Abhileen Chaturvedi, Economic Laws Practice (ELP)
It was in the early 90s, when India along with most of the developing world, embraced the idea of a liberalised economy. The ‘Liberalisation Era’ as it were called, continues to benefit the country in unimaginable ways with the population too welcoming the transition. Both the local and the national government made promises, then and now, in the form of incentives or concessions or a public private partnership for attracting foreign investments in India. However, the exact legal status of such promises remains a controversial subject – are these ‘internationalised’ contracts to be treated in the same level as treaties obligations or are they to be treated strictly as a commercial contract[1]. A related question thus arises as to whether a contracting state would violate international law if it modifies or prematurely terminates a concession agreement, between itself and a private party.
Through this article, we study the recent trends under the investor state dispute settlement (‘ISDS’) mechanism where similar controversies arose. The paper discusses the basic qualifications which a concessionaire needs to posses in order to invoke a treaty claim and certain substantive rights available to the investor.
Jurisdiction
The protections available to an investor are limited to the qualified ‘investors’ and ‘investments’ as defined under the relevant treaty. While certain treaties determine the nationality of an ‘investor’ by seat, place of effective management or substantial control, certain other treaties also treat locally incorporated entities that are owned or controlled by nationals of the contracting states as qualified investments under a treaty[2]. The definitions of ‘investment’ also differs in different treaties. Certain countries provide elaborate qualifications for an ‘investment’[3], whereas some countries adopt a much liberal approach[4].
A concessionaire foreign investor would either hold a direct or an indirect stake in the constituted entity which owns and operates the business. When a host states adopts a measure, modifying or terminating the concession, two jurisdictional issues are bound to rise: (i) whether the foreign shareholder/investor would initiate a the treaty claim; or (ii) whether the local company has standing to bring treaty claims.
A separate issue is whether a locally incorporated entity has standing to bring treaty claims on its own behalf when it is owned or controlled by foreign investors. The ICSID Convention expressly allows locally incorporated entities to appear as claimants in arbitration proceedings[5], if the respondent state has consented to it under the relevant BIT[6].
Legitimate expectations
The doctrine of legitimate expectations is perhaps the most relevant in disputes involving concessions, where investments have often been made, placing reliance on a concession which would generate a predictable and stable revenues during the term of the concession[7].
However, this does not mean that the host state must bring its regulatory/policy changes to an absolute standstill. It means that the state cannot unilaterally withdraw the entire legal framework on which the investor relied on when the investment was made for a particular project[8].
In Urbaser v Argentina[9], the tribunal held that the legal framework that the investor knew or should have known at the time of investing included the potential measures that Argentina might have to adopt to protect basic human rights. The tribunal noted that the relevant regulatory regime at the time the investments were made included other legal obligations Argentina had entered into, including Argentina’s constitutional obligations ‘to ensure the population’s health and access to water and to take all measures required to that effect.’ The tribunal recognised that ‘the Province had to guarantee the continuation of the basic water supply to millions of Argentines. The protection of this universal basic human right constitutes the framework within which Claimants should frame their expectations.’ That said, the tribunal noted that although these obligations ‘prevail’ over the concession, ‘the Government must exercise such responsibility in a manner that comports with the [FET] standard.’ Ultimately, the tribunal concluded that Argentina’s measures terminating concession were not in breach of the FET standard, except with respect to the manner in which the government sought to renegotiate the concession agreement between 2003 and 2005.
Transparency
The FET standard also requires states to act transparently towards investors, free from ambiguity and uncertainty[10].
In Crystallex v Venezuela, Crystallex was the recipient of a concession through a joint venture incorporated with the state-owned entity Corporación Venezolana de Guayana (CVG). The mining operation contract was executed to develop mining concessions in Venezuela. While Crystallex applied for all necessary permits, one of the ministries expressed concerns over an environmental permit due to apprehensions, over the project’s impact on the environment and indigenous peoples in the area. When CVG terminated the MOC in 2011, Crystallex brought claims under the Canada-Venezuela BIT.
In analysing Venezuela’s failure to act transparently, the tribunal ‘linked’ the ‘the notion of transparency’ to the ‘concept of consistency’, which the tribunal found Venezuela had failed to comply with when dealing with Crystallex. The tribunal found the reference to global warming particularly troubling, as ‘such concern had not been raised a single time in the innumerable occasions of exchanges occurred between the Claimant and the Venezuelan authorities throughout the four-year review process‘. Therefore, the tribunal found that the process leading to the permit denial had not been transparent because the claimant had not been informed and had not been given the opportunity to comment on any environmental issues[11].
