Peru wins dispute with American energy firm over the scope of a stabilization agreement

By Fernando Cabrera Diaz
23 December 2008

The Republic of Peru has defended itself successfully against a claim initiated by Delaware-based Aguaytia Energy LLC (AEL). AEL had sought US$142 million as compensation for what it claimed was Peru’s violation of a stabilization agreement. However, the Tribunal disagreed and instead held that the stability agreement did not provide for the substantive rights that the investor was claiming.

In the early 1990s, as Peru privatized its hydrocarbon and the electric power sectors, so-called legal stability agreements were offered to investors, under which the state promised to keep certain rules and judicial frameworks, such as tax codes, stable for a given number of years.

The claimant, through its Peruvian subsidiary, invested in the Aguaytia integrated energy project, a natural gas development project in the Aguaytia gas fields of eastern Peru, which contain an estimated 302 billion cubic feet of recoverable gas reserves. In addition to an agreement to exploit the gas field, electricity generation and transmission concessions, Aguaytia agreed to a legal stability agreement in which Peru guaranteed the stability of the tax system, the right to free remittances, and the right to non-discrimination, among other things.

This last guarantee—stability of the right to non-discrimination—was at the crux of the dispute. According to the claimant, Peru violated this guarantee when it offered a more advantageous investment model to ‘favoured investors’. In particular, AEL refers to a Build, Operate, Own and Transfer (BOOT) concession which Peru, after an international tender process, awarded to the Colombian energy firm ISA in 2001.

Under the ISA BOOT Concession, ISA assumed obligations to fulfill in constructing transmission lines and in turn received various incentives, including a stable remuneration scheme, independent of the actual load flow of electricity. In light of the ISA BOOT contract, AEL sought to have its transmission lines re-classified in order to take advantage of the same remuneration scheme, first through Peruvian administrative channels and then domestic courts.

While AEL was partially successful, certain issues, including the classification of two of its lines, were not decided to its satisfaction, leading to AEL’s ICSID claim, launched in May of 2006. In its claim, AEL argued that the guarantee of the stability of the right to non-discrimination included substantive protection against discrimination in the treatment of investors, such as the BOOT Concession investor.

Peru, however, maintained that the Stability Agreement guaranteed the stability of the right to non-discrimination as set out by Peruvian law, but no separate substantive right to non-discrimination. Ultimately the Tribunal sided with Peru, and held that the provision in question only guaranteed that the specified Peruvian laws protecting against discrimination would not be modified as they applied to AEL during the term of the Agreement, rather than creating a substantive protection against discrimination.

This finding, according to the Tribunal, ended the matter “because the Claimant asserts no case based on detrimental legislative or other legal framework change, and it is common ground that the Peruvian courts, and not this Tribunal, have jurisdiction over any alleged breach by the state of its anti-discrimination laws.”

It is “clear from the wording of the Agreement that the guarantees it contains concerning juridical stability do not convey a most favored investor status,” added the Tribunal.

On costs, the tribunal followed the language of the Stability Agreement and concluded that each side must pay its own and their share of ICSID arbitration fees.

White & case partner Jonathan C. Hamilton, who represented Peru, said that the Tribunal’s decision affirmed that stability agreements reduce the political risk of investing in emerging markets by freezing certain existing laws for a fixed period of time, but do not create new substantive rights.

The issue of stability agreements was recently taken up by a tribunal in an ICSID arbitration, Duke Energy vs. Peru. As reported previously by ITN, in an August 2008 decision, that tribunal adopted a more expansive view of stability agreements in the context of tax stabilization, by providing substantive protections. Duke Energy controls AEL.


Aguaytia Energy LLC v. Republic of Peru

Previous ITN reporting on the Duke Energy v. Peru award is available from the ITN website here.