Before the Other Shoe Drops (II): The First ICSID Final Award in the Spanish Renewable Energy Arbitration Saga Finds for the Investors – Crossing the Line?

by Clifford J. Hendel, Araoz & Rueda Abogados

The following updates the author’s entry September 2015 in this blog entitled “Before the Other Shoe Drops: The Current State of Renewable Energy Arbitration in Spain.” 

In recent years, some 30 cases have been filed — under SCC, UNCITRAL and (principally) ICSID rules — alleging that Spain breached the Energy Charter Treaty (ECT) when it altered the regulatory framework governing investments in the renewable energy sector.

During the course of 2016, final awards were issued in favor of Spain in two cases challenging certain  regulatory changes in the photovoltaic sector heard under the auspices of the Stockholm Chamber of Commerce (SCC).  Now, in a landmark award issued on 4 May 2017, an ICSID tribunal has found in favor of the claimant investors in a case challenging a series of more recent changes impacting the thermo-solar sector.

The Tribunal awarded damages of € 128 million plus interest to investors Eiser Infrastructure Ltd of the UK and its subsidiary Energia Solar Luxembourg sarl of Luxembourg for the loss in value of their investments in three concentrated solar power (CSP) thermosolar plants.

Issued in both English and Spanish versions, only the Spanish version is to date available on the Internet.

Below is a limited summary of the award, together with a few preliminary observations about its possible impact on the resolution of the future cases, many of which are fast-approaching decision.

Background

In the early years of this century, Spain’s then-government designed a Renewable Energy Plan based on a very generous incentive system for investments in the production of electricity from renewable energies. As a result, sunny Spain quickly became a world leader in renewable energy. However, the opening of a gaping “tariff deficit” (excess of subsidies paid to producers and revenues from the sale of energy to consumers), exacerbated by the consequences of the financial crisis, led to a series of aggressive and ultimately effective measures aimed to cutback on the incentive system and erase the tariff deficit.

Starting in 2012 the regulatory changes became particularly stringent. Significantly, in December 2012, Spain imposed a 7% tax on electricity production and eliminated certain solar power subsidies. In the course of 2013, new regulations eliminated the tariff regulations set out in Decree 661/2007 which provided stability in electricity tariffs and a “reasonable return” on investment. Finally, in 2014, a new regime governing renewable energy was established, which calculated a reasonable rate of return for investors based on the hypothetical standard operating costs of hypothetical ‘efficient’ solar energy plants – standards to which Claimants’ plants did not conform.

Claimants argued that, taken together, these regulatory changes amounted to ‘complete value destruction’ of their investment, as the plants’ revenue fell below what was required to cover financing and operating costs or provide a return on investment, and their Spanish operating companies were forced into debt rescheduling negotiations with their lenders.

Certain Jurisdictional Matters

Unlike many of the series of cases, the Eiser case was not bifurcated into separate jurisdictional and merits phases. The award accordingly includes extensive discussion of the various jurisdictional objections that Spain had raised.

Of particular relevance is the Tribunal’s rejection of the contention that the ECT’s investor-state mechanism does not apply to intra-EU disputes. Citing similar conclusions reached by an ICSID panel in a 2016 jurisdictional ruling in the RREEF matter which had found its way to the public domain and in the SCC Charanne case mentioned below, the Tribunal found unavailing Spain’s argument that there was an implicit exception in case of intra-EU disputes, suggesting that if it had been the intent of the treaty’s drafters to exclude intra-EU disputes, this would have been made clear in the text, rather than being a “trap for the unwary”.  Interestingly, the Tribunal declined to admit to the file an amicus curiae brief presented by the EU Commission two months before the merits hearing, since the Commission refused to provide the costs undertaking which the Tribunal had deemed appropriate in light of the eleventh-hour presentation of the submission.

