ICSID Tribunal Finds Tanzania To Have Violated Bilateral Investment Treaty But Declines To Award Any Damages
Privatization of public services, such as the provision of utilities and waste disposal facilities, has led to many investment disputes. These cases -- mostly in Latin America -- have drawn particular attention from the NGO community due to the public interest issues inherent in such disputes. This Insight concerns a recent award in a dispute about a water-privatization project in Tanzania that went awry.
In 2003, the Republic of Tanzania obtained $140 million in World Bank, African Development Bank and European Investment Bank funding for a comprehensive program of repairing, updating, and expanding Dar es Salaamâs water and sewerage infrastructure. At the time, the water situation was âprecarious,â water was not equally available in all regions, and the tariffs charged users of water were too low to fund capital expenditures. The sewerage situation was even worse. The funding was conditioned on having a private operator manage and operate the water and sewerage system. Only Biwater Gauff (a joint venture of two European companies, one registered in England and Wales and one registered in Germany) submitted a tender, and it was awarded the bid. The terms of the tender required Biwater Gauff to establish a local operating company, with a minimum number of shares to be held by a Tanzanian company or national. The operating company, City Water Services Limited, then entered into three key contracts with the Dar es Salaam Water and Sewerage Authority (âDAWASAâ).
The most important contract was the Water and Sewerage Lease Contract, which required City Water to provide water and sewerage services for a ten-year period in a designated area and implement certain capital works associated with the modernization project. The contract required City Water to pay rental fees to DAWASA. City Water would collect an operator tariff, which would fund its operations; a lessor tariff, which it would turn over to DAWASA; and a first-time connection tariff, which would be placed in a trust account to fund low-income usersâ connection charges. In return, DAWASA gave City Water exclusive use of certain assets that City Water would lease from DAWASA, gave City Water the exclusive right to operate the designated water services, and promised not to operate in any way that would hinder or conflict with City Waterâs operations.
City Water commenced performance August 1, 2003. In addition to the infrastructure problems, which were hard to fix, City Water found it difficult to bill and collect from customers for the services it provided, both because it faced unauthorized competitors and because many residents resisted the rise in the rates. A significant issue was its failure to implement the new billing process, which was the âlifeblood of the systemâ and would help fund City Waterâs operations. City Water had underestimated the difficulty of the project and failed to allocate sufficient managerial and financial resources to it. City Water requested an increase in the Operator Tariff, but Tanzania rejected the request after an auditorâs report suggested it was unwarranted. Relations between the government and Biwater Gauff continued to deteriorate, and although they tried discussed renegotiating the contracts under the guidance of an expert mediator, mediation failed. Between May 13, 2005 and June 1, 2005, DAWASA and other government authorities took certain steps, including repudiating the lease contract and occupying City Waterâs facilities, taking over the management, and deporting City Waterâs senior managers.
Biwater Gauff then brought a claim under the bilateral investment treaty (BIT) between the United Kingdom and the Republic of Tanzania, alleging expropriation of its property and unreasonable or discriminatory treatment. The company also claimed that Tanzania had violated its obligation to provide fair and equitable treatment and full protection and security and to permit the repatriation of investment funds. Biwater Gauff requested damages in the range of US$19 â 20 million.
Two legal issues in particular are worth highlighting within the complex factual and legal issues raised in the dispute.
The first key feature of the Biwater Gauff decision is the tribunalâs approach to the ICSID Conventionâs requirement that the Centreâs jurisdiction âshall extend to any legal dispute arising directly out of an investment.â While most investment treaties define investment broadly (and Tanzania conceded that Biwaterâs investment qualified under the BIT), an ICSID dispute must also satisfy the Conventionâs jurisdictional limitations. The Convention does not define investment, but recently several tribunals, most notably that in Salini v. Morocco, have identified five criteria that an investment must meet to qualify under the Convention: (1) duration; (2) regularity of profit and return; (3) assumption of risk; (4) substantial commitment; and (5) significance for the host Stateâs development. The Salini criteria can be traced to Christoph Schreuerâs influential treatise on the ICSID Convention, in which he described qualities typical of investments found to satisfy the Conventionâs jurisdictional criterion, although Professor Schreuer was not advocating the establishment of jurisdictional requirements or the formulation of a definition.
