Post-award Bargaining Power of States: Examples from Bolivia

24 octubre, 2023 / José Bernal / Deja un comentario

El 3 de junio de 2019 publiqué en Kluwer Arbitration Blog el siguiente artículo. Lo replico en su totalidad, incluyendo el link al artículo original (en inglés):

Post-award Bargaining Power of States: Examples from Bolivia

José Carlos Bernal Rivera (Guevara & Gutiérrez S.C.)/June 3, 2019/

One of the main objectives of investment arbitration, as a feature of international investment law, is to provide a neutral forum for the parties in dispute. Neutrality is necessary because the parties are fundamentally different: while the investor is a private entity, the state is a sovereign entity with sovereign immunity. However, the scenario of neutrality that is created by the arbitral procedure ends with the issuing of an arbitral award. The situation of imbalance between the state and the investor, which was present before the start of the arbitral procedure, resurfaces once the jurisdiction of the arbitral tribunal has ceased, and the parties sit again at the negotiation table.

The reason for this imbalance is that enforcement of an award against a state cannot be sought before a neutral arbitral tribunal, but must be sought before local courts, those of the very own losing state, or those in other countries where assets of the losing state can be located. The task of enforcing arbitral awards against states is complex, to say the least, and both parties are aware of this. The situation creates considerable leverage for states, which can be used to negotiate significant discounts on the amounts awarded by the arbitral tribunal, in exchange for prompt payment. This article examines briefly the sources of this leverage, and describes examples from Bolivia, to try to grasp the magnitude of this post-award bargaining power of states.

Sovereign immunity as the main leverage factor

Leaving aside all factors related to recognition of the arbitral award, the investor must also take into consideration the problems related to sovereign immunity. As entities subject to international law, states have sovereign immunity rights, from both jurisdiction and enforcement. Immunity from jurisdiction is deemed to be waived through the state´s consent to arbitration. However, immunity from enforcement is not, as it is the investor’s task to enforce the award against assets not covered by this immunity.

Specific immunity provisions are regulated by the internal laws of each state. For instance, in the US, the applicable law is the US Foreign Sovereign Immunities Act of 1976. Therefore, investors are subject to the specific laws of each country where enforcement of the award is sought, and such laws vary. A common criteria for determining whether specific assets can be seized (under the prevailing doctrine of restrictive immunity), is based on the “commercial” use of such assets. Embassies, for example, cannot be seized, as they are not commercial in nature.

The task of trying to defeat the sovereign immunity of a state is considerably burdensome. Argentina, for example, successfully avoided compliance of investment arbitration awards for years, creating doubts on the entire international system of investor-state dispute resolution ¹⁾. There are no broadly used mechanisms to avoid this problem. States and investors could explicitly provide for a waiver of the state’s immunity from enforcement, included in their specific investment contracts, or in the relevant investment treaty. However, states are understandably reluctant to waive their immunity from enforcement.

Lack of well-organized information on post-award settlement agreements

The conventional wisdom is that most states voluntarily comply with arbitral awards, which is true, but misses the point of this analysis. It is unclear how post-award actions of states should be analyzed and recorded, but they are certainly not receiving the attention that they deserve.

Take as an example the several investment arbitration awards settled by Argentina in late 2013²⁾. The arbitral awards in these cases had established various compensation amounts in favor of the investors, but following the negotiations between the Argentinian government and the investors, the terms of the compensation had varied considerably. Yet, the outcomes of these post-award negotiations are not shown in the web database of ICSID, or in other popular sources of information such as UNCTAD’s “Investment Policy Hub”.

It is understandable that arbitration records do not to pay particular attention to whether the award was paid in full, or whether the state had successfully negotiated a discount. However, the lack of well-organized information regarding the aftermath of arbitral awards, could be deceiving the arbitration practitioner’s perception of the value of an arbitral award in the real world. It seems like a country which has bargained the amount of the arbitral award, would still be considered by academics and practitioners, for all general purposes, as having complied voluntarily with the award. So, the conventional wisdom declaring that almost all states voluntarily comply with investment arbitration awards, is not particularly useful to assess the bargaining power of states.

