Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22

(Originally published in 2011 in International Investment Law and Sustainable Development: Key cases from 2000–2010; republished on this website on October 18, 2018. Read more here.)

Award available at https://www.italaw.com/sites/default/files/case-documents/ita0095.pdf

Keywords

Amicus curiae, causation, damages, definition of “investment,” expropriation, fair and equitable treatment, jurisdiction, margin of appreciation, multiple/parallel proceedings, necessity, reference to other bodies/principles of law, “Salini” test, transparency

Key dates

Request for Arbitration: 5 August 2005

Constitution of Tribunal: 9 February 2006

Award: 24 July 2008

Arbitrators

Mr. Bernard Honotiau (president)

Mr. Gary Born (claimant appointee)

Mr. Toby Landau (respondent appointee)

Forum and applicable procedural rules

International Centre for Settlement of Investment Disputes (ICSID)

ICSID Rules of Procedure for Arbitration Proceedings

Applicable treaty

United Kingdom–Tanzania Bilateral Investment Treaty (BIT)

Alleged treaty violations

• Expropriation
• Fair and equitable treatment
• Full protection and security
• Unreasonable or discriminatory measures
• Unrestricted transfer of capital and returns

Other legal issues raised

• Causation
• Damages
• Interpretation—reference to other bodies/principles of law
• Jurisdiction—definition of “investment”—definition under the ICSID Convention
• Margin of appreciation
• Necessity defence
• Procedure—amicus curiae participation
• Procedure—transparency

1.0 Case Summary

1.1 Factual Background

In 2003, the World Bank and other international financial institutions awarded Tanzania US$140,000,000 in order to enable the country to repair and upgrade its water and sewer infrastructure and services. As a condition of that funding Tanzania had to appoint a private party to manage and operate the water and sewerage systems and related works. The claimant, Biwater Gauff (Tanzania) Limited (“Biwater” or “the Claimant”[1]), successfully bid for the right to develop Tanzania’s water and sewer infrastructure and services project (“the Project”) and formed another company, City Water, to operate the Project. City Water and the relevant government agency, the Dar es Salaam Water and Sewerage Authority (“Water Authority”), entered into the contracts governing implementation and operation of the Project in February 2003.

As a result of the Claimant’s “poor” bid and the Claimant/City Water’s subsequent mismanagement of the Project, City Water failed to generate expected income and consequently encountered extreme financial and practical difficulties that prevented it from meeting its contractual obligations (para. 789). These difficulties became so severe that, just eighteen months into what was supposed to be at least a ten-year arrangement, City Water made clear that it needed to renegotiate the terms of the underlying deal in order to avoid complete collapse of its business and activities. Although the government had no legal obligation under the contract to renegotiate, it agreed in February 2005 to do so. The parties appointed an expert mediator to facilitate the process and set 6 May 2005 as the deadline for reaching an agreement.

On 12 May 2005, the renegotiation process ended in failure when City Water rejected the final compromise agreement proposed by the mediator. Given the failure of the renegotiations and City Water’s inability to fulfill its obligations under the contract, the Water Authority concluded that same day that, among other actions, it should begin the process to terminate the Project contract with City Water. On 13 May 2005, the Minister of Water and Livestock Development (“the Minister”) issued a press release to the same effect. On 17 May 2005, the Minister informed City Water staff that the Project contract with City Water had been terminated and that City Water operations and staff would be transferred to a new government entity. The Water Authority issued a notice to terminate the contract on 25 May 1999; pursuant to that notice, the contract would terminate on 24 June 1999 if City Water had not yet cured its breach.

City Water, in turn, stated in a 30 May 1999 communication with the Water Authority that (1) the 25 May 1999 notice of contract termination was invalid and that (2) City Water was “determined to continue to perform the contract and would continue to do so unless and/or until” an arbitral tribunal constituted in accordance with the Project contract “decided otherwise” (para. 221). On 1 June 2005, government officials deported City Water’s senior management, appointed new management, entered City Water’s offices, took control of the company’s assets and informed City Water staff of the changes.