On the other hand, the Tribunal granted Spain’s ECT’s tax exception objection to jurisdiction, to the effect that the Tribunal had no jurisdiction to determine whether the 7% energy tax breached the treaty. Claimants, relying on the Yukos case, had argued that the tax was a bad faith alternative to reducing the subsidies, and thus was not entitled to the treaty’s tax exception. However, the Tribunal was not prepared to find bad faith, and thus applied the exception, observing that the exercise of the sovereign’s taxing power should not be questioned lightly, and that the facts did not at all suggest a patter of conduct designed to destroy Claimants or their investment (such as found by the Yukos panel in that case).

In an interesting obiter, the Tribunal observed (twice) that any damages that might accrue to a CSP investment due to the 7% tax would be substantially limited, if not entirely eliminated, since Spain had decided to include this charge as an indemnifiable cost.

The Tribunal also granted Spain’s objection based on the ECT’s requirement that claims alleging expropriation by reason of taxes be submitted first to the tax authorities.

The remaining jurisdictional objections were rejected, in rather short shrift, i.e, those based on (i) the supposed lack of standing of Claimants due to their being funds who only channeled capital of participants/limited partners, (ii) the supposed inability of shareholders to bring claims for damages actually incurred by participated entities even where the claim is for the reduction in value of the shareholding and (iii) the supposed failure to observe the ECT’s cooling-off period in respect of certain of the regulatory changes challenged (the Tribunal characterizing as unreasonable and inefficient Spain’s suggestion that each new regulatory measure in the challenged series be the subject of a new cooling-off period requiring a new trigger letter, when in reality the case involved a single dispute arising from the claim that by a series of measures, Spain modified in a fundamental way the economic regime for Claimants’ CSP projects in violation of the ECT).

Merits: Focus on FET as a guaranty of stability and protection against fundamental regulatory changes which fail to take into account circumstances of existing investments; “Crossing the line”

Citing judicial and financial economy (values noted by the Tribunal in a variety of contexts throughout the award), he Tribunal focused its analysis on Claimants’ arguments based on fair and equitable treatment (FET) under Article 10(1) of the ECT, considering this the most adequate benchmark under which to evaluate the measures, and thus not specifically and directly addressing the other claims of expropriation, unreasonable measures or breach of the ECT’s umbrella clause.

Recognizing the inherent right of states to regulate, and thus rejecting any suggestion of an absolute right to regulatory stability, the Tribunal concluded that the FET clause of the ECT protected against “fundamental” changes in a manner that failed to take account of the circumstances of existing investments made in reliance on the prior regime and that led to “unprecedented”, “totally different” regulatory regimes.

Significantly, the Tribunal distinguished the case from the February 2016 Charanne  award which rejected an investor’s claims in an SCC matter challenging regulations promulgated in 2010, affirming in forceful language that the factual and legal situations in the two cases were “fundamentally different,” the measures challenged in Charanne having only marginally decreased solar investments’ profitability, being “much less dramatic” and “much less extensive” than those challenged in Eiser, which created “a totally new regulatory focus,” and were applied in a manner which “eliminated the financial bases” of existing investments.

The consequences to the Claimants of the “total and unreasonable” change in the regulatory regime was the virtual destruction of their investment. The Tribunal accordingly concluded that the changes violated the FET clause.

The core of the Tribunal’s analysis is set out in paragraphs 362 and 363 of the award. Interestingly, the award circles back and restates the analysis once and again thereafter.  The following excerpts (in the author’s “reverse-engineered” translation from the Spanish version of the award which is circulating on the internet to the English in which it was surely drafted) give a good flavor:

362. “…The question presented is to what extent treaty protections, in particular the obligation under the ECT to provide investors fair and equitable treatment, can be invoked and give rise to a right of compensation as a result of the exercise of the recognized right of a State to regulate.”

363. “….[T]he Tribunal finds that Respondent’s obligation under the ECT to provide fair and equitable treatment to investors protects them from a fundamental change in the regulatory regime in a manner which does not take into account the circumstances of the existing investment made on the basis of the prior regime. The ECT does not prohibit Spain from making appropriate changes in the regulatory regime of RD 661/2007….But the ECT does protect investors against the total and unreasonable changes experienced here.”

