Treaty claims for cancelled or modified infrastructure projects in the wake of Covid-19 

A recent ICSID tribunal has denied an investor’s claim concerning the development of an airport project in Latvia. The investor was unable to proceed with the construction of its project due to numerous amendments to the relevant development plan, culminating in a decision to significantly restrict the size of the airport. The tribunal determined that the actions of the airport authority were not attributable to the State and that the changes to the development plans did not give rise to a treaty-breach, despite having an impact on the investor’s ability to proceed with the works. This decision may have wider implications for developers and contractors on global infrastructure projects that may now be under feasibility reviews (and may subsequently face suspension, or cancellation) as a result of the Covid-19 pandemic.

Staur Eiendom AS, EBO Invest AS & Rox Holdings AS v Latvia

The Claimants in this case were all limited liability companies who held an interest in (SIA) Rixport (“Rixport”), a company incorporated for the purpose of bidding for a contract for the development of a parcel of land adjacent to Riga International Airport in Latvia. Following a tender process in 2006, the Latvian state-owned company SJSC Airport Riga (“SJSC”), which operates Riga International Airport, awarded four land lease agreements to Rixport in respect of this land (the “Land Leases”). Under a business proposal which was annexed to the Land Leases, Rixport undertook to use the land for the construction of hotels, conference and exhibition facilities, a business park and greenery and recreational areas.

Following the award of the Land Leases to Rixport, the Claimants argued that the development plans for Riga Airport were continually reviewed and revised to take into account elements such as projected flight numbers, passenger numbers, cargo volumes, and required infrastructure capacity. During 2006, SJSC was anticipating (in the context of the economic conditions at the time) a need to develop the capacity of Riga Airport to accommodate increased use and a growing volume of passengers (which was anticipated to increase from 2.5m passengers to up to 7.5m passengers). There is a dispute as to whether the development plan was a product of SJSC’s internal deliberations or whether it was dictated or otherwise influenced by the Latvian Ministry of Transport (the “MoT”) (being the sole shareholder of SJSC).

Following an extended period whereby no construction was carried out by Rixport and unsuccessful settlement discussions between the Parties, SJSC cancelled the Land Leases on the basis of Rixport’s failure to make rent payments. The Claimants commenced ICISD arbitration against Latvia alleging that Rixport’s construction and development efforts were thwarted by “constant changes to the SJSC Airport’s development plans”.

State attribution

To succeed in their treaty claim, the Claimants were required to show that SJSC’s changes to its development plans were attributable to the Latvian Government. The Claimants relied on a number of grounds to support attribution, including:

• the MoT having a role in SJSC’s decision making and operations;

• SJSC’s board was not independent from the MoT and was made up of politically appointed directors who referred to themselves as “state officials”;

• SJSC’s financial dependence on the State which was evidenced by the alleged need for SJSC to obtain MoT authorisation for any major expenditure;

• SJSC’s development plans for Riga Airport were submitted to the MoT and the Latvian Cabinet of Ministers for review;

• More generally that the management of strategic state assets such as an international airport could not possibly take place without the exercise of governmental authority.

These grounds were contested by SJSC witnesses and the tribunal found that attribution had not been proved: “there is no evidence that the changes of SJSC Airport’s business plans, including the postponement of SJSC Airport’s terminal expansion plans, were instructed, directed or otherwise attributable to any decisions of the State”. In doing so, the tribunal accepted the State’s submissions that there must be a presumption of autonomy for State Owned Enterprises unless there is compelling evidence to the contrary. The tribunal accepted the State’s witness evidence that “SJSC Airport develops internal business development plans ‘like most businesses.’ These plans are not binding upon anyone and are not required to be approved by the State. Even if they are prepared with the objectives of the State for the Airport in mind, it does not follow that they are themselves acts of governmental authority”. In this case, the appointment of board members and having oversight in relation to SJSC decisions or conduct was not sufficient to demonstrate a lack of autonomy for the SJSC. Such conduct “was not unlike that ordinarily played by the shareholder of any private company” and was not sufficient for SJSC’s separate legal personality to be disregarded.