1.2 Summary of Legal Issues and Award

The Claimant initiated these ICSID proceedings roughly two months later. It argued that the government’s actions (including the actions of the Water Authority and the Minister, all collectively referred to as “Tanzania” or “the Government”), including its termination of the contract, announcements about that termination in a press conference and staff meeting, deportation of City Water’s management, and seizure of City Water’s assets violated Tanzania’s obligations under the United Kingdom–Tanzania Bilateral Investment Treaty (BIT)  to  (1)  not  unlawfully expropriate  property, (2) provide fair and equitable treatment, (3) not impair the investment through unreasonable or discriminatory measures, (4) grant full protection and security and (5) guarantee the unrestricted transfer of funds.

Over the respondent’s objections, the Tribunal found that it had jurisdiction over the dispute and then agreed with the Claimant that Tanzania had violated the first four of the five treaty obligations noted above. The Tribunal held, however, that the breaches of the BIT did not cause City Water any losses. Accordingly, the Tribunal held that Tanzania was not liable to pay any damages to the Claimant. In reaching its conclusions, the Tribunal relied not only on the submissions by parties, but also on information provided in an amicus brief by several non- governmental organizations (NGOs) (“the Amici”)[2]with expertise in environmental, human rights and sustainable development issues relevant to the case (paras. 57–68, 356–392).

City Water had also initiated parallel proceedings before a separate tribunal, in which City Water alleged Tanzania breached its obligations under the Project contract. In a December 2007 decision, that tribunal, which operated in accordance with the UNCITRAL [United Nations Commission on International Trade Law] Arbitration Rules, rejected City Water’s claims and instead awarded roughly £3 million in damages to the Water Authority.[3]Shortly after the UNCITRAL tribunal issued that decision, Tanzania submitted the decision to the ICSID Tribunal on the ground that it was relevant to, and should be considered in connection with, assessment of the Claimant’s treaty-based claims (para. 477). The ICSID Tribunal, however, disagreed. It stated that it was both obligated and able to “make its own determinations on all matters of fact and law” and that it would therefore not rely on the UNCITRAL award when assessing the merits of the treaty dispute (para. 478).

2.0 Select Legal Issues

This investor–state dispute touches on a host of issues relating to sustainable development: it speaks to, among other topics, the balance struck by BITs between investors’ rights and investors’ obligations and states’ corresponding rights and obligations; transparency in and legitimacy of investor–state dispute settlement; and needs for and risks of private investment in what are traditionally public services. This summary focuses on six particular issues: (1) jurisdiction and the definition of an “investment” under the ICSID Convention; (2) transparency of the proceedings; (3) amicus curiae participation in investment disputes; (4) the award’s apparently low threshold for successful expropriation claims; (5) the Tribunal’s apparent failure to accord Tanzania a “margin of appreciation” and subsequent rejection of the government’s “necessity” justifications; and (6) the practical significance of the Tribunal’s approach to causation.

2.1 Definition of an “investment” under the ICSID Convention

Article 25 of the ICSID Convention specifies that ICSID tribunals can only assume jurisdiction over certain legal disputes. One of its jurisdictional requirements is that the dispute must arise directly out of an “investment,” a term that, in contrast to many BITs (including the BIT between the United Kingdom and Tanzania governing the Biwater dispute), is not defined in the Convention. Tanzania argued that the meaning of an “investment” under the ICSID Convention had been developed through case law and required establishment of five criteria that are often cited as the “Salini” test: (1) adequate duration; (2) regularity of profit and return; (3) risk; (4) substantial commitment of resources, financial or otherwise; and (5) contribution to the host state’s development.[4]  Tanzania objected that even if the Claimant’s activities qualified as an investment under the governing BIT, which defined investments broadly, the Claimant’s activities did not satisfy the Salini test and, therefore, the Tribunal did not have jurisdiction under the ICSID Convention to hear the dispute.

