Kenya prevails in a geothermal arbitration brought by WalAm Energy— ICSID tribunal rejects all claimant allegations

WalAm Energy LLC v. The Republic of Kenya (ICSID Case No. ARB/15/7)

In an award dated July 10, 2020, an ICSID tribunal dismissed claims brought by WalAm Energy LCC (“WalAm”), a company incorporated in the United States and headquartered in Canada, over a geothermal project in the Republic of Kenya following Kenya’s removal of WalAm’s licence to explore and develop the Suswa geothermal concession. The tribunal found that Kenya validly removed WalAm’s licence by declaring it forfeited due to its failure to perform any physical work during a continuous period of six months.

Background and claims

In a July 20, 2007 letter addressed to the Minister of Energy, WalAm submitted an application for an authority to explore. Later, on September 5, 2007, WalAm Energy obtained a licence from Kenya’s Ministry of Energy, granting the entity exclusive rights to “enter, explore, drill for and extract, produce, utilize and dispose of geothermal steam and associated geothermal resources.” Separately, in a letter dated September 3, 2007, but signed by the minister on the same date as the licence, WalAm was given permission to explore for geothermal resources under Section 6(1) of the Geothermal Resources Act (the “GRA”).

In February 2009, WalAm informed the minister by letter that it had completed the exploration of the Suswa geothermal concession, along with prospecting and pre-feasibility analyses, and proposed to proceed with the geothermal licence rights and initial drilling. At that time, WalAm also asked the government to discuss the possibility of entering into a power purchase agreement (PPA) due to WalAm’s limited financial resources. Later in March, meetings between the government and WalAm representatives took place. Although Kenya engaged in preliminary discussions, a PPA was never concluded.

In March 2009, GeothermEx issued a feasibility report. However, WalAm did not provide a work program to the government until February 2011. In March of that year, the work program was approved based on the understanding that the schedule would be strictly followed. By the end of the year, WalAm’s project had failed to progress and adhere to the program’s plan for that year.

On March 18, 2012, the government wrote a show cause letter stressing that WalAm was in breach of the licence as it had not carried out sufficient work at Suswa over the previous five years. The government also stated that “Under normal practice, it takes five years from geothermal resource exploration to construction of such power plants” (para. 284). On October 30, 2012, the Minister of Energy issued a forfeiture letter revoking WalAm’s licence. In response, WalAm filed for arbitration against Kenya under the licence dispute resolution clause, claiming a breach of customary international law for unlawfully declaring the licence forfeited and seeking hundreds of millions of dollars in compensation and reinstatement of the licence.

Domestic law is the applicable law. Customary international law may apply through domestic law

As the licence had no applicable law provision, WalAm argued that by consenting to arbitrate disputes “pursuant to” the ICSID Convention, Kenya agreed to arbitrate claims arising under Kenyan law and rules of international law because the tribunal’s jurisdiction is founded on the basis of Article 42(1) of the ICSID Convention and Kenyan law, which incorporates customary international law. This article provides that disputes in the absence of agreement between the parties on the applicable law should be decided “under the law of the Contracting State party to the dispute and such rules of international law as may be applicable” (Article 42(1) of the ICSID Convention). The claimant further submitted that Kenyan law and customary international law were applicable because Kenya had expressly incorporated international law into its Constitution. Kenya, however, argued that only domestic law was applicable because that was the law under which the licence was issued.

The tribunal upheld the respondent’s argument and reasoned that under Article 42 (1) of the Convention, Kenyan law was the applicable law because that was the State party’s law to the dispute and the law that applies to the legality of the licence. Also, the licence’s existence and validity derive from domestic law, as the government issued it. The tribunal also added that customary international law could only be relevant when examining particular issues through local law because “customary international law is incorporated into Kenyan law […], but that would not change the applicable law” for a particular issue. Customary international law would only apply to ancillary or general rules incorporated in Kenyan domestic law (para. 348).