Examples from Bolivia

Bolivia has taken part of investment arbitration cases, as respondent state, in at least 8 opportunities; however, most of the commenced arbitration cases – and other potential cases arising from nationalizations – were settled by the Bolivian government before an arbitral award was rendered. Only two investment arbitration cases brought against Bolivia have reached an award.

In Quiborax S.A., Non Metallic Minerals S.A. and Allan Fosk Kaplún v. Plurinational State of Bolivia (ICSID Case No. ARB/06/2), the arbitral tribunal awarded US$ 48,619,578 to the investors, plus interests on 16 September 2015. Bolivia requested the annulment of the award, but the application for annulment was dismissed by the ad hoc committee.

The interest of this award was established at 1-year LIBOR + 2%, compounded annually, calculated from 1 July 2013 until payment in full. The date of the settlement agreement was 7 June 2018. At that point in time, the total amount of the award – with interest – would have been of approximately US$ 57,1 million. However, after the negotiations between the parties, they agreed to a settlement of US$ 42,6 million. In this case, the bargaining power of the state represented a reduction of 26,4% of the amount of the award.

In Guaracachi America, Inc. and Rurelec PLC v. The Plurinational State of Bolivia (PCA Case No. 2011-17) the arbitral tribunal awarded US$ 28,927,582 to the investor plus interest, on 31 January 2014. The award established annually compounded interest at a rate of 5.633331% starting on 1 May 2010.

A settlement agreement was reached by the parties on 29 May 2014, for US$ 31,5 million. However, applying the interest provided for in the award, the compensation would have been approximately of US$ 36,18 million. In this case, the bargaining power of the state represented a reduction of 12,93% of the amount of the award.

These limited examples, are only intended to show that states do, in fact, have a bargaining power, and that in certain situations, this leverage can be as powerful as to allow the discount of even a quarter of the total amount awarded by the arbitral tribunal to the investor.

Bargaining power as market valuation of the arbitral award

The market is the best judge of the true value of most things, including the real value of investment treaty arbitration awards. An analysis of the bargaining power of states is, in essence, an analysis of the true value of the arbitral awards, as determined by the players in the market.

Of course, every arbitral award can be valued differently. The specific characteristics of the case, and of the respondent state, could play an important role in the valuation of every specific award. For example, in the case of Argentina, political pressure of the US and other countries pushed Argentina to settle and pay some of its pending arbitration cases, but it is unlikely that this would happen in all scenarios of recalcitrant states. In addition, the investors could “sell” their rights under the award to firms specialized in performing complex multinational enforcement proceedings, widening the pool of market participants. All these factors will, in ultimate instance, affect the value of the arbitral award, and the willingness of the parties (investor and state) to settle the award at a discount. Whatever the circumstances are, it is predictable that the parties will end up sitting again at the negotiations table, after the award is issued, and that the state will intrinsically have a leverage to negotiate more favorable terms.

Conclusions

It is only logical that the complexities of enforcing arbitral awards against states would considerably diminish the true value of arbitral awards, augmenting the bargaining power of states. A more thorough analysis of the spread between awards (as provided by the arbitral tribunal) and settled amounts, could offer arbitration practitioners a better understanding of the entire value of investment arbitration claims. Understating the importance of this bargaining power of states would only alienate the entire investment arbitration system from its true value in the real world.

The views expressed are those of the author alone, and should not be regarded as representative of or binding upon the author’s law firm.