The Tribunal rejected Tanzania’s arguments. It stated that the five Salini criteria were neither fixed nor mandatory requirements for an “investment” under the ICSID Convention, but were merely factors that should be taken into account. Notably, the Tribunal also stated that the definition of “investment” in the relevant BIT should inform interpretation of “investment” under the ICSID Convention. e Tribunal noted that, in the case before it, the governing BIT broadly defined an “investment” as “every kind of asset.” It then concluded that such broad language counselled against using the narrow definition of “investment” that would result through strict application of the Salini test.

The approach used by the Tribunal here—of using the BIT to guide interpretation of the ICSID Convention and to inform (and broaden) the scope of ICSID jurisdiction—arguably contrasts with the approach used by other tribunals. In Phoenix v. Czech Republic, for example, the tribunal emphasized that the jurisdictional requirements of the ICSID Convention were separate from and additional to the jurisdictional requirements under the governing BIT or other agreement. According to the Phoenixtribunal, parties to a BIT can confirm or restrict the ICSID notion of an investment in their BITs, but cannot expand it in order to have access to arbitration under the ICSID Convention.

2.2 Confidentiality requirements

In September 2006, in response to a request by the Claimant, the Tribunal issued an order directing parties to refrain from disclosing to any third parties documents and other information produced by the parties during the proceedings. The confidentiality order also instructed parties to limit public discussion of the case to what was “necessary” and would not cause the dispute’s resolution to become “potentially more difficult” (para. 51). When issuing that order, the Tribunal noted that there was no general principle of confidentiality in ICSID proceedings that would prevent a party from disclosing information from or about the proceedings,[5] and also acknowledged that there was an “accepted need for greater transparency in this field [that] generally militate[d] against” the gag order sought by the Claimant.[6] It nevertheless held that its restrictions on disclosure were warranted in the Biwater dispute because the public interest in and media attention on the case threatenedto aggravate the matter and prejudice the parties.[7]

The Tribunal’s order—which limits public access to information precisely because of the public’s interest in it and which was triggered by thethreat of (as opposed to actual) prejudice—raises concerns, including that it could conflict with obligations of governments and businesses to act openly and transparently.

2.3 Amicus Curiae Participation

During the course of these proceedings, the ICSID Arbitration Rules were amended to include more specific provisions regarding non-party participation. In particular, Arbitration Rule 37 was revised to both make clear that tribunals have the general authority to allow submissions by amicus curiae and to provide guidelines regarding when consideration of such submissions would be appropriate. Pursuant to those amended rules, the Amici filed their petition for amicus curiae status in November 2006.

The Claimant opposed the Amici’s request on the grounds that the Amici’s contributions would be factually and legally irrelevant to the dispute and/or would not contribute anything that could not be added by the parties (para. 358). The Tribunal, however, rejected the Claimant’s arguments. In support of its decision to admit the brief, the Tribunal first noted the broad implications of and the public interest in the dispute (para. 358). Then, turning to the particular application of the Amici, the Tribunal held that their participation was appropriate in light of the considerations set forth in the new Arbitration Rule 37. The Tribunal explained that the petitioners were NGOs “with specialized interests and expertise in human rights, environmental and good governance issues” who “approach[ed] the issues in this case with interests, expertise and perspectives that have been demonstrated to materially differ from those of the two contending parties, and as such have provided a useful contribution to these proceedings” (para. 359). The Tribunal further emphasized the importance of the Amici’s input, making clear that the Amici’s “submissions [had] informed the [Tribunal’s] analysis of [the] claims” (para. 392).

