Category Archives: Case summaries

Case Summary: Rusoro v. Venezuela

Moulting gold at a factoryThis case summary is based on the August 2016 award in the case between Rusoro and Venezuela.

Venezuelan president Hugo Chavez nationalized the Venezuelan gold sector through an official decree during the summer 2011. The decree meant that the state took over all assets and rights from foreign gold companies active in the country, and that private companies were prohibited from exporting gold out of Venezuela.

Rusoro, a Canadian company with extensive gold production investments in Venezuela, claimed that the decree violated the bilateral investment treaty between Canada and Venezuela.

During the arbitration, the state did not deny that an expropriation had taken place, but it claimed that it was done in a legal manner (the state did contest the tribunal’s jurisdiction and Rusoro’s damage claims).

The tribunal rejected some of Rusoro’s claims on procedural grounds but found that the state had unlawfully expropriated the investor’s assets. Although the tribunal did concede that Venezuela had a right to expropriate on political grounds, and that it had done so in accordance with its own laws and in a non-discriminatory manner, it said that the state should have compensated Rusoro. Since no compensation had been paid, Venezuela had violated the treaty.

A large part of the award deals with the quantification of Rusoro’s losses (i.e. how much the state should pay as compensation for the expropriation). After hearing both sides’ economic experts, the tribunal valued Rusoro’s losses to $1,2 billion plus interest.

Case Summary: Windstream Energy LLC v. Canada

River Skyline Overlooking Detroit, Michigan as seen from Windsor, OntarioThis case summary is based on the award, which was rendered on September 27, 2016 and published a few months later.

Windstream is an American company, which invested in one of the world’s largest offshore wind power parks, to be located in Lake Ontario. The park has not yet been built, however, and according to Windstream this is due to the Ontario province’s illegitimate cancellation of the project.

In 2010 Windstream received a 20-year contract with Ontario to build the park and initiated the preparatory investments. Shortly thereafter, the province launched a public consultation. In February 2011, the result of that consultation prompted the energy authority in Ontario to halt the project, in order to conduct more scientific studies into the park’s effect on its surroundings.

That paus is still in force and the park has not been built. When Windstream initiated arbitration in 2014, the company argued that Ontario de facto had cancelled the project, since Windstream no longer could meet the deadlines needed to make the project commercially viable. According to Windstream, the conduct violated NAFTA and the company therefore sued Canada, as responsible under international law for the conduct of public bodies in the provinces.

In the award, the arbitral tribunal did not find that the Windstream’s investment had been expropriated, since the company had not been deprived of its assets: the 20-year contract is still in force and could be re-negotiatied.

The tribunal did find, however, that the “fair and equitable treatment” clause of NAFTA had been violated. Although the tribunal stated that the province’s original purpose with the temporary paus seemed genuine, it found that the purpose had not been followed up over time: for example, very little scientific study seems to have taken place. In those circumstances, it was not reasonable to leave Windstream in a “limbo” for such a long time.

Canada was therefore found to be in breach of NAFTA and ordered to compensate Windstream for its losses amounting to some €21 million. This sum was significantly lower than what Windstream had asked for, but the tribunal emphasized that the investor’s contract was still in force and could be re-negotiatied, a fact which limited the losses sustained by the investor.

We have earlier published a summary of a similar dispute, which also arose out of the production of wind power in Ontario. In that case, Mesa v. Canada, the state was successful on all points.

 

Case Summary: Pac Rim Cayman LLC v El Salvador

Inside of salt mine shoot on corridorOur next case summary is Pac Rim Cayman LLC v. El Salvador and the summary is prepared based on the award rendered in October 2016.

The claim was brought based on the Central America Free Trade Agreement (CAFTA) and El Salvadoran Investment Law.

The investor held an exploration permit for a largely-underground gold mining site in Eldorado and further applied for an exploitation permit.  The dispute arose from the government’s refusal to grant exploitation license, which, according to the investor, amounted to several breaches of El Salvadoran Investment Law.

Meanwhile, the state based its refusal on the failure of the investor to obtain either ownership rights to all of the surface land in the concession area, or authorisations from all relevant landowners, as required under the Mining Law.