352.“Taking into account the context, object and aim of the ECT, the Tribunal concludes that the obligation to provide fair and equitable treatment established by Article 10(1) necessarily implies an obligation to provide fundamental stability in the essential characteristics of the legal regime on which investors relied in making long-term investments. This does not mean that regulatory regimes cannot evolve. Clearly they can….[but] they may not be so radically changed that they deny investors who made investments on the basis of such regimes of the value of their investment.”

387. “Claimants could not reasonably expect that there would be no change in the regime of RD 661/2007 over the course of three or four decades. As with any other regulated investment, they must have anticipated that there would be changes over time. Nonetheless, Article 10(1) of the ECT gave them the right to expect that Spain would not modify, in a drastic and abrupt manner, the regime on which their investment depended, in a manner which destoyed its value. But this was the result …..As expressed in Parkerings: ‘any businessman or investor knows that laws will evolve over time. What is prohibited, however, is for the State to act unfairly, unreasonably or inequitably in the exercise of its legislative power.’”

418. “….The derogation of RD 661/2007 by Respondent, and its decision to apply a completely new method to reduce the remuneration of Claimants’ existing plants, denied them of essentially the entire value of their investment. Doing so violated Respondent’s obligation to provide fair and equitable treatment.”

458. “The Tribunal considers that Respondent ‘crossed the line’ and violated the obligation to provide fair and equitable treatment in June 2014 when the prior regulatory regime was definitively replaced by a completely new regime….”

The Tribunal rejected Spain’s attempt to put on record the July 2016 award of another SCC tribunal in the Isolux case, a kind of sister-case to Charanne, since that decision (unlike Charanne, which Spain’s Energy Ministry published on its website) is and remains confidential.  It is understood that Spain prevailed on the merits in Isolux (as in Charanne, over a dissenting opinion) in relation to the measures at issue in Eiser. But the Tribunal refused to accept the decision on record due to its confidentiality, chastising Spain for having communicated the award to the Tribunal on an ex parte basis.

DCF, damages and costs

In calculating damages for this breach, the Tribunal accepted the investors’ suggestion to use a discounted cash-flow (DCF) analysis. Applied from June 2014 when the new regulatory regime took full force, the Tribunal awarded €128 million in lost profits as per claimants’ experts’ calculations, together with pre-award interest at Spain’s borrowing rate, 2.07%, compounded monthly from the June 2014 date of breach, and post-award interest at 2.5%, also compounded monthly.

The Tribunal rejected for insufficient evidence claims for (a) Euros 68 million in additional damages on the basis of an asserted useful life of 40 years (rather than 25 years) and (b) Euros 88 million to gross up the requested compensation so as to neutralize the eventual tax consequences of an award in favor of Claimants, and further rejected (c) a claim for Euros 13 million for losses incurred prior to the June 2014 changes which the Tribunal found is when Respondent had actually “crossed the line.”

In a communication posted on its website shortly after the award was issued, the Spanish Ministry of Energy highlighted the fact that Claimants had recovered less than half of what they had sought. However, from the nature of the heads of damages that were rejected, and the limited time and energy apparently devoted to their prosecution, it would seem clear that Claimants prevailed on their key damage claim.

Finally, the Tribunal left each party to bear its own costs.

Some Preliminary Observations

The Eiser award has been circulating on the Internet only since 8 May and only in its Spanish language version. It is 175 pages long and full analysis will require a more careful reading, hopefully of the English “original” text.

Yet some preliminary reactions can be offered:

