Technology’s Legal Edge | 9 November 2020

Current trends in investor state disputes in the telecommunications sector

By Kate Cervantes-Knox & Lucia Bizikova

1. Introduction

1.1 The ongoing Covid-19 pandemic has highlighted the ever-increasing importance of an interconnected world and access to telecommunications infrastructure. This is against the backdrop of the telecommunications sector having become one of the fastest growing sectors globally in recent years. The recent GSMA data on unique mobile phone subscriptions reveals that since the beginning of the new millennium, mobile phone subscriptions worldwide have increased almost nine times, reaching 5.13 billion in 2019. Broadband penetration data shows a similar upward trend, with fixed broadband subscriptions having doubled in the last twenty years, and as of 2019 there were 1.045 billion fixed broadband subscriptions globally. The most significant increase was recorded in mobile data usage, which increased more than 25% in the majority of OECD countries in 2019.

1.2 There is evidence that such high levels of activity in the telecommunications sector are leading to an associated increase in telecoms-related disputes. In particular, this is the case for disputes between private investors and host States arising under bilateral investment treaties (the “BITs”). The number of telecoms disputes arising under BITs may be due, at least in part, to the significant up-front investment required to build the necessary telecommunications infrastructure, and the fact that investors in the telecoms sector cannot move their assets elsewhere if the business climate changes in an adverse way. Since 1994 when the first telecoms-related investor-State arbitration was submitted to the International Centre for the Settlement of Investment Disputes (the “ICSID”), there have been 70 different telecoms-related disputes brought before investment arbitration tribunals (including tribunals appointed by ICSID, and tribunals applying other arbitral rules, such as those of the ICC and UNCITRAL), with 22 cases currently pending. Importantly, 41.4% of those cases, or 29 in total, have been initiated in the last five to six years. In the 14 cases where jurisdiction was accepted by the tribunal, 9 cases were decided in favour of the investor, and 5 cases in favour of the state. Tribunals have declined jurisdiction to hear the dispute in 14 different cases.

1.3 In 2020, seven new telecoms disputes have been registered under the ICSID Rules. In October 2020 alone, two new claims have been filed before ICSID: the French telecoms group Orange has commenced a claim against Iraq, and an Azerbaijani citizen Mr Hasanov, who owns the Neqsol group of companies, has brought a claim against Georgia. It is noteworthy that both of these claims arise from the conduct of the relevant state telecommunications regulators. Orange alleges that Iraq’s telecoms regulator wrongfully accused its joint venture company of failing to comply with Iraqi law when it acquired Korek Telecom, that it refused to approve the transaction, and that it ordered Orange and its business partners to transfer the shares back to the Iraqi shareholders. Similarly, Mr Hasanov claims that the Georgian telecoms regulator, the GNCC, has wrongfully accused him of a failure to seek its prior approval to his indirect acquisition of the Georgian telecommunications company Caucasus Online (“Caucasus”), which owns the fibre optic cable connecting Georgia to Europe under the Black Sea. The GNCC has imposed a series of sanctions which Mr Hasanov claims to be unlawful and discriminatory, including a requirement that Caucasus reverse the transaction. Moreover Georgia fast-tracked amendments to its Communications Law, allowing the GNCC to appoint a “Special Manager” over Caucasus, which Mr Hasanov claims is an expropriation of his investment. [1]

1.4 In addition to the newly registered cases, seven decisions have also been handed down by tribunals in 2020, which include two decisions of ICSID annulment committees. The most recent award (yet to be published) was reportedly issued by the tribunal in Vodafone v India (I) on 25 September 2020. The tribunal accepted jurisdiction and found for the claimant, finding India to be in breach of the fair and equitable treatment provision under the Netherlands-India BIT. A related arbitration in Vodafone v India (II) is still pending before the PCA tribunal.

1.5 A number of trends are apparent from awards that have been given in investor state telecommunications, which we discuss below.

2. Investor protection under BITs

2.1 A BIT is an international treaty entered into by two sovereign states, pursuant to which each signatory state undertakes to promote and protect investments made by nationals – whether companies or individuals, of the other signatory state in its territory on a reciprocal basis. As of today, more than 3,000 different BITs exist globally. Because each BIT is negotiated between the two signatory states, their terms vary.