The tribunal decided to hear the claims under El Salvadoran law, which was allowed under the ICSID Convention, after it ruled that it did not have jurisdiction under the CAFTA.

The tribunal sided with the state and disagreed with the investor’s interpretation of the Mining Law which would not require authorisations from surface-level landowners if the activity does not involve surface-level land. According to the tribunal, the mining might pose environmental risks to surface landowners. Therefore, the investor’s interpretation was disproportionate to the risks.

In conclusion, the tribunal found that the investor did not comply with the requirement under the Mining Law to be granted an exploitation permit and therefore the government did not have any obligation to grant such permit to the investor.

The investor was also ordered to pay the majority of the state’s costs in the proceedings.

See other case summaries involving the mining industry here.

 

Philip Morris v. Uruguay

Blogg_v34Our next case summary is Philip Morris v. Uruguay. This summary is prepared based on the publicly-available award rendered in July 2016.

The case reminds us of the one between Philip Morris and Australia. In both cases, Philip Morris claimed that their investment had lost value due to a new tobacco legislation and therefore the company is entitled to compensation.

The case against Australia was dismissed at an early stage, when the tribunal held that Philip Morris unlawfully took advantage of a subsidiary in order to get access to ISDS. Therefore, the tribunal did not examine the main issue of the case, which was the tobacco legislation itself. Meanwhile, the dispute with Uruguay went all the way to the assessment of the measure in dispute, and the majority of the tribunal found that the Uruguayan tobacco legislation did not violate the bilateral investment treaty between Switzerland and Uruguay (BIT).

Philip Morris based its arguments on two main parts of the Uruguayan legislation: first was the decision by the country’s Ministry of Health that bans selling different types of presentations of the same brand of cigarettes (it is not allowed to sell a product that is ”light”, ”menthol” or ”gold”). The second is a presidential decision which requires that the images of health warning on cigarette package increase from 50% to 80%.

The company argued that these measures violated several provisions in the BIT, including a violation of its intellectual property rights.

In the 300-page award, the tribunal asserted that intellectual property rights are indeed protected by the BIT – however it did not find that the state violated the agreement as the company failed to prove that it had suffered a level of damage required to find violation. Further, according to the tribunal, the state has a large policy space to implement reforms aiming to protect legitimate interest – and therefore this type of measure cannot be considered an expropriation or a breach of the fair and equitable treatment standard of protection as long as they are made on rational grounds and in good faith. It found that Uruguay had a genuine interest in protecting public health – and that the government adopted the reforms in a serious and well-motivated manner.

Another argument by Philip Morris was that it was denied a fair trial in the Uruguayan courts, where the company had first tried to appeal the tobacco measures. The company claimed that two different instances of court system in the country had ruled contrary to each other. In this case, even though the Supreme Court sided with the company, an administrative court chose ignore the Supreme Court and rejected the company’s appeal. The tribunal agreed that this was strange but at the same time viewed that this fact was not enough to consider that Philip Morris had been denied a fair trial.

Because Philip Morris’ claims were dismissed on its entirety, the company was ordered to pay the entire cost of the dispute, as well as 70% of Uruguay’s legal fees.

Transglobal Green Energy v. Panama

Panama2016This case summary is based on the publicly-available ICSID award in the case between the American company Transglobal Green Energy (”Transglobal”) and The Republic of Panama. In the award from June 2, 2016, the arbitral tribunal rejected the case early on and found that the investors attempted to abusively create jurisdiction under an investment treaty.

The case centered around a hydro-electric power plant in Panama. A company owned by Panamian national Julio Cesar Lisac had been awarded a concession to operate the plant for 50 years. After the first year, the Panamian authorities found that Mr. Lisac’s company did not meet the requirements of the concession and therefore terminated the agreement (and later awarded the concession to another company). Mr. Lisac challenged this termination in Panamanian courts.

