Investment disputes in construction and infrastructure

Introduction

Investments into construction and infrastructure projects are vital for opening up emerging markets, and can contribute to long-term economic growth. Investment protection regimes in the form of bilateral and multilateral investment treaties, backed by the right to have recourse to an investment arbitration tribunal in the event of breaches of those treaties, remain an essential element of mitigating the risk of such investments. In this article we explore recent investment cases in the sector.

Construction, infrastructure and investment

In one of the best-known of all investment arbitration decisions, the tribunal in Salini v Morocco (ICSID Case No Arb/00/04) (Decision on Jurisdiction, 23 July 2001) laid down the “Salini test”, articulating four essential elements of an “investment” that must be present in order to qualify for the jurisdiction of the International Centre for the Settlement of Investment Disputes (ICSID). Oft-cited, they were (1) a contribution of money or assets; (2) an assumption of risk; for (3) an appropriate duration; and, most controversially, (4) a contribution to the host State’s economy. The criteria have been applied more flexibly by recent tribunals, with a trend towards a simpler test of (1) contribution, (2) risk and (3) duration.

One constant though, is that there are few sectors that can claim to tick these boxes, and make a positive contribution to a host State’s economy, as well as investments in the construction and infrastructure sector. It has long been well-known that key to the development of emerging markets is foreign investment in appropriate infrastructure projects – road, rail and telecoms – projects that open the doors for further inward investment and economic growth. It is also no coincidence that the Salini case itself arose out of a construction contract for the building of roads.

Investors in construction and infrastructure projects continue to structure their deals to avail themselves of the important protections afforded by investment treaties. Done properly, this provides the important safety net of a right to bring claims in investment arbitration before a neutral Tribunal in the event that things go wrong, as in the following recent examples.

Borkowski v Armenia

A claim was commenced by investors in August 2018 under the Armenia-United States of America bilateral investment treaty (BIT). The dispute relates to the construction of the Southern Armenia Railway and High Speed Road Projects, which have previously been valued by the claimant at approximately US$3 billion.

The projects, which form part of the North-South Transport Corridor between Moscow and Mumbai, are particularly important to Armenia due to the political tension on Armenia’s eastern and western borders with neighboring Turkey and Azerbaijan. The projects will create the shortest transportation route from the ports of the Black Sea to the ports of the Persian Gulf, reducing freight costs significantly, whilst also opening up access to significant natural resources.

The concession terms of the public/ private partnership provided specific exclusivity periods in respect of feasibility studies and construction with the option of renewal by the investors for an additional 20 years. In the arbitration Borkowski and his company Rasia claim that as they prepared to sell the exclusive concessions, Armenian officials threatened to confiscate the road concessions while simultaneously granting third parties contractual rights over the projects.

This is the third BIT claim that Armenia has faced, with the socio-political importance of the projects meaning that this will be an important case to watch. Armenia is also currently defending a claim from USA investors claiming US$15 million in damages in relation to a dispute over the construction of luxury apartments in the capital city of Yerevan.

Way2B ACE v Libya

This dispute arose as a result of the Libyan civil war in 2011, which formed a part of the wider Arab Spring movement. Portuguese based investor Way2B brought a €60 million claim against Libyan authorities in relation to construction contracts for two university complexes which were razed during the uprising.

A key issue in the case was whether or not the Libyan contracting party (ODAC) was a state entity, and thus whether their actions and contractual obligations were attributable to the Libyan state. Despite the fact that the intangible contractual obligations, including performance bonds and advance payment guarantees, were found to fall within the definition of investment in the Libya-Portugal BIT, the Tribunal found that ODAC was not acting on the instructions of the Libyan state and was financially independent from the government. Additionally, the claimants’ failure to adduce evidence to prove when and who caused the damage to the sites meant that it would not be possible to determine whether the Libyan state was diligent in protecting the investment.

Notwithstanding this decision, an important point to emerge from the case was whether the force majeure clause operated as an exclusion to the respondent’s liability in performing obligations under the contract and in particular whether in turn this limited liability under the BIT. The Tribunal found that a force majeure war-clause in a contract does not operate to exclude other BIT protections including full protection and security.

Deutsche Telekom v India

In January 2019, the Swiss Federal Supreme Court upheld a UNCITRAL award given in favour of Deutsche Telekom against the state of India. The claim brought under Articles 3 and 5 of the Germany-India BIT related to the 20 per cent indirect shareholding held by Deutsche Telekom’s in Indian telecoms company Devas Multimedia. Devas had concluded contracts with Indian state-owned satellite company Antrix in 2005, which provided for Antrix to build, launch and operate two satellites and lease S-band spectrum, a particularly valuable band of radio wave frequencies, which can host 4G and LTE mobile services. The contract provided for the payment of reservation fees for the spectrum and an ongoing lease fee.

In 2011, Antrix terminated the contract in response to the granting of exclusive rights over the network’s S-band spectrum and the Indian government’s annulment of the agreement due to requests from the Indian military for use of the high-value spectrum. Following arbitration, an UNCITRAL Tribunal found in favour of Deutsche Telekom, concluding that the respondent had breached the fair and equitable treatment standard (FET) in Article 3(2) of the BIT.

India challenged the award in Switzerland putting forth three arguments: (1) the investment was indirect in nature and was not covered by the BIT; (2) the India-Germany BIT was an example of an “admissiontype” investment treaty that granted protection only after the establishment of an enterprise in the host state, and excluded “pre-investment activities”. This was to be differentiated from a “right of establishment” treaty, which might grant protections to the investor immediately upon the establishment of an enterprise in the territory of the host state, and as a consequence the Tribunal had erred in focusing on Deutsche Telekom’s purchase of shares in Devas, and not on the fact that the project itself was still at a preparatory stage at the time of cancellation of the Contract, including because various critical licences were still pending; and (3) India was protecting its “essential security interests,” which it was permitted to do under the terms of the BIT. The Swiss Court rejected these arguments and upheld the award.

Comparison can be drawn between the decision in this case (and the Swiss Court’s view in upholding the award) and a separate 2016 award under the Mauritius-India BIT, that was made in favour of a group of Mauritian Devas investors. The relevant language in the Germany-India BIT excused state action “essential” to security “to the extent necessary” to protect the host State’s interest. In contrast, the Mauritius- India BIT contains a similar but broader exclusion for action merely “directed” to the “protection of [India’s] essential security interest”. In the Mauritius case, the Tribunal decided that because the Indian military’s requests for use of the S-Band spectrum (which led to Antrix’s termination of the contract) were for 60 per cent of the available high-value bandwidth, it followed that 60 per cent of the action in terminating the contract was “directed” to the protection of India’s security, with India liable to compensate investors for only the remaining 40 per cent of the contract value (which would have remained available to commercial interests) as a result.

Conclusion

These recent cases highlight how investment treaty protections backed by actionable rights to bring claims against host states, give investors a public, neutral and international forum to pursue remedies wherever those states fail to abide by their international obligations. But the Libya case shows that care must be taken in the structuring of the deal to ensure that the protections bite against the state, and the Deutsche Telekom case shows that often times success in the arbitration itself is not necessarily the end of the road. Further, the example of the Mauritian investors in relation to the same project shows that investment arbitrations are never straightforward (particularly where national security, public health or environmental arguments are raised by Respondent States), and that particular care must be taken over the wording and the scope of protections offered under specific treaties. However, what is clear is that as a safety net against state misconduct, the protections in investment treaties and investor-state dispute settlement (ISDS) continue to be an important part of the investors’ toolkit for mitigating state risk.

With special thanks to Will McCaughan for his assistance in preparing this article.