  1. As in the SCC cases decided last year favorably to Spain on the merits (Charanne and Isolux), albeit only by majority decision and with forceful dissents, Spain’s principal jurisdictional arguments – including the intra-EU objection noted above — were largely rejected. Inasmuch as it would appear that none of the cases to date has been dismissed for lack of jurisdiction, it can probably be expected that this trend will hold, and future cases may be more likely to be heard without bifurcation, and thus decided more expeditiously.
  2. The Eiser Tribunal’s common-sensical (and perhaps, common-lawyerly, since all of its members are common-law trained professionals) and elegant discussion of the limits of the right to regulate and its application in the specific context of the facts and circumstances of the case (distinguishing clearly and effectively the factual and legal matrices involving its application in the context of Charanne) could prove to be a useful roadmap to future panels reviewing the same regulatory changes in the context of similarly-situated (or not similarly-situated) investors and investments.
  3. The Isolux award, if and when it becomes public, will be closely studied to assess its “fit” into the competing Charanne and Eiser conclusions and its relevance to the future cases.
  4. The Eiser award contains a number of comments and characterizations which could be read as being rather critical of Spain, not only regarding the merits or demerits of the underlying regulatory actions as mentioned above (the award cites excerpts from reports of various Spanish public entities which were critical of the regulation the draft of which had been submitted for their review), but also its litigation posture (e.g., insisting on bifurcation but refusing to contemplate any precedential or “test case” value of a decision on jurisdiction) and procedural conduct (e.g., the ex parte communication mentioned above).
  5. Of course, while there is no hierarchy in international arbitration and thus no doctrine of precedent or binding jurisprudence, Tribunals deciding cases raising issues which have been addressed by other Tribunals will generally take interest in the prior findings and reasoning, especially to the extent they appear well-reasoned and well-structured. The Eiser award (which itself relied on Charanne and RREEF where it considered it appropriate to do so) appears on first read to be well-reasoned and well-structured and may thus have material weight in the upcoming awards. By the same token, it may stimulate international investors who have been sitting on the sidelines these past few years to file claims.
  6. Whether or not Eiser will prove to be a game-changer in the Spanish renewable energy saga after the two SCC awards issued in 2016 (Charanne and Isolux) appeared to give the overall advantage to Spain) remains to be seen.

Stay tuned: the game is far from over…..

The Case Against the Corruption Defense

José María de la Jara*[1] and Eduardo Iñiguez*[2]

 

In 1989, high-profile executives from Dubai met with Daniel Arap Moi, former President of Kenya, to seek his approval for the construction of duty free complexes at the Nairobi and Mombasa International Airports.

At the beginning of the meeting, an executive from the investor, World Duty Free (WDF), left a brown briefcase containing US$ 500,000.00 in cash by the wall. When the gathering was over, the cash had been replaced with fresh corn … and the project had been approved.

A few years later, WDF began an investment arbitration claiming the Kenyan Government had breached their agreement. During the process, the investor alleged the payment was a gift required by protocol. This was seized by the Republic of Kenya, which argued that bribing was illegal and that the investor’s conduct should not be protected. Upon that, the tribunal held that “corruption is contrary to international public policy of most, if not all states or, to use another formula, to transnational public policy” and consequently declared the claim inadmissible. This is known as the “Corruption Defense”.

First recognized in ICC Case No. 1110 in 1963, the Corruption Defense has been used by states when the contract that gives place to the arbitration was obtained by corrupted means.

The acceptance of this strategy has typically resulted in the refusal to hear the merits of the claim, even where the corruption also involved the state , given place to the tribunal declining its jurisdiction (e.g. Inceysa Vallisoleta v. Republic of El Salvador) or considering the claim inadmissible (e.g. Phoenix Action v. The Czech Republic).

Arbitration practitioners have recognized the attribution asymmetry derived from the Corruption Defense, leading to a one-sided result where states that took part on the corrupt act could profit from their own illicit conduct. However, tribunals have not yet come to a different solution different than sharing arbitration costs.

In our view, exaggerated reliance on the Corruption Defense might actually end up increasing the net levels of illegal acts in host states. Hence, in this article we propose three steps to analyze whether such strategy should be accepted by tribunals. This guide will help states on their evaluation of the contingencies of the Corruption Defense, as well as innocent, gullible or equally-guilty investors that want to fight against that strategy.

  • Is the state contradicting itself?

Since host states are typically defendants in investment arbitration, it is them who have historically brought out the defenses based on the investors’ “unclean hands”.

From that point of view, states should bear in mind that some tribunals have required a high-standard of proof for corruption.