2.2 However, most BITs provide a number of important protections in respect of investments made by foreign investors in the host state. These include an obligation on the part of the host state to treat investments fairly and equitably and to provide full protection and security to the investors, to treat the investment in a non-discriminatory fashion, and to prohibit unlawful nationalisation and expropriation of investments by the host state. Importantly, the vast majority of BITs allow foreign investors to commence international arbitration proceedings directly against the host state before a neutral arbitral tribunal if their investments are subject to adverse treatment. More often than not, such arbitrations are brought before ICSID, which is a part of the World Bank Group. Out of 70 arbitrations in the telecoms sector arising under different BITs, as many as 44 are being, or have been, administered by ICSID.

3. Jurisdictional requirements for bringing a claim under a BIT

3.1 There are several factors that determine whether the investor is entitled to protection of its investment under a BIT. First, it is necessary to establish that a valid BIT is in force between the host state and the state of which the investor is a national, or, if the investor is a company, a state in which it has been incorporated. In particular, it is important that the BIT in question was in force at the time that the investment was made. It is also necessary to show that the investor meets the legal definition of an “investor” under the relevant BIT. This will depend on the language used in each BIT. For example, some BITs do not grant protection to indirect shareholders, while others do. Another key jurisdictional question is the extent to which the particular investment is covered. Most BITs include a broad definition of “investment”, which often refers to “every kind of asset” and includes a non-exhaustive list of examples.

3.2 Persuading the tribunal that it has jurisdiction to hear the dispute has proven to be an important challenge for investors bringing investor state claims in respect of telecoms disputes. This is because as many as 14 tribunals have found that they do not have jurisdiction to hear the dispute. This corresponds to nearly 75% of all disputes in which the states have prevailed.

3.3 For example, in Dagher v Sudan, the investor, Mr Dagher was unable to prove that he was a national of Jordan and as such, the Jordan-Sudan BIT he sought to rely on did not apply; in Orascom v Algeria, the tribunal held that the same claim pursued by the claimant in that proceeding was already raised in another arbitration; and in Saba Fakes v Turkey, the investor was unable to prove legal ownership of the disputed telecoms firm. In addition, a number of claimants have failed to establish that they were “investors” under the applicable BIT (Italba v Uruguay) or that their activities in the host State constituted an “investment” for the purposes of the applicable BIT (ACP Axos v Kosovo). Similarly, in two related arbitrations in Emmis v Hungary and Accession Mezzanine v Hungary, the tribunal found that the investors did not have any rights in Hungary that were capable of being expropriated.

4. Most common breaches of BITs alleged in telecoms disputes

4.1 According to the information available in respect of investor state arbitrations in the telecoms sector, the most common breaches alleged by investors are breaches of the fair and equitable treatment standard (at least 31), breach of the prohibition against unlawful expropriation (at least 30) and failure to provide full protection and security (at least 16). The definition and scope of each of these obligations depends on the specific wording in the applicable BIT.

a) Fair and equitable treatment (FET)

4.2 In general, the obligation to provide fair and equitable treatment has been interpreted as requiring the state to act consistently, transparently, reasonably, without ambiguity, arbitrariness or discrimination, and in an even-handed manner to ensure due process in decision-making and to respect investors’ legitimate expectations. In telecoms disputes, breaches of the fair and equitable treatment have been invoked by investors in the context of a telecommunications regulator’s issuance of measures that destroyed the investor’s interconnection rights and all prospects of entering the host state’s telecommunications market; the decision of a state’s regulatory agency to annul the investor’s acquisition of shares in a local telecoms company and transfer them back to the original shareholders who were nationals of that State; and the arbitrary annulment of the investor’s lease of electromagnetic spectrum on two satellites following a broader political backlash against foreign investments.

b) Expropriation

4.3 Expropriation, which can be direct and indirect, has been interpreted as a taking of private property by a government acting in its sovereign capacity that substantially deprives the investor of the value of its investment. While states usually have the right to expropriate, this is subject to paying appropriate and fair compensation to the investor. Expropriation has been claimed by investors in the context of the relevant government’s take-over of the investor’s telecommunications firm and the enactment of legislation ordering that firm’s sale; the decision of the host state’s Supreme Court ordering that some telecommunications infrastructure must be returned to the state, and the relevant government’s decision to award radio-broadcasting licences formerly held by the investor to a third party. It is also worth noting that a direct expropriation, whereby the Government of the host state would physically take the investor’s investment is rare in telecoms disputes. The only example of when a direct expropriation has allegedly taken place is in Abanto v Venezuela, in which the claimant has alleged that Venezuela has physically taken the commercial site of a telecommunications company Omnivision. The claim is currently pending before an ICSID tribunal.

c) Full protection and security

4.4 Ultimately, the obligation to provide full protection and security can be described as the requirement of the host state to adopt measures protective of investments and investors from physical harm and from infringement of the investors’ rights by third parties that may occur during civil unrest or as a result of actions of the state’s organs and agents. It has been invoked by investors in respect of a state’s alleged failure to make budgetary allocations, suspension of income-generating activities, renegotiation of the investor’s contract under duress, changing key components of the conditions of licence agreements, abuses of law to terminate the contract and subjecting the investor to “opaque and arbitrary” national security review.

