Biwater Gauff (Tanzania) Ltd. v United Republic of Tanzania: according to an ICSID tribunal, Tanzania violated its BIT with the UK. Despite this finding, Biwater recovered nothing as the tribunal found insufficient causal link between its economic loss and the government's conduct.

Summary and business impacts

In a long-awaited decision published on 24 July 2008, a tribunal constituted under the rules of the International Centre for the Settlement of Investment Disputes (ICSID) found that Tanzania's actions in respect of its lease contract with Biwater amounted to an expropriation and a violation of several standards in the UK-Tanzania bilateral investment treaty (BIT). Interestingly, however, the tribunal concluded that Tanzania did not owe Biwater any compensation since there was insufficient link between the breaches and the considerable losses sustained. Biwater had made no claims for non-pecuniary compensation or moral damages.

In reaching this conclusion, the tribunal undertook a detailed analysis of both the government's actions and Biwater's performance under the contract. Despite the ultimate finding on damages, this analysis demonstrates the willingness of ICSID tribunals to examine a government's actions and hold them responsible for any unlawful exercise of power. Similarly, it shows their willingness to examine investors' performance and hold them responsible for a certain level of compliance.

Factual background

In 2003, Biwater was awarded three contracts for the management and operation of water and sewage services in Dar es Salaam. Subsequently, the bid contracts were leased to City Water, a locally-incorporated company of which Biwater was a 51% shareholder.

On encountering difficulties in running such a huge project, City Water requested a renegotiation of the contract. The negotiations failed. The local water and sewage authority terminated the contract and called the performance bond. Tanzanian officials then deported City Water's senior management and took over its offices in order to take control of the company's assets and instate new management.

Biwater advanced five claims on the merits relating to: expropriation, fair and equitable treatment, unreasonable or discriminatory measures, full protection and security and free transfers.

Tribunal's findings

Expropriation

In relation to Biwater's expropriation claim, the tribunal held that:

  • expropriation may result from the cumulative effect of individual acts which do not themselves constitute expropriation;
  • in order for a breach of contract to amount to an expropriation, a State must exercise elements of governmental authority. A Minister's press conference announcing the termination of the contracts, the withdrawal of a VAT exemption, the occupation of City Water's facilities and the deportation of City Water senior staff had all involved an exercise of sovereign authority that violated City Water's rights without justification, thereby amounting to an expropriation;
  • there need not be a substantive or quantifiable economic loss in order for expropriation to exist, although this goes to the issues of causation and quantum;
  • Biwater's performance under the contract would be taken into consideration in so far as it contributed to an understanding of the surrounding facts. Although an ICSID tribunal may not decide a contractual dispute, as commercial tribunals would do, it may "take into consideration" the facts surrounding a contract and its performance in determining claims arising under the BIT.

Other Treaty Standards

Although the tribunal was reluctant to generalise as regards "fair and equitable treatment", it identified several components of the standard: protection of legitimate expectations, good faith, transparency, consistency and non-discrimination. Furthermore, any violation of the "reasonableness" and "non-discriminatory" standards also constitutes a violation of the fair and equitable treatment standard.

Adopting the analysis set out in Saluka v. Czech Republic, the arbitrators determined that "reasonableness" requires a State's conduct to bear a reasonable relationship to some rational policy and "non-discrimination" requires that a State give a rational justification for any different treatment of a foreign investor. Only some of Tanzania's conduct was found to have violated these standards. 

Damages

According to the decision, in order to obtain damages, a party must show that:

  • the value of its investment was diminished or eliminated; and
  • the actions of the other party were the actual and proximate cause of such diminution. In this case, the tribunal concluded that the value of City Water on the date of the expropriation was nil. Furthermore, the fact that the investment had no value was attributable to City Water's actions rather than Tanzania's. An expropriation had taken place but there was no demonstrable economic loss. In such a case, non-pecuniary remedies such as injunctions and declaratory or restitutionary relief rather than economic recovery may have been appropriate but were not claimed.

Amici Briefs

In forming its conclusions, the tribunal drew extensively on the "amicus curiae" briefs which had been submitted by five NGOs with expertise in human rights, environmental and good governance issues in Tanzania. In an early procedural order, the tribunal had granted permission to these NGOs to participate in the proceedings by submitting briefs, due to the public interest at stake. Whilst the petitioners brought materially different perspectives from those of the two parties, a key contribution was to the argument that investors have obligations as a matter of international law.

Conclusion

Investors should take care to ensure that their conduct and the management of the investment cannot be criticised, in case that should affect a tribunal's decision. They should also give careful thought to the type of relief they request as this case suggests that, even in circumstances when compensatory damages may not be appropriate, moral damages or non-pecuniary remedies may be awarded if requested.