of effective management to be located in the home state. It also argued, based on filings with the U.S. Securities and Exchange Commission and other documents, that “Tenaris is an Argentine company, with 27,000 employees, billions of dollars of revenue and offices on the 26th and 30th floor of a 30-storey office block in Buenos Aires” (para. 120).
In order to resolve this objection, the tribunal first considered the ordinary meaning of the terms “siège social” and “sede.” On the basis of the parties’ submissions, the tribunal found it clear that neither term was a consistent “legal term of art” and that in fact the terms have a number of ordinary meanings.
The tribunal then considered the meaning of these terms given their context as well as the object and purpose of the BITs. It found that, placed in their context, the terms “must connote something different to, or over and above, the purely formal matter of the address of a registered office or statutory seat” (para. 150). The tribunal therefore determined that “siège social” and “sede” in the BITs in issue in this case mean the place of effective management. On the basis of the submissions and the evidence, the tribunal concluded that Tenaris and Talta had their place of effective management in Luxembourg and Portugal, respectively, and accordingly upheld its jurisdiction ratione personae over the claimants.
Tribunal rejects Venezuela’s objection that the dispute was merely contractual
Venezuela also objected to jurisdiction on the basis that claims in respect of allegedly insufficient or discriminatory supply of inputs to Matesi gave rise to a purely contractual dispute. The claimants responded that their claims for discrimination arose solely out of breaches of the fair and equitable treatment (FET) and non-impairment clauses of the BITs. They argued that the relevant supplier was CVG FMO, a state entity with a sovereign monopoly.
The tribunal approached this second objection by distinguishing between jurisdiction to hear the claims and ultimately liability regarding those claims under the BITs. At the jurisdictional stage, the determinative question was not whether the claimants’ factual allegations were true. Thus, Venezuela’s argument that CVG FMO was acting in a commercial and private capacity, while a key issue in terms of ultimate liability, was not a bar to the tribunal’s jurisdiction.
Unlawful nationalization results in indirect expropriation under the BITs
The tribunal addressed the claims arising from the nationalization of Matesi on the basis that “[n]o doubt about it, Venezuela nationalized Matesi” (para. 451). The issue was therefore whether Venezuela’s nationalization of SIDOR in 2008 and subsequently Matesi in 2009 amounted to an unlawful indirect expropriation, as per the claimants, or whether the nationalization had been entirely legal under Venezuelan law, such that it was only upon formal expropriation that the BITs applied.
The tribunal was persuaded that “Venezuela failed to implement the procedures that it had put in place to effect the nationalisation of SIDOR and its subsidiaries and, specifically, Matesi” (para. 493). It found that, in so doing, Venezuela manifestly failed to conform with the requirements of the “tailor made” domestic law process for nationalization, which resulted in indirect expropriation under the BITs. The tribunal went to on observe that the case is “akin to the ADC [v.] Hungary case, in that the affected investor has not had: ‘a reasonable chance within a reasonable time to claim its legitimate rights and have its claims heard’” (para. 497).
Events prior to indirect expropriation do not rise to level of treaty breach
According to the claimants, Venezuela breached the FET, non-discrimination, and non-impairment provisions of both BITs by virtue of CVG FMO’s discrimination against Matesi, that is, the claimants’ investment.
Although the claimants’ affiliate SIDOR regularly had the kind of inputs needed for production of HBI by Matesi, SIDOR was obliged to sell these inputs to CVG FMO. According to the claimants, their supply agreement with CVG FMO was “pivotal to [their] decision to invest in Matesi and was a condition precedent to [their] purchase of PosVen’s assets” (para. 322).
In terms of whether CVG FMO discriminated against Matesi, the tribunal found that the evidence pointed to certain failures. However, it then found that CVG FMO was neither an organ of the state for the purposes of Article 4 of the International Law Commission (ILC) Articles on Responsibility of States for Internationally Wrongful Acts nor empowered by Venezuela to exercise elements of governmental authority under ILC Article 5.
The claimants further argued that serious labour unrest, lost access to Matesi’s physical plant, and the holding against their will of some 20 members of its administrative staff resulted in a breach of Venezuela’s obligations under the security and protection standard in the BITs. The tribunal accepted the claimants’ submission that Venezuela’s obligation was not exclusively limited to physical protection from third parties but that it could also include adverse effects stemming from the host state and its organs. It then noted that the claimants were seeking merely declaratory relief for damages suffered during the nationalization process, but that the alleged failures to provide security and protection took place post-nationalization.
Tribunal departs from Discounted Cash Flow method in determining damages
Having found that expropriation occurred without prompt and adequate compensation, the tribunal set out to determine the compensation to be paid by Venezuela. Regarding the calculation of compensation, the tribunal found the relevant provisions in the BITs very similar to those contained in the ILC Articles, which it considered the most accurate reflection of customary international law.