5. Common behaviours of host states that can lead to BIT claims

5.1 Assessing the key trends and most common behaviours of host states that have led investors to bring claims before international investment tribunals can be of important practical relevance to investors and host States alike in understanding the types of conduct which can give rise to an investor state dispute.

5.2 Generally, the subject-matter of the vast majority of all BIT disputes in the telecoms sector can be classed under one or more thematic categories, which are determined by the prevailing circumstances and alleged action taken by the host state and include: i) Unfavourable treatment of the investor or unfavourable legislation (14 cases); ii) Suspension, revocation or refusal to renew a concession or licence (14 cases); iii) Tax (11 cases); iv) Court order or court proceedings (9 cases); v) Unilateral termination of a partnership agreement / Other termination of an agreement (7 cases); vi) Forced suspension of operations / Forced sale or transfer of shares (6 cases); vii) Annulment of an acquisition of shares (4 cases); viii) Tender-related (4 cases); ix) Criminal investigations or proceedings (3 cases); x) Not allowing the investor to set / increase prices (2 cases); ; xi) Breach of a settlement agreement (1 case); and xii) Physical taking of the investment (1 case).

5.3 The most frequent measures adopted by host states that have escalated into BIT disputes, whether ultimately found by an arbitral tribunal to be actual breaches of a BIT or not, are discussed below. It is worth noting that the same conduct of the state may lead to multiple claims brought against it by different investors. This is fairly common in telecoms disputes – for example, a single decision of the Colombia’s Supreme Court has led to 2 different disputes in Telefónica v Colombia and América Móvil v Colombia brought under the Spain-Colombia and Mexico-Colombia BITs; the Iraqi regulatory agency’s decision to annul the acquisition of shares in Korek Telecom has resulted into two disputes in Agility v Iraq and Itisaluna Iraq and others v Iraq brought under the Kuwait-Iraq and Jordan-Iraq BITs; retrospective tax introduced by India also led to two investment arbitrations initiated by English and Dutch entities from the Vodafone group; India’s cancellations of leases and licences over satellite-based businesses gave rise to three different disputes in Astro and South Asia Entertainment v India, Deutsche Telecom v India and Devas v India that were brought under the United Kingdom-India, Mauritius-India and Germany-India BITs. Three separate claims were also brought against Belize by English investors British Caribbean Bank and Dunkeld following the State’s compulsory acquisition of the claimants’ interest in a local telecommunications company.

a) Unfavourable treatment of the investor or unfavourable legislation (14 cases)

5.4 This category generally encapsulates circumstances in which the host state or its bodies and agencies are accused of unfair treatment. Often, this involves the adoption of unfavourable regulations and laws that unduly penalise the investor. Some notable examples include allegations of preferential treatment of local companies by the regulator (Eutelsat v Mexico, Nelson v Mexico), including a failure to create fair, competitive and favourable regulatory environment (Global Telecom v Canada), adverse regulatory decisions on the allocation of mobile phone or wireless internet frequencies (Juvel v Poland, Dagher v Sudan), issuance of a resolution by the state’s regulatory authority to require all operators to reduce their tariffs (Telefónica v Mexico), the enactment of legislation that requires the sale of the investor’s property (Motorola v Turkey), or enactments that overturn the assurances previously given to the investor by the relevant government with regard to its digital cellular licences (Ameritech v Poland).