The Tribunal, however, constrained the nature of the Amici’s participation. The gag order discussed above hindered the Amici’s ability to meaningfully participate in the dispute by limiting the Amici’s knowledge about relevant issues and facts. The Tribunal also rejected the Amici’s attempts to overcome those limits when it denied the Amici’s requests to access documents produced by the parties during the proceedings and to attend oral hearings (paras. 365–369).[8] Although the Tribunal indicated that it might have revisited and/or altered its decision regarding access to documents if there were sufficient need, it suggested its discretion on the issue of oral hearings was more limited: the Tribunal explained that because the Claimant opposed opening the hearings to the Amici, it was powerless under the ICSID Arbitration Rules to allow the non-parties’ attendance (paras. 367–369).

The Tribunal’s acceptance of and reference to the Amici’s contributions is significant for a number of reasons: it recognizes and affirms the public interest in investor–state disputes, helps normalize the idea of non-party participation, helps ensure that investor–state disputes take into account broader issues such as sustainable development and human rights where relevant, promotes investor and government accountability and enhances the perceived legitimacy of the system. Moreover, although the decision seems to allow either party to veto opening hearings to non-parties, it also appears to suggest a willingness to override a party’s objection to disclosing documents in some circumstances (paras. 365–368). Building on these trends, in October 2009, a tribunal in another investor–state dispute, Foresti v. South Africa,[9] issued a decision clarifying when such document disclosure would be necessary. It concluded that in order to enable the non-parties participating in the dispute to be effective and useful, those non-parties must be granted access to documents submitted by the disputing parties.[10]

2.4 Expropriation: Lowering the threshold for liability

According to the Tribunal, key elements establishing an expropriation claim are that the state, (1) acting through exercise of its sovereign authority (as opposed  to  acting merely  as  a  contractual  party) (paras.  457–458), (2) unreasonably deprived an investor of its rights (para. 463). Based on these principles, the Tribunal found that Tanzania had cumulatively expropriated the Claimant’s rights in violation of the BIT. More specifically, the “rights” that the Tribunal found had been expropriated were the Claimant’s rights to termination of the contract in accordance with the contractually specified procedures (para. 487). With respect to the allegedly wrongful acts, the Tribunal held that Tanzania had effected the expropriation through a series of steps including (1) the Minister’s 13 May 2005 press conference and 17 May 2005 speech to City Water staff announcing termination of the contract, (2) the government’s takeover of City Water’s premises, assets and operations on 1 June 2005 and (3) the government’s deportation of City Water officials, also on 1 June 2005 (para. 519).

One reason these findings warrant attention is that they appear to deviate from other investment law decisions by applying a low threshold for government exposure to expropriation claims. More specifically, the Tribunal’s holding that the government effected an expropriation by depriving the Claimant of its contract termination rights—a small subset of the Claimant’s original bundle of rights under the Project contract—seems inconsistent with the body of case law that only allows expropriation claims for substantial deprivations of rights that essentially destroy the investor’s investment (paras. 438, 463). The Tribunal noted that those rights to normal contract termination were, as a result of the Claimant’s own misconduct, the only rights the Claimant had left at the time of the expropriation; the Tribunal then concluded that, by interfering with those limited remaining rights, the government interfered with the Claimant’s entire investment (para. 489). Consequently, Biwater seems to lower the threshold for claimants to prevail in expropriation claims and, paradoxically, also seems to do so when the investor has played a significant role in eviscerating its own rights.

Biwater seems to also lower the bar for government exposure to expropriation claims by finding that statements by government officials (1) to the public relating to such fundamental issues of public importance as water infrastructure and (2) to staff regarding the future of their employment could give rise to liability even where there is no evidence that such statements had any impact at all on the investment (paras. 696, 699, 800). Biwater, therefore, raises questions regarding when government statements are legitimate efforts to manage the public’s and employees’ legitimate expectations and when those statements could be deemed wrongful under international investment law.

