Quiborax S.A. and Non-Metallic Minerals S.A. v. Plurinational State of Bolivia (ICSID Case No. ARB/06/2)
On September 16, 2015, a tribunal at the International Centre for Settlement of Investment Disputes (ICSID) ordered Bolivia to pay approximately US$50 million in compensation for the expropriation of a mining investment. The claimants were Chilean company Quiborax S.A. (Quiborax) and Bolivian-incorporated Non-Metallic Minerals S.A. (NMM), majority owned and established by Quiborax as its investment vehicle to extract ulexite in Bolivia.
Background and claims
The Gran Salar de Uyuni, a salt flat in the Bolivian region of Potosí, has been a reserve since 1965. Bolivian Law No. 1854 of 1998 (Ley Valda) reduced the size of the reserve, and several mining concessions were requested and granted in the former reserve area. Between 2001 and 2003, Quiborax acquired 11 mining concessions, which were transferred to NMM.
Local communities did not favour the mining concessions in the area. This led Potosí representatives to present bills to reverse Ley Valda and transfer the concessions to the state. Accordingly, Law No. 2564 was promulgated in December 2003, abrogating Ley Valda. The law also authorized the executive to audit the concessions granted while Ley Valda was in force, and to annul the mining rights of concessionaires that were liable to sanctions, reverting the concessions and non-metallic resources to the state.
Based on tax and customs irregularities found in the audits, Bolivia revoked all of NMM’s mining concessions by Decree 27,589 of June 23, 2004 (Revocation Decree). In compliance with the decree, NMM handed over the operation of the concessions to the Potosí administration within 30 days of their revocation. The legality of the Revocation Decree was later questioned, as the mining code provided for the annulment of mining concessions, but not for their revocation. Attempting to remedy the situation, Bolivia abrogated the Revocation Decree itself in December 2005, at the same time annulling the concessions.
One month after the Revocation Decree, Quiborax and NMM requested consultations under the Bolivia–Chile BIT, and ultimately filed arbitration on October 4, 2005; proceedings commenced in December 2007. Among other claims, they argued that the Revocation Decree directly expropriated NMM’s investment (the concessions) and indirectly expropriated Quiborax’s investment (its shares in NMM), and that the expropriation was unlawful. They asked for compensation of US$146,848,827, plus compound interest, and US$4 million for moral damages.
Tribunal finds that illegal conduct during the operation of an investment does not bar an investor from relying on guarantees under a BIT
Bolivia objected that the investments could not benefit from BIT protection as they were neither made nor operated in accordance with Bolivian law. The tribunal reasoned that “ongoing illegality” in the operation of the investment could not affect the availability of BIT protections. As to the allegation of an “original illegality,” the tribunal recalled its jurisdictional decision that the investments were made in accordance with Bolivian law. While Bolivia offered new evidence that the investments were fraudulently acquired, the tribunal found it to be inconclusive.
Bolivia had also argued that the concessions were irregular and void from the outset, and therefore the investors did not have any rights subject to protection. But the tribunal did not support this argument. It found evidence that “the annulment […] was an ex post attempt to improve Bolivia’s defense in this arbitration, not a bona fide exercise of Bolivia’s police powers” (para. 139). Furthermore, looking at Bolivian law, the tribunal held that the alleged irregularities were non-existent or did not serve as grounds for annulment.
Tribunal finds expropriation unlawful despite legitimate public interest at stake
The tribunal was not convinced that the tax and customs irregularities mentioned as grounds for the Revocation Decree really occurred. Even if they did, the tribunal did not find the revocation was justified under Bolivian law. In view of evidence that the claimants were not notified of the audits and did not have access to information about them, the tribunal held that the revocation failed to comply with due process under international law and Bolivian law.
Endorsing the direct expropriation standard enunciated in Burlington v. Ecuador, on which the claimants relied, the tribunal held that the Revocation Decree had resulted in a permanent deprivation of the claimants’ investment, without justification as a legitimate exercise of the Bolivia’s police powers. Therefore, it upheld the claim that the Revocation Decree directly expropriated NMM’s investment in the concessions.
The tribunal also addressed the claimants’ claim that the Revocation Decree indirectly expropriated Quiborax’s shares in NMM. According to the tribunal, since the concessions appeared to be NMM’s only business, without them the shares in the company were “virtually worthless” (para. 239), resulting in an indirect expropriation of Quiborax’s investment in NMM.