The parties’ experts agreed that, where arm’s-length transactions are unavailable, the value of an asset generally is determined best by the Discounted Cash Flow method. However, the tribunal observed that “the devil, alas, is in the detail” (para. 521). Whereas the claimants’ expert had pinned the value at US$239 million, Venezuela’s expert had arrived at a value of US$0. The tribunal concluded that there were major flaws in the approaches of both parties.
The tribunal proceeded to canvass other approaches to determining the Fair Market Value ultimately returning to the notion of agreed price in an arm’s-length transaction. In this context, the tribunal considered the 2004 acquisition of Matesi’s underlying assets by SIDOR and the claimants. This transaction provided relevant data having regard to the criteria for an arm’s-length transaction.
Ultimately, the tribunal ordered that Venezuela pay US$87,300,000 for breaches of the BITs, as well as pre-award interest from the valuation date of April 30, 2008, at an annual rate of 9 per cent, in the sum of US$85,501,213.70 within six months of the date of the award.
Notes: The tribunal was composed of John Beechey (President appointed by agreement of the parties, British national), Judd Kessler (claimant’s appointee, U.S. national), and Toby Landau (respondent’s appointee, British national). The final award of January 29, 2016 is available at http://www.italaw.com/sites/default/files/case-documents/italaw7098.pdf.
The first ICSID case against Guinea is dismissed for lack of jurisdiction
Société civile immobilière de Gaëta v. Republic of Guinea, ICSID Case No. ARB/12/36
Stefanie Schacherer [*]
In a decision dated December 21, 2015, a tribunal at the International Centre for Settlement of Investment Disputes (ICSID) ruled that it lacked jurisdiction to hear a case brought by Société civile immobilière de Gaëta (Gaëta) against Guinea under the Guinean Investment Code.
Having built the Cité des Chemins de Fer (the Cité) in Conakry, Gaëta alleged expropriation of its investment and a violation of fair and equitable treatment (FET) by Guinea. Gaëta sought compensation of around US$90 million. The tribunal, however, concluded that Gaëta had not succeeded in proving that it was a foreign investor within the meaning of the Investment Code. Moreover, Gaëta did not establish that it had made a protected investment within the meaning of the Investment Code and article 25 of the ICSID Convention.
Background
Gaëta is a company registered with the French Commercial Register. It is managed by its managing director, Mr. Guido Santullo. Gaëta made its investment in Guinea in 1997 through a construction lease agreement. The project comprised the construction of several buildings for commercial, administrative and banking purposes on the site of the Cité. The lease, planned to have a life of 60 years, also provided Gaëta a right to rent the buildings. The contract also provided significant exemptions on customs duties, taxes and fees as well as on state fees.
Following conclusion of the contract, Gaëta had turned to another company, Séricom Guinée, for the planning, development and construction work. Mr. Guido Santullo is the majority shareholder of this company. After the completion of work in 1999, the buildings were leased to third parties. A second company controlled by Mr. Guido Santullo, SCI Cité des Chemins de Fer, provided security and maintenance services for the premises in the Cité and billed the tenants for its services.
In December 2008, Guinea entered an unstable period of government transition following the death of President Lansana Conté. The incoming new administration instructed an audit company to clarify the legal status of the Cité lands and the tax regime applicable to Gaëta. The audit firm concluded, first, that Gaëta had no legal existence in Guinea, and second, that the company had earned income in Guinea since 1999 and that this income had not been subjected to taxation.
Consequently, Gaëta was subjected to a tax adjustment for tax evasion in the amount of around US$7.8 million. From 2009 until early 2012, Gaëta contested being responsible for tax fraud, through the tax exemptions that the Guinean Government had previously granted the company. In 2012, however, the new President Alpha Condé decided that the buildings in the Cité would be requisitioned for one year.
Guinea contests Gaëta’s qualification as a foreign investor
The tribunal first clarified that only a foreign investor may invoke the international arbitration mechanism under the Investment Code and the ICSID Convention. Since Gaëta asserted that it was a French company, the tribunal considered its nationality under French law.
Contrary to the arguments of the claimant, the tribunal emphasized that it was empowered to engage in a thorough review of applicable national law. According to the tribunal, such an examination is only made as a preliminary step and does not involve checking the validity of a decision made by national authorities (para. 135).
In its analysis, the tribunal considered that Gaëta, headquartered in France, benefited from the presumption of French nationality. Under French law, however, this presumption may be rebutted if it is established that the company has its real headquarters in a foreign state.
