Category Archives: Case summaries

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.

Case Summary: Adel A Hamadi Al Tamami v. Sultanate of Oman

?????????????????????????????????This summary is prepared based on facts described in the award rendered in October 2015.

The investor made an investment in the development and operation of a limestone quarry in Oman through two lease agreements between his corporations and an Omani state-owned enterprise. The dispute arose mainly because of the termination of the lease agreement by the Omani SOE. In addition, the investor based his claim on his arrest and prosecution by the Omani authorities relating to unlawful operation of the quarry.

The investor brought the claim under the U.S – Oman Free Trade Agreement, arguing that the measures by the Omani authorities constituted violation of fair and equitable standard treatment and that it amounted to expropriation.

The tribunal found that it had no jurisdiction to decide on termination of the first lease agreement because it had ceased to exist before the U.S – Oman FTA came into force. Further, the tribunal rejected the expropriation claim due to the termination of the second lease agreement by the Omani SOE, asserting that this action was not attributable to the Omani State.  According to the tribunal, the SOE did not exercise the necessary governmental authority for its actions to be considered those of the Omani State.

The arrest and prosecution of the investor, according to the tribunal, did not amount to a violation of fair and equitable treatment standard protection. The tribunal took note of the fact that the investor was prosecuted and later acquitted for, among others, alleged violation of environmental law by operating quarries without necessary permits. However, in the view of the tribunal, a state must be able to take a legal position when it comes to alleged violation of its laws, even if that position turns out to be wrong, provided it does so in good faith and with appropriate due process.

The Tribunal agreed that in this case, Oman had to defend itself against claims that had been “entirely unmeritorious”. Accordingly it ordered that the investor pay to the Omani State as respondent 75% share of its total litigation costs.

Guest blog in Swedish: The first award in solar panel cases against Spain

Solar panels behind fenceIn a guest blog in Swedish this week, Jonas Hallberg, an analyst at the Swedish National Board of Trade, has written about Charanne B.V. & Construction Investments S.A.R.L v. Spain. The award is the first that has been rendered among at least 26 disputes regarding Spain’s measure to reduce incentives for solar panel sectors.

The award is published and can be downloaded in Investment Arbitration Reporter website.

The investors brought the claim under the Energy Charter Treaty, arguing that the measure violated fair and equitable treatment standard and that it constituted indirect expropriation.

The tribunal rejected the investors’ claims in its entirety and ordered the investors to pay Spain’s legal costs which is equivalent to EUR 1.3 million.

Peter Allard vs. Barbados: Investor argues breach of environmental laws

KingfisherPeter Allard, a Canadian investor who owns a nature sanctuary in Barbados, has brought an ISDS claim against Barbados. In a nutshell, he grounds his claim on the failure of the government of Barbados to enforce its own environmental law which, as a result, has polluted his sanctuary. He is also accusing Barbados of refusing to abide by its international obligations under the Convention on Wetlands and Convention on Biological Diversity.

The actions and inactions by Barbados, according to the investor, have destroyed the value of his investment in the sanctuary. The claim is brought under Canada – Barbados Bilateral Investment Treaty (BIT).

The sanctuary, which is an eco-tourism facility, consists of almost 35 acres of natural wetlands situated on the Graeme Hall wetlands, a site protected under the Convention of Wetlands of International Importance in the south coast of Barbados. Mr Allard, as written in his notice of dispute, made investment in this sanctuary with the purpose to conserve the environmental heritage of Barbados.

The investor claims that Barbados has failed to accord him full protection and security under the BIT. Among other things, the investor points out that Barbados has failed to prevent the Barbados Water Authority, a state agency, from repeatedly discharging polluted substances from a sewage treatment facility into the Graeme Hall wetlands. The investor also asserts that Barbados has failed to operate drainage structures into the wetlands that regulate its biological health.

In addition, the investor argues that Barbados has violated fair and equitable treatment standard protection under the BIT due to a change of land use that allows run off of pollution into the sanctuary. The investor underlines that he made the investment in the sanctuary because of Barbados’ previous regulatory frameworks that he believed will protect the environment.

The case is still pending and administered by the Permanent Court of Arbitration in the Hague. Barbados’ reply to this claim is not publicly available and therefore the response of the state is still unknown.

The First ICSID Case of 2016: Al Jazeera v. Egypt

satellite dishAccording to the ICSID website, the first case registered in 2016 was an arbitration initiated by the global media company Al Jazeera against Egypt.

There have long been indications that Qatar-based Al Jazeera would seek compensation under the Qatar-Egypt bilateral investment treaty for injuries allegedly suffered since the Muslim Brotherhood was overthrown in 2013. In connection with the regime change, the new Egyptian government accused Al Jazeera of being a propaganda machine for the Brotherhood. The Financial Times reported on the dispute already in April 2014:

“The lawyers argue that by arresting and attacking Al Jazeera journalists, seizing the broadcaster’s property and jamming its signal, the Egyptian government has violated its rights as a foreign investor in the country and put the $90m it has invested in Egypt since 2001 at risk.”