Full protection and security
The full protection and security (FPS) standard is another frequently invoked substantive measure in treaty arbitration arising out of violations due to change in concessions granted to an investor. While it is often invoked, Tribunal’s on most occasions have ruled against an investor. FPS undeniably provides protection against physical violence (to the the investor or its investments) in the host state[12], but concessions-related disputes often raise the question whether the FPS extends includes legal certainty[13].
There is little consistence in the ISDS jurisprudence over this issue and tribunals interpret this substantive protection narrowly. In Azurix v Argentina, the tribunal accepted the view that FPS is ‘not only a matter of physical security; the stability afforded by a secure investment environment is as important from an investor’s point of view.’ On the contrary, in OI European Group BV v Venezuela case, the tribunal dismissed the claimant’s argument that the FPS standard covers legal certainty[14]. While academic questions may arise, practically, once a tribunal has found a breach of the FET standard, it will be unlikely that the tribunal will also decide whether the disputed measure also violated the FPS standard – an additional violation of the treaty may not affect the amount of damages.
Contract and treaty claims
A dispute between a state and an investor, on most occasions gives rise to complex jurisdictional issues. There is a great chance that the parties might dispute the nature of the claim – whether it’s a claim under a treaty or it’s a contractual claim under the concession agreement. An investor may elect to invoke the dispute resolution clause in a concession agreement (could be arbitration or litigation) and depending upon the language the BIT, could perhaps invoke the dispute resolution process prescribed under the host state’s BIT with the investor’s home state.
It is this multiplicity of forums available to investor which gives rise to certain convoluted and intricate jurisdictional objections. Under the investor state dispute settlement mechanism, where treaty provisions are invoked by an investor on account of revision/amendments/termination of a concession; governments invariably argue that the claim is purely contractual and not covered by the treaty; there is no consent to treaty arbitration when parties agree that disputes under the contract are to be referred to the local courts; or the claim is inadmissible because the treaty contains a ‘fork-in-the-road clause‘ that bars the tribunal from hearing the case if the investor has already submitted the dispute to the local courts. Generally, under international law, the violation of a contract between a state and an investor is not in itself a violation of international law.
A BIT may also sometimes contain an umbrella clause. Under an umbrella clause, an investor can argue that issues ordinarily governed by local law and jurisdiction (including breach by the state of its contractual obligations owed to the investor), will be characterised as a breach of an investment treaty obligation.
As straightforward as it may sound, not every breach of contract, even where an umbrella clause applies, will result in a violation of the applicable treaty. Assuming that commitments in a state contract are covered by the umbrella clause, the protection afforded under a BIT is only granted when the investor can establish that the host state exercised its sovereign authority to depart from its contractual commitments.111
Expropriation
A bedrock of most of the BITs is the protection accorded to an investor against expropriation, nationalisation or measures of a like nature. While most BITs will distinctly shield investments from direct expropriation, measures amounting to an indirect or creeping expropriation may also be challenged by an investor. Though expropriation is not prohibited, it necessarily must be for a public purpose, non-discriminatory, and in accordance with due process, and subject to compensation. The most likely questions which must be determined would therefore be whether an expropriation occurred and whether that expropriation was lawful or unlawful.
When it comes to concessions, the rights of an investor which may be protected under a BIT (though this might differ in different BITs), could possibly include shareholding interests (in the form of both equity and loans), the right to exploit or operate the concession assets along with the expectation of a stabilised policy and regulatory atmosphere in the host country. Even though a government may not adopt distinct and identifiable measures which expropriate an investment, measures adopted by a government which can neutralise the concession granted, or where government intervention through policy measures renders it impossible to operate the concession, may qualify as instances of indirect or creeping expropriation. An arbitral tribunal constituted under BIT may thus have to look into the effect of a government measure and whether the government’s measure has rendered the concession commercially difficult or commercially unviable and whether the government measure is absolutely arbitrary, discriminatory and without any due process.
From the above it can be inferred that after a tribunal has determined that there exists an instance of expropriation, it must also determine whether the same is lawful or unlawful. The importance of this determination is pertinent, as it affects the amount of damages that the respondent state may have to pay. In cases of lawful expropriation, the compensation amount is calculated based on the fair market value of the expropriated investment. However, if a tribunal finds that an expropriation was unlawful under international law, the principle of full reparation under customary international law requires that all consequences stemming from the illegal act must be covered by the damages paid to the investor[15].
Covid – 19 and concession agreement
The reality of the pandemic is not alien to any nation across the globe today. Several measures have been adopted by countries to not only check the spread of the virus but also to check the economic damage that it may cause. While some nations have banned imports from other nations, certain countries have also adopted measures which promote the local industry. There may be the best of intentions behind these measures but the cumulative effect of the same could possibly damage the commercial interests (and in some cases may even expropriate) of a foreign investor.
