ICSID Tribunal Finds Tanzania To Have Violated Bilateral Investment Treaty But Declines To Award Any Damages

Introduction

Privatization of public services, such as the provision of utilities and waste disposal facilities, has led to many investment disputes. These cases[1] -- mostly in Latin America -- have drawn particular attention from the NGO community due to the public interest issues inherent in such disputes. This Insight concerns a recent award in a dispute about a water-privatization project in Tanzania that went awry.[2]

Background

In 2003, the Republic of Tanzania obtained $140 million in World Bank, African Development Bank and European Investment Bank funding for a comprehensive program of repairing, updating, and expanding Dar es Salaam’s water and sewerage infrastructure. At the time, the water situation was “precarious,” water was not equally available in all regions, and the tariffs charged users of water were too low to fund capital expenditures. The sewerage situation was even worse. The funding was conditioned on having a private operator manage and operate the water and sewerage system.[3] Only Biwater Gauff (a joint venture of two European companies, one registered in England and Wales and one registered in Germany) submitted a tender, and it was awarded the bid. The terms of the tender required Biwater Gauff to establish a local operating company, with a minimum number of shares to be held by a Tanzanian company or national. The operating company, City Water Services Limited, then entered into three key contracts with the Dar es Salaam Water and Sewerage Authority (“DAWASA”).

The most important contract was the Water and Sewerage Lease Contract, which required City Water to provide water and sewerage services for a ten-year period in a designated area and implement certain capital works associated with the modernization project. The contract required City Water to pay rental fees to DAWASA. City Water would collect an operator tariff, which would fund its operations; a lessor tariff, which it would turn over to DAWASA; and a first-time connection tariff, which would be placed in a trust account to fund low-income users’ connection charges. In return, DAWASA gave City Water exclusive use of certain assets that City Water would lease from DAWASA, gave City Water the exclusive right to operate the designated water services, and promised not to operate in any way that would hinder or conflict with City Water’s operations.

City Water commenced performance August 1, 2003. In addition to the infrastructure problems, which were hard to fix, City Water found it difficult to bill and collect from customers for the services it provided, both because it faced unauthorized competitors and because many residents resisted the rise in the rates. A significant issue was its failure to implement the new billing process, which was the “lifeblood of the system” and would help fund City Water’s operations.[4] City Water had underestimated the difficulty of the project and failed to allocate sufficient managerial and financial resources to it. City Water requested an increase in the Operator Tariff, but Tanzania rejected the request after an auditor’s report suggested it was unwarranted. Relations between the government and Biwater Gauff continued to deteriorate, and although they tried discussed renegotiating the contracts under the guidance of an expert mediator, mediation failed. Between May 13, 2005 and June 1, 2005, DAWASA and other government authorities took certain steps, including repudiating the lease contract and occupying City Water’s facilities, taking over the management, and deporting City Water’s senior managers.

Biwater Gauff then brought a claim under the bilateral investment treaty (BIT) between the United Kingdom and the Republic of Tanzania, alleging expropriation of its property and unreasonable or discriminatory treatment. The company also claimed that Tanzania had violated its obligation to provide fair and equitable treatment and full protection and security and to permit the repatriation of investment funds. Biwater Gauff requested damages in the range of US$19 – 20 million.

Legal Issues

Two legal issues in particular are worth highlighting within the complex factual and legal issues raised in the dispute.

The first key feature of the Biwater Gauff decision is the tribunal’s approach to the ICSID Convention’s requirement that the Centre’s jurisdiction “shall extend to any legal dispute arising directly out of an investment.”[5] While most investment treaties define investment broadly (and Tanzania conceded that Biwater’s investment qualified under the BIT), an ICSID dispute must also satisfy the Convention’s jurisdictional limitations. The Convention does not define investment, but recently several tribunals, most notably that in Salini v. Morocco, have identified five criteria that an investment must meet to qualify under the Convention: (1) duration; (2) regularity of profit and return; (3) assumption of risk; (4) substantial commitment; and (5) significance for the host State’s development.[6] The Salini criteria can be traced to Christoph Schreuer’s influential treatise on the ICSID Convention, in which he described qualities typical of investments found to satisfy the Convention’s jurisdictional criterion, although Professor Schreuer was not advocating the establishment of jurisdictional requirements or the formulation of a definition.[7]

Rather than follow the line of cases that had adopted the Salini approach, the Biwater Gauff tribunal held that there was no basis for a “rote, or overly strict, application of the five Salini criteria in every case.”[8] The drafters of the Convention had deliberately left the term “investment” undefined, and the tribunal was reluctant to impose a strict test that would arbitrarily exclude certain transactions from the scope of the Convention.[9] Moreover, given the broad definition of investment in most BITs, a narrow interpretation would lead to the Convention’s contradicting individual agreements that purport to grant jurisdiction to the Centre, as well as violating what might be viewed as an international consensus.[10] The tribunal therefore substituted a more flexible and pragmatic approach to what constitutes an investment under the Convention, and concluded that it did indeed have jurisdiction. It rejected Tanzania’s main argument – that Biwater Gauff had invested in the project only as a “loss leader” with a low rate of return in the hope of securing other profitable opportunities later. The tribunal refused to draw any link between a party’s motives for entering into an investment and its ability to qualify for protection under the ICSID regime.

