Bolivia found in breach of UK-Bolivia BIT for nationalizing an electricity generator without compensation
Guaracachi America, Inc. (U.S.A.) and 2. Rurelec plc (United Kingdom) v. Plurinational State of Bolivia,UNCITRAL, PCA Case No. 2011-17, Award
In a January 31, 2014 ruling a tribunal has found Bolivia in breach of the UK-Bolivia BIT and liable for some US$35.5 million in damages in a case involving the nationalization of an electricity generator. The case also included a claim by a US claimant under the US-Bolivia BIT; however, that claim was dismissed for lack of jurisdiction, after the tribunal found that the claimant could be denied benefits under the treaty.
In the early 1990sBolivia introduced a number of reforms to its energy sector, including changes to its legal framework which resulted in the privatization of small state-owned enterprises through international public tenders.
In this context, a US company , Guaracachi America, Inc. (GAI), and a British company, Rurelec Plc., invested in the Bolivian state-owned company Empresa Electrica Guaracachi S.A. (EGSA). The new legal framework stipulated the reorganization of vertically integrated companies into generation, transmission and distribution companies, and EGSA was one of the three new generation companies.
In 2007, however, Bolivia abruptly changed course and moved to nationalize the entire electricity sector. As a result, the claimants’ 50.0001 per cent shareholding in EGSA was nationalized.
“Joinder” v. “consolidation” of claims
Bolivia objected to the consolidation of GAI and Rurelec’s claims given that they fell under different BITs. Bolivia argued that neither the dispute resolution clauses of the US-Bolivia BIT nor the UK-Bolivia BIT contain Bolivia’s consent to settle disputes jointly on the basis of a treaty other than the one applicable to such foreign investors. Thus, the tribunal lacks “rationae voluntatis” on the grounds that no two claims can be joined or consolidated without the express consent of the State.
However, the claimants drew a distinction between “consolidation” and “joinder” of claims. Specifically, the claimants argued that the consolidation of claims is a procedural device that provides for combining two or more proceedings with the result that the other tribunal ceases to exist. From the claimants’ standpoint, in the present proceedings claims were not “consolidated” given that the two claimants decided to jointly submit several claims in the context of single proceeding. In addition, the claimants argued that in multi-party arbitrations claims are often submitted jointly under different legal instruments. It is therefore a procedural rather than jurisdictional question, argued the claimants.
Siding with the claimants, the tribunal decided that the submission of identical claims under different BITs in a single arbitration does not require the express consent of Bolivia; the key point is that Bolivia has provided its consent to arbitration in the case of disputes involving investors from both the US and the UK.
Protection of Rurelec’s indirect investment
Rurelec made its investment via intermediaries incorporated under the laws of the British Virgin Islands. Bolivia argued that firstly, such indirect investments are not protected by the UK-Bolivia BIT and, secondly, Rurelec must prove that it acquired an indirect ownership interest in EGSA prior to the dispute.
The tribunal decided that Rurelec had made an indirect acquisition of EGSA before the date of nationalization. Moreover, indirect investments are also protected under the UK-Bolivia BIT given its broad definition of investment. As such, the tribunal concluded that the fact that Rurelec does not directly own shares of ESGA does not mean that it does not own such shares within the meaning of the BIT.
Lack of jurisdiction due to the exercise of the denial of benefit clause
Article XII of the US–Bolivia BIT provides for the denial of the treaty’s benefits to a company in case two conditions are met: 1) companies owned by nationals of a third state (GAI’s shareholder has always been domiciled in the British Virgin Islands); and 2) companies that do not carry out any substantial business activities in the territory on the US. Referring to this article, Bolivia asserted that GAI is no more than a “mailbox company” and as such does not benefit from the BITs protections.
The claimants’ countered that a denial of benefits in this case would run contrary to the principles of stability, certainty and good faith. Furthermore, the claimants argued that the denial of benefits clause cannot be applied retroactively, i.e., once the investment has been made, since the purpose of such provision is to give the host State the opportunity to alert investors in advance that they are no longer granted protection under the BIT, thereby protecting their legitimate expectations.
With regard to the second requirement of Article XII, GAI emphasized that it had conducted substantial commercial activities in the US, having maintained offices and held meetings in the country.