Fair and equal treatment

Despite finding against the Claimants in relation to attribution, the tribunal nonetheless considered the Claimant’s case that Latvia had violated its obligation to afford fair and equitable treatment to Rixport. The tribunal rejected the suggestion that Rixport could have had a reasonable expectation for a consistent policy with regards to the development of the airport as (despite various representations being made by SJSC and other Government representatives) “the leases did not provide for the expansion of the Airport terminal in accordance with any particular technical plan or timeline. Nor did they contain any representations concerning Airport passenger forecasts”. The tribunal did not accept that the State and/or SJSC had created a legitimate expectation that the development was “shovel-ready” or that Rixport could commence construction soon after the land leases had been awarded. Instead, the tribunal held that it was “normal and indeed necessary, for an airport to continuously assess the need of the market and to consider possible changes, including extensions or expansions”.

Implications for Covid-19 affected projects

Whilst this decision arose from a very specific set of facts, it potentially has wider implications for the airport infrastructure sector and global infrastructure projects generally in light of the current economic downturn caused by the Covid-19 pandemic. The development interruptions experienced by the Claimants in this case (e.g. “repeated and significant changes to the number of passengers the airport facilities were expected to cater for”) are exactly the type of interruptions that many airport infrastructure projects may be experiencing in the current climate of economic uncertainty.

In the 10 years leading up to 2020, the global volume of air passengers has increased annually between 5-10% p.a.. The high rate of growth of demand for air travel coupled with low air-fares (largely driven by the increased number of budget carriers which entered the market in recent years) has increased the financial and economic feasibility for a number of new airport developments and airport expansion projects over the past few years. This has included a number of airport projects in locations that traditionally would not have experienced high enough passenger volumes to justify new development, including locations in Latin America, Eastern Europe, Africa and South-East Asia.

However, the aviation industry now faces an unprecedented period where it will seek to recover from: (i) a significant drop in revenues, (ii) a likely sustained period of reduced demand for air travel, (iii) increased health and safety costs, and (iv) what is likely to be a narrowing of the number of routes offered by many airlines or potentially insolvency of smaller airlines including low-cost carriers. These factors are likely to result in a number of airport development/expansion projects (particularly in what would traditionally be considered ‘low-demand’ locations) as no longer being financially or economically feasible. As such, a number of these projects may be reduced in scope, shelved or even cancelled.

The decision in this case demonstrates that developers and EPC Contractors on projects which end up being reduced in scope, shelved or cancelled as a result of changing economic conditions, will need to satisfy a high evidentiary threshold in order to establish treaty breaches in respect of these impacted projects. Parties should be cognisant that:

• A high threshold exists for seeking to attribute actions by a state-owned entity to the state itself. This case is a further example of an ICSID tribunal taking a narrow approach towards the assessment of attribution and requiring the claimants to submit compelling evidence to demonstrate that the presumption of autonomy for state-owned enterprises should be displaced. Whilst the Claimants had relied on express representations by various State officials expressing support for the development prior to the Land Leases, it was unable to prove that subsequent changes in plans for the airport were directed or instructed by the State.

• Where the development or project in question relates to ancillary facilities such as those considered in this case (i.e. hotels, conference facilities and other key supporting infrastructure to the airport), it should be ensured that the contract documents expressly specify that the development of those ancillary facilities is predicated on certain developmental baselines for the primary infrastructure (e.g. in the case of an airport, a defined terminal size or location, an agreed baseline of estimated passenger volumes, and/or an agreed date for completion of construction/upgrade to the terminal itself etc). Accordingly, if any subsequent changes to the development of the ancillary facilities are required in order to meet changes to the planning for the primary infrastructure, there is a clear measure to assess the investor’s legitimate expectations at the time of the investment. This should help to preserve the option to seek treaty-based relief (particularly potential claims for breaches of the fair and equitable treatment standard) without facing the same difficulties as beset the Claimants in this case.

There are other ICSID decisions where claimants have been successful in demonstrating that project cancellations (as opposed to simply suspensions or reductions in scope) are a breach of treaty-based obligations by the State. The present case suggests that claims based on the underlying parameters of a project being altered (as opposed to projects being cancelled entirely) are more difficult to demonstrate as treaty breaches.

References:

Staur Eiendom AS, EBO Invest AS & Roxy Holding AS v Republic of Latvia, ICSID Case No. ARB/16/38.

Convention on the Settlement of Investment Disputes between States and Nationals of Other States dated 18 March 1965 (the “ICSID Convention”).

Agreement between Government of the Kingdom of Norway and the Government of the Republic of Latvia on the Mutual Promotion and Protection of Investments, which was signed on 16 June 1992 and entered into force on 1 December 1992 (the “BIT”).