Subsequent to the termination of the concession, Mr. Lisac transferred part of his company’s interests in the power plant project to Transglobal, a company incorporated in Texas. Using Transglobal’s American nationality, an arbitration was brought against Panama based on the bilateral investment treaty (”BIT”) between USA and Panama. The investors alleged that the termination of the 50-year concession was made in violation of the BIT.

The arbitrators found that they did not have jurisdiction over the case and thus rejected the claim early in the proceedings. Since Mr. Lisac and his comapny both had Panamanian nationality, the move to transfer the interests in the power plant to American-incorporated Transglobal was held to be made with the only purpose of obtaining protection under the BIT between USA and Panama. Therefore the tribunal stated that the investor attempted to create ”artificial jurisdiction over a pre-existing domestic dispute”, thereby abusing the system of investment treaty arbitration.

The tribunal’s reasoning was similar to that in Philip Morris v. Australia, where another tribunal refused to hear Philip Morris’ claims because they were found to constitute an abuse of the investment treaty system.

Both these recent cases demonstrate that there is no room to exploit ISDS to bring unjustified claims. One academic recently described this as a tendency by tribunals to ”police the gates to investment treaty claims against states”.

Mesa Power Group LLC v. Canada

Array of wind power station at the sunsetOur next case summary is Mesa Power Group LLC v. Government of Canada, an arbitration under Chapter 11 of NAFTA. This summary is prepared based on the publicly available award rendered on 31 March 2016.

The claimant in this case was Mesa Power Group LLC (“Mesa”), a U.S. corporation that oversees and develops renewable energy projects, notably in the wind sector. Mesa’s claims centered on the Government of Ontario’s Feed-in Tariff program (the “FIT Program”), enacted to promote the generation and consumption of renewable energy in the province. Under this program, generators of renewable energy could apply for a 20 or 40-year power purchase agreement (a “FIT Contract”) that would guarantee a certain price per kWh for electricity delivered into the Ontario electricity system. Participants in the FIT Program had to satisfy a certain domestic-content requirement, meaning that the 25-50% of the equipment used must be made in Canada. Mesa filed six applications under the FIT Program, but was not awarded any FIT contracts.

Mesa filed for arbitration under NAFTA Chapter 11, claiming that the government had acted in an arbitrary and discriminatory manner in awarding FIT contracts. Specifically, Mesa argued that the program’s domestic-content requirement was impermissible under NAFTA, that the awarding of FIT contracts was irregular and resulted in discrimination against Mesa, and that the government’s changes to the FIT program after applications had been received amounted to arbitrary and unfair treatment. Mesa sought more than CAD 650 million in damages.

Responding to Mesa’s claims, Canada argued the acts of the Ontario Power Authority were not covered by the obligations in Chapter 11 of NAFTA; and that even if the acts were covered, Article 1108 excludes procurement programs from protection under the principles of National Treatment and Most-Favored-Nation (“MFN”) Treatment. Finally, Canada maintained that Mesa had not been treated less favorably than other Canadian or U.S. investors.

In its award, rendered on 31 March 2016, the arbitral found that the claims did properly fall within Chapter 11 of NAFTA, but that the FIT program had not constituted a breach of Canada’s obligations under that treaty. Specifically, the tribunal agreed with the respondent state that, under Article 1108, procurement programs are excluded from Chapter 11’s National Treatment and MFN clauses. The tribunal further concluded that Canada’s conduct in implementing the FIT Program had not breached the “fair and equitable treatment” standard of Article 1105.

The tribunal noted that “at least some criticism” could be levelled at the government’s policy choices and actions with respect to its renewable energy programs. The tribunal concluded, however, that “judged in all the circumstances, this is not criticism that reaches the threshold of a violation of Canada’s international obligations.” Mesa’s claims were thus dismissed in their entirety, and Mesa was ordered to bear the costs of the arbitration, including a portion of Canada’s cost of legal representation.

Philip Morris Asia Limited v. Australia  

Cigarette on the foreground and many cigarettes on a backgroundOur next case summary is Philip Morris Asia Limited v. the Commonwealth of Australia. This summary is prepared based on the publicly-available award rendered on 17 December 2015.

