Corporate responsibility for human rights violations after Urbaser - Oil and Gas Law Committee newsletter article, June 2017

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Floriane Lavaud, Debevoise & Plimpton, New York
flavaud@debevoise.com

Blair Albom, Debevoise & Plimpton, New York
bralbom@debevoise.com

Rhianna Hoover, Debevoise & Plimpton, New York
rhoover@debevoise.com

 

In Urbaser v Argentina, an International Centre for Settlement of Investment Disputes (ICSID) tribunal recognised for the first time that states in investment treaty arbitrations may bring counterclaims against corporate investors for alleged human rights violations.1 Although the tribunal ultimately dismissed Argentina’s counterclaim on the merits, the decision builds on a trend towards greater corporate responsibility for human rights violations.

Background

The two Spanish claimants were shareholders in a company that won a concession for water and sewerage services to be provided in a low-income region of Buenos Aires. At the time, the company won the concession with the province of Buenos Aires, 35 per cent of the region’s inhabitants had drinking water services and only 13 per cent had sewerage services. A primary goal of the concession was to expand drinking water and sewerage services in the area.

Argentina’s financial crisis in 2001–2002 caused a ‘critical sanitary situation’2 in the country and led to the implementation of emergency legislation that negatively affected the concessionaire’s ability to generate revenue, eventually leading to insolvency. As a result, the claimants initiated arbitration against Argentina, alleging violations of the applicable regulatory framework and violations of the Spain–Argentina bilateral investment treaty (the ‘Spain–Argentina BIT’).3 Argentina, in turn, filed a counterclaim alleging that the claimants’ failure to fulfil their investment obligations (ie, to meet certain milestones for expanding water and sewerage services in the province) constituted a violation of the basic human right to water.

Broad treaty language allows jurisdiction over counterclaims

To assert jurisdiction over Argentina’s counterclaim, the tribunal stated that it had to determine whether the counterclaim was based on ‘facts that if established as alleged may constitute violations of rights and obligations that are within the scope of the arbitration agreement governed by Article X’.4 The tribunal’s determination on jurisdiction was thus rooted in the language of Article X of the Spain–Argentina BIT, which provides that ‘[d]isputes arising between a Party and an investor of the other Party in connection with investments’5 shall ‘be settled amicably between the parties’,6 and that disputes can be submitted to an arbitral tribunal ‘at the request of either party’.7

Ultimately, the tribunal asserted jurisdiction over Argentina’s counterclaim based on three main grounds.

First, the tribunal found that the parties had consented to the submission of counterclaims by either the investor or the state. The claimants had argued that a BIT enables claims by investors only, and that the BIT’s silence on this point prohibited Argentina from pursuing counterclaims against investors. In rejecting these arguments, the tribunal noted that the BIT’s arbitration provisions were ‘completely neutral as to the identity of the claimant or respondent’8 and did not include a ‘carve out’9 that precluded the host state from invoking rights against an investor. The tribunal contrasted the breadth of the BIT’s dispute resolution provisions with ‘more narrowly drafted arbitration clauses’10 that contemplated the submission of claims by the investor only.

Second, the tribunal rejected the claimants’ argument that, even if the BIT permitted the submission of claims by the state, claimants had consented to arbitration only as claimants and not as respondents.11 The tribunal noted that Article 46 of the ICSID Convention allows counterclaims to be raised as long as they are ‘within the scope of the consent of the parties’,12 and that the provision ‘does not open the door for any unilateral determination of the Tribunal’s competence’.13 Thus, the consent given by the claimants to arbitrate covered ‘all disputes in connection with investments within the meaning of the BIT’.14

Third, the tribunal rejected the contention that Argentina’s counterclaim had no connection to the claimants’ claims under the BIT. Rather, it found that ‘the factual link between the two claims is manifest’15 (emphasis added) because both claims were based on the same investment, and that this ‘would be sufficient to adopt jurisdiction over the [c]ounterclaim’.16 This approach differs from that adopted by other arbitral tribunals which have required a legal connection between the counterclaim and the underlying claims17 and thus potentially expands the scope of permissible counterclaims that can be brought by host states.