To determine the actual headquarters, the tribunal took account of the place of management and administration of the company and the place of its business. Taking into account the documents submitted, the tribunal judged that it was clear that the management of the plaintiff’s Guinean business took place in Guinea between 1997 and 2009. Thus, all correspondence between Guinea and the plaintiff was always addressed to Mr. Guido Santullo in Guinea. Similarly, management of rents and Gaëta’s accounting had been carried out not in France but from offices the plaintiff held in Conakry. Turning lastly to commercial activity, the tribunal found a significant difference between the annual turnover generated in France, amounting to approximately US$5,000, and that generated in Guinea, which amounted to around US$3 million.
Taking these factors into account, the tribunal concluded that the claimant was not a French company. The tribunal deduced from this that it had no jurisdiction ratione personae over the case at hand.
The existence of a protected investment
Despite its declaration of lack of jurisdiction on this case and contrary to the principle of judicial economy, the tribunal decided to also examine whether the conditions of its ratione materiae jurisdiction were met in this case, “to avoid any uncertainty and for exhaustiveness” (para. 183).
The tribunal discussed at length the definition of investment under international law and particularly under article 25 of the ICSID Convention. A thorough review of the Salini criteria was at the heart of its analysis. The criteria of this case are: (i) a certain period of investment, (ii) the taking of a risk by the investor, (iii) a substantial contribution and (iv) the contribution to the development of the host state (Salini Costruttori v. Kingdom of Morocco).
According to the tribunal, these criteria should not be rigidly and systematically applied (para. 208) but should be examined primarily in light of the specific circumstances of the case at hand, taking particular account of the different instruments used by the parties to express their consent to ICSID jurisdiction (Biwater Gauff v. Tanzania).
The Investment Code of Guinea does not contain an express definition of investment, merely stating in article 2.1 that “everyone is free to undertake in the territory of the Republic of Guinea a commercial, industrial, mining, agricultural or service activity in compliance with the laws and regulations of the Republic.” According to the tribunal, Guinean Law only provides indicators. For this reason, it examined the construction lease agreement in terms of the criteria established by the Salini jurisdiction (para. 213).
Nevertheless, in its analysis of the elements, the tribunal primarily focused on the review of the criterion of substantial contribution (criterion (iii) above). The tribunal noted that an investor must have incurred expenses in order to pursue an economic goal. These expenses must be substantial, without there being a minimum requirement in terms of capital invested. Next, the tribunal considered that even if the origin of the funds is irrelevant, it is necessary that the claimant is indeed the maker of the expenditure made in connection with the investment (para. 231).
In this case, the tribunal concluded that the construction lease agreement constituted an investment. On the other hand, the tribunal found that Gaëta was not the real maker of this investment. After reviewing the various balance sheets of the claimant and those of other companies controlled by Mr. Guido Santullo, Séricom Guinée and SCI Cité des Chemins de Fer, the tribunal held that it was impossible to determine which of the companies had actually financed the construction works of the Cité, on the basis of incomplete and contradictory information. Given the lack of evidence, the tribunal concluded that Gaëta did not make the investment and could not benefit from the protection afforded by international law.
Costs
The tribunal considered that, because of the lack of jurisdiction and the fact that the claimant had been totally unsuccessful, it should in principle bear all the costs of the proceedings. Nonetheless, given that Guinea had burdened the proceedings and breached certain of its obligations, the tribunal decided that it was fair to have Gaëta bear only 80 per cent of the costs of the proceedings. According to the tribunal, the most flagrant violation by Guinea was its refusal to pay its advance share to ICSID as per the rules of procedure. The tribunal found that this obligation is systematic and independent of the chances of success (para. 307). Moreover, Guinea had also burdened the proceedings by the slowness with which it had provided documents relevant to the tribunal’s analysis. For these same reasons, the tribunal ordered Guinea to bear 20 per cent of its own costs and legal expenses.
Note: The ICSID tribunal was composed of Pierre Tercier (Chair, appointed by the parties, Swiss national), Laurent Lévy (claimant’s appointee, Swiss national) and Horacio A. Grigera Naón (respondent’s appointee, Argentinian national). The ruling of December 21, 2015 is available at: http://www.italaw.com/sites/default/files/case-documents/italaw7038.pdf
Slovenia is condemned to pay €20 million in damages and US$10 million in costs to Croatian national electric company
Hrvatska Elektroprivreda d.d. v. Republic of Slovenia, ICSID Case No. ARB/05/24
Inaê Siqueira de Oliveira [*]
An award rendered on December 17, 2015 by an arbitral tribunal constituted under the auspices of the International Centre for Settlement of Investment Disputes (ICSID) added a new—and apparently final—chapter to a nearly 20-year-old conflict between the governments of Croatia and Slovenia over the supply of electricity generated by the Krško Nuclear Power Plant (Krško NPP), located in Slovenia.
The tribunal found that Slovenia failed to resume deliveries of electricity generated by Krško NPP to the claimant, Hrvatska Elektroprivreda d.d. (HEP), the state-owned national electric company of Croatia. Thus, the tribunal ordered Slovenia to pay HEP damages of €19,987,000 plus compound interests and reimburse US$10 million in arbitration costs.