Based mostly on media reports about the public perception that the claimants’ mining activities consisted in the looting of national wealth by Chilean investors, the tribunal considered that there was compelling evidence of a discriminatory intent in targeting NMM because of the Chilean nationality of Quiborax. Further, the tribunal had already decided that the expropriation was not carried out in accordance with the law, and it was undisputed that the claimants were not compensated. Accordingly, the tribunal held that the expropriation was unlawful under the BIT.
Even though the tribunal deferred to “Bolivia’s sovereign right to determine what is in the national and public interest” and accepted that “Bolivia may have had a legitimate interest in protecting the Gran Salar de Uyuni Fiscal Reserve” (para. 254), it found that this was irrelevant as the tribunal had already determined on other grounds that the expropriation was unlawful.
Both revocation and subsequent annulment breached FET standard
Without much analysis and leaving open the question of whether the BIT’s fair and equitable treatment (FET) standard corresponded to the minimum standard under international law, the tribunal considered that even under a more demanding standard the revocation of the concessions breached international law, as it was discriminatory and unjustified under domestic law. Again recalling that the annulment appeared to have been a strategy to legalize the revocation when the Revocation Decree was questioned, the tribunal held that the annulment also breached FET.
Tribunal dismisses claims for declaratory judgment and moral damages
The claimants alleged that Bolivia engaged in post-expropriation acts of harassment—mainly by initiating criminal cases against shareholders of the claimants—and that this breached the FET standard and the non-impairment clause under the BIT. However, the tribunal did not find sufficient evidence of such conduct. The tribunal also dismissed the claimants’ allegations that Bolivia, through its procedural conduct in the arbitration, breached several provisions of the ICSID Convention and its duty of good faith. Accordingly, the tribunal dismissed the claimants’ request for a declaratory judgment.
Furthermore, the tribunal understood that the US$4 million in moral damages sought by the claimants were intended to repair non-material damage resulting from the alleged post-expropriation acts of harassment. As the tribunal had already dismissed such alleged breaches, it held that there was no basis for a moral damages claim.
Full reparation valuated under DCF method; calculation based on the date of the award
In accordance with customary international law—as articulated in the Chorzów case and the International Law Commission (ILC) Articles on Responsibility of States for Internationally Wrongful Acts—the tribunal held that the claimants were entitled to full reparation. In the circumstances of the case, it did not see any relevant mitigating factors.
The parties agreed that the reparation should reflect the fair market value of the investment. However, for the valuation, the claimants favoured the discounted cash flow (DCF) method, while Bolivia favoured considering the net amounts invested. The tribunal sided with the claimant, noting that the DCF method is widely accepted, is mentioned in the World Bank Guidelines on the Treatment of Foreign Direct Investment, and has been endorsed by many investment tribunals. It decided to focus on assessing the fair market value of the mining concessions, NMM’s primary asset, and found that the record of operations and prospective profitability of NMM’s mining activity justified applying the DCF method.
The claimants maintained that compensation should be calculated based on the award date, while Bolivia argued that it should be calculated based on the expropriation date. After carefully analyzing the parties’ submissions and the reasoning in Chorzów, a majority of the tribunal decided to quantify the losses on the date of the award, considering that the expropriation was unlawful for various reasons, not only because it lacked compensation. In support of its decision, the majority cited to other investment tribunals, adjudicatory bodies and scholars following the same approach. Brigitte Stern, arbitrator appointed by Bolivia, wrote a partially dissenting opinion, outlining legal and economic reasons why, in her view, the valuation should in all cases be calculated based on the expropriation date.
Damages award and costs
Based on a series of parameters and on the cash flows that the ulexite reserves would have generated if the concessions had not been expropriated, the tribunal awarded damages amounting to US$48,619,578. It also awarded interest, compounded annually, at the rate of one-year LIBOR plus two per cent. Bolivia was ordered to cover half of the claimants’ arbitration costs, and each party was ordered to cover its own legal fees and expenses.
Notes: The ICSID tribunal was composed of Gabrielle Kaufmann-Kohler (President appointed by the Chairman of the Administrative Council, Swiss national), Marc Lalonde (claimant’s appointee, Canadian national), and Brigitte Stern (respondent’s appointee, French national). The award is available at http://www.italaw.com/sites/default/files/case-documents/italaw4389.pdf. Brigitte Stern’s partial dissent is available at http://www.italaw.com/sites/default/files/case-documents/italaw4388.pdf.
Martin Dietrich Brauch is an International Law Advisor and Associate of IISD’s Investment for Sustainable Development Program, based in Latin America.