Rather than follow the line of cases that had adopted the Salini approach, the Biwater Gauff tribunal held that there was no basis for a ârote, or overly strict, application of the five Salini criteria in every case.â The drafters of the Convention had deliberately left the term âinvestmentâ undefined, and the tribunal was reluctant to impose a strict test that would arbitrarily exclude certain transactions from the scope of the Convention. Moreover, given the broad definition of investment in most BITs, a narrow interpretation would lead to the Conventionâs contradicting individual agreements that purport to grant jurisdiction to the Centre, as well as violating what might be viewed as an international consensus. The tribunal therefore substituted a more flexible and pragmatic approach to what constitutes an investment under the Convention, and concluded that it did indeed have jurisdiction. It rejected Tanzaniaâs main argument â that Biwater Gauff had invested in the project only as a âloss leaderâ with a low rate of return in the hope of securing other profitable opportunities later. The tribunal refused to draw any link between a partyâs motives for entering into an investment and its ability to qualify for protection under the ICSID regime.
Second, the decision is notable for the erudite debate between the two arbitrators in the majority, Bernard Hanotiau and Toby Landau, and the concurring and dissenting arbitrator, Gary Born, on the proper role that should be played by âcausation.â All of the arbitrators agreed that Tanzaniaâs acts constituted expropriation of Biwater Gauffâs investment. Messrs. Hanotiau and Landau concluded, however, that all of the compensable damage to Biwater Gauffâs investment had occurred prior to Tanzaniaâs violations of the BIT, which occurred between 13 May 2005 and 1 June 2005. According to the majority, then, Tanzaniaâs conduct did not cause any injury, notwithstanding its unlawful nature. In Mr. Bornâs view, it is unacceptable to separate the concepts of the unlawful conduct and injury: the âwrongful seizure clearly caused injury to City Water by depriving it prematurely of the use and enjoyment of its property.â Rather, the appropriate focus with respect to causation was the quantum of damage attributable to the injurious act. Because Biwater Gauff had failed to prove any monetary damages arising from the injury it suffered, it was not entitled to any recovery.
The difference in opinion did not matter in Biwater Gauff, as all of the arbitrators agreed that the claimant should not be awarded money damages. Mr. Born was concerned, however, that in other cases the analytical distinction could be decisive as to the outcome. The majority found Mr. Bornâs approach âtenable,â but nonetheless found it important to emphasize that it was insufficient merely to show a ââtakingâ, or unfair or inequitable conduct, there must [also] necessarily have been an âinjuryâ caused such as to ground a claim for compensation.â The majority cited the International Law Commissionâs Articles on State Responsibility, which provide that âInjury includes any damage, whether material or moral, caused by the internationally wrongful act of a State.â Mr. Born did not dispute this point, but suggested that injury need not have a quantifiable monetary value, as evidenced by the commentary to Article 31: â[T]here is no general requirement, over and above any requirements laid down by the relevant primary obligations, that a State should have suffered material harm for damage before it can seek reparation for a breach. The existence of actual damage will be highly relevant to the form and quantum of reparation.â 
Although the arbitrators agreed that there was no compensable quantifiable monetary loss, they split on whether to award costs â a reflection of their basic differences in approach. Messrs. Hanotiau and Landau concluded that neither party should be ordered to pay the costs incurred by the other, as both had been successful: Biwater Gauff in proving that Tanzania violated the BIT, and Tanzania, in resisting any claim for damages. Mr. Born, on the other hand, concluded that the tribunal should not just grant declaratory relief, but should award costs in favor of Biwater Gauff. Grounding his decision in the principle that there should be no right without a remedy, he concluded that Biwater Gauff should be awarded its costs because in breaching fundamental international rights and protections, and refusing to acknowledge the effects and nature of its conduct, Tanzania had caused moral damages to Biwater Gauff, and it would be âat best anomalous for a tribunal to grant no affirmative relief.â 
Jurisdictional objections are becoming more common, and further colloquy on how the jurisdictional provisions of the ICSID Convention should be interpreted is welcome. Moreover, quantum is an understudied area of international investment law (although this is slowly changing). Also, as Mr. Born notes, issues of causation and the attribution of damages to unlawful acts as opposed to other supervening factors are likely to recur.