Second, the decision is notable for the erudite debate between the two arbitrators in the majority, Bernard Hanotiau and Toby Landau, and the concurring and dissenting arbitrator, Gary Born, on the proper role that should be played by “causation.” All of the arbitrators agreed that Tanzania’s acts constituted expropriation of Biwater Gauff’s investment. Messrs. Hanotiau and Landau concluded, however, that all of the compensable damage to Biwater Gauff’s investment had occurred prior to Tanzania’s violations of the BIT, which occurred between 13 May 2005 and 1 June 2005.[11] According to the majority, then, Tanzania’s conduct did not cause any injury, notwithstanding its unlawful nature.[12] In Mr. Born’s view, it is unacceptable to separate the concepts of the unlawful conduct and injury: the “wrongful seizure clearly caused injury to City Water by depriving it prematurely of the use and enjoyment of its property.”[13] Rather, the appropriate focus with respect to causation was the quantum of damage attributable to the injurious act.[14] Because Biwater Gauff had failed to prove any monetary damages arising from the injury it suffered, it was not entitled to any recovery.

The difference in opinion did not matter in Biwater Gauff, as all of the arbitrators agreed that the claimant should not be awarded money damages. Mr. Born was concerned, however, that in other cases the analytical distinction could be decisive as to the outcome.[15] The majority found Mr. Born’s approach “tenable,” but nonetheless found it important to emphasize that it was insufficient merely to show a “‘taking’, or unfair or inequitable conduct, there must [also] necessarily have been an ‘injury’ caused such as to ground a claim for compensation.”[16] The majority cited the International Law Commission’s Articles on State Responsibility, which provide that “Injury includes any damage, whether material or moral, caused by the internationally wrongful act of a State.”[17] Mr. Born did not dispute this point, but suggested that injury need not have a quantifiable monetary value, as evidenced by the commentary to Article 31: “[T]here is no general requirement, over and above any requirements laid down by the relevant primary obligations, that a State should have suffered material harm for damage before it can seek reparation for a breach. The existence of actual damage will be highly relevant to the form and quantum of reparation.” [18]

Although the arbitrators agreed that there was no compensable quantifiable monetary loss, they split on whether to award costs – a reflection of their basic differences in approach. Messrs. Hanotiau and Landau concluded that neither party should be ordered to pay the costs incurred by the other, as both had been successful: Biwater Gauff in proving that Tanzania violated the BIT, and Tanzania, in resisting any claim for damages.[19] Mr. Born, on the other hand, concluded that the tribunal should not just grant declaratory relief, but should award costs in favor of Biwater Gauff. Grounding his decision in the principle that there should be no right without a remedy, he concluded that Biwater Gauff should be awarded its costs because in breaching fundamental international rights and protections, and refusing to acknowledge the effects and nature of its conduct, Tanzania had caused moral damages to Biwater Gauff, and it would be “at best anomalous for a tribunal to grant no affirmative relief.” [20]

Conclusion

Jurisdictional objections are becoming more common, and further colloquy on how the jurisdictional provisions of the ICSID Convention should be interpreted is welcome. Moreover, quantum is an understudied area of international investment law (although this is slowly changing).[21] Also, as Mr. Born notes, issues of causation and the attribution of damages to unlawful acts as opposed to other supervening factors are likely to recur.

About the Author

Andrea K. Bjorklund, an ASIL Member and Executive Council Nominee, is a Professor of Law at the University of California, Davis.  She was formerly with the Legal Adviser’s Office of the U.S. Department of State where she defended the U.S. Government in investor-State cases brought under NAFTA Chapter 11.

About the ASIL International Economic Law Interest Group

The ASIL International Economic Law Interest Group promotes academic interest, discussion, research and publication on subjects broadly related to the transnational movement and regulation of goods, services, persons and capital. International law topics include trade law, economic integration law, private law, business regulation, financial law, tax law, intellectual property law and the role of law in development. Click here to learn more about the ASIL International Economic Law Interest Group.

Endnotes