Facts and claims
In 1974, the national electricity companies of Slovenia and Croatia established a joint venture, Nuklearna Elektrana Krško (NEK), to build and operate Krško NPP, located in the Slovenian territory just 15 kilometers west of the border between the two countries. The financing, construction, operation, management and use of Krško NPP were regulated by four bilateral agreements, all based on the parity principle, according to which the co-investors were equal partners in all aspects.
Disagreements over Krško NPP began in the 1990s. HEP was convinced that some measures adopted by Slovenia were inconsistent with the parity principle embedded in the bilateral agreements. In contrast, Slovenia considered that HEP was not complying with its financial obligations towards NEK.
On July 30, 1998, NEK suspended electricity delivery to HEP, and Slovenia issued a decree which, in HEP’s view, affected its ownership rights. Over the following years, several meetings took place between the two countries in order to resolve the dispute. The negotiations led to a 2001 treaty including an investor–state dispute settlement clause (the 2001 Agreement), in which Slovenia and Croatia agreed that i) they would waive all their past financial claims related to Krško NPP, ii) HEP would be recognized as co-owner and co-manager of Krško NPP, and iii) the delivery of electricity to HEP would be resumed on an agreed upon date. The tribunal accepted HEP’s submission that June 30, 2002 was the agreed upon date.
Ratification of the 2001 Agreement met strong parliamentary and public opposition in Slovenia. It was ratified only on February 25, 2003—nearly eight months after the agreed upon date for the resuming of electricity delivery. Throughout this period, Slovenia offered to sell electricity to HEP twice—in June 2002 and November 2002 (the 2002 Offers)—in lieu of the electricity that should have been supplied under the 2001 Agreement, and twice HEP refused. Electricity deliveries to HEP resumed on April 19, 2003.
The main issues before the tribunal were i) whether Slovenia met its obligations under the 2001 Agreement by making the 2002 Offers, ii) whether HEP should have accepted the 2002 Offers to mitigate its losses, iii) whether HEP passed on any additional costs to consumers and therefore suffered no loss, and iv) if HEP incurred in losses, how the tribunal could valuate the compensation.
Although HEP advanced two alternative legal bases for its claims—the 2001 Agreement and the Energy Charter Treaty (ECT)—the tribunal dismissed all ECT claims in the Decision on the Treaty Interpretation Issue, dated June 12, 2009. In the final award, the tribunal pointed out that the reasons for the dismissal were “necessarily implicit” (para. 580) in view of the substance of the earlier decision, but spelled them out anyway. It reasoned that, given the content of the 2009 decision, which found Slovenia liable to HEP for the claim of compensation under the 2001 Agreement—remaining for determination the issues of the 2002 Offers, mitigation, quantum of compensation, and costs—the alternative basis on which HEP had sought compensation (the ECT) “necessarily, indeed automatically, fell out of consideration” (para. 579).
The 2002 Offers and mitigation of loss
The tribunal dismissed Slovenia’s submission that, by making the 2002 Offers, Slovenia had essentially complied with its obligations under the 2001 Agreement. The decision relied heavily on the opinion of the independent expert appointed to assist the tribunal in assessing the parties’ position on damages. According to the expert’s opinion, accepted by the tribunal, the 2002 Offers were materially different, from an economic perspective, to what was agreed to in the 2001 Agreement.
The tribunal also accepted HEP’s position that it was reasonable to reject the 2002 Offers due to the “substantial differences between the terms of the [2002] Offers and those of the 2001 Agreement” (para. 214) and that there were non-financial matters that also reasonably influenced HEP’s decision, such as the concern that accepting the offers could lead to a disincentive for Slovenia to ratify the 2001 Agreement.
Tribunal analyzes pass-on defence brought up by independent expert
The independent expert pointed out in his report that “based on his experience […], he would expect a monopoly entity like HEP to adjust its tariffs so as to reflect its costs” (para. 220). Said differently, HEP could have passed any increase in costs onto consumers; therefore, HEP itself would not have incurred any recoverable loss. If successful, the consequences of the pass-on defence would be considerable: it would mean that HEP did not have any damages to recover.
Even though the pass-on defence was not raised by Slovenia, the tribunal decided it would analyze it. The defence is typical of competition law cases, but the tribunal saw no obstacle to consider it under international law. However, the tribunal’s analysis ended up focusing on the procedural aspect of the pass-on defence. As an affirmative defence, the burden of proving that the costs had been passed onto consumers lied with Slovenia. As no evidence of this was adduced, the tribunal found it was “not in a position to conclude that no loss occurred in the present case” (para. 245).