For example, in Bin Hammam v. FIFA, Mr. Hammam, a candidate for FIFA President was present in a meeting with Mr. Warner and several delegates who would decide on his candidacy. Immediately after Mr. Hammam left the room, Mr. Warner announced there were “gifts” for the delegates, which were actually envelopes containing US$ 40,000 in cash. Even though the tribunal determined “it is more likely than not that Mr. Bin Hammam gave the money”, it held that other scenarios could not be excluded, such as the money being given to Mr. Warner “as a token of appreciation for setting up the meeting” or “that there was another source of money”.

If the state provides evidence that could to fulfill this high standard, investors could argue that a Corruption Defense contradicts the host state’s previous acts. This is known as the Doctrine of Estoppel.

In sum, such doctrine posits that no one should take advantage of its own previous acts. In Saltman words, “[i]t is intended to afford protection against injustice and fraud to an injured party by denying another party the right to repudiate any acts, admissions of representations which have been relied on by the injured party to its detriment”.

As discussed by Reeder, international investment tribunals have already applied the Estoppel Doctrine. For example, in Fraport, the tribunal recognized that: “[p]rinciples of fairness should require a tribunal to hold a government estopped from raising violations of its own law as a jurisdictional defense when it knowingly overlooked them and endorsed an investment which was not in compliance with its law”.

In our view, the Doctrine of Estoppel could be used to fight against the Corruption Defense, as the state’s request for arbitration relies on a corrupt procurement of the contract, where the state also participated.

In order to establish a contradiction, the investor would need to prove that the contract was concluded between the host state and a private party by corrupted means. In contrast, bribery between private parties, as in ICC Case No. 1110, will not help investors on fighting against the Corruption Defense.

Once the corrupt act by the state is identified and proven (first act), the state should be banned from using its own corruption as a defense against the investor’s claim (contradiction).

Under this framework, the Republic of Kenya’s use of the Corruption Defense should not have been accepted, as it acknowledged to have received a bribery.

  • Is the state responsible?

A possible barrier for the application of the Estoppel Doctrine is whether the conduct of a specific official or government organization can be extended and considered as the state’s responsibility.

According to Pitou, even when US courts will generally not estop agents who have acted without actual authority, several of them are likely to construe a government employee’s authority, so the estoppel can proceed.

International investment arbitration tribunals also follow such a position. For example, the tribunal in SGS v. The Republic of Paraguay held that the conduct of host state officials remains attributable to the state. Furthermore, in the Waguih case, the tribunal stated that the conduct of any state organ shall be considered an act of the state, even there when it exceeds the authority of that organ.

Therefore, in a situation where the President of a state itself is the one who incurs in the corruption acts (like in the Kenyan case), such behavior should be considered as an act of the state.

Also, host states should take into account that their strategic position would be dramatically hampered if the investor provides evidence that they did not do anything to investigate nor prosecute the corrupt acts that are now being used as defense. After all, how could a state benefit from its own behavior if nothing has been done to remedy it?

As stated by Raouf, “if a host State takes no action in order to investigate or prosecute the corrupt acts of its own officials, it should have a consequence upon its right to rely corruption as a defense”.

As a result, states that want to rely on the Corruption Defense should be demanded to prove that they have done everything on their power to investigate and sanction the illegal conduct.

Furthermore, admitting the corruption acts and doing nothing about them (not now nor before) could be considered as ex post knowledge or ratification of those, as in Ionnis Kardassopoulos v Georgia. As Kulkarni concludes, “lack of genuine interest in combating corruption may be inferred and lend credence to an estoppel claim”.

  • Is the investor responsible?

Even if the aforementioned steps are applied, investment tribunals will still be cautious to deny the Corruption Defense, as it could mean favoring the investor on the merits, even when the contract that gave place to arbitration involved illicit acts.

Consequently, investors fighting against a Corruption Defense should prove the gravity of each party’s contribution to the illegal behavior. In order to do that, as suggested by Kulkarni, they might consider presenting evidence of (i) who began the corrupt behavior, (ii) the amount paid, (iii) the involvement of the state and (iv) to what extent the conduct was only incidental.

