On July 24, 2008, a panel of distinguished arbitrators (Gary Born, Toby Landau, Bernard Hanotiau) rendered an award in the case of Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania.1 The ICSID Tribunal refused to award damages to an Anglo- German consortium that filed a claim against the Republic of Tanzania under the UK-Tanzania Bilateral Investment Treaty (BIT). The Tribunal’s ruling came in the wake of an award in favor of Tanzania in an UNCITRAL arbitration initiated by the parties to resolve their purely contractual (i.e., non-treaty) differences. The main thrust of the Biwater Gauff decision, endorsed by the Tribunal’s majority,2 is that while Tanzania’s actions may have constituted prima facie violations of certain BIT provisions, they did not cause injury to the claimant’s venture. Consequently, the claimant was not entitled to compensation. In the course of its discussion, the Tribunal made some important observations with respect to the notion of legal injury and the proper conceptualization of “investment” in ICSID arbitration. It also offered a reminder that ICSID arbitration is not meant to be an insurance policy against an investors’ miscalculations and/or fiscal mismanagement. Finally, the Tribunal offered some remarks on the role of amici curiae in the arbitral proceedings.
Summary of the Dispute
Biwater arose out of a dispute between a British project company, held jointly by a British and a German company, and the Republic of Tanzania over a concession to operate the water and sewerage services of Tanzania’s capital, Dar es Salaam. After concluding that Claimant failed to meet its contractual obligations, Tanzania canceled the contract and regained possession of assets previously leased to Claimant. Claimant brought an action before ICSID under the UK-Tanzania BIT, claiming that Tanzania breached its obligation to afford Claimant fair and equitable treatment, to provide full protection and security, not to take unreasonable and discriminatory measures and to guarantee the unrestricted transfer of funds.
Facts Established By The Tribunal3
In 2003 several multilateral lending institutions, including the World Bank, the African Development Bank, and the European Investment Bank, granted Tanzania US$140 million to upgrade and expand the water and sewerage infrastructure of its capital city, Dar es Salaam. In 2002, to fulfill some of the conditions imposed by the multilateral lenders, Tanzania had launched a bidding process for a private operator of water and sewerage services, who would also serve as a contractor for some of the required upgrade and expansion works.
Tanzania awarded the concession, set to last for ten years, to a joint venture of Biwater International Limited (“Biwater”), a British corporation and HP Gauff Ingenieure GmbH and C. KG-JBG (“Gauff”). In January 2003, Biwater and Gauff incorporated jointly Biwater Gauff (Tanzania) (“BGT”), a British corporation that would become the Claimant in this case. In turn, as required by the terms of the bid, BGT partnered with a Tanzanian company, Super Doll Trailer Manufacture Co. (T) Limited (“STM”), and incorporated the operating company, City Water Services Limited (“City Water”), under the laws of Tanzania. To implement the project, City Water entered into three key contracts (jointly, “Project Contracts”) with the Dar es Salaam Water and Sewerage Authority (DAWASA).
Under the terms of the Project Contracts, City Water would lease DAWASA’s existing pipeline network, which City Water would use to provide water and sewerage services to customers. Customers would pay a tariff that would remain fixed under a contractual indexation formula for the first five years of operation. City Water’s portion of that tariff was subject to three levels of review: annual, interim and major. The main reason the parties agreed to elaborate tariffreview provisions was that neither City Water nor DAWASA had extensive or sufficiently reliable data on customer demand and revenue projections. In addition to providing services previously rendered by DAWASA, City Water would undertake, on a priority basis, the performance of upgrades to the water supply system and would install water meters in all customer locations, to attain accurate data on water consumption. City Water would also act as the main contractor for the expansion of Dar es Salaam’s water supply network and for other improvements necessary for the implementation of the project.