Calculation of damages
The tribunal relied mainly on the findings of the independent expert when ruling on the valuation of damages. The parties and the expert were far from agreeing on the appropriate methodology for calculating HEP’s losses, but the basic approach all of them adopted may be summarized as X minus Y—“X” being the factual scenario, namely, “the cost incurred by HEP in replacing the Krško electricity that should have been supplied under the 2001 Agreement” (para. 359), and “Y” being the counterfactual, namely, “[the cost] of the electricity that should have been supplied to HEP under the 2001 Agreement” (para. 349).
The epicenter of the disagreements was the valuation of “X.” As the non-supply prolonged a situation that had already endured four years (since July 30, 1998), the tribunal could not merely look into HEP’s books to find what the company had done to replace the electricity that should have been supplied by Krško NPP from June 30, 2002 onwards. In order to solve this puzzle (how HEP replaced the Krško electricity), the tribunal relied on the evidence presented by the parties, witness’ testimonies and the independent expert’s opinion.
The tribunal accepted that HEP used a combination of energy that was imported and generated in national thermal power plants to replace the electricity from Krško NPP. Although the imports were cheaper than the electricity from thermal plants, and although HEP could have imported all replacement energy, as Slovenia argued, the tribunal found that HEP had valid concerns about supply security to not want to rely entirely on imports. In other words, the tribunal found that, by using the combination of imports and thermal plants, HEP acted in a reasonable manner. To rule on the proportion of replacement energy from thermal plants versus imports, the tribunal once again preferred the methodology used by the independent expert.
To the €19,987,000 in compensation, the tribunal determined that interest, compounded at six-month intervals, should be added from the date Slovenia breached its obligations under the 2001 Agreement (July 01, 2002) until the date of payment in full.
Reimbursement of HEP’s costs
The tribunal acknowledged that the prevailing trend in investment treaty arbitration is the use of the “costs follow the event” approach, according to which the successful party is entitled to recover some or all of its costs. Having considered that HEP was the successful party in this case, and that the costs claimed (US$13,300,000) were “reasonable in the circumstances” (para. 610), the tribunal ordered Slovenia to reimburse US$10 million to HEP for its arbitration costs and legal expenses.
Notes: The ICSID tribunal was composed of David A. R. Williams (President appointed by the co-arbitrators, New Zealand national), Charles N. Brower (claimant’s appointee, U.S. national), and Jan Paulsson (respondent’s appointee, Swedish national). The award is available at http://www.italaw.com/sites/default/files/case-documents/ITA LAW 7012.pdf. The Decision on the Treaty Interpretation Issue is available at http://www.italaw.com/documents/Hrvatska-Interpretation.pdf.
The only known investment treaty arbitration against Equatorial Guinea fails on jurisdictional grounds
Grupo Francisco Hernando Contreras, S.L. v. Republic of Equatorial Guinea, ICSID Case No. ARB(AF)/12/2
Martin Dietrich Brauch [*]
A majority tribunal at the Additional Facility (AF) of the International Centre for Settlement of Investment Disputes (ICSID) dismissed the case of Spanish construction company Grupo Francisco Hernando Contreras, S.L. (Contreras Group) against Equatorial Guinea, in an award dated December 4, 2015. According to the majority, the claimant was not a protected investor under the bilateral investment treaty (BIT), as it did not make an investment in accordance with host state law.
Factual background and claims
Throughout 2008, a Contreras Group company signed several documents with Equatorial Guinea. These included a letter of intentions formalizing a proposal to build an industrial district and a self-sufficient city of 15,000 residences in Equatorial Guinea, and an agreement on the constitution of a joint-stock company to build industries in the Malabo and Bata regions. The Contreras Group subsequently constituted two companies in Equatorial Guinea: Nueva Edificación 2000, S.A. (Nueva Edificación), wholly-owned by the Contreras Group, and Industrias y Construcciones Guinea Ecuatorial, S.A. (INCOGESA), owned by the Contreras Group and Equatorial Guinea in equal parts.
Between 2008 and 2011, several steps were taken to advance the construction projects. In particular, the Contreras Group delivered projects, business plans and profitability studies for the government’s review, and acquired machinery in Spain. The government, in turn, authorized by resolution the establishment of Nueva Edificación, hired a company to evaluate the projects presented, and issued Nueva Edificación a direct award (“adjudicación directa”) to build the administrative city of Oyala.
In early 2012, however, the Contreras Group complained that Equatorial Guinea had failed to make outstanding payments and was imposing unjustified obstacles to the project, in breach of the 2003 Spain–Equatorial Guinea BIT. It initiated arbitration in March 2012 under the BIT and ICSID AF Arbitration Rules, as Equatorial Guinea is not a party to the ICSID Convention. The respondent opposed a series of objections to jurisdiction.