Life after ICSID: 10th anniversary of Bolivia’s withdrawal from ICSID

24 octubre, 2023 / José Bernal / Deja un comentario

El 12 de agosto de 2017 se publicó en Kluwer Arbitration Blog el siguiente artículo, sobre arbitraje de inversión. Lo replico completo abajo, con el link al artículo original (en inglés):

Life after ICSID: 10th anniversary of Bolivia’s withdrawal from ICSID

José Carlos Bernal Rivera (Guevara & Gutiérrez S.C.) and Mauricio Viscarra Azuga/August 12, 2017/Leave a comment

It has been ten years since Bolivia denounced the International Centre for Settlement of Investment Disputes Convention (“ICSID Convention”), becoming the first country to withdraw from the ICSID Convention in history. True, several countries have never even signed the ICSID Convention in the first place (including large economies such as Brazil and India), but until 2007, no countries had denounced the treaty. After Bolivia´s denunciation, Ecuador and Venezuela soon followed.

Several articles have touched upon the apparent crisis of ISDS in Latin American countries as a result of the ICSID withdrawals, and the attempt of UNASUR to establish a new regional investment arbitration center for South America. It would be interesting to analyze the influence of Bolivia´s withdrawal over foreign direct investment in the country, but any such analysis would need to factorize many features of the Bolivian economy and political environment. That task is not, by any means, an easy one.

Instead, we would like to use this brief article to “commemorate” the inauspicious anniversary of the first denunciation of the ICSID Convention, by describing Bolivia´s life after ICSID. In the last ten years, several international arbitration cases have been filed against Bolivia, and there are certain lessons to be learned from them, in connection to the denunciation of the ICSID Convention.

Arbitration claims filed prior to the denunciation

Although 10 years have passed since Bolivia denounced the ICSID Convention, a still active ICSID case involves the country. In Quiborax S.A. and Non Metallic Minerals S.A. v. Plurinational State of Bolivia (ICSID Case No. ARB/06/2), the Chilean company Quiborax sought compensation for the revocation of mining concessions in the department of Potosí by the government. The arbitration claim was filed against Bolivia at ICSID on October 5, 2005, almost two years before Bolivia denounced the ICSID Convention. In September of 2015, the arbitral tribunal issued an award in favor of Quiborax and ordered Bolivia to pay approximately US$ 50 million. Bolivia filed an annulment request, and the case is now pending a decision from the annulment committee.

While there is consensus on the fact that claims filed at ICSID against a particular country, are not affected by the subsequent denunciation of the Convention by that country (pursuant to article 72 of the ICSID Convention), it is still mesmerizing to realize that Bolivia remains subject to the decisions of an ICSID tribunal, even ten years after leaving ICSID. In this case, one of the reasons for the delay was the multiple time extensions requested by the parties in order to reach a settlement agreement, which was ultimately unsuccessful.

Arbitration claims filed during the six month term of Art 71 of the ICSID Convention

Article 71 of the ICSID Convention establishes that “[t]he denunciation [of the ICSID Convention] shall take effect six months after receipt of such notice.” Using this article, an investor filed a claim against Bolivia during that six-month gap between the submission of the denunciation and the entry into effect of the denunciation. In E.T.I. Euro Telecom International N.V. v. Plurinational State of Bolivia (ICSID Case No. ARB/07/28), the Italian company filed a claim against Bolivia for the nationalization of its investment in the telecommunications company “Entel.”

The interesting aspect of this arbitration claim is that it was filed on October 12, 2007, five months and ten days after Bolivia submitted a notice of denunciation of the ICSID Convention, but within the six month waiting period required for the denunciation to take effect. Bolivia objected to the jurisdiction, but the claim was validly registered at ICSID, as it seemed not to be manifestly outside the jurisdiction of the center.

The claim of the Italian company was later settled with Bolivia for approximately US$ 100 million, so we did not get to see whether Bolivia had compelling arguments to object to the jurisdiction of ICSID under this article. The preliminary registration of the arbitration claim at ICSID, and later cases against Venezuela (see e.g. Venoklim Holding B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB 12/22), seem to show that the scale would have leaned in favor of the investor on the topic of jurisdiction in this case.

Arbitration claims filed long after the withdrawal of the country

It seems logical that after the six-month period, the doors to ICSID arbitration would be closed. However, article 72 of the ICSID Convention leaves room for another interpretation.