Andrea K. Bjorklund, an ASIL Member and Executive Council Nominee, is a Professor of Law at the University of California, Davis. She was formerly with the Legal Adviserâs Office of the U.S. Department of State where she defended the U.S. Government in investor-State cases brought under NAFTA Chapter 11.
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 A partial list includes CompaÃ±Ãa de Aguas del Aconquija, S.A. & Vivendi Universal (France) v. Argentine Republic, ICSID (W. Bank) ARB/97/3; Aguas del Tunari S.A. (Spain) v. Republic of Bolivia, ICSID (W. Bank) ARB/02/03; Waste Management Inc.(U.S.) v. Mexico, ICSID (W. Bank) ARB(AF)/98/2.
 Biwater Gauff (Tanzania) Ltd. (U.K.) v. United Republic of Tanzania ICSID (W. Bank) ARB/05/22 (Award) (24 July 2008) [hereinafter Biwater Gauff Award].
 Id. para 96.
 Id. para. 160.
 Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, March 18., 1965, art. 25(1), 17 U.S.T. 1270, 575 U.N.T.S. 159.
 Salini Costruttori SpA (Italy) v. Kingdom of Morocco, ICSID (W. Bank) ARB/00/4 (Decision on Jurisdiction) (23 July 2001), 42 I.L.M. 609 (2003).
 CHRISTOPH SCHREUER, THE ICSID CONVENTION: A COMMENTARY 138-141 (2001).
 Biwater Gauff Award, supra note ii, para. 312. The tribunal is not the only critic of the Salini test; Dev Krishan and Julien Mortenson have also questioned its usefulness and pedigree. Devashish Krishan, A Notion of ICSID Investment, in INVESTMENT TREATY ARBITRATION AND INTERNATIONAL LAW (T.J. Grierson Weiler ed. 2008); Julian Mortenson, Subverting the Grand Bargain: Deference and Autonomy in International Investment Law (unpublished manuscript on file with the author).
 Julian Mortenson has conducted an in-depth analysis of the travaux prÃ©paratoires of the Convention to conclude that the drafters intended the definition to be very broad. Mortenson, supra note viii.
 Biwater Gauff Award, supra note ii, para. 314.
 Id. para. 798.
 Id. para. 803.
 Biwater Gauff (Tanzania) Ltd. (U.K.) v. United Republic of Tanzania, ICSID (W. Bank) ARB/05/22 (Concurring and Dissenting Opinion) (18 July 2008), para. 17 [hereinafter Biwater Gauff Dissent].
 Id. para. 18.
 Id. para. 16.
 Biwater Gauff Award, supra note ii, para. 804.
 JAMES CRAWFORD, THE INTERNATIONAL LAW COMMISSIONâS ARTICLES ON STATE RESPONSIBILITY, INTRODUCTION, TEXT, AND COMMENTARIES, 201 (2002) (Art. 31(2)).
 Id. at 203.
 Biwater Gauff Award, supra note ii, para. 812.
 Biwater Gauff Dissent, supra note xiii, paras 32-33.
 See, e.g., Lucy Reed, Less is More, More or Less, 22:3 INSTITUTE FOR TRANSNATIONAL ARBITRATION NEWS & NOTES (Summer 2008); INVESTMENT TREATY LAW: CURRENT ISSUES III: REMEDIES IN INTERNATIONAL INVESTMENT LAW (Andrea K. Bjorklund, Ian A. Laird & Sergey Ripinsky eds., forthcoming 2008/09)