The claimant in this case was Philip Morris Asia Limited (PM Asia), a Hong Kong-registered company. As a result of a corporate restructuring within the Philip Morris group in 2011, PM Asia acquired indirect ownership in an Australian subsidiary, Philip Morris Limited (PML), which sells tobacco products in Australia under different brands.

The dispute arose from the introduction of the so-called plain packaging legislation for tobacco products sold in Australia which aims to reduce smoking. The legislation in essence prohibits use of trademarks, symbols, graphic or images on tobacco products and packaging. Tobacco packaging may only display the name of the tobacco company in standard font and size and this means that it may be difficult for consumers to distinguish one brand from another.

PM Asia initiated an arbitration proceeding under the UNCITRAL Arbitration Rules at the Permanent Court of Arbitration in The Hague in 2011 on grounds that the plain packaging legislation had restricted the use of trademarks by PML on its tobacco packaging.  This restriction, according to PM Asia, constituted an expropriation under Australia –Hong Kong bilateral investment treaty (BIT).

Australia submitted jurisdictional objections, among others things, that PMA’s investment in PML was made only in order to be able to bring an arbitration claim under the BIT. PM Asia commenced the arbitration shortly after it acquired PML and therefore, according to Australia, this should be considered an abuse of rights.

In a recently-published jurisdictional award, the tribunal noted that, based on case law, an arbitration claim constitutes an abuse of rights when an investor has changed its corporate structure to gain the protection of an investment treaty at a point when a specific dispute was foreseeable.

In this particular case, the tribunal observed that PM Asia was aware that the Australian government would pursue the plain packaging policy when it acquired PML. The government had signalled its intention to introduce this policy as early as in 2008, and therefore the dispute was considered to be foreseeable to PM Asia. The tribunal further found that evidence showed that the main and determinative reason for the corporate restructuring was the intention to bring a claim under the BIT, using the Hong Kong entity as claimant.

Based on these facts, the tribunal dismissed the claim on grounds that the commencement of the arbitration by PM Asia constituted an abuse of rights.

Case summary: Nykomb v Latvia

Latvia_Nykomb

This summary is prepared based on the publicly-available award rendered in December 2003. The case concerned an alleged discriminatory treatment by Latvian state, through its state-owned company, against a foreign investor in electricity industry.

Nykomb Synergetics Technology Holding AB (“investor”) is a Swedish company that had a business in electricity generation. It wholly-owned Windau, a Latvian subsidiary company.

In 1997, Windau and Latvenergo, a Latvian state-owned company, concluded a contract in which Windau was to build a plant that will produce electric power. Latvenergo, in turn, was to purchase the power from the plant.

The dispute revolved around electricity pricing, where the investor claimed that Latvian law guaranteed Windau a multiplier of two (double tariff) for the first eight years of the plant operation. The law was changed in 1998 to provide a 0.75 tariff. Latvenergo refused to pay double tariff to Windau and contended that the correct multiplier was 0.75.

The investor brought an ISDS claim against Latvia under the Energy Charter Treaty (ECT), claiming among others that this treatment was discriminatory.

The tribunal sided with the investor and held that according to Latvian law and the contract between Windau and Latvenergo, Windau had a right to a double tariff in the first eight years of the plant’s operation. In this case, the Latvian state was responsible for Latvenergo’s refusal to pay double tariff because Latvenergo was “clearly an instrument of the State in the highly regulated electricity market”.

Further, the tribunal found that Windau has been subject to a discriminatory treatment since Latvenergo were paying double tariff to two Latvian companies. It went on to say that there was no legitimate reason to treat Windau differently than those two companies.

The tribunal ordered Latvia to compensate the investor for the loss suffered before the award was rendered and to pay double tariff for the remainder of the eight years. However, it refused to award compensation for future loss on grounds that this was too uncertain and speculative.

Ensuring ISDS rule-of-law outcome

AnullmentBlogAs a matter of principle, the outcome of ISDS proceeding, which is the arbitral award, is final and binding. This very feature has made international arbitration a success since it provides a speedy and efficient outcome for both states and foreign investors. International rules such as the ICSID Convention and the New York Convention provide mechanisms to ensure respect for the rule of law outcome in the proceedings. Where a breach of the conventions has occurred, this could result in an annulment or refusal of enforcement of the award.