It has been held that the arbitral tribunal to be appointed in the case will likely have to determine the extent to which media freedom is protected by the treaty. With this novel issue in the spotlight, the arbitration will likely be closely watched by the news media.

ISDS CASE SUMMARY: Maffezini v. Spain

GaliciaBlogOur next case summary is Emilio Augustin Maffezini v. The Kingdom of Spain (ICSID Case No. ARB/97/7). The summary was prepared based on the award rendered on 9 November 2000.

The claimant was an Argentinian individual who established and invested in a corporation named EAMSA, for the purpose of building a production facility for chemical products in Galicia, Spain. The project was a joint venture with the Sociedad para el Desarrollo Industrial de Galicia(SODIGA), a public-private entity with a mandate to encourage industrial development in Galicia. SODIGA provided the investor with assistance in the form of advice and financing.

The project eventually failed due to surging costs, and the investor filed for arbitration under the Argentina-Spain BIT. The investor claimed (1) that the project failed because SODIGA had given flawed advice underestimating the costs of the project, and (2) that SODIGA was responsible for the additional costs resulting from the Environmental Impact Assessment (EIA) because it had pressured EAMSA to begin construction before the EIA process was finalized. Spain contested the allegations, stating that SODIGA was a private company whose acts were not attributable to the state, and that the investor had assumed any risk relating to the feasibility and profitability of his investment.

On the issue of state attribution, the tribunal found that some of SODIGA’s functions were governmental in nature while others were commercial. Accordingly, the tribunal found that it was necessary to categorize the various acts or omissions giving rise to the dispute. On the investor’s main claim – that SODIGA’s bad advice was responsible for the project’s failure – the tribunal found that even though SODIGA officials had provided certain assistance relating to the project’s costs and returns, that assistance did not amount to a public function attributable to the state. Moreover, the investor was, simply put, responsible for his own investment. The tribunal explained:

“Bilateral Investment Treaties are not insurance policies against bad business judgments. While it is probably true that there were shortcomings in the policies and practices that SODIGA and its sister entities pursued in the here relevant period in Spain, they cannot be deemed to relieve investors of the business risks inherent in any investment.”

The claimant also contended that SODIGA was responsible for the additional costs resulting from the EIA, which lead to the investor’s decision to stop the construction work and call off the project. In this regard, the tribunal concluded that the investor should have known that the project – a chemical plant – would require an EIA. According to the tribunal, the investor had known about the EIA requirement from the beginning of the project, but had tried to minimize it so as to avoid additional costs or technical difficulties.

For these reasons, the tribunal found that Spain could not be held responsible for the investor’s losses.

Arbitrators’ expertise makes ISDS strong

???????As investment and trade develop, disputes will be more diverse. Looking back at history, the International Center for Settlement of Investment Disputes (ICSID) only registered 28 ISDS cases during the first two decades after its establishment. In contrast, there have been 38 cases registered at the ICSID in the year 2014 alone. The substantive issues of disputes have become more diverse, and therefore a wider range of expertise is needed to solve the disputes.

One cannot perceive how future disputes will look like and what expertise will be required. At the same time, the quality of ISDS outcome needs to be ensured. The current practice has served this purpose by allowing parties to the dispute and/or arbitration institutes to appoint arbitrators from a broad range of expertise, as opposed to a pre-determined list.

Let’s look at some of the cases. In Glamis Gold v. USA, the tribunal had to decide whether a requirement to conduct a certain mining technique had constituted an indirect expropriation. This case required expertise to assess the value of the mining project, including evaluation of mineral price. In fact, the tribunal contributed 100-page analysis only on this issue.

In another case, Methanex v. USA, the tribunal was faced with lengthy submissions from parties on whether or not a certain chemical for fuel production was dangerous for the environment. In addition, there have been other complicated disputes on, among other things, electricity pricing and gas pricing. The above cases are only small part in the big pool of ISDS cases which requires specific expertise.

The current system of arbitrator’s appointment has made international arbitration able to adapt with the present needs of dispute resolution. Most importantly, it can keep up with the trade development. It is therefore unwise to replace this important feature with a pre-determined list of arbitrators.

Case Summary No. 9: Compaña de Aguas & Vivendi v. Argentina

The water pipe which is connected to the pump swinging a foamy liquid.Our next case summary is Compañiá de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentine Republic. The summary was prepared based on the award rendered on 20 August 2007.

The investor was a French company and its Argentine affiliate who entered into a concession agreement with the Province of Tucuman to provide water and sewage services.

According to the investor, the Tucuman authorities – the legislature, the governor and the province’s regulatory authorities – relentlessly “attacked” the investor and the concession agreement almost from its inception. Investors claimed that these actions were taken with a view to pressuring them to renegotiate the tariffs of the concession.

Among other things, the investor pointed out to the statements made by the government that the water could cause cholera, typhoid and hepatitis and that the customers should not pay their bills. Further, the investor argued that the government used their regulatory powers to impose unilaterally modified tariffs, contrary to the terms of the concession agreement. In the end the investor terminated the concession agreement.

