Biwater Gauff (Tanzania) vs Tanzania

Biwater Gauff (Tanzania) vs Tanzania

by Oleksandra Riabenko

Procedural Order No. 3

This tribunal’s decision flies directly in the face of the general trend in investor-state arbitration toward greater transparency.

The tribunal asserts the need to avoid “trial by media” and to “preserve the proper functioning of the dispute settlement procedure.”

Biwater Gauff has exited Tanzania, so the tribunal’s concern to preserve the relationship of trust and confidence between the parties would seem irrelevant.

Procedural Order No. 5

Procedural Order No. 5 could be described as three steps forward, one step back:

There can be no concerns about exacerbating the value of the dispute itself, because Biwater Gauff’s losses crystallized at the point where it left the country.

Repeated acknowledgement of the undoubted public interest in the arbitration and its rejection of BGT's submission that the case is a simple contractual dispute without wider environmental, human rights, or sustainable development implications.

Adoption of the Methanex tribunal’s statements concerning the desirability of increasing the transparency of investor-state arbitration.

Willingness to allow the petitioners to file a written submission

Refusal to grant the petitioners access to key arbitration documents

Factual Background

02/08/2005 - Biwater Gauff (Tanzania) Ltd. (BGT) filed a request for arbitration against the Tanzania at the ICSID.

The substance - the claimant’s investment in the water and sewerage system of Dar es Salaam.

1997 - crisis neared. The government created DAWASA.

A human rights/sustainable development angle to this case

Separate Opinion

Tanzania breached its obligations under BIT in respect of the BGT's investment in the water and sewarage system or Dar es Salaam

The tribunal held that:

The World Bank and the IMF pushed Tanzania to bring private investment.

Arbitrator Gary Born diverged from his colleagues Bernard Hanotiau and Toby Landau.

Before the BGT:

“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).”

The tender was won by joint British-German venture - BGT.

versus

August 2003 - DAWASA had about 100,000 water customers (in a city with about 3 million population)

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.

The service was erratic (many households received water less than 6 hours per day)

Water delivered was not safe for drinking

When investors choose to enter into this sector, they encumber themselves with responsibilities linked to the achievement of essential human rights.

BIT - a treaty between two governments under which "each promises, on a reciprocal basis, to observe the standards of treatment laid down by the treaty in its dealings with investors from the other contracting states"

February 2003 - BGT and DAWASA signed a 1-year contract for providing water and sewerage services.

The investor claimed for all of the various expenditures by the BGT, as well as the opportunity costs of having made these investments.

periodic outbreaks of cholera and water diseases

Standards

BGT claimed losses of $20-25 million

fair and equitable treatment

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.

compensation for the investor

MFN treatment

national treatment

international arbitration of disputes

Problems in arbitrations between foreign investors and governments

Major rationale

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.

The assumption was that it would be very hard if not impossible to perform worse than DAWASA

such disputes frequently arise in sensitive public service sectors like water, electricity, oil and gas, waste disposal, and telecommunications

may challenge measures taken by the host government to protect the public welfare, if the measures directly or indirectly affect the value of the investment

to avoid the delay or bias an investor might face if it were to commence legal proceedings against the host government in that country’s courts.

One of more than 250 known international arbitrations by foreign investors against governments, mostly of developing countries under BITs

investors have been known to use the threat of investor-state arbitration as a tactic to discourage governments from pursuing public welfare regulations in their public’s interest

have significant implications for the public purse.

Lauder v. Czech Republic

CME Czech Republic B.V. v. Czech Republic)

$350 million of damages

Mr. Born felt that some further remedy was owing. He 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).

Desert Place Properties vs Republic of Yemen

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.

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.)

Still, BGT apparently failed to meet its own performance targets under the lease contract (60% of shortfall).

The context in which this investment under the UK-Tanzania BIT occurred placed additional obligations on the investor, these additional obligations relate to legal human rights duties and sustainable development issues.

Aguas Argentinas et al v Argentina

Investor-state arbitrations have largely taken place under a veil of secrecy.

Legal Arguments of Amici Curiae

Amici

The water quantity was lower by about 20%

LHRC

LEAT

CIEL

TGNP

IISD

Some tribunals have allowed non-parties such as human rights and environmental non-governmental organizations to file written submissions in the proceedings:

December 2004 - BGT proposed a revision of contract.

BITs are not insurance policies against bad business judgements

The factor that gives this case particular public interest is that the investment dispute centres around the water distribution and sewage systems of a larger metropolitan area … Those systems provide basic public services to millions of people and as a result may raise a variety of complex public and international law questions, including human rights considerations.

The failure of BGT's investment was closely related to a lack of business competence and acumen, or to a poor business strategy

Amici Curiae

April 2005 - BGT and Tanzania appointed an independent mediator to conduct a contract renegotiation.

Suez v Argentina

Methanex v USA

Existing investor-state case law and emerging doctrine support at least three specific investor responsibilities:

the duty to apply proper business standards to the investment process, including proper due diligence procedures

The right to water and to pursue sustainable development goals, so fundamental to developing countries, should be understood to increase the standards of responsibilities of investors in the water sector.

the duty to observe the principle of pacta sunt servanda

the duty to act in good faith both prior to and during the investment period

2006 - ICSID revised its Arbitration Rules

The BGT's performance was below that proposed in its bid, as well as achieved by DAWASA

Canada, the United States, and Mexico have agreed that investor-state hearings under NAFTA should be open to the public.

Definition of Investment

13/05/2005 - the government announced that the lease contract terminated that day.

The tribunal in BGT vs Tanzania noted the problematic nature of the Salini test:

August 2005 - BGT filed a notice of arbitration with ICSID

duration

regularity of profit and return

Conclusion

assumption of risk

substantial commitment

According to BGT, Tanzania broke its obligations under UK-Tanzania BIT by terminating the contract and deportation of senior management.

significance for the host state's development

BGT alleged that as a result it suffered losses of U.S. $20-25 million.

“A more flexible and pragmatic approach to the meaning of ‘investment’ is appropriate, which takes into account the features identified in Salini, but along with all the circumstances of the case, including the nature of the instrument containing the relevant consent to ICSID”.

Expropriation

The case in context

Although the investor's claims for damages were dismissed, ICSID tribunal held that Tanzania breached 4 different provisions of the treaty.

BGT's investment in water and sewerage system was closely watched by civil society groups, concerned that privatization of the water supply will result in even worse access to water for the poor.

The BGT alleged that expropriation was made by government with the subsequent purpose to physically occupy its offices, usurp management control and deport key executives.

If BGT succeeded its claim, Tanzania may had to pay out millions of $ in compensation.

The Government of Tanzania argued that BGT had simply nothing to be expropriated.

The tribunal’s judgment could arguably be claimed as a victory by both the respondent and the claimant. While it upheld a number of the claimant’s contentions by finding that the Tanzanian Government did breach the BIT through a cumulative expropriation of BGT’s investment, violating certain standards of the fair and equitable treatment standard and displaying unreasonable and discriminatory conduct, it dismissed BGT’s other allegations against the government and, importantly, its claims for damages.

Tanzania noted that the likely collapse of the BGT could have threatened the water supply and sewerage and, hence, public health and welfare.

Even should BGT not succeed, Tanzania will be left with a hefty legal bill, funds that may otherwise have been available to further sustainable development in a poor country.