Law applicable to jurisdictional objections
Recalling that the ICSID AF Rules do not define the applicable law and that the ICSID Convention does not apply to cases under ICSID AF Rules, the tribunal looked to the BIT to determine the applicable law.
BIT Article 11(3) provides that the arbitration shall be governed by the provisions of the BIT, the domestic law of the host state, and applicable rules and principles of international law. Accordingly, the tribunal set out to analyze each of jurisdictional objection based on the BIT, applying the domestic law of Equatorial Guinea when BIT provisions so determined.
Tribunal succinctly dismisses three jurisdictional objections
Equatorial Guinea had originally objected that the BIT was not in force when the dispute arose. Considering that both states had deposited their instruments of ratification by 2009, that the BIT provides for its provisional application upon its signing in 2003, and that the respondent had withdrawn its objection at the hearing, the tribunal held that the BIT was in force and applied to the dispute at hand.
The respondent had also argued that it had not consented to arbitration under Article 25 of the ICSID Convention. Recalling that the ICSID Convention is not applicable to arbitrations under AF Rules, and indicating that the signing of the BIT expressed Equatorial Guinea’s consent to arbitrate, the tribunal dismissed the objection.
Equatorial Guinea also denied that there was a “legal dispute” within the meaning of Article 25(1) of the ICSID Convention. The tribunal once again rejected the application of the ICSID Convention, and held that, for purposes of determining its jurisdiction, it should assume the dispute had a legal nature, given that the investor claimed compensation for breach of investment protection standards under the BIT.
To qualify as “investor,” claimant must have made a covered investment
The respondent argued that the Contreras Group did not make an “investment” in Equatorial Guinea within the meaning of the BIT and, therefore, did not qualify as an “investor.”
Considering that the Contreras Group was both constituted and headquartered in Spain, the tribunal held that it qualified as a “company” of Spanish nationality that owns or controls a company established in Equatorial Guinea, within the meaning of the BIT. In addition, the tribunal concluded that, to qualify as an “investor,” the claimant also needed to have made an investment in the other party in accordance with its domestic laws.
Did the Contreras Group make investments in accordance with Equatoguinean law?
BIT Article 1(2) defines “investments” by an illustrative list of assets, subject to the investor’s compliance with host state law. To determine whether there was an investment, the majority briefly referred to criteria of the Salini test (contribution by the investor, duration, risk). It noted that both parties agreed that the existence of an investment depended on “a contribution of the Claimant which would arise from a contractual relationship” (para. 141), but disagreed as to whether the investment complied with host state law.
Emphasizing that the contractual basis of the claims was an essential requirement for the existence of a covered investment, the tribunal set out to analyze, under Equatoguinean law, the alleged contractual relationship for the construction work in Malabo and Bata, and the supposed existence of a direct award for the construction work in Oyala.
Based on the text of the constitution agreement related to the Malabo and Bata construction work, the tribunal concluded that the existence of rights and obligations was conditioned on: (a) the conclusion of a construction agreement between INCOGESA and Equatorial Guinea; and (b) the proper constitution of the companies Nueva Edificación and INCOGESA.
There was no evidence that the Contreras Group had complied with the administrative procedure under the Equatoguinean Law on Contracts for the conclusion of a construction agreement with the state, the tribunal indicated. Furthermore, it concluded that the state’s “administrative silence” did not generate binding effects that could replace compliance with the legal procedure.
Even though Nueva Edificación was duly registered, the tribunal noted that its capital stock was later reduced significantly below the minimum required by law—which would eventually lead to the company’s dissolution. It also noted that Nueva Edificación did not begin its activities within the time limits established by law. With respect to INCOGESA, the tribunal pointed out that, although the company was formally constituted and its capital stock was allegedly paid in full, there was no proof that the capital stock had been deposited in a bank account, as required by Equatoguinean law.
Finding that neither of the companies was formed in accordance with Equatoguinean law, the tribunal concluded that they did not have legal personality to operate as vehicles for the claimant’s investments. In the majority’s analysis, “the arguments and conduct of the Claimant evidence its lack of appropriate knowledge of the domestic law applicable to its alleged investment,” a failure that “expresses negligent conduct” (para. 227).
As to the Oyala construction, the majority noted that the government resolution formalizing a direct award did not exclude the need to enter into a contract within 30 days of the award, as required by the Law on Contracts. As there was no evidence that the Contreras Group sought to conclude the contract or that Equatorial Guinea refused to conclude it, the Contreras Group abandoned its intention to invest in the country, in the majority’s view.
Dismissal and costs
The majority deemed it unnecessary to examine the Salini criteria of duration and risk. It dismissed the case for lack of a protected investor and investment, ordering each party to bear its own expenses and an equal part of arbitration costs.