Also, as stated by Davies, an investor should make reasonable efforts to monitor, supervise and punish its employees and co-operate with law enforcement authorities. He must be able to prove that he has taken measures to prevent and, given the case, correct any possible corruption acts.

Specially, an investor must take in consideration what the International community has called “red flags”, which are indicators of ethical and/or reputational risks that could possibly be a sign of corruption.  The following are some of red flags identifies by the he Woolf Committee:

  • An investor lacks experience in the sector and still gets the contract/project;
  • No significant business presence of the company within the country;
  • An investor request ‘urgent’ payments or unusually high commissions;
  • An investor requests payments be paid in cash, to be paid in a third country, to a numbered bank account, or to some other person or entity; and/or
  • An investor has a close personal/professional relationship to the government.

Based on that, investors should prepare their defense taking into account whether any of its employees incurred in a behavior tagged as a “red flag” and, if so, which measures were taken to punish such conduct and mitigate its impact.

Final remarks

Freeing states from their responsibilities and denying investors’ access to arbitration where both might be responsible is an asymmetrical solution, especially if states know from the outset that they will be defendants and thus will be the only ones allowed to use the Corruption Defense. As identified by Rojas, this encourages states to take less precaution against illegal behavior, as they could ultimately rely on the Corruption Defense. Moreover, Reeder warns that states could immunize themselves against arbitral judgments by preparing a Corruption Defense in advance, avoiding liability even for willfully violating an investment treaty.

Corruption is no doubt despicable. However, arbitrators that “close their eyes” when faced with corruption allegations and deny their jurisdiction are not the answer to such illegal practices. As Kreindler explains, determining illegality is both the business and the duty of arbitrators. In our view, this would result in great disclosures with respect to corruption, as both parties would be incentivized to litigate the attribution of the illegal act, resulting in potential benefits for global anti-corruption efforts.

In conclusion, states and investors should both respond for their acts, in proportion to their fault. After all, it takes two to tango.

[1]  Associate at Bullard Falla Ezcurra +. Executive Director at PsychoLAWgy.

[2]  Intern at Bullard Falla Ezcurra +.

The authors would like to thank Matt Reeder for his contribution to this work.

Urbaser v. Argentina: Analysing the Expanding Scope of Investment Arbitration in light of Human Rights Obligations

by Sujoy Sur

While allowing investors the right to directly bring a claim against the States has said to be the single most progressive development in International Law in the 20th century, they also have gained recognition as ‘subjects’ of international law. It is this recognition which puts a corollary duty on the investor to regard human rights while carrying out activities in the host state. Over the past couple of decades, there has been a growth in, both, international human rights jurisprudence and investment arbitration claims by investors against States. With both procedural and substantive matters of importance coming to the fore, it has led to the convergence of both the areas and raised a valid concern of the importance of erga omnes obligations of human rights in investment arbitration. A human rights concern is a two-way street, with States being concerned about human rights violations by the investor in their territory and the investor being careful that his/her human rights are not unjustly violated by the State.

The recent award in the case of Urbaser v. Argentina brought to the fore the aspect of increasing convergence of human rights with investment law. This case cements the strengthening position being given to non-treaty international obligations in investment arbitration cases, besides mercantile obligations, as also seen previously in the Phillip Morris cases last year. The Panel, besides deciding on other questions on merit of the case, successfully allowed the State to make a human rights counter-claim against the Spanish corporation, Urbaser. A first of its kind, as the treaty allowed for filing of claims from either of the parties, thus, allowing for the possibility of counter-claims.

The dispute arose under the Spain-Argentina BIT. The claimant investor was a shareholder in a concessionaire which provided water and sewerage services in the Province of Buenos Aires, Argentina. This was granted to the claimant’s subsidiary, AGBA, in early 2000s. Argentina faced a financial emergency in 2001-02. It took emergency measures in January 2002, in the process of which the Claimant’s concession was also terminated in 2006 by Buenos Aires, leading to Claimant’s financial loss and insolvency. Citing obstruction and persistent neglect of AGBA’s shareholders’ interests, the Claimants alleged violations of the BIT, namely:

  • Article III.1, on the prohibition to adopt unjustified or discriminatory measures;
  • Article IV.1, on the obligation to afford fair and equitable treatment to the referred investments; and
  • Article V, which forbids any illegal and discriminatory expropriation of foreign investments, imposing obligations to compensate.