Eleven months after the commencement of City Water’s operations, however, it was apparent that the project was facing significant financial difficulties and was in danger of shutting down. City Water concluded that it would need to call for an interim review of the tariff it was receiving under the Project Contracts. Critically for Claimant’s claims against Tanzania, although the water and sewer systems were in bad condition before City Water took over, shifting part of the blame for increased operating costs to prior acts of DAWASA, the main source of City Water’s problems was the Claimant’s (BGT’s) gross overestimation of projected tariff revenues at the bidding stage, combined with the failure of the BGT-appointed management of City Water to successfully handle the project’s numerous challenges. The operating company’s failures were borne out in Claimant’s own internal evaluation of the project, in reports by independent auditors employed to evaluate whether a tariff renegotiation was warranted (it was not) and the decision of a mediator employed by the parties in the course of subsequent negotiations on how to revive the moribund project.
Despite good faith negotiations during the first months of 2005, Claimant and the Government of Tanzania failed to reach agreement on how to salvage the project. Contemporaneous documentation cited by the Tribunal provides further evidence that the project was in dire straits, since solutions that were considered potentially viable during the negotiations were simultaneously characterized as “radical” or “last resort” by the parties themselves.
While the contractual relationship was headed inevitably towards dissolution, Tanzanian Government officials, motivated by electoral concerns, among others, took a series of drastic measures that went far beyond the contractually mandated process for termination of the Project Contracts. In May 2005, Tanzanian Government officials, causing public furor, repudiated unilaterally and rather publicly the lease agreement with City Water, while calling on the performance bond posted by BGT, reinstated the previously waived VAT on purchases by City Water, repossessed forcibly the assets previously leased to City Water and deported City Water’s BGT-appointed management.
The Tribunal’s Holdings
The Biwater Gauff Tribunal addressed exhaustively all arguments raised by the parties. The more significant aspects of the Tribunal’s Award are listed below.
Jurisdiction:4 The Tribunal found that it was properly vested with jurisdiction. A notable objection by Tanzania to the Tribunal’s jurisdiction was that, since City Water had been unprofitable from the start and was likely to remain as such for the duration of its concession, it could not be considered an “investment” under the ICSID Convention. In support of this proposition, Tanzania cited the “regularity of profit” requirement of the so-called “Salini test,” according to which the hallmarks of an investment are i) duration; ii) regularity of profit and return; iii) assumption of risk; iv) substantial commitment and v) significance for the host State’s development. The Tribunal, nonetheless, ruled against a strict application of the Salini test, and in favor of a flexible approach that would allow consideration of all relevant circumstances in a given case. The Tribunal opined further that the mere fact that an investment is unprofitable does not render it unfit for protection by the ICSID Convention and the provisions of the applicable BIT. It was sufficient that the Claimant had in good faith expected to receive a positive return on its investment.
Expropriation:5 The Tribunal found that Tanzania had committed an indirect expropriation of BGT’s investment through a series of actions that transcended the behavior expected of a party to the Project Contracts and entered the realm of exercise of sovereign authority that violated Tanzania’s treaty obligations. Specifically, instead of following the contractually prescribed course for termination of the Project Contracts, the Tanzanian Government openly repudiated the lease contract with City Water causing public furor, called on the performance bond, canceled the VAT waiver and deported City Water’s expatriate staff. In the Tribunal’s view, the cumulative effect of these acts amounted to an unlawful expropriation of BGT’s rights in the lease contract and in the project because BGT’s rights, although due to expire a short time thereafter under the contracts’ Notice of Termination, were still technically valid.
Fair and Equitable Treatment:6 The Tribunal ruled that several of Tanzania’s actions breached its treaty obligation to accord BGT’s investment fair and equitable treatment, despite the relatively high bar State activity needs to meet to violate that standard. Specifically, the Tribunal cited as violations: Tanzania’s publicity campaign against City Water in May 2005, including the public repudiation of the lease contract; the withdrawal of the VAT exemption; the forcible occupation of City Water’s offices; the assumption of management control by the Government and the deportation of City Water’s BGT-affiliated senior management.