The ICSID Convention has 153 state parties and most ISDS proceedings are conducted under this convention. The convention provides that both the state and foreign investor can request the award to be annulled for limited procedural reasons. Annulment is fundamentally different from appeal, as it only targets the legitimacy of the decision-making by the tribunal, and not the substantive correctness of the award.

Under the ICSID Convention, an award can be annulled for reasons of flaws on the part of the tribunal, among others, if it has manifestly exceeded its powers or if there was corruption by a member of the tribunal. Further, a serious departure from a fundamental rule of procedures is also a ground for annulment. The Chairman of the ICSID Administrative Council will assign an annulment committee to decide on a particular annulment proceeding.

In Enron v. Argentina, the committee found that the tribunal erred by too simply and quickly drawing legal conclusions from economists’ expert reports. By evaluating Argentina‘s defences in a manner that was so incomplete, according to the committee, it amounted to a failure to apply the applicable law. The award was therefore annulled.

The annulment committee also sided with the state in Klöckner v. Cameroon, where it held that the tribunal assumed that certain principles applied to the case, such as principles of loyalty and openness, rather than actually demonstrated that these principles existed. Therefore, the annulment committee found that the tribunal had manifestly exceeded its powers.

Outside the scope of the ICSID system, the New York Convention serves as an enforcement and recognition tool for arbitral awards. It provides that a domestic court may refuse to enforce an arbitral award on grounds, among others, that a party to the dispute was not given opportunity to present its case or if the award contains matters on issues beyond the scope of the arbitration agreement.

When States file claims against investors in ISDS

CounterclaimsMost ISDS disputes are based on agreement between states, usually bilateral investment treaties (BITs), which aim to provide protection under international law to foreign investors. Since only states are parties to the agreements, it is also only states that have obligations under these agreements. Obligations aimed to give rights to foreign investors. Therefore ISDS clauses are designed so that a proceeding can only be initiated by the foreign investor, not by the state. But there are exceptions.

A state that is being sued may respond by claiming that the investor also breached its obligation, through a counterclaim. This is possible under most investment agreements and arbitration rules as long as the state’s counterclaim is clearly connected with the main dispute. There are many examples of counterclaims, but a notable case is Ecuador’s successful counterclaim against Perenco.

This high-profile ISDS case was an ICSID proceeding in which Perenco initially brought a claim against Ecuador due to changes in Ecuadorian legislation, which, according to Perenco, violated its rights under the investment agreement. Ecuador launched a counterclaim against Perenco, claiming that Perenco violated Ecuadorian environmental legislation, including by not informing the state of several oil spills. According to Ecuador, the failure had led to several environmental disasters in the Amazon, and Ecuadorian environmental laws provide that the company must reimburse the state with USD 2.5 billion for cleaning up of the spills.

The tribunal in Perenco v. Ecuador issued a decision in which they indicated that Ecuador’s allegations at first sight seemed justified but that it was unlikely that the damages could be as large as USD 2.5 billion. Although the tribunal seemed to agree with Ecuador’s argument, it also viewed that it would require a long and expensive investigation to determine the damages, and encouraged the parties to reach a settlement. Negotiations are still ongoing. Meanwhile, Ecuador has launched counterclaims against another energy company with similar factual circumstances, and the case is also still pending.

States have also brought claims against investors directly, which is possible under the ICSID Arbitration Rules. There have been ICSID cases in which the state sued the foreign investor for alleged breach of contract, such as Gabon v. Société Serete S.A. and Tanzania Electric Supply Co. Ltd. v. IPTL (which was launched by Tanzania’s state owned power company, but where, in practice, the state stood behind the process). Another example is when East Kalimantan (a province of Indonesia) launched an ICSID case against several coal mining companies having operation in the province, arguing that these companies had a divestment obligation. The tribunal found that it did not have jurisdiction to hear the dispute. In these types of cases, it is common that the case is not based on agreements between states, but a direct agreement between the state and the investor.