The work on a number of infrastructure projects stand suspended due to the lockdowns imposed by different governments. While the lockdowns may be temporary, its effects could be more scarring, if not permanent. What happens in a situation when an infra project which otherwise would have been allowed to function, cannot be function due to a mass exodus of its workers? Would there be revision of concessions after the lockdown period given the fact that timelines for completion would change and in fact may lead to escalation in prices too? What happens to a concessionaire of duty-free shops at airports – is the concessionaire liable to pay fees during the period of lockdown? What happens to a concessionaire who cannot export its products due to government restrictions on import/export of manufactured goods or raw material? On the other hand what happens if a concessionaire which may be a global conglomerate, may itself rethink its investment in the host nation as it may not be as lucrative as it would have been in normal times; would the government have the tools to specifically enforce its arrangement with the concessionaire and if yes, before which forum?
Several of these questions arise and it most certainly cannot be said that the present situation will not lead to treaty disputes. Indeed a few days back, there were reports of a concessionaire who threatened treaty arbitration against a South American nation on account of certain measures taken by the government during this crisis. There is a good amount of jurisprudence in the ISDS regime which may address the above concerns but the question that remains is that whether it should be applied in the current scenario, given the fact that the world has experienced few incidents of this nature.
Conclusion
Concession agreements are a useful instrument for governments to attract private participation in large scale public infrastructure projects. Given the fact that the opportunity to invest in these large-scale infrastructure projects will be more in case of a developing nation, one will see a greater number of disputes under the ISDS regime involving a developing nation where the issue pertains to a concession. Over the last few years the incentives offered by governments have become the cause for invocation of various treaty claims. As agreements of such nature are essentially commercial, governments must ensure adequate safeguards, either through its treaty or through the very contract itself so that treaty claims are separable from commercial claims. Also, a local government’s offer of incentives may not be in the larger national interest and thus, it becomes more necessary to use specific language while granting such incentives or concessions so that the national government is distinguished from a local government’s measure.
Abhileen Chaturvedi is an Associate Partner at Economic Laws Practice (ELP). He can be reached here.
Views are personal.
[1] John Baloro The Comparative and International Law Journal of Southern Africa Vol. 19, No. 3 (NOVEMBER 1986), pp. 410-449
[2] A similar situation to the Model India BIT which has an ‘enterprise’ model as opposed to the widely followed ‘asset’ based definition of an investment.
[3] Definition of ‘Investment’ under the Model India BIT
[4] US Model BIT – “investment” means every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk.
[5] ICSID Convention, Article 25(2)(b) 2nd prong
[6] CMS Gas Transmission Company v The Republic of Argentina, ICSID Case No. ARB/01/8, Decision of the Tribunal on Objections to Jurisdiction, 17 July 2003, para. 36
[7] Rudolf Dolzer, ‘Fair and Equitable Treatment: Today’s Contours’, Santa Clara Journal of International Law, vol. 12, p. 17 (2014), emphasizing that ‘[t]he protection of legitimate expectations by the FET standard will today properly be considered as the central pillar in the understanding and application of the FET standard.’
[8] EISER Infrastructure Limited and Energía Solar Luxembourg S.à.r.l. v Kingdom of Spain, ICSID Case No. ARB/13/36, Final Award, 4 May 2017, para. 362
[9] Urbaser S.A. and Consorcio de Aguas Bilbao Biskaia, Bilbao Biskaia Ur Partzuergoa v. Argentine Republic, ICSID Case No. ARB/07/26, Award, 8 December 2016.
[10] Técnicas Medioambientales Tecmed S. A. v The United Mexican States, ICSID Case No. ARB (AF)/00/2, Award, 29 May 2003
[11] Crystallex International Corporation v Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/11/2, Award, 4 April 2016, para. 598.
[12] Christoph Schreuer, ‘Full Protection and Security’, Journal of International Dispute Settlement, Vol. 1, No. 2 (2010), pp. 353-369.
[13] Azurix Corp. v The Argentine Republic, ICSID Case No. ARB/01/12, Decision on Jurisdiction, 8 December 2003
[14] OI European Group B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/11/25, Award
[15] Case Concerning the Factory at Chorzów (Indemnity), Judgment No. 13, 1928 PCIJ, Series A No. 17, Order, 13 September 1928, p. 47, where the PCIJ held that ‘[t]he essential principle contained in the actual notion of an illegal act – a principle which seems to be established by international practice and in particular by decision of arbitral tribunals – is that reparation must, as far as possible, wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed.’
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