Article 72 states that “[n]otice by a Contracting State pursuant to Articles 70 or 71 [i.e. denunciation of the Convention] shall not affect the rights or obligations under this Convention of that State […] arising out of consent to the jurisdiction of the Centre given by one of them before such notice was received by the depositary” (emphasis added). The logic of the argument would be that a withdrawing State, such as Bolivia, is still subject to ICSID jurisdiction even after denouncing the ICSID Convention, if it has already given its consent unilaterally, for example, in a BIT, or in a contract (as was the case in Alcoa Minerals of Jamaica Inc. v. Jamaica, ICSID Case No. ARB/74/2).

Arbitration clauses in BITs are commonly understood as irrevocable signs of consent granted by states to arbitrate investment disputes with nationals of the other states. Following the exact wording of Article 72, there would be room for interpreting that Bolivia would still be bound to ICSID arbitration by its BITs, where specific consent to ICSID arbitration was granted to certain investors.

It might be a long shot for investors to try to convince an arbitration tribunal that states are permanently subject to ICSID jurisdiction even after denouncing the Convention. There are, now, precedents of more strict interpretations of Article. 71, which could play against any such attempt (e.g. Venoklim v. Venezuela), but these cases did not exist in 2007. The wording of the specific BIT would also be important, as it can condition ICSID arbitration on membership of both states to ICSID (in which case, the article 72 interpretation would not apply).

A relevant case for Bolivia regarding this point was Pan American Energy LLC v. Plurinational State of Bolivia (ICSID Case No. ARB/10/8). It was registered at ICSID on April 12, 2010, more than two years after the denunciation of Bolivia became effective, and it would have been the first practical approach to the correct interpretation of article 72 of the Convention under this theory. The case was, however, settled for US$ 357 million, and we did not get to hear the arguments of the parties on this issue.

Bolivia’s exposure to investment arbitration in other fora

It is also important to note that, if the intention of Bolivia by denouncing the ICSID Convention was to completely close investors’ access to international arbitration against the state or state-owned entities, the goal was not met. During the ten years after denouncing ICSID, Bolivia was involved in several international arbitration cases arising from expropriations and nationalizations carried out by the government of president Evo Morales. In the absence of ICSID as an alternative, the investors sought other fora for pursuing their claims.

They did so on the base of bilateral investment treaties (“BITs”) entered into by Bolivia. Bolivia had 23 BITs in place before denouncing the ICSID Convention. In 2009, after the new Constitution of Bolivia was enacted, the government announced that it would start a process of denunciation and renegotiation of all these bilateral treaties, as they were deemed to be contrary to the new Constitution. It is not completely clear when exactly did Bolivia denounce all its BITs, as no hard data can be found on the status of the BITs, but it is relevant that the BITs had survival clauses which allowed investors to continue to rely on them, at least for some years, for protection of their investments. The BITs also provided for other available dispute settlements forums.

BITs entered into with France, Sweden and the UK had survival clauses of 20 years; those entered into with Argentina, the Netherlands and Peru had survival clauses of 15 years; and so forth. Some BITs also granted investors the possibility of filing ad-hoc arbitration claims using UNCITRAL rules, or the possibility of using the Additional Facility Rules of ICSID, and even ICC arbitration. Among the arbitration claims filed against Bolivia after the denunciation of the ICSID Convention are i) Guaracachi America, Inc. and Rurelec PLC v. The Plurinational State of Bolivia (UNCITRAL, PCA Case No. 2011-17); ii) South American Silver Limited v. The Plurinational State of Bolivia (UNCITRAL, PCA Case No. 2013-15); and iii) Iberdrola S.A. and Iberdrola Energía, S.A.U. v The Plurinational State of Bolivia (UNCITRAL, PCA Case No. 2015-05). As can be seen, arbitration under UNCITRAL rules, and administered by the Permanent Court of Arbitration, are the preferred options for the investors nowadays.