Dissent rejects Salini criteria, formalistic notion of contract, and remarks about the claimant’s lack of knowledge
Arbitrator Orrego Vicuña, however, would have upheld the tribunal’s jurisdiction. In his dissent, he indicated that the Salini criteria were not included in the BIT, and have been rendered obsolete by investment treaties and jurisprudence. Even acknowledging that there was no written contract, he disagreed with the majority’s formalistic interpretation. In his view, there were sufficient elements to evidence the existence of a contract, consisting in an agreement expressed by an offer followed by acceptance.
He also opposed the majority’s remarks about the investor’s negligence: “if the investor is contracting with the state, it is the latter who has the obligation to require that all the steps required by its legislation are adopted” (dissent, para. 14).
Notes: The ICSID tribunal was composed of Bernardo Sepúlveda Amor (President appointed by the Chairman of the Administrative Council, Mexican national), Francisco Orrego Vicuña (claimant’s appointee, Chilean national), and Raúl E. Vinuesa (respondent’s appointee, Spanish and Argentine national). The award, including the dissent by Francisco Orrego Vicuña, is available in Spanish only at http://www.italaw.com/sites/default/files/case-documents/italaw7106.pdf.
ICSID tribunal orders Zimbabwe to return expropriated farms
Bernhard von Pezold and others v. Zimbabwe, ICSID Case No ARB/10/15
Jacob Greenberg [*]
In a 318-page award issued July 28, 2015 but only published February 2016, a tribunal at the International Centre for Settlement of Investment Disputes (ICSID) ordered Zimbabwe to return farms it seized without compensation in 2005. The tribunal found that this seizure, along with the government’s clandestine encouragement of illegal settlement of the same estates, constituted a breach of the expropriation, fair and equitable treatment (FET), and several other provisions in Zimbabwean bilateral investment treaties (BITs) with Switzerland and Germany. Restitution is rarely used as a remedy in international investment arbitration, but the tribunal agreed it was appropriate and feasible here.
Along with returning title to the farms, the ICSID tribunal called upon Zimbabwe to pay the claimants, Bernhard von Pezold and his family, US$65 million in compensation to account for lost value. This was the second time an arbitral tribunal found Zimbabwe violated expropriation and FET provisions in BITs. In a parallel expropriation case (Border Timbers Limited, Timber Products International (Private) Limited, and Hangani Developments Co (Private) Limited v. Zimbabwe (ICSID Case No ARB/10/25)), the same tribunal ruled in favor of Border Timbers, a company majority-owned by the Pezold family, but the award remains unpublished.
Background
When Zimbabwe President Robert Mugabe first came to power in 1980, he set out to correct the state of affairs at the time, when a small number of white commercial farmers owned a large majority of the farmland. His land reform program began with voluntary sellers and buyers, but due to impatience with the slow pace of transfer and Mugabe’s flagging popularity, it devolved into expropriation with compensation, and in 2005, expropriation without compensation. Beginning in 2000, black settlers began invading and occupying predominantly white-owned farms.
Bernhard von Pezold and his family, who are dual Swiss and German nationals, bought 78,275 hectares of farmland in Zimbabwe starting in 1988 under the Switzerland–Zimbabwe and Germany–Zimbabwe BITs. Their estates were heavily invaded, with settlers occupying 22 per cent of the farmland. In 2005, when the constitution was amended, the Zimbabwean state acquired title to most of the claimants’ land, revoked their right to challenge the acquisition, and criminalized their continued occupancy of the land. The claimants continued to occupy the land, but argued they were reduced to “mere licensees at the will of the Respondent” (para. 159).
The new constitution enacted in 2013 provided full compensation for land seized from “indigenous Zimbabweans,” which a Zimbabwe witness testified refers exclusively to black Zimbabweans. The constitution also reaffirmed the right of foreign investors to full compensation under the BITs.
Panel finds Zimbabwe’s actions constituted an unlawful expropriation
Zimbabwe essentially conceded that expropriation took place, but claimed the acts were lawful and for a public purpose. The land was expropriated, it argued, because indigenous people remained disadvantaged given the slow pace of land reform. The claimants may not have received monetary compensation, but their continued, substantially unencumbered use of the land constituted prompt, adequate, and effective compensation. Moreover, if the government policed the raids, it would be turning on its people and risking a massacre.
The tribunal rejected these arguments, ruling the expropriation was unlawful and discriminatory, and lacked due process. The transfer of title was sufficient to establish expropriation, and no compensation was paid, so it was not lawful. Continued use of the land could not be considered compensation because “any income that may have been gathered after [the government seized title] would not equate to prompt adequate and effective compensation without delay” (para. 497).
Without compensation, the expropriation is already unlawful, and thus, a violation of the BIT, the tribunal reasoned. It also addressed several other claimant arguments for unlawful expropriation, finding it lacked due process because the amendment transferring title barred the claimants from challenging the transfer in court. The action was also held racially discriminatory because the vast majority of the farms expropriated were white-owned, and the few black owners affected were compensated for the land seized. Finally, the tribunal found the expropriating acts had no public purpose because the land was never redistributed, and remained mostly in the claimants’ hands.
