Causation, morality, and quantum.

• Author: Bjorklund, Andrea K.
• Position: Biwater Gauff Ltd. (UK

Quantum is rapidly losing its status as an under-theorized area of investment law. A veritable avalanche of books, book chapters, and articles has made a welcome contribution both to methods of valuation and to the philosophical underpinnings of the award of damages resulting from violations of investment treaty obligations. (1) This contribution will address only one small area--causation--and some of its ramifications.

"Causation" serves several purposes in investment arbitration. (2) One role it plays is in establishing liability--harm resulting from unlawful conduct is attributable to the State if it is caused by State action, or by State inaction if the State had a duty to act. Conduct attributable to some actor other than the State does not give rise to State responsibility. A second role it plays is in establishing the amount of compensation due. There must be a causal link between the unlawful act and the injury, including monetary damages, that ensues. (3) In direct expropriation cases this inquiry is usually uncontroversial, as the taking of the property is virtually synonymous with injury because the deprived party has lost what he hitherto owned.

Differing appreciation about the causal relationship between the unlawful act and injury is the crux of the disagreement between the majority and the dissenter in the recent tribunal decision in Biwater Gauff v. Tanzania. (4) The majority determined that there was an unlawful act--an expropriation--but that no injury resulted as the investment's value was functionally nil. The unlawful act did not, therefore, give rise to an award of compensation. The dissent, on the other hand, viewed the matter as a question of valuation; the unlawful act was in itself an injury. Tanzania had violated the Tanzania-United Kingdom BIT by expropriating the claimant's property, but the claimant had failed to prove that the injury had compensable value.

The distinction is subtle. Most unlawful acts lead to quantifiable money damages, even if there is dispute about the appropriate valuation. If there is no quantifiable damage, it would seem to be a moot point; neither the Biwater Gauff majority nor the dissent awarded any damages. Yet reparations are not necessarily limited to specific material damage, such as compensation for an unlawful taking, if the claimant can prove additional damages, including moral damages. Thus, determining the existence of injury, and whether it need be established separately from the wrongful act itself, might play an important role in the award of costs or in the award of moral damages, even in the absence of compensable material damage for loss of profits or expropriation.

This essay sets out a short summary of the complex facts giving rise to the Biwater Gauff dispute. It then analyzes the differences of opinion with respect to causation between the majority and the dissenting arbitrator. Finally, it traces some of the ramifications of the different approaches to causation and discusses some of the different roles played by causation in investment disputes.

Biwater Gauff v. Tanzania is the latest in a series of investment awards resulting from unsuccessful public utility privatization projects. (5) In 2003, the Republic of Tanzania secured funding of US$140 million from various international lenders to repair, update, and expand Dar es Salaam's water and sewerage infrastructure. (6) Water was not available in all areas of the city, and the tariffs charged were too low to fund capital expenditures. The sewerage situation was even worse. (7) A condition of the funding was that a private operator manage and operate the modernization project. (8) After an initial tendering process that did not result in any contractual award, Tanzania recommenced a bid process. (9) While three companies pre-qualified to submit tenders, only Biwater Gauff (a joint venture of two European companies, one registered in England and Wales and one registered in Germany) actually submitted a tender and it was awarded the bid. (10) Biwater Gauff then established a local company, as required by the tender, to operate the project. The company they incorporated, City Water Services Limited (City Water), entered into three key contracts for the implementation of the project with the Dar es Salaam Water and Sewerage Authority (DAWASA). (11)

The primary contract required that City Water provide water and sewerage services for a ten-year period in a designated area and implement certain capital works associated with the modernization project. (12) Under this Water and Sewerage Lease Contract, City Water assumed rental fee payment obligations to DAWASA. To fund those payment obligations, City Water would collect tariffs from the residents of Dar es Salaam who used the water and sewerage systems. (13) DAWASA also agreed to give City Water the right to use existing equipment and gave them the exclusive right to operate the designated services. Moreover, DAWASA promised not to interfere with or hinder City Water's operations. (14)

City Water began operating in August 2003, and immediately ran into problems. The company faced unauthorized competitors; there were infrastructure problems that were not readily reparable; and City Water found it difficult to bill and collect from customers for the services it provided, in part because Tanzania had subsidized the provision of water and sewerage services for many years, and residents resisted the rise in rates instituted by City Water. (15) A significant issue was City Water's failure to implement a new billing process, which was a cornerstone of the modernization project and was essential to funding its operations. (16) It became clear that City Water had underestimated the difficulty of the project and failed to allocate sufficient managerial and financial resources to it. (17) To relieve its cash-flow problems, City Water requested permission to increase the operator tariff it charged residents, but Tanzania rejected the request after an auditor's report suggested it was unwarranted. (18)

Relations between City Water, Biwater Gauff, and government authorities deteriorated rapidly, and mediation failed. (19) Between May 13, 2005 and June 1, 2005, less than two years after City Water had commenced operations, DAWASA and other government authorities repudiated the lease contract, occupied City Water's facilities, took over the management, and deported City Water's senior managers. (20)

Biwater Gauff alleged, inter alia, expropriation of its property and unreasonable or discriminatory treatment in violation of the Tanzania--United Kingdom BIT. Biwater Gauff requested damages in the range of US$19-20 million. (21)

All of the arbitrators agreed that Tanzania's acts constituted an illegal expropriation of Biwater Gauff's investment. They disagreed, however, on the proper role that causation should play. Bernard Hanotiau and Toby Landau, the arbitrators in the majority, concluded that all of the compensable damage to Biwater Gauff's investment had occurred prior to Tanzania's violations of the BIT. (22) According to the majority, then, Tanzania's conduct did not cause any injury, notwithstanding its unlawful nature. (23) In Gary Born's view, the majority erred in separating the concepts of the unlawful conduct and injury: the "wrongful seizure clearly caused injury to City Water by depriving it prematurely of the use and enjoyment of its property." (24) Given that, the appropriate focus with respect to causation should have been the quantum of damage attributable to the injurious act. (25) Biwater Gauff was not entitled to any recovery, not because it had not suffered injury, but because it had failed to prove any monetary damages arising from the injury it suffered.

The difference between the majority and the dissent hinges on different conceptions of what it means to sustain an "injury." The majority equated sustaining an injury with incurring monetary damage. Because the expropriation caused no monetary damage, there was no injury. Mr. Born, on the other hand, treated injury as an issue distinct from monetary damage. The unlawful conduct itself was an injury. In that respect the claimant succeeded; where the claimant fell short was in proving the value of the damages resulting from the injury. Though not outcome-determinative as to liability on the rather unusual facts of the Biwater Gauff case, Mr. Born was concerned that in other cases the analytical distinction could...