Conclusions

Even if a state denounces the ICSID Convention, the doors for investment arbitration are not completely closed to foreign investors. Articles 71 and 72 of the ICSID Convention provide for mechanisms that allow investors additional protection periods (for at least six months and questionably for even longer), and survival clauses of BITs also keep states exposed to investment arbitration in other arbitration forums. As Bolivia learned the hard way, denouncing the ICSID Convention is not an immediate escape valve for regretful states.

The views expressed are those of the authors alone, and should not be regarded as representative of or binding upon the authors’ law firm.

Bolivia’s Step Back in State Arbitration

24 octubre, 202324 octubre, 2023 / José Bernal / Deja un comentario

El 15 de mayo de 2017 se publicó en Kluwer Arbitration Blog uno de mis primeros artículos sobre arbitraje, lo replico completo en este blog, incluyendo la entrada al artículo original:

Bolivia’s Step Back in State Arbitration

José Carlos Bernal Rivera (Guevara & Gutiérrez S.C.)/May 15, 2017/2 Comments

As reported in the excellent piece by Alejandro López Ortiz and Gustavo Fernandes in “A Year of Legal Developments for International Arbitration in Latin America”, Bolivia may have taken a step back in State arbitration with the passing of its new act on arbitration in 2015. The article remarks the limitations to arbitrability introduced by the new act, and the investment arbitration chapter of the act, which intends to provide a domestic arbitration framework for both national and foreign investors in Bolivia. The goals of these and other provisions of the new act are to keep arbitration proceedings (even investment arbitrations involving foreign investors) inside the country and subject to Bolivian law and its authorities.

So, how far does the new Bolivian arbitration act go in its intent to keep State arbitration inside the country? Aside from whether this mechanism will attract foreign investments, it is interesting to analyze the Bolivian proposal. Why is the government so disenchanted with international arbitration? How is the act’s investment arbitration chapter supposed to work? Are these limits to international arbitration a brand new feature of this act, or just a reflex of the policies implemented by the government since 2006? This brief article will try to dig deeper in the current situation of Bolivia, and the great lengths it is willing to go in order to avoid any more international arbitration cases involving the State or State entities in the future.

International arbitration boom in the last decade in Bolivia

In the last decade, a large amount of arbitration claims were filed against Bolivia as a result of investment disputes between foreign nationals and the State. The nationalizations carried out by the government of Mr. Evo Morales since he was elected to the Bolivian presidency in 2006, have, predictably, brought a large array of foreign investors to the negotiation table for reaching settlements with the government, and in several cases to arbitration instances. Bolivia promptly proceeded to withdraw from ICSID in 2007, becoming the first country in history to take this step.

Euro Telecom International reached a settlement agreement with Bolivia for approximately US$ 100 million for the nationalization of the telecom company ENTEL. Ashmore Energy International and Shell reached another settlement agreement with Bolivia in 2009 for US$ 241 million for the nationalization of pipeline infrastructure, and Pan American Energy settled with Bolivia for US$ 498 million in 2014 for the nationalization of the oil company “Chaco.”

Other companies were not able to reach settlements and opted for arbitration. Chilean company Quiborax was awarded US$ 48.6 million by an ICSID tribunal. Red Eléctrica of Spain was awarded US$ 65 million for the nationalization of its shares in the Bolivian company “TDE”. The Canadian company South American Silver is seeking US$ 385 million for the nationalization of the “Mallku Khota” mine in Bolivia, and Glencore has recently filed, in August 2016, a new arbitration claim against Bolivia for the nationalization of “Vinto” and “Colquiri” mines, for which the parties were initially negotiating a settlement agreement, which was unsuccessful. There are several other cases, but these are enough to illustrate the point.

It is not possible to say that Bolivia´s disenchantment with investment arbitration in international fora is based solely on the results of these cases. Bolivia’s policy rather fits well with the general discourse of the government regarding the recovery of natural resources from transnational companies. In 2009, the Bolivian Constitution was completely modified in order to implement the new policies of the government. One of the most remarkable changes was that of article 366, which states that all foreign companies operating within the oil and gas industry in Bolivia are bound to Bolivian sovereignty and authorities, and that “[n]o foreign jurisdiction or international arbitration will be accepted in any case […].” This is the first and only mention of the word “arbitration” in the Bolivian Constitution.