The actions also violated FET and were not excused by necessity
The tribunal also found a violation of FET. Zimbabwe had, on multiple occasions, assured the claimants that their investments would not be subject to expropriation. According to the tribunal, these declarations established legitimate expectations on behalf of the claimants, which were violated when their land was expropriated.
Zimbabwe asserted a customary international law defense of necessity for its actions, arguing the state of affairs in the country at the time made its actions unavoidable. This “March of History” was a spontaneous movement among the indigenous people of Zimbabwe that resulted in land raiding, and would have intensified if the government had not amended the constitution to seize the land. The government also claimed it was powerless to stop the raids. Additionally, Zimbabwe cited its economic crisis, beginning in 2006, as further evidence of a state of emergency.
The tribunal again rejected Zimbabwe’s claim, finding its arguments implausible. The settlers constituted only a minority of Zimbabwe’s population, as evidenced by the fact that the government’s attempt to amend the constitution in 2000 to allow expropriation without compensation was rejected by referendum. Thus, according to the tribunal, the government could not properly classify the situation as a “State-wide interest,” and in fact, never enacted any emergency legislation to deal with the crisis. Moreover, the tribunal found that, by discriminating along racial lines, these actions breached an essential interest of the international community as a whole, which precluded Zimbabwe from justifying them based on its own essential interest.
The tribunal additionally found that not only could the government have done more to prevent the invasions, but also it actively encouraged and aided them to boost its flagging popularity amongst its core base. The government’s true motive in expropriating the land was holding onto its power, not addressing a national crisis or remedying historical anti-indigenous land policies, the tribunal held.
The tribunal assesses unconventional remedies
In addition to expropriation and FET, the tribunal ruled Zimbabwe also breached the non-impairment, full protection and security, and free transfer of payments provisions of the BITs. To remedy these violations, the tribunal took the unconventional step of ordering Zimbabwe to make restitution by reissuing title to the properties it seized in 2005. Restitution is rarely awarded in international investment disputes either because of material impossibilities, like irreparably damaged property, or because claimants merely prefer compensation for its simplicity and ease of enforcement, the tribunal speculated.
To warrant this unique remedy, the tribunal explained, restitution must be neither materially impossible nor disproportionate to the benefit derived; mere practical or legal difficulties do not rise to the level of material impossibility. Zimbabwe argued restitution would create chaos, but the tribunal considered that the claimants already occupied most of the land, the property damage was not irreparable, and reinstating title would be a simple administrative act. Moreover, returning title would give the claimants the ability to initiate legal action against the settlers in local courts, and any chaos resulting from their eviction would be a matter for local police. Consequently, the tribunal held that restitution was not materially impossible, and because it only applied to the claimants (rather than everyone who had their land expropriated), the burden was also not disproportionate to the benefit.
The tribunal reasoned that, if restitution were insufficient to restore the status quo ante, it could also award other forms of reparation. Holding that further compensation was necessary, it assessed US$64 million in monetary damages to make up the difference between the properties “as is” and their condition “but for” the expropriation.
The tribunal took another rare step by assessing an additional US$1 million in moral damages. Relying on the claimants’ mostly unchallenged testimony, the tribunal found the settlers had kidnapped, threatened, and physically attacked the claimants and their employees. It held that, even if Zimbabwe were not directly responsible for these attacks, the failure of the police to prevent them over the course of several years would fall short of a state’s obligation to provide full protection under the law.
If Zimbabwe returns the titles, it will owe US$65 million, but if it fails, it will owe US$196 million. In November 2015, Zimbabwe moved to annul the award.
Notes: The tribunal was composed of L. Yves Fortier (President appointed by agreement of both parties, a Canadian national), David A.R. Williams (claimant’s appointee, national of New Zealand), and Michael Hwang (Zimbabwe’s appointee, Singaporean national). The award on merits is available at http://www.italaw.com/sites/default/files/case-documents/italaw7095_0.pdf.
Authors
Matthew Levine is a Canadian lawyer and a contributor to IISD’s Investment for Sustainable Development Program.
Stefanie Schacherer is a Ph.D. candidate and a Teaching and Research Assistant at the Faculty of Law of the University of Geneva.
Inaê Siqueira de Oliveira is a Law student at the Federal University of Rio Grande do Sul, Brazil.
Martin Dietrich Brauch is an International Law Advisor and Associate of IISD’s Investment for Sustainable Development Program, based in Latin America.
Jacob Greenberg is a Geneva International Fellow from the University of Michigan Law School and an extern with IISD’s Investment for Sustainable Development Program.