Investors may be liable for human rights violations

Although the tribunal ultimately dismissed Argentina’s counterclaim on the merits, the tribunal recognised that investors may, under certain circumstances, be subject to international human rights obligations related to their investments in host states. This determination again turned on the specific language of the Spain–Argentina BIT, specifically the BIT’s invocation of ‘general principles of international law’18 and the scope of the most-favoured nation clause that permitted investors and states to rely upon more favourable ‘general international law’.19

As a threshold matter, the tribunal noted that it was ‘reluctant’ to share the investors’ position that the duty to guarantee the human right to water always falls on the state, and never on ‘private companies like the claimants’.20 In light of the Universal Declaration of Human Rights, the International Covenant on Economic, Social and Cultural Rights, and the United Nations Guiding Principles on Business and Human Rights, the tribunal concluded that ‘international law accepts corporate social responsibility as a standard of crucial importance for companies operating in the field of international commerce’.21

The tribunal then drew a distinction between ‘positive’ and ‘negative’ obligations. It stated that, although states have a ‘positive’ obligation under international law to enforce the human right to water, an investor has no such obligation absent ‘a contract or similar legal relationship of civil and commercial law’.22 However, investors have a ‘negative’ obligation to abstain from violating human rights, which is ‘of immediate application’.23 As such, the tribunal’s ruling signals that a company that engages in human rights violations may be subject to liability irrespective of whether it is bound by positive obligations to proactively enforce human rights.

Urbaser builds on trend towards greater corporate responsibility

The Urbaser decision builds on a trend towards not only permitting states to bring counterclaims in investment arbitration,24 but also increasing corporate responsibility for human rights violations.

Depending on the language of the applicable BIT, the scope of counterclaims may now include allegations of human rights violations. Companies should therefore be aware of the specific language of the BITs that govern their investments. BITs that do not contemplate state claims or counterclaims or do not make any reference to international law are less likely to allow state counterclaims. By contrast, broadly worded BITs may enhance the risk that an investor will be subject to liability. Notably, various model BITs, including the United States 2012 Model BIT25 and the 2006 France Model BIT, also contain broad language that may allow counterclaims by states.26

Several initiatives demonstrate growing attention to human rights violations. For example, the UN Guiding Principles on Business and Human Rights have enjoyed widespread acceptance in recent years,27 with the Council of Europe recommending that its 47 Member States ‘effectively implement’ such principles ‘as the current globally agreed baseline in the field of business and human rights’.28 In addition to the Guiding Principles, the UN also established a working group to develop ‘an international legally binding instrument to regulate, in international human rights law, the activities of transnational corporations and other business enterprises’.29 This trend is further evidenced by an increase in domestic litigation related to corporate liability for human rights, particularly with respect to extractive industries,30 and by the inclusion in recent BITs of an obligation on ‘investors and investments’ to ‘uphold human rights in the host state’.31

Although the reach of the Urbaser decision may to some extent be limited by the broad language of the Spain–Argentina BIT, the decision nonetheless adds to a growing trend that suggests companies should remain mindful of their obligations to respect human rights while conducting business.

 

Notes

1     Urbaser SA and Consorcio de Aguas Bilbao Bizkaia v The Argentine Republic, ICSID Case No ARB/07/26, Award, 8 December 2016.

2     Ibid, at 71.

3     Agreement between the Argentine Republic and the Kingdom of Spain on the Reciprocal Promotion and Protection of Investments (28 September 1992).

4     Award, para 1153.

5     Spain–Argentina BIT, Art X(1).

6     Ibid.

7     Ibid at Art X(3).

8     Award, para 1143.

9     Ibid at 1187.

10   Ibid at 1143 (comparing Article X of the Spanish–Argentina BIT to Article 9 of the Greece–Romania BIT which applies to ‘disputes between an investor of a Contracting Party and the other Contracting Party concerning an obligation of the latter under this Agreement’).

11   Ibid at 1147.

12   Ibid.

13   Ibid.

14   Ibid.

15   Ibid at 1151.

16   Ibid.

17   See, eg, Saluka Investments BV v Czech Republic, Decision on Jurisdiction over the Czech Republic’s Counterclaim (7 May 2004), para 79 (finding there was no jurisdiction where counterclaim did not constitute ‘“an indivisible whole” with the primary claim asserted by the Claimant’, or invoke ‘obligations which share with the primary claim “a common origin, identical sources, and an operational unity”’); Sergei Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company v Mongolia, Award on Jurisdiction and Liability (28 April 2011), para 693 (‘In considering whether the Tribunal has jurisdiction to consider the counterclaims, it must… decide whether there is a close connection between them and the primary claim from which they arose or whether the counterclaims are matters that are otherwise covered by the general law of Respondent.’).