After analyzing Article X(5) of the BIT, which states that, “The arbitral tribunal shall make its decision on the basis of… norms of private international law, and the general principles of international law”, the tribunal held that it is permitted by the BIT to incorporate principles of international law to adjudicate the claim, thus, the BIT was not a ‘closed system strictly preserving investors’ right under the BIT. On the basis of this the Tribunal rejected the Claimant’s contention that guaranteeing the human right to water is a duty that may be born solely by the State, and never borne also by private companies like themselves. The Tribunal referred to the Universal Declaration of Human Rights (“UDHR”) and the International Covenant on Economic, Social and Cultural Rights (“ICESCR”) while reasoning its stance on making private companies liable for human rights violations in investment disputes. Article 30 of the UDHR imposes the duty on any group or person to maintain rights under the Declaration, while General Comment 15 (Art. 11 and 12) by the Committee on Economic, Social and Cultural Rights stresses the importance of the supply and the economic accessibility of water, which will be the duty of States to ensure, in case it is being provided by third parties. Corroborating its finding, the Tribunal further held that ‘international law accepts corporate social responsibility as a standard of crucial importance for companies operating in the field of international commerce’, which includes the duty to comply with human rights obligations in countries other than the seat of their incorporation. Further, the Tribunal relied on Article 31(3)(c) of the Vienna Convention on Law of Treaties (“VCLT”) and Tulip Real Estate v. Republic of Turkey to conclusively hold that rules of international law, of which human rights are also a part of, cannot be ignored when adjudicating a claim arising out of a BIT, especially when the treaty provides for it.

 

The decision reached by the Panel is of consequential importance for two reasons. Firstly, investment treaty arbitration is in a precarious situation as many countries are either signing out of it or have already rescinded their treaties, owing to the regulatory chill they have been facing because of multitudes of investment claims. Secondly, the decision reaffirms the greater scope which States are being given off late by arbitral tribunals to regulate, to assert their sovereignty in a bona fide manner, and to make sure the rights of their citizens are not violated in fear of protecting the treaty rights of alien investors. In Philip Morris v. Uruguay last year in the investor was not allowed to subvert the national policy adopted for the purposes of public health. The intention of the State, it being bona fide, to take a public policy measure was given a higher legal ground against the claims of it being unreasonable, discriminatory and disproportionate which were analysed and rejected by the tribunal. The tribunal had also imported the human rights doctrine of “margin of appreciation” from the jurisprudence of European Court of Human Rights to grant Uruguay a regulatory space to take such a measure for its national needs. The ruling in Urbaser also squarely goes against the ruling in cases of Biloune v. Ghana Investments Centre and Tradex Hellas S.A. v. Albania, where the tribunals expressly dismissed human rights argument stating that its competence is limited only to the commercial merits in the dispute.

The ruling in Urbaser can also be held to be controversial for the purposes of imposing a human rights liability on investors, but this goes well with the prevailing trend of, I) Investors having a legal personality as transnational in international law, therefore, II) having the duty to uphold international law, including human rights. Back in August 2003 itself, the Sub-Commission on the Promotion of Human Rights of the United Nations Commission on Human Rights (CHR) approved the Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights which defines human rights as one in the UN multilateral and customary system, being in consonance with Articles 1, 2, 55 and 56 of the UN Charter. The Norms on Transnational Corporations reinforce how corporations must pay heed to international human rights law. Similarly, the UN issued another document in June 2011, titled ‘Guiding Principles of Business and Human Rights’ which lays down principles of human rights which Corporations must follow, in recognition of the State’s obligation to protect human rights in its territory and the duty on Corporations, as specialised organs performing specific functions, to respect human rights while doing so. Although these obligations might be obligatory in nature, they are a restatement of the will of the international community and act as a guiding mechanism for international courts/panels to adjudicate upon disputes. These are obligations besides the more binding ones which the Panel cited, such as the UDHR, ICESCR, which have attained peremptory status in International Law.

