Holding investors to account for human rights violations through counterclaims in investment treaty arbitration

by Allen & Overy LLP
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​The relationship between international investment law and international human rights law has become increasingly relevant in recent years. How and to what extent a state should be permitted to rely on its human rights obligations to defend claims that it has breached its investment treaty obligations has, in particular, received significant attention. Less discussed, however, is how investment treaties may be used positively to enforce compliance with human rights obligations. Following the recent decision of the tribunal in Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v Argentina, this blog post considers the circumstances in which a state may be able to bring a counterclaim under an investment treaty against an investor for human rights violations.

Background to the Urbaser case

Urbaser was brought under the Spain-Argentina bilateral investment treaty (BIT). The dispute concerned a concession for water and sewerage services in the Province of Buenos Aires granted in early 2000 to the claimants’ subsidiary, AGBA. The concession was ultimately terminated by Buenos Aires in July 2006, following what the claimants alleged to be:

  • Obstruction by Buenos Aires of AGBA’s operations.

  • Buenos Aires’ unwillingness reasonably to renegotiate the concession in the light of measures taken by Argentina in the face of the state’s economic crisis.

The claimants claimed that Bueons Aires’ actions amounted to a breach by Argentina of its fair and equitable treatment, non-impairment and expropriation obligations under the BIT.

Argentina denied the claimants’ claims. In its defence, it argued that the difficulties faced by the concession were in large part grounded on AGBA’s and its shareholders’ deficient management and failure to fulfil obligations under the concession agreement. Buenos Aires claimed that the deficiencies were never remedied, notwithstanding the assistance of the province during a renegotiation period of over one year. Hence, Buenos Aires had faced no alternative other than to declare the concession terminated. In addition, Argentina counterclaimed for damages on the basis of the claimants’ alleged “failure to provide the necessary investment into the Concession, thereby violating its commitments and its obligations under international law based on the human right to water”.

For reasons that fall outside the scope of this blog post, the claimants’ claims were dismissed. The sections below discuss the tribunal’s key findings relating to the counterclaim, both as regards jurisdiction and the merits.

Jurisdiction

The Urbaser tribunal found that it had jurisdiction over the counterclaims brought by Argentina under the BIT and the International Centre for Settlement of Investment Disputes (ICSID) Convention on the basis that:

  • The dispute resolution provision in the BIT was drafted in sufficiently broad terms (and thus the parties had consented to such claims for the purposes of Article 46 of the ICSID Convention), as required by Article 46 of the ICSID Convention.

  • The counterclaims arose “directly out of the subject-matter of the dispute”.

As regards the former requirement, the claimants argued that their acceptance of Argentina’s offer to arbitrate related only to claims brought by them. The tribunal noted, however, that the dispute resolution provision of the BIT was drafted in the broadest possible terms, permitting any disputes arising between a state and investor “in connection with investments” to be referred to arbitration (article X(1) of the BIT). There was nothing in the provision that excluded the possibility of a state bringing claims against the investor.

In fact (unlike most BIT’s which only envisage rights for investors to make claims), the BIT expressly envisaged that, in certain circumstances, either the state or the investor could commence arbitration (article X(3) of the BIT). The claimants’ acceptance of Argentina’s offer to arbitrate was not subject to any specific exclusions. Furthermore, had the claimants’ acceptance been more restricted in scope than Argentina’s offer to arbitrate, “the appropriate conclusion would have been that no agreement had been concluded between the Parties”.

The “subject matter” requirement was satisfied since the counterclaim concerned the same “investment” as the claimants’ claims.

Finally, the tribunal noted that it was not appropriate to require Argentina to comply with the six-month cooling-off period in the BIT when the claimants had been the party to commence arbitration and had not complied with the provision themselves.

Merits

As regards the merits of Argentina’s counterclaim, the tribunal again considered there to be two requirements which needed to be to satisfied:

  • Whether the BIT permitted it to apply international law outside of investment treaty law to the dispute.

  • Whether the human rights obligation that Argentina had alleged the claimants to have violated could, in fact, be said to be borne by private parties.

With respect to the first issue, the tribunal observed that this requirement was not difficult to satisfy: article X(5) of the BIT permitted decisions to be made not just on the basis of the BIT, but also:

“…. where appropriate, on the basis of other treaties… the domestic law of the Party in whose territory the investment was made, including the norms of private international law, and the general principles of international law”.

The analysis in relation to the second issue was, however, more complex. The tribunal rejected the claimants’ argument that (as a matter of principle) guaranteeing the human right to water, like other human rights obligations, was a duty borne solely by states. It stated that, while in the past it was held that only states could be subjects of international law, that principle had “lost its impact” in light of the acceptance of a corporation’s ability to invoke international law rights, for example under BITs.

The tribunal then turned to examine various international law instruments, including the Universal Declaration of Human Rights 1948 and the International Covenant on Economic, Social and Cultural Rights 1966 (ICSECR), which address the human rights of individuals. It noted that, while it could be argued that those instruments “do not state more than rights pertaining to each individual”:

“… in order to ensure that such rights be enjoyed by each person, it must necessarily also be ensured that no other individual or entity…may act in disregard of such rights”.

Indeed, support for this corresponding obligation could be found in certain provisions of the instruments’ text.

In light of its analysis, the tribunal held that there existed an obligation on all individuals, including corporate individuals, not to engage in activity aimed at destroying the human right to dignity, and the right to adequate housing and living conditions. However, the tribunal could not find evidence of an obligation on corporations corresponding to the obligation of states to provide all people living under their jurisdiction with safe and clean drinking water and sewerage services (which was the obligation that Argentina alleged the claimants had breached). Accordingly, Argentina’s counterclaim was dismissed.

Conclusion

The Urbaser tribunal’s finding of a human rights obligation applicable to corporations is novel and likely to be controversial. Furthermore, it is notable that the tribunal was only able to entertain Argentina’s counterclaim because, as discussed above, the jurisdiction clause of the specific BIT at issue was drafted broadly. Nevertheless, provided that relevant jurisdictional requirements can be satisfied, the Urbaser decision potentially paves the way for states to bring human rights-based counterclaims in investment treaty arbitration in future. This is a development relevant to both states and investors. Should states prevail in future cases, this may expose investors to financial liability.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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