Tribunal dismisses Kenya’s allegations regarding the validity of the licence

Kenya argued that under its domestic law, WalAm never applied for a licence because its letter dated July 20, 2007, was an application for authority only to explore. Consequently, a valid licence was never issued because the Minister of Energy never received a licence application. Therefore, the licence was void ab initio because the GRA requirements were not only a “mere formality” as claimed by WalAm (para. 361). The tribunal rejected Kenya’s arguments because the Ministry granted both despite WalAm’s application only for authority. Certainly, Kenya intended to grant both the authority to explore and the licence. The tribunal further stressed that despite the lack of clarity about the circumstances in which the minister’s licence came to be issued as the claimant only applied for an authority to explore, WalAm wished to obtain both authority to explore and a licence. Similarly, the minister intended to grant both and did so, considering that WalAm was compliant entirely with the GRA (para. 364).

Rightful declaration of forfeiture: Tribunal dismisses all grounds raised by the claimant

WalAm challenged the declaration’s validity on different grounds (on ultra vires; unjust enrichment; good faith; unreasonableness; proportionality; improper purpose; relevant and irrelevant considerations; procedural fairness; consent; estoppel, and reliance on own wrong). The tribunal rejected all allegations.

The government acted within its legal power

WalAm first argued that the government acted beyond its legal power (i.e., ultra vires) when it declared the forfeiture of the licence on the basis that WalAm had failed to build the power plant in five years. The tribunal, however,  reasoned that contrary to what WalAm argued, the notice of forfeiture should only be interpreted in light of the licence and the GRA. Therefore, it concluded that the Minister of Energy was entitled to rely on Section 11(1)(a) of the GRA and the licence if no exploration activities were carried out for a continuous period of six months and expressly did so on the notice of forfeiture (paras. 412–428).

Failure to perform physical activity triggers the right to forfeit

WalAm also contended that the minister had no factual basis to rely on Section 11(1)(a) because the work WalAm had done before the forfeiture notice was served could be interpreted as work, considering work as any activity concerning the licence. To determine whether the claimant had carried out any work, the tribunal turned to the interpretation and meaning of the words “in or under the land” in the GRA, Section 11(1)(a), and “in or under the licence area” in the licence, clause 7(1)(a). The tribunal sided with the respondent’s interpretation that both expressions required physical activity (paras. 438–440). The tribunal further explained that this interpretation “reads the forfeiture provision in the context” and was therefore not narrow and literal as argued by WalAm but “consistent with the object and purpose of the licence” and the rights granted under it (para. 441).

Revocation of the licence was in good faith, reasonable and proportional

WalAm further argued that the licence’s revocation was in bad faith because the government’s ultimate goal was to transfer the licence rights to a public entity. The claimant further argued that the forfeiture was disproportionate and unreasonable under domestic law. The tribunal rejected these arguments on the basis that WalAm did not strictly adhere to the timetable. Moreover, given WalAm’s long history of inability to deliver since the work program’s approval on September 7, 2007, and to acquire sufficient financial resources to do so, the licence’s revocation was lawful and therefore reasonable and proportional.

No failure to take into account relevant considerations or consider irrelevant ones

WalAm further argued that the government failed to take into account “relevant considerations” when it decided to declare the licence forfeited. It is well established under Kenyan law that the exercise of discretionary public power may be found to have failed if “irrelevant considerations” are taken into account or “relevant considerations” are disregarded. The tribunal rejected this argument, indicating that as previously determined in its analysis, the reason for the forfeiture to be issued was that “no apparent efforts to explore and exploit the geothermal resources” had been made, and this was not an irrelevant consideration (para. 471). Similarly, the tribunal further concluded that Kenya had not failed to take into account any “relevant considerations.” The claimant’s belief that its obligations under the licence were suspended came from the expectations arising from its repeated statements that it needed a PPA to raise the funds that the infrastructure required to progress the project.