2.5 Protection of public interests and the margin of appreciation

Tanzania argued that its actions in taking over the facilities and management of City Water could not support any liability under the BIT because they were justified under the Project contract’s provision allowing the Water Authority to “take any measures…necessary…to ensure continuity of water supply and sewerage services” when facilitating change to “a new system of management” (para. 428). More specifically, Tanzania argued that City Water’s lack of funds prevented it from performing properly and created a “real threat to public health and welfare” (para. 436). In light of that threat, when City Water refused to turn over its operation of the Project  at  the  end  of  May,  the government  had  contractual discretion—in addition to moral and arguably legal obligations—to take actions it thought necessary to regain possession and control of City Water’s assets and operations (paras. 429, 434). Tanzania further contended it was entitled to a “measure of appreciation” by the Tribunal reviewing its actions (paras. 434–435).

The Tribunal, however, dismissed those defences and apparently did not accord the government its requested level of deference. Even though it recognized that, “viewed at that time, this crisis [with City Water] could have threatened a vital public service and…had to be resolved one way or the other” (para. 654), it nevertheless held that there was “no necessity or impending public purpose to justify the Government’s intervention in the way that took place” (para. 515). This holding suggests both a lack of deference to governments and a strict requirement for them to adhere to contractual procedures, irrespective of whether such adherence is compatible with their broader obligations to the public.

2.6 Causation and damages: Finding liability even without losses

Although the Tribunal found for the Claimant on four of its five claims, it held that Tanzania was not liable for any damages because any losses suffered by the Claimant were caused by the Claimant’s own failures in the performance of the Project contract (para. 773–808). This approach, which places the causation analysis in the context of assessing whether and what amount of damages are due, differs notably from the approach used in other cases such as Lauder v. Czech Republic,[11] which require proof of causation in order to establish there has been a violation of the BIT at all (paras. 757–758). The difference in the two approaches is not just analytical, but can have practical impacts. A tribunal’s conclusion that a respondent state has violated the BIT, for example, can result in it imposing a larger share of the parties’ and tribunal’s legal fees and costs on the respondent state or can damage the host state’s reputation as a safe and desirable place for foreign investment.

Notes

[1] The term “Claimant” is used to refer to Biwater Gauff (Tanzania), or BGT, as well as Biwater International Limited and HP Gauff Ingenieure GmbH and Company, BGT’s English and German parent companies, whose joint venture had prepared and submitted the bid (para. 112).

[2] The Amici included the Lawyers’ Environmental Action Team, the Legal and Human Rights Centre, the Tanzania Gender Networking Programme, the Center for International Environmental Law, and the International Institute for Sustainable Development (para. 57).

[3] See A. Seager (2008), “Tanzania wins £3m damages from Biwater subsidiary,” The Guardian, 11 January, http://www.guardian.co.uk/business/2008/jan/11/worldbank.tanzania.

[4] As shown in Phoenix v. Czech Republic, the Salini test is often cited as having four, not five, cirteria: a contribution (1) of money or other assets of economic value, (2) for a certain duration, (3) with an element of risk, and (4) that makes a contribution to the host state’s development.

[5] Biwater, Procedural Order No. 3, 29 September 2006, paras. 124–25.

[6] Biwater, 2006, para. 133.

[7] Biwater, 2006, paras. 143–48.

[8] See N. Bernasconi-Osterwalder (forthcoming), “Transparency and amicus curiae in ICSID arbitration: Lessons learned from Biwater Gauff v. Tanzania,” in M. Gehring, M.-C. Cordonier Segger & A. Newcombe (Eds.), Sustainable development in world investment law, Kluwer Law International.

[9] Piero Foresti, Laura de Carli and others v. Republic of South Africa, ICSID Case No. ARB(AF)/07/1.

[10] Foresti v. South Africa, Letter to Non-Parties in Response to Petition for Limited Participation as Non-Disputing Parties, 5 October 2009. The Foresti tribunal left open to a later date the issue of whether it would allow the non-parties to attend or make oral submissions at hearings in the case.

[11] Final Award (3 September 2001), paras. 233–234.