The investor brought the claim under the Argentina – France Bilateral Investment Treaty (BIT).

The tribunal found that there was a violation of fair and equitable treatment standard under the BIT. It noted that while it would have been entirely proper for a new government to seek to renegotiate a concession agreement in a transparent and non-coercive manner, it was unfair and inequitable to bring the investor to renegotiation table through threats of termination based on colourable allegations. The evidence did not show the existence of health risk from the water provided by the investor.

The tribunal further held that the actions of the government against the concession was equivalent to an expropriation as they had a devastating effect on the economic viability of the concession. The investor’s recovery rate declined dramatically over the life of the concession, among others because the government’s public statement asking the customers not to pay their bills. The tribunal reasoned that the investor had the right to expect that the government will not engage in damaging campaign against them. Therefore, according to the tribunal, the investor was radically deprived of the economic use of its investment.

Case Summary No. 7

Blue chemical cans all over. Outdoors on chemical plant.We continue our series of case summaries with SD Myers v. Canada, a NAFTA dispute decided under the UNCITRAL arbitration rules. The summary is based on the facts as described in the three separate awards rendered by the arbitral tribunal between November 2000 and December 2002.

S.D. Myers, Inc. (“SDMI”) is a United States corporation that processes and disposes of polychlorinated biphenyl (“PCB”), an environmentally hazardous chemical compound used in electronics manufacturing. SDMI created a Canadian affiliate with the aim of soliciting orders for the destruction of Canadian PCBs at its U.S. facility. The U.S. had banned the import of PCB from Canada in 1980, but granted SDMI an exception in 1995. Promptly after SDMI had been granted permission from the U.S. government to import PCB waste from Canada, Canada issued an order prohibiting the export of PCB waste to the U.S. The prohibition was in effect for approximately 16 months.

SDMI filed claims against Canada under the UNCITRAL Rules in October 1998, alleging that Canada’s ban on the export of PCB waste had violated several provisions of Chapter 11 of NAFTA. SDMI claimed that it had suffered economic harm to its investment through interference with its operations, lost contracts and opportunities in Canada. Canada maintained that the ban had been motivated by environmental concerns.

In its first partial award, on liability only, the tribunal found for the investor with respect to its Article 1102 and 1105 claims, holding that Canada had violated NAFTA’s national treatment and minimum standard of treatment provisions. According to the tribunal, the evidence showed that Canada’s ban on PCB export was not driven by environmental concerns, as asserted by Canada, but intended primarily to protect the Canadian PCB disposal industry from U.S. competition. The investor’s claims regarding expropriation and performance requirements were dismissed. Canada challenged the award in its own federal court, on the grounds that the tribunal had exceeded its jurisdiction and that the award was against Canadian public policy. The court dismissed the challenge.

The tribunal issued two subsequent awards, on damages and costs, respectively. On damages, the tribunal reasoned that the investor may only be compensated for harm proximately caused by the breach of the specific NAFTA provision. According to this principle, indirect harm such as loss of opportunity or a damaged reputation are too remote to warrant compensation. The tribunal thus awarded SDMI damages of CAN$ 6 million, a fraction of the US$ 70 million claimed by the investor. 

Case Summary No. 6

Image of blurred store for backgroundOur sixth example of an ISDS case is Franck Charles Arif v. Moldova, a case filed with the International Centre for Settlement of Investment Disputes (ICSID) in Washington, D.C. The summary is based on the facts as described in the award rendered in April 2013.

The claimant, Mr. Franck Arif, a French national, was the sole owner of a company that had won a state tender to operate a series of duty-free stores at five locations along the Romanian border. The company had also secured the exclusive right to operate a duty-free store at the country’s main airport. In filing for arbitration, Mr. Arif argued that the success of his investments had been obstructed by a series of government delays, unnecessary inspections, and domestic judicial decisions that invalidated both the tender for the border-stores and the lease agreement for the airport store. Mr. Arif argued that the Moldovan state’s actions had violated several provisions of the bilateral investment treaty (BIT) between France and Moldova.

The arbitral tribunal rejected most of the claimant’s claims (e.g. expropriation, denial of justice, discrimination), but granted one of his claims based on the fair and equitable treatment standard set forth in the BIT. In short, the tribunal found that the state’s actions had frustrated the investor’s legitimate expectation of a secure legal framework in which to operate the airport store. For this breach, the investor was awarded USD 2.8 million in damages, significantly less than the USD 44 million he had requested. The tribunal also gave Moldova the option of further reducing the damages owed to Mr. Arif by offering restitution instead—in effect allowing him to re-open the store at issue.

Mr. Franck Arif also sued Moldova at the European Court of Human Rights in Strasbourg, on the grounds that the Moldovan government’s actions breached the European Convention on Human Rights. Disputes before European Court last many years; no verdict has yet been reached in the case filed by Mr. Arif.