Unreasonable and Discriminatory Measures:7 To be reasonable and nondiscriminatory, a State’s actions need to bear a reasonable relationship to a rational policy, while any differential treatment of a foreign investor must have a rational justification. Because this treaty standard bears a close relationship to that of unfair and inequitable treatment, the Government’s acts that the Tribunal ruled to be unreasonable or discriminatory overlapped with those that it characterized as unfair or inequitable. Among such acts were the public repudiation of the lease contract in conjunction with derogatory public remarks directed towards City Water and BGT; a speech delivered by a Tanzanian Minister to City Water staff that undermined BGT’s managerial control; the withdrawal of the VAT exemption and the seizure of City Water’s assets and subsequent deportation of its senior management.
Full Protection and Security:8 The Tribunal held that a state affords full protection and security when it guarantees a stable and secure physical, commercial and legal environment. The Tribunal found that Tanzania’s seizure of City Water’s offices and deportation of City Water staff violated Tanzania’s obligation to provide a safe environment.
Remedies:9 The majority of the Tribunal (Messrs. Landau and Hanotiau) ruled that, although some of Tanzania’s acts met the treaty-established elements for breach of Tanzania’s treaty obligations, BGT had failed to establish a causal link between that breach and the diminution in value of BGT’s investment. The majority found, specifically, that Tanzania’s actions were neither the proximate cause nor the cause in fact of City Water’s economic failure. The Tribunal proceeded to demonstrate that, at the time Tanzania committed the acts violative of the BIT, City Water was already worth nothing due to BGT’s mismanagement. Thus, according to the majority, Tanzania had not injured Claimant.
Amici Curiae:10 The Tribunal noted with approval arguments made by amici curiae, which the Tribunal allowed to participate by applying the new ICSID Rules.11 In fact, the Biwater Gauff Tribunal was the first ICSID Tribunal to permit amicus participation under the new Rules. The Tribunal’s extensive discussion of the points raised by the amici, and its reference to the usefulness of the amicus submission, affirmed the active role amici are expected to play in investment arbitration, and vested third-party participation with additional institutional legitimacy (beyond that conferred by the Rules themselves). Notably, in this instance, the amici did not confine themselves to broad policy considerations, as the Tribunal’s initial decision to allow their participation suggested. Rather, they addressed several substantive issues, including, inter alia, the possibility that BGT’s bid for the project was artificially (and unsustainably) low with an eye to renegotiation at some future point.
The Partial Dissent
As mentioned above, one of the arbitrators, Gary Born, disagreed with the Tribunal majority’s conclusion that BGT had failed to establish a causal link between Tanzania’s actions and BGT’s injury. According to Mr. Born’s partial dissent, since BGT had made a broad plea for relief, it had requested legal redress for all types of injury recognized under the BIT. Thus, a facial violation of the BIT by Tanzania automatically amounted to compensable injury to the Claimant and the causal link between act and injury was actually present. One of the ways Tanzania had injured Claimant was by depriving it of the enjoyment of its investment before the contractually determined termination of the Project Contracts. Tanzania’s expropriatory act was a legally cognizable injury under the Treaty. Yet, because the investment was worthless, the injury resulted in zero damages. Accordingly, Mr. Born concurred in the judgment that Claimant should receive no compensation.
The majority’s response was that both its and Mr. Born’s approaches were “tenable” and led to the same result—namely that the Claimant was not entitled to compensation.
Biwater Gauff is an important case, which first and foremost illustrates the maxim “caveat investor.” ICSID claims are not insurance policies for investment decisions that fail to yield desirable outcomes because of poor planning and/or mismanagement. The Award itself serves as a model of reasoning and exhaustive analysis. In addition to promoting a flexible view as to the notion of “investment” under the ICSID Convention, the Tribunal offered clear and compelling insights on several legal standards, such as fair and equitable treatment, which otherwise remain hotly debated in international investment law. Furthermore, the Tribunal helped solidify the legitimacy of amicus submissions, a practice that is nascent in ICSID arbitration. Finally, the debate between the majority and Mr. Born on the issue of causation highlighted several nuances of a less discussed aspect of ICSID claims. In all, the Biwater Award is an important addition to ICSID jurisprudence that is certain to serve as a guide for many tribunals in the years to come.