5.5 In addition, allegations of corruption of government officials in exchange for returning favours to local businesses also fall under this category (Astro and South Asia Entertainment v India).

b) Suspension, revocation or refusal to renew a concession or licence (14 cases)

5.6 This category covers disputes arising out of the alleged suspension or revocation of a telecommunications concession or licence, or a refusal to renew such concession or licence by the host-State or one of its entities. For example, claims have been brought in respect of the refusal to renew the investor’s CO internet domain despite the fact that, according to the investor, it was renewable for another 10-year term (Neustar v Colombia); non-renewal of the investor’s broadcasting licence (beIn v Saudi Arabia) or a cancellation of such licence (Al Jazeera v Egypt), revocation of the wireless spectrum licence (Italba v Uruguay) or a revocation of a 20-year telecommunications licence granted by the previous administration (Millicom v Senegal).

c) Tax (11 cases)

5.7 The third most significant category of measures adopted by the host state in the context of telecoms disputes relates to tax and different aspect of tax obligations of the investor. This can relate to capital tax imposed on the investor following an acquisition of a mobile company (Axiata v Nepal), claims arising out of a retrospective transaction tax imposed over the investor’s acquisition of a local telecoms business (Vodafone v India (I), Vodafone v India (II)), tax assessment levied upon the investor following the sale of its stake in a telecommunications provider due to public pressure (Alghanim v Jordan), or refusal to grant an exemption from profits tax and customs duties on machinery and equipment transported into the country (MTN v Jordan).

6. Damages awarded by arbitral tribunals in telecoms disputes under BITs

6.1 The amount of damages claimed by investors in telecoms disputes has varied considerably, ranging from some US$ 20 million to several billion dollars. In general, expropriation claims have attracted higher claims for compensation than other categories of claims.

6.2 The amount of damages that states have ultimately been ordered to pay are wide-ranging. The highest amount awarded by an arbitral tribunal in a telecoms dispute on record was in France Telekom v Lebanon, where the tribunal awarded US$ 266 million to the investor. The award has not been made public, so it is not clear which breach(es) of the France-Lebanon BIT were found. A similar amount (US$ 237.8 million) was awarded in Siemens v Argentina, following the tribunal’s findings that Argentina expropriated Siemens’ investment, failed to award it fair and equitable treatment and took arbitrary measures in respect of its investment. The third highest amount of compensation awarded was in Rumeli v Kazakhstan, where the tribunal found that Kazakhstan breached the fair and equitable treatment standard and expropriated Rumeli’s investment, awarding the investor US$ 125 million.

6.3 The lowest award on record in a telecoms dispute was ordered by the tribunal in Lemire v Ukraine (II). In Lemire (II), where the tribunal found that Ukraine breached the fair and equitable treatment standard under the US-Ukraine BIT and awarded the investor US$ 8.7 million.

7. Anticipated future trends

7.1 Given the ongoing development in the telecommunications technology and stable investment flow in the sector, it is unlikely that the spotlight will move away from the telecoms sector any time soon. This is likely to give rise to a continued rise in investor state claims in this sector in the coming years.

7.2 For example, the recent deployment of 5G network will inevitably lead to states renewing and issuing new licences and possibly adopting new regulatory frameworks. We may also see the introduction of new taxation policies, that might be considered by investors to undermine their legitimate expectations and to have a negative impact on the return on their investment. Alternatively, investors may consider that they are being discriminated against as compared with a state-owned entity. Typically, this happens when the state imposes a new law or policy that puts the foreign investor at a financial disadvantage and can include, for example, unfavourable regulation of the interconnection regime, mandatory increases of the foreign operator’s costs, withdrawal of access to essential facilities or providing access at an unreasonable cost, or tax policies specifically targeting the foreign investor’s activities.

7.3 As more technologies emerge and convergence continues, the regulatory framework has become increasingly complex and in some cases it could inadvertently favour the state-owned operator. This may also lead to changes of licence conditions, cancellation and reselling of the existing licenses and changes of the business terms that were used to attract the initial investment in the first place. Ultimately, it is also possible that some states might attempt to gain control over the operator and its assets by indirectly renationalising them, promoting forced sales or premature termination of management agreements.

7.4 The extent to which any of these types of measures could be in breach of protections offered by the applicable BIT will depend on the specific terms of the BIT, and the particular circumstances of each case. Sovereign states do have a right to self-regulate, but this needs to be balanced against the investors’ need for a stable investment environment and any promises and assurances that were given by the relevant government and its officials before making the investment.

8. Conclusion

8.1 In conclusion, it is prudent for both host States and investors to follow trends in investor state disputes in the sector as well as key legal developments which could have a bearing on a state’s compliance with its BIT obligations. This will allow them to react promptly and be in a better position, in the case of states, to ensure that their conduct does not fall foul of applicable BITs, and in the case of investors to consider their legal strategy should they consider that they have been subject to adverse treatment in breach of investment treaty obligations. Prospective investors should also seek to structure their investments in a way that optimises protections under available BITs, in case it is necessary for them to take advantage of the legal remedies provided for by applicable BITs.