18   Spain–Argentina BIT, Art X(5) (‘The arbitral tribunal shall make its decision on the basis of this Agreement and, where appropriate, on the basis of other treaties in force between the Parties, the domestic law of the Party in whose territory the investment was made, including its norms of private international law, and the general principles of international law.’).

19   Ibid, Art IV(2) (‘In all matters governed by this Agreement, such treatment [of investments made by investors of the other Party] shall be no less favourable than that accorded by each Party to investments made in its territory by investors of a third country.’).

20   Award, para 1193.

21   Ibid.

22   Ibid at 1210.

23   Ibid.

24   SeeIna C Popova and Fiona Poon, ‘From Perpetual Respondent to Aspiring Counterclaimant? State Counterclaims in the New Wave of Investment Treaties’, BCDR International Arbitration Review, Kluwer Law International 2015, at 224 (‘Counterclaims in investment arbitration have become more frequent in recent years. Half of the publicly-available decisions on State counterclaims were issued since 2008, and four decisions were handed down in the past two years alone.’).

25   2012 US Model BIT, Art 28(7) (‘A respondent may not assert as a defense, counterclaim, right of set-off, or for any other reason that the claimant has received or will receive indemnification or other compensation for all or part of the alleged damages pursuant to an insurance or guarantee contract.’)

26   2006 France Model BIT, Art 7 (‘Any dispute concerning the investments occurring between one Contracting Party and a national or company of the other Contracting Party shall be settled amicably between the two parties concerned. If this dispute has not been settled within a period of six months… it shall be submitted at the request of either party to the arbitration of [ICSID].’).

27   United Nations Office of the High Commissioner on Human Rights, ‘Guiding Principles on Business and Human Rights: Implementing the United Nations “Protect, Respect and Remedy” Framework’ (2011), available at www.ohchr.org/Documents/Publications/GuidingPrinciplesBusinessHR_EN.pdf accessed 9 June 2017.

28   Council of Europe, Recommendation CM/Rec (2016) 3 of the Committee of Ministers to Member States on Human Rights and Business (2 March 2016), available at https://wcd.coe.int/ViewDoc.jsp?Ref=CM/Rec%282016%293&Language=lanEnglish&Ver=original&BackColorInternet=DBDCF2&BackColorIntranet=FDC864&BackColorLogged=FDC864 accessed 9 June 2017.

29   See UN Human Rights Council, ‘Open-ended intergovernmental working group on transnational corporations and other business enterprises with respect to human rights’ (26 June 2014), available at www.ohchr.org/EN/HRBodies/HRC/WGTransCorp/Pages/IGWGOnTNC.aspx accessed 9 June 2017.

30   See Araya v Nevsun, 2016 BCSC 1856 (British Columbia Supreme Court) (6 October 2016) (permitting claims alleging human rights violations at a mine in East Africa to proceed to trial); Lungowe v Vedanta Resources PLC and Konkola Copper Mines PLC, [2016] EWHC 975 (TCC) (27 May 2016) (allowing claim to proceed against UK-domiciled parent company for alleged human rights abuses by its subsidiary in Zambia); Choc v Hudbay Minerals, 2013 ONSC 1414(Ontario Superior Court) (22 July 2013) (denying motion to dismiss claims against Canadian companies for alleged human rights violations in Guatemala).

31   Reciprocal Investment Promotion and Protection Agreement between the Government of the Kingdom of Morocco and the Government of the Federal Republic of Nigeria (3 December 2016), Art 18 (‘Post Establishment Obligations: (1) Investments shall, in keeping with good practice requirements relating to the size and nature of the investment, maintain an environmental management system… (2) Investors and investments shall uphold human rights in the host state; (3) Investors and investments shall act in accordance with core labour standards… (4) Investors and investments shall not manage or operate the investments in a manner which circumvents international environmental, labour and human rights obligations to which the host state and/or home state are Parties.’); see alsoTarcisio Gazzini, ‘Nigeria and Morocco Move Towards a “New Generation” of Bilateral Investment Treaties,’ EJIL: Talk! (8 May 2017), available at www.ejiltalk.org/nigeria-and-morocco-move-towards-a-new-generation-of-bilateral-investment-treaties accessed 9 June 2017.