Investment Arbitration Reporter

By Luke Eric Peterson

In the first arbitration claim known to have arisen under the UK-Tanzania investment treaty,an ICSID tribunal has held that Tanzania breached 4 different provisions of the treaty – even as the investor’s claims for damages were dismissed. (For background on the case, see this accompanying report.)

Notably, the tribunal held that Tanzania committed an expropriation of Biwater Gauff (Tanzania) Ltd.’s contractual rights to operate water and sewerage services in Dar es Salaam.

For its part, BGT had urged the tribunal to disregard the actual performance by each party under the contract. On this view, the ultimate termination of the contract served to eclipse any of these contractual performance questions, leading to an inarguable act of expropriation.

Further, BGT objected to the summary manner in which this alleged expropriation was carried out. In addition, BGT also alleged an expropriation had occurred by virtue of the subsequent move by the Tanzanian Government to physically occupy City Water’s offices, usurp management control, and deport key executives.

The Government of Tanzania sought to rebut these claims by arguing that BGT, quite simply, had nothing to be expropriated. Lawyers for the Republic argued that there were no rights of value by the time of the alleged expropriative acts in May-June 2005, as City Water was losing money at a precipitous (and certainly fatal) rate by the time of the alleged expropriation.

Tanzania seeks margin of appreciation in choosing its response to “crisis”

In the ICSID proceeding, Tanzania urged that it be accorded a certain measure of appreciation– i.e. deference – when it came to the Government’s handling of the situation. In specific terms, Tanzania noted that the likely collapse of City Water could have threatened the supply of water and sewerage, and, hence, public health and welfare. In the tribunal’s recounting of Tanzania’s position, it was argued that “water and sanitation services are vitally important, and the Republic has more than a right to protect such services in case of a crisis: it has a moral and perhaps even a legal obligation to do so.”

(The pleadings by the parties are not in the public domain, so the ambiguity with respect to whether Tanzania felt itself to be under a binding legal obligation to protect water services is not susceptible to further analysis here)

The request by Tanzania for a measure (or margin) of appreciation remains somewhat of an emerging line of argument by Governments in investment arbitration cases, but draws upon the deference which is customarily accorded to governments in certain other areas of international law (for e.g. human rights law) when it comes to determining the appropriate means of complying with their international obligations. It is much rarer in the investment arbitration context – at least to date – for adjudicators to expressly grant such a measure of appreciation to governments. Indeed, in the BGT case, the tribunal does not enter into a discussion as to the level of deference that might be owed to governments.

Rather, the tribunal took the view that “there was no necessity or impending public purpose to justify the Government’s intervention in the way that took place” - thereby obviating any inquiry into the level of deference to be accorded to a government in such circumstances.

Expropriation breach found

Ultimately, the tribunal would hold that several actions complained of by Tanzania had the “cumulative” effect of breaching the expropriation provision of the treaty. The tribunal rejected a claim that the mere move by DAWASA to pursue the termination of its contract with City Water (a move which City Water challenged in a contract-based arbitration) amounted to an expropriation. Rather, “a series of steps were taken by the Republic which could not be characterised as the ordinary behaviour of a contractual counterparty, and which adversely impacted upon City Water’s rights (albeit that by this stage, those rights were at most rights to have a contractual termination procedure progress without interference).”

In essence, the arbitrators held that Tanzanian officials inflamed and exacerbated tensions – leading to the ultimate expropriation finding - by virtue of a series of political statements, as well as the subsequent take-over of City Water’s offices and deportation of its managers.

While the arbitrators concurred in holding that certain actions amounted to an expropriation, they differed in one respect. The majority declined to examine whether Tanzania may have misused a portion of the performance bond posted by BGT, when the bond was subsequently called in by DAWASA and disbursed – allegedly including to provide seed money for a new public entity which replaced City Water. Whereas the majority deemed this a contractual matter which should be resolved by arbitration under the contract, and found that the evidence was inconclusive as to how the performance bond proceeds had actually been used, arbitrator Gary Born in a Separate Opinion, dissented from that holding.

Tribunal’s holdings on remedies owing to BGT

When it came to the assessment of remedies for the treaty breaches, the terminal state of BGT’s investments at the time of the treaty breaches loomed large. Notably, BGT had argued that a Discounted-Cash-Flow analysis (which would have assessed the future profits of the investment and the discounting of these to present net value) was not appropriate for purposes of calculating the “fair market value” of its investments. Rather, the investor claimed for all of the various expenditures by BGT, as well as the opportunity costs of having made those investments.

Tanzania protested that BGT had tallied up every conceivable expenditure and then tacked on a 20-25% assumed return – bearing little relationship to the reality of the investment. According to the Government, “fair market value” is what an informed hypothetical willing buyer would pay for City Water’s (worthless) investments.

Indeed, Tanzania insisted that the real cause of City Water’s losses was not the actions taken by Tanzania, something which the tribunal held it was critical to investigate. For its part, the tribunal noted that any claim for compensation would not succeed if there were not a sufficient causal link to the actual treaty breaches. Ultimately, the tribunal was convinced that the poorly prepared and executed project was essentially worthless before the various treaty breaches were committed by Tanzania in May and June of 2005.

In a Separate Opinion, arbitrator Gary Born diverged from his colleagues Bernard Hanotiau and Toby Landau, in that he held that the majority’s analysis “confuses issues of causation, on the one hand, and quantification or quantum of damages, on the other”. While conceding that this distinction was not decisive on the facts of the case (i.e. agreeing that City Water had no economic value at the time of the breaches), Mr. Born contended it could be decisive in other cases.

On his analysis, an “injury” was clearly caused by the wrongful seizure of BGT’s assets, and international law demands that injuries be accompanied by a remedy. Indeed, Mr. Born would go on to disagree with the majority’s decision to have the parties split the costs of the proceeding and to bear their own legal costs.

Mr. Born felt that some further remedy was owing, beyond a mere declaration of treaty, so as to better advance the objectives of bilateral investment treaties and the ICSID Convention.

Mr. Born noted that this might have taken the form of an award of costs or perhaps moral damages (which had not been specifically claimed by BGT).(It is commonplace in investment treaty arbitrations for arbitrators to award pecuniary damages (i.e. compensation for financial losses suffered by an investor). However, in a notable February 2008 ruling at ICSID, an investment treaty tribunal also awarded so-called “moral damages” to a company whose executives claimed that they had suffered the “stress and anxiety of being harassed, threatened and detained” and intimidated by state agents and armed tribes.*

The tribunal found that the company’s reputation, and the physical health of the executives, had been affected by the mistreatment suffered, and the tribunal awarded 1 Million (US) Dollars in moral damages.)

However, any claim of moral damages by BGT in its dispute with Tanzania would have had to reckon with the holding by the majority in the final paragraph of the award that it would not have looked favorably on a claim by BGT for moral damages, in light of the circumstances of the case, and in particular the investor’s conduct.

For further analysis of other holdings in this case, see our other report: http://www.iareporter.com/articles/20091229_8

* Desert Line Properties v. Republic of Yemen, Award of February 6, 2008, available on-line at: http://ita.law.uvic.ca/documents/DesertLine.pdf

Investment Arbitration Reporter is a specialized news publication tracking developments in the area of international investment law and policy.

The publication does not offer legal or financial advice or recommendations of any kind.
 
To offer news-tips or comments, email the Editor, Luke Eric Peterson, at: editor@iareporter.com