ICSID tribunal finds Latvia breached FET under Latvia–Lithuania BIT
UAB E Enerģija v. Republic of Latvia, ICSID Case No. ARB/12/33
In a proceeding brought by UAB E Enerģija (UAB), a Lithuania-based energy company, a tribunal at the International Centre for Settlement of Investment Disputes (ICSID) held that Latvia’s conduct breached the fair and equitable (FET) standard under the Latvia–Lithuania bilateral investment treaty (BIT). In particular, the tribunal held that Latvia’s conduct toward the company appeared “to be founded on prejudice or preference rather than on reason or fact,” and was accordingly arbitrary within the meaning of the BIT (para. 887).
Background and claims
UAB entered into a 30-year lease agreement with AS Rēzeknes Siltumtīkli (the regulator), a company wholly owned by the Rēzekne Municipality (the municipality), to operate a district heating system for the City of Rēzeknes, Latvia. UAB established a separate entity, Latgales Enerģija (LE), to invest in this project.
In September 2007, the regulator sued LE in the Latgales Regional Court seeking payment of certain amounts and obtained attachment of its funds. Within a month, the municipality declared an energy crisis and appointed Rēzeknes Enerģija (RE) to provide thermal energy in the city. Following local elections, the newly elected politicians objected to the privatization of the service and terminated the lease in 2008, seizing all of the company’s assets and investments without compensation.
After four years of unsuccessful negotiations, UAB initiated arbitration claiming that Latvia breached its BIT obligations, particularly the FET and full protection and security standards under BIT Article 3(1).
Latvia’s preliminary objections to jurisdiction
Latvia presented several objections to the tribunal’s jurisdiction. First, it argued that UAB’s internal documents authorizing the request for arbitration failed to comply with the conditions precedent, namely, resorting to mediation prior to arbitration and obtaining the approval from the European Bank for Reconstruction and Development (EBRD) as a shareholder. Second, it asserted that there was no dispute within the meaning of ICSID Convention Article 25. Latvia argued that the extensive delay in the submission of UAB’s request for arbitration, 42 months after the period authorized in the BIT, shows UAB’s bad faith and caused Latvia to understand that the claims would not be pursued beyond negotiations.
The tribunal dismissed these objections, stating that the contents of UAB’s internal documents were insufficient to prove that the approval from EBRD was a condition precedent to arbitration. Further, it found that Latvia’s treatment of UAB’s investment qualifies to be a “legal dispute arising out of an investment” under ICSID Convention Article 25(1).
Latvia’s application for termination or stay of proceedings
Relying on Impregilo v. Argentina, Latvia submitted that the arbitration should be suspended or terminated pending the final adjudication of the judicial proceedings in the Latvian courts. The tribunal rejected this application since the parties to the Latvian proceedings (regulator and LE) and the parties to the arbitration proceeding (UAB and Latvia) were not the same. Further, although the court proceeding related to an application for a stay under the lease agreement, it did not deal with the standards of protection under the BIT. The tribunal reasoned that an overlap between contract and treaty claims was not sufficient to warrant a stay or proceedings. Consequently, it found no cogent reason to order a stay of the arbitration proceedings or terminate them.
Breach of FET standard under BIT Article 3(1)
UAB argued that the municipality’s delay in adopting a heat supply development plan amounted to a breach of the FET standard. It asserted that the non-existence of such a plan caused the regulator to deny LE’s applications for a new tariff in 2006 and 2007. In addition, UAB submitted that the municipality’s conduct was in bad faith and that the energy crisis was used to force LE into relinquishing some or all of the heating system.
The tribunal rejected this argument, stating that, while the municipality’s duty to act during the energy crisis cannot be doubted, the question for consideration was whether the energy crisis was declared in good faith and whether the municipality complied with BIT Article 3(1). In deciding this issue, the tribunal took note of the October 9, 2007 meeting of the Energy Committee, in which LE was summoned to provide heating within 24 hours, even though the municipality was aware that its bank account had been attached to the proceedings by the regulator. The tribunal emphasized that the municipality had, only a week before declaring the energy crisis, incorporated RE and endowed it with a capital of LVL 4 million (approximately USD 7 million) and appointed it as the “person in charge” of the provision of heating services in Rēzekne. Therefore, the tribunal found the municipality’s conduct in breach of BIT Article 3(1).
Revocation of licenses does not amount to expropriation
With regard to expropriation, UAB contended that the municipality acted in bad faith by conspiring with the regulator and RE to give rise to an energy crisis. UAB asserted that the regulator and the municipality sanctioned LE over a year by revoking UAB’s licenses, forcibly recovering its assets and finally terminating its long-term agreement. In the tribunal’s view, however, the regulator was entitled to revoke the licenses due to non-payment for the natural gas supplied to LE. It held that the regulator’s decision to revoke the license did not amount to a breach of BIT Article 4(1) on expropriation.
“Necessary permits” to be granted in accordance with domestic laws and regulations only
UAB invoked the most-favoured-nation (MFN) treatment clause contained in BIT Article 3(2) to argue that Latvia breached the obligations under Articles 2(2) and 3(1) of the Latvia–Romania BIT. Under these obligations, when the host state has admitted an investment in its territory in accordance with its laws, it shall “grant the necessary permits in connection with such investment” (para. 1104). UAB submitted that the municipality had failed to issue the required heat supply development plan and, consequently, the regulator failed to authorize LE to charge the revised heating tariffs.
The tribunal chose not to deal with the question of how procedural benefits could be imported through an MFN clause. Even so, it stated that it was doubtful whether the host state’s obligation to grant MFN treatment “subject to its laws and international agreements” could be relied upon to import standards contained in other treaties at all, since it may be limited to de facto treatment under domestic law. Further, the tribunal was unsure of whether the concept of a “necessary permit” “in connection with the investment” would include the heat supply and development plan for the City of Rēzekne. Likewise, it was also uncertain of whether the regulator’s decisions approving a new tariff proposed by LE fell into the category of permits contemplated by the provisions relied on by UAB. In any case, the tribunal found that any necessary permits have to be granted by the host state only “provided that it is in accordance with its national law” (para. 1109).
Damages and costs
The tribunal awarded UAB a sum of EUR 1,585,000 plus pre- and post-award interest, compounded annually for losses suffered as a consequence of Latvia’s breaches of BIT Article 3(1). A majority ordered Latvia to pay 50 per cent of the costs incurred by UAB. Arbitrator Reinisch dissented that, considering that the claims were not frivolous and were only pursued in good faith, each party should have born its own costs.
Notes: The tribunal was composed of Paolo Michelle Patocchi (President appointed by the Chairman of the ICSID Administrative Council, Swiss national), Samuel Wordsworth (UAB’s appointee, British national) and August Reinisch (appointed by the Chairman of the ICSID Administrative Council, Austrian national). The award of December 22, 2017 is available at https://www.italaw.com/sites/default/files/case-documents/italaw9481.pdf and August Reinisch’s dissenting opinion is available at https://www.italaw.com/sites/default/files/case-documents/italaw9482.pdf.
Gladwin Issac is a final year undergraduate student of Law and Social Work at the Gujarat National Law University, India.