Tribunal finds expropriation of investment by Bolivia due to non-payment of compensation but awards only sunk costs to British investor

South American Silver Limited (Bermuda) v. the Plurinational State of Bolivia, PCA Case No. 2013-15

In a PCA-administered UNCITRAL arbitration initiated by South American Silver Limited (Bermuda) (SAS) against Bolivia, the tribunal held that Bolivia unlawfully expropriated SAS’s investment, but awarded the mining investor sunk costs only. The final award was rendered on November 22, 2018.

Background and claims

On November 7, 2003, Compañía Minera Malku Khota (CMMK) was incorporated in Bolivia to explore and develop the Malku Khota mining project. The claimant, SAS, indirectly owns all shares in CMMK.

Between 2003 and 2007, CMMK acquired 10 mining concessions. The area of the concessions was principally inhabited by Indigenous communities, grouped in ayllus. In 2010, members of these communities accused CMMK of polluting sacred spaces, abusing its authority, deceiving and threatening community members, and condoning the rape of women from the community.

Resulting tensions between the local communities and CMMK officials culminated in violent clashes. The Bolivian government intervened and reached an agreement with the Indigenous communities. On August 1, 2012, Bolivia issued Supreme Decree No. 1308, reversing the ownership of the mining concessions to Bolivia. SAS claimed that the reversion constituted expropriation under Article 5 of the Bolivia­–United Kingdom BIT (the BIT).

Jurisdictional objections dismissed

Bolivia raised two jurisdictional objections: (1) the tribunal lacks jurisdiction since SAS is not the direct owner of the shares, and (2) the claims are inadmissible since SAS did not have clean hands and its investment did not satisfy the legality requirement.

According to Bolivia, the consent to arbitration in the BIT was given for disputes regarding an investment “of” a company, meaning that the investor should be the owner or direct holder of the investment. Since SAS did not have direct ownership of CMMK or the concessions, Bolivia argued that the dispute did not relate to an investment “of” SAS and that the tribunal lacked jurisdiction.

The tribunal dismissed this objection since nothing in the BIT nor any evidence from the time of the negotiation of the BIT suggested that the state parties excluded the possibility of indirect acquisition. It also observed that the corporate structure under consideration was not so sophisticated as to be unforeseeable by the state parties to the BIT at the time of its conclusion, if they had wanted to restrict or prohibit it.

Bolivia also argued that VCLT Article 32 does not limit the supplementary means of interpretation to the travaux préparatoires, but requires “the circumstances of its conclusion” to be taken into account. According to Bolivia, contemporaneous treaties signed by it at the time when the BIT was concluded must be considered among the circumstances of the conclusion of the BIT.

The majority of the tribunal disagreed, because the “circumstances” that VCLT Article 32 refers to are those of the conclusion of the BIT and not those of other treaties that were not proven to have been part of such circumstances. Thus, the majority found that the term “of” in BIT Article 8(1) did not exclude indirect investments.

In his dissenting opinion, arbitrator Osvaldo César Guglielmino cited Poštová Banka v. Greece and considered that investment tribunals frequently referred to contemporaneously concluded treaties when applying VCLT interpretation methods. He concluded that, in accordance with VCLT Article 31, the scope of protection under BIT Article 5(2) did not extend to companies of third states making investments through special purpose companies of one of the state parties.

Bolivia had also invoked the Salini test, seeking a determination from the tribunal to the effect that, even when an investment fulfils the Salini requirements, only the entity making the contribution and undertaking the risk directly can be considered an investor. Having already held that SAS was an investor and that the shares in CMMK and the mining concessions were investments under the BIT, the tribunal did not deem it necessary to carry out an interpretation of the Salini requirements.

The tribunal noted that the clean hands doctrine invoked by Bolivia was neither referred to in the text of the BIT nor part of the general principles of international law or international public policy. It also held that Bolivia failed to show that the alleged violations go to the essence of the investment such that it must be considered illegal. According to the tribunal, even if CMMK’s conduct may have motivated the reversion, this did not mean that the investment ceased to be covered by the BIT or became unlawful.