From the point of view non-investment treaty obligations, the incorporation of it was also done by an arbitral panel in the case of SPP v. Egypt, where on the basis of the wordings of the treaty, the Panel interpreted that these obligations exist as far as the dispute is concerned when seen through Article 42 of the ICSID Convention. Though Egypt was not allowed the defence as the cancellation of the contract took place before it ratified the UNESCO Convention under which the contract would be illegal, SPP findings laid down that a) Investment obligation can be held to be against the State’s general international obligations, b) International obligations can be given precedence over investment promises. However, in the Urbaser case, Article X of the BIT specifically provided for adherence to international law and obligations besides contractual and investment law obligations, thus providing the tribunal a scope to directly adjudicate the case through the parameters of non-treaty obligations.

The Urbaser case has many far reaching implications. Besides the jurisdictional implication as far as counter-claims are concerned, it sets a path for greater allowance for conflict of other international law norms with that of international investment law, thus, a greater scope for regulation and assertion of sovereignty for the host States.

It is not that this is first case where the defence of human rights has been acknowledged. In Suez v. Argentina the tribunal did acknowledge the validity of State’s action in accordance with international law, by virtue of Article 42 of ICSID, but it held the concern to be mutually exclusive from that of the State’s obligations for the investor. In SAUR International v Argentine Republic the tribunal had also acknowledged the need for the State to regulate for human rights concerns as a part of its ‘governmental powers’, but said it has to be balanced out against the investors interests, thus, holding Argentina’s actions as one eligible for compensable expropriation to the investor. The tribunal in this case not only acknowledged the importance of human rights obligations in the role they play as a part of international law in a consent based mechanism such as investment arbitration, which in earlier cases was disregarded, but also stated the value of both the norms when seen from a wider aperture of international law. Although one can say that human rights obligations, here that of water, trumped the BIT obligations but a hierarchical nature of obligations was not stated explicitly. This position might become clearer with similar disputes in the future.

By directly adjudicating that a human rights issue and an investment dispute are not mutually exclusive, the tribunal’s decision can be ascertained to hold that different aspects of international law are under the ambit of one legal system which is how a dispute must be seen. Investment claims cannot be allowed to fragment international law by making them an exception to inherent obligations which every subject of international law is expected to follow. Such an inclusion and interpretation by ad-hoc tribunals is another way how investment law can converge and is seen to be converging with other branches of international law, rather than fragmenting it, besides multilateralization of investment treaty law as another way. This, thus, is the great comeback which the bilateral investment treaty regime can build upon.

What this dispute also inspires is how a treaty should be worded to allow the arbitral panel a greater scope to assess the action of the host State in light of its domestic and international obligations. Many States which are backing out of the investment treaty regime should and will come up with treaties which expressly state that tribunal should adjudicate a claim on the basis of principles of private and public international law, as seen in Article X of the Spain-Argentina BIT. Article 14(9) of the India’s new Model BIT, Article 9.23 of the TPP are a couple of examples.

It will be pertinent to see whether human rights as a whole will be put on a pedestal which might act as the looking glass through which investor duties and violations will be analysed or will it be graded so that only the most important rights which are peremptory in nature are allowed as a defence. This will also to an extent satiate the concerns raised by the tribunal in the SAUR case of there being an asymmetrical power relationship between the investor and the State. However, as far as right to water is concerned, it has always been acknowledged by international law as one of the most important human rights guarantee but it got disregarded owing to myriad of technical and jurisdictional reasons.

Lastly, such a decision by the tribunal also changes the scenario as far as the liability of investors is concerned and as to how investors must pay regard to other international obligations, particularly to that of human rights. This makes the investors more accountable to the kind of investments they make, forcing them to foresee the repercussions of their actions. This will surely bring a positive change to the investment climate in the world and allow States to take confidence in the investment treaty regime with renewed vigor.


* Sujoy Sur, BA/LLB, Gujarat National Law University.