Against this background, the policies of the 2015 arbitration act are definitely not new. The ICSID withdrawal, the 2009 Constitution and, the repeal of key pieces of legislation (such as the repeal of the investment law which was in place since the nineties) were revealing factors regarding the shift in the investment policies of the government, and they all took place several years before the enactment of the new arbitration law of 2015. It is likely that the high amounts paid by the Bolivian government for the nationalizations were a contributing factor for the step back of Bolivia in State arbitration, although some people claim that the amounts paid actually reflect good results, if they compare to the amounts sought by the investors in the first place.

The “investment arbitration” chapter of the Bolivian act

This second part of the article analyzes the content of the new act in regards to investment arbitration in Bolivia and subject to Bolivian law. How would an investment arbitration case involving a foreign company be conducted in Bolivia?

One of the most important realizations about this chapter of the Bolivian act is that it might not be applicable to many of the foreign companies doing business in the country. Here is why. There are several restrictions to the participation of foreigners in some industries of the Bolivian economy (all in accordance to the general discourse of the current government, as explained in the first part of this article). The “strategic” sectors of the economy, which include some of the largest industries in Bolivia, such as oil, gas, mining and electricity, are reserved only for State-owned entities. Any participation of foreign companies in these industries can only be made in close connection with State-owned companies. This means that State-owned companies would either need to hire foreign companies to provide services (in which case the foreign companies would probably not be doing investments per se), or they would need to associate with the foreign companies in a sort of joint venture enterprise or “PPP.” The second scenario is less common in practice than the first.

It seems like the investment chapter of the Bolivian law has in mind the rather uncommon scenario of mixed enterprises in which both State and the foreign company associate. This chapter of the law envisages two scenarios: one dedicated to Bolivian investment and, one dedicated to mixed investment and foreign investment. The terms “Bolivian investment”, “mixed investment” and “foreign investment” are not defined in the arbitration act, but their exact definition can be gathered from the Investment Promotion Act of April, 2014.

If a foreign company and a Bolivian State-owned company associate to work in a strategic sector of the Bolivian economy, this would probably be considered a mixed investment (it cannot be a “foreign investment”, because of the restrictions applicable to strategic sectors of the economy). In such a case, internal disputes between the two partners might be considered investment disputes, which the parties could potentially submit to the investment arbitration procedure established under the new act. What would such an investment arbitration case look like?

The investment arbitration chapter of the new Bolivian act establishes several mandatory provisions that will be applied to investment cases, thus limiting the right of the parties to freely determine the characteristics of the procedure in their arbitration agreement. The law mandates that, before submitting to arbitration, the parties must first engage into a conciliation process. The lex arbitri will be Bolivia’s, and the arbitration would be deemed local, not international (though the audiences can take place abroad). The arbitral tribunal must necessarily be composed of three arbitrators, and the arbitration cannot be ex aequo et bono, it must be decided under Bolivian law.

By far, the most relevant restriction in the investment arbitration chapter is that of the lex arbitri. The act mandates that the procedural laws applicable to investment arbitration cases be Bolivian law, which means that any annulment claim sought against an arbitral award issued in an investment case against Bolivia, would be reviewed by Bolivian courts. This is, as you can imagine, far from ideal for a foreign company. If the seat of the arbitration is that of the country against which the company has filed the claim, then many of the most attractive features of the institution of arbitration as an ADR mechanism are diminished.

Conclusion

There seems to be several reasons that have pushed Bolivia to withdraw from ICSID and try to establish a local alternative structure for investment arbitration cases. It is also clear, however, that the “local option” in the new arbitration law does not really offer a completely neutral forum for investors, and this might be a potent deterrent for investment. Bolivia must consider the possibility that, by trying to keep investment arbitration cases inside the country, it might be keeping foreign investment outside of it altogether.