For the tribunal, such an assertion was illegitimate because the Minister of Energy expressly rejected a PPA on several occasions. First, it explicitly removed WalAm’s reference to a PPA in its application when issuing the exploration licence. Secondly, when the 2011 work program was approved, government representatives did not adopt WalAm’s timetable for a PPA. Therefore, according to the tribunal, the claimant’s inability to raise sufficient capital resulted from the WalAm’s deficiencies and its inadequacy (para. 493).

Consent and estoppel: Kenya’s conduct could not have formed the basis of an estoppel or waiver as alleged by the claimant

WalAm further argued that Kenya consented in writing to the claimant not performing work in or under the land until it had a PPA or while negotiations for a PPA were ongoing and that Kenya should be estopped from relying on them to perform to trigger rights to forfeiture. The tribunal dismissed this claim because WalAm failed to prove that the government had expressly stated in any of its communications or letters that it had consented to the investor not performing work “in or under the land” until the conclusion of a PPA. No statement of consent or express representation could find estoppel to that effect. Moreover, the government informed WalAm of the minister’s dissatisfaction with the lack of progress and work on many occasions. It was made clear in communications that the licence was under threat of forfeiture.

No legitimate expectations, as claimant failed to establish any evidential basis and support for its claim

The tribunal considered that the claimant could not argue that it had a legitimate expectation that it would not be required to begin drilling before a PPA was in place based on the government’s conduct. Accordingly, it concluded that WalAm did not “have a legitimate expectation in the public law sense” as it failed to show that “statements were made by or on behalf of the government inducing such reasonable expectation” (para. 527)

Customary international law application: No breach of the minimum standard of treatment

WalAm invoked breaches of the customary international law minimum standard of treatment, arguing that Kenya had violated its duty to accord the claimant the minimum standard under Article 47 of the Kenyan Constitution and customary international law. According to the claimant, the government’s obstructive conduct and refusal to act in good faith to negotiate a PPA prevented WalAm from moving forward and bringing the project into production.

The tribunal noted that all elements put forward by WalAm capable of constituting unfair treatment in breach of the international law standard have been previously considered in the tribunal’s analysis and rejected. The tribunal added that expropriation did not apply, and any claims on the merits would have failed. Also, the tribunal concluded that even if the absence of objections or silence from the government can in some instances generate legitimate expectations (see Gold reserve v. Venezuela),^[1] it could not give rise, in this particular case, to any expectations in relation to the conclusion or failure to obtain a PPA in the investment treaty context (paras. 558–561).

Costs

The respondent argued that all expenses should be borne by WalAm. Further, it added that even if the claimant were to prevail on liability, there should be an apportionment of costs to reflect the unnecessary costs caused by the claimant’s conduct. In turn, the claimant argued that the respondent should bear the total arbitration costs incurred by the claimant.

The tribunal stated that the ICSID Convention “gives the widest discretion to allocate all costs of the arbitration” and noted that the respondent’s legal costs were significantly lower than the claimant’s costs.

Tribunal ordered WalAm to pay the respondent USD 648,857.75 for the respondent’s portion of the arbitration costs and the sums of EUR 3,586,039.28 and USD 252,262.82 to cover 75% of the respondent’s legal fees and expenses.

Notes: The tribunal was composed of Joe Smouha (president, nominated by the parties, British national), Swithin J. Munyantwali (claimant’s appointee, British and Ugandan national) and James Spigelman (respondent’s appointee, Australian national). The award of July 10, 2020, is available at https://www.iareporter.com/articles/revealed-award-in-dispute-over-kenyan-geothermal-energy-project-comes-to-light/

Maria Bisila Torao is an international lawyer based in London. She holds an LL.M. in investment treaty arbitration from Uppsala University, an LL.M. in international commercial arbitration from Stockholm University, and a bachelor’s degree in law from the University of Malaga.

^[1] Gold Reserve Inc. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/09/1