Bolivia committed unlawful expropriation by failing to compensate

In the tribunal’s view, there was undoubtedly an aggravated conflict that led to serious acts of violence. Further, it found that the Indigenous communities’ opposition to the project was well-established, as were SAS’s significant shortcomings in managing community relations. The tribunal held that the mere absence of a formulaic reference to human rights or to the protection of the communities did not lead to the conclusion that the reversion was not conducted for a social benefit related to Bolivia’s domestic needs. It held that the premises mentioned in the reversion had been proven. These include the protection of human rights—the right to life and the right to peace, both expressly mentioned in the reversion decree—and the protection of the communities and the ayllus against the difficulties resulting from the project.

With respect to due process, SAS argued that Bolivia’s obligation to give the investor an opportunity to “assert its rights” included granting an opportunity to participate in the expropriatory decision and in the determination of the amount of compensation. The tribunal disagreed and held, based on the text of the BIT, that the affected investor has a right to challenge the legality of the expropriation decision, not a right to participate in the decision-making process.

Bolivia alleged that, insofar as SAS had opted to pursue an expropriation claim in international arbitration, Bolivia had complied with its obligation to compensate without delay by participating in the proceeding. The tribunal rejected this argument as contradicting its prior actions, since Bolivia had defended the reversion as a legal expropriation, recognized that it had to provide compensation and continued with the hiring process of a valuation company, even after SAS had initiated arbitration.

Therefore, the tribunal concluded that, although the reversion fulfilled the requirements under BIT Article 5 relating to public purpose and social benefit, as well as due process, it did not fulfil the compensation requirement. The tribunal also rejected Bolivia’s arguments that the reversion was justified by a state of necessity and that it constituted the legitimate exercise of police powers.

Other claims—FET and full protection and security

SAS contended that Bolivia violated the FET standard under BIT Article 2(2) as it frustrated its legitimate expectation and failed to act in a transparent and consistent manner. The tribunal agreed with SAS that, in certain situations, some of Bolivia’s officials could have acted more efficiently. However, it held that the lack of opportunity or efficiency in some actions did neither qualify as an FET violation nor allow the conclusion that Bolivia acted with premeditation to gain control of the project. According to the tribunal, such allegations require a high standard of proof to establish bad faith or intolerable negligence by the state, and such evidence is nonexistent in this case.

The tribunal also found that Bolivia did not violate the full protection and security (FPS) standard under BIT Article 2(2). First, it concluded that SAS had not shown that Bolivia refused or failed to intervene when requested to do by SAS and that delays or inefficiencies regarding specific actions are insufficient to qualify as breaches of the standard. Second, SAS had complained that Bolivia did not militarize the areas surrounding Malku Khota and presented this as proof that Bolivia did not act with due diligence. The tribunal found that SAS failed to show that militarizing the area would have been conducive to resolving the social conflict. It also concluded that Bolivia did not stop implementing measures to seek the continuation of the project. Third, the tribunal understood that Bolivia’s commitment to suspend criminal proceedings against the leaders of the Indigenous organizations was a concession within the framework of an agreement to end the social conflict; it did not constitute inaction against alleged threats and aggressions directed at CMMK.

Decision and costs

The tribunal found that the reversal constituted direct expropriation and a breach of the obligation to provide compensation for expropriation. However, it found that Bolivia did not breach its obligations to afford FET or FPS. It also rejected SAS’s claims that Bolivia adopted arbitrary or discriminatory measures and breached the national treatment standard.

Guglielmino, in his dissent, considered that SAS was not the owner of shares in CMMK and that BIT Article 5(2) does not afford protection to such indirect investments. Accordingly, he concluded that SAS did not prove that it made a protected investment under the BIT, which prevented the tribunal from assuming jurisdiction to resolve the dispute.

Considering that the project was not in the production stage, the tribunal disregarded the traditional discounted cash flow (DCF) method in favour of a sunk-costs approach. The tribunal found that it was not possible to value the project on the basis of any comparable projects, nor was there evidence of its economic viability or of market value at which SAS’s shares were traded. Consequently, it held that the market value of such shares was to be determined by reference to CMMK’s value, which, for the purposes of compensation, corresponded to the value of what CMMK invested in the project.

The tribunal awarded SAS compensation of USD 18.7 million. It also ordered SAS to bear 65 per cent of the arbitration costs and each disputing party to bear its own legal costs and expenses.

Notes: The tribunal was composed of Eduardo Zuleta Jaramillo (president, Colombian national), Francisco Orrego Vicuña (claimant’s appointee, Chilean national) and Osvaldo César Guglielmino (respondent’s appointee, Argentinian national). The award is available at

Trishna Menon is an Associate at Clarus Law Associates, New Delhi, India.