However, the tribunal ultimately decided that it lacked jurisdiction to consider GAI’s claim in light of conditions set out under Article XII. The tribunal was not persuaded that Bolivia in the course of the privatization imposed any requirement to establish GAI as a single purpose vehicle for public tender of EGSA. Moreover, GAI was not precluded to own any other assets other than EGSA shares. Finally, insufficient evidence was provided that GAI carried out substantial business activities in the US.
The tribunal noted that Bolivia denied the benefits of the BIT after both parties had given their consent to arbitration; however, in tribunal’s point of view, the denial of benefits cannot be equated to the withdrawal of prior consent to arbitration.
With regard to the timing of the denial of benefits, the tribunal agreed that the denial would usually be notified whenever an investor decides to invoke one of the benefits under BIT, commenting that it would be odd for a State to scrutinize whether the requirements of the above Article XII are met in relation to an investor with whom it has no dispute.
Finally, the tribunal understood that such a ruling put an investor in a fragile position, since the investor would never know at which point the benefits would be denied. However, in the tribunals’ view, such denial would not come as a total surprise given that the investor was cognizant of Article XII and anyway used an investment vehicle controlled by the third state with no substantial business activities.
Failure to pay just and effective compensation
The claimants also argued that Bolivia violated Article 5(1) of the UK-Bolivia BIT, which stipulates the conditions for lawful expropriation. These requirements are promptness, adequacy and/or fairness of compensation and due process.
The claimants asserted that the valuation process of EGSA was neither transparent nor participatory. The claimants’ financial statements, approved by the Board of Directors following the positive assessment of PWC, showed EGSA’s profits amounted to US$5.8 million in 2010. However, Bolivia retained an independent consulting firm to perform the statutory audit. This audit determined that EGSA had a $2.3 million loss—and it was on the basis of this audit that Bolivia maintained it had no obligation to provide compensation. In the claimants’ view, the audit arranged by the Bolivian government had the sole purpose of reducing EGSA’ apparent value.
However, the tribunal was not convinced that Bolivia acted willfully and intentionally to obtain an expert valuation with negative values for EGSA. Moreover, the tribunal concluded that there is no rule of customary international law obliging an expropriating state to grant the expropriated investor a right to take part in the valuation process. However, the expropriation was still found unlawful since no compensation was paid. Therefore, the main question before the tribunal was the quantum of the compensation.
Following the discussion of different valuation methods, the tribunal also considered the issue of interest rates. The claimants relied on Article 5 of the UK-Bolivia BIT, which establishes the standard of compensation for lawful expropriation, and required to apply the principle of “full reparation” (i.e., the interest at a normal commercial or legal rate). However, the tribunal rejected to apply the EGSA’ weighted average cost of capital (WACC) as of May 2010 as the applicable rate given that post-May 2010 period was marked with negative changes to fundamentals that make up the WACC. Instead, the tribunal used the annual interest rate reported on the Bolivian Central Bank website for commercial loans in May 2010.
As the result, the amount of compensation constitutes USD 28,927,582 increased by annual composed interest rate of 5.6% on that amount since May 2010 until the date of payment in full. Each party bears its own legal costs.
Dissenting opinion of co-arbitrator Manuel Conthe
In the view of arbitrator Conthe, Bolivia failed to comply with due process requirement. In his view, expropriation is an administrative act that limits the rights of an investor. Therefore, it must meet three minimum procedural requirements: it must be reasoned; these reasons must be formally communicated to the investor; and the investor, having being notified of such reasons, has a right to be heard.
In Conthe’s opinion, Bolivia breached the UK-Bolivia BIT not because it underestimated the value of EGSA, but because it failed to comply with the minimum requirements of due process. Given valuation report was never communicated to Rurelec, it was deprived of its right to make comments on it. Moreover, in arbitrator’s Conthe view, due to the violation of due process requirements, the tribunal should have ordered Bolivia to pay legal costs, at least partially.
The tribunal was composed of Dr José Miguel Júdice (president), Mr. Manuel Conthe (claimants’ appointee) and Dr. Raúl Emilio Vinuesa (respondent’s appointee).