Investment arbitration and construction contracts: jurisdiction over ancillary agreements and EDF funded projects

A recent ICSID tribunal has upheld jurisdiction over a dispute concerning an alleged settlement agreement arising from contractor claims on a major infrastructure project in the Republic of Mozambique. In addition to deciding that its jurisdiction extended to such ancillary agreements, the tribunal rejected an argument that its jurisdiction was limited by a purported exclusive jurisdiction mechanism for projects funded by the European Development Fund, which provides that any disputes arising from such projects shall be determined pursuant to the dispute resolution mechanism set out in the Cotonou Convention.

CMC Muratori Cementisti CMC Di Ravenna Società Cooperativa v Mozambique

Mozambique’s main road (the ‘N1’) runs from Maputo in the south to Pemba in the north. Following a decision by the Government to rehabilitate a significant stretch of this road, the “Namacurra-Rio Ligonha Project” was born. The Ministry of Public Works and Housing (the “Ministry”), who was responsible for these works, delegated responsibility to deliver the Project to the Administracão Nacional de Estradas (“ANE”). Following a public tender process, in 2005 ANE awarded to CMC a contract for works in relation to the Lot 3 of the Project (the “Contract”). The works were funded by the European Development Fund (“EDF”).

CMC carried out the works between 2005 and 2008. During the course of these works, CMC alleged that it carried out various additional works and suffered delay and disruption, for which it was entitled to additional compensation. During 2009, the parties exchanged various correspondence through which ANE made a commercial offer to pay a sum to CMC in satisfaction of these claims. A dispute arose between the parties as to whether CMC’s response to this offer constituted an acceptance of the proposal or a counter-offer (the “Settlement Agreement”). In any event, ANE never made payment of the proposed sum to CMC and, following a change in Government officials in charge of the Ministry and ANE, ANE refused to make payment of the proposed sum and sought to resile from its original offer.

In 2017, CMC initiated proceedings under the ICSID Convention against the Republic of Mozambique to recover its alleged entitlement to additional compensation. CMC relied on a bilateral investment treaty (the “BIT”) between Mozambique and Italy (where the CMC group of companies was based). In response, Mozambique raised a number of jurisdictional objections. In an award handed down in October 2019, the tribunal dismissed Mozambique’s jurisdictional objections and further dismissed CMC’s claim on the merits. In this Law-Now we focus on Mozambique’s jurisdictional objections.

Is a ‘settlement agreement’ an investment?

The scope of the dispute largely concerned the validity of the alleged Settlement Agreement. Whilst it is well-established that a contract for construction works is an investment for the purposes of the ICSID Convention, Mozambique argued that the Tribunal did not have jurisdiction because the alleged Settlement Agreement was merely a “legal act” and, of itself, involved no contribution to, or relevant economic activity within, Mozambique (as required by the ICISD Convention).

In response, CMC argued that the Settlement Agreement was either itself an investment in Mozambique, or that it was at the least a “credit for sums of money or any performance having economic value connected with an investment”, part of the definition of ‘investment’ set out in the applicable BIT. CMC also argued that the alleged Settlement Agreement was an investment by virtue of the fact that it was connected to and arose from the Contract, thereby making it both an “associated activity” and “performance having economic value connected with an investment” under the definition of ‘investment’.

In considering whether the Settlement Agreement was an investment under the ICSID Convention, the tribunal weighed up a number of authorities and applied an approach of determining whether the definition of ‘investment’ in the BIT “exceeds what is permissible” under the ICSID Convention. The tribunal ruled in favour of CMC finding that “the definition of “investment” in the [investment treaty] does not exceed what is permissible under the ICSID Convention. The Claimants’ claims “for sums of money or any performance having an economic value” within the meaning of Article 1(c) of the [investment treaty] arise directly out of their investment in the Lot 3 Project. In the view of the Tribunal, that is sufficient to bring the Claimants’ claims within the jurisdiction of the Tribunal under both the [investment treaty] and the ICSID Convention”.

ICSID Jurisdiction for EDF Funded Projects

Mozambique and Italy are both parties to the Partnership Agreement between the members of the African, Caribbean and Pacific Group of States, of the one part, and the European Community and its Member States, of the other part (the “Cotonou Convention”). As a matter of standard practice, construction contracts for EDF funded projects typically adopt a standard form dispute resolution provision that, in the case of ‘transnational contracts’, disputes shall be settled either (a) in accordance with the national legislation of the State of the Contracting Authority or its established practices, if the parties so agree; or (b) by Cotonou Convention arbitration.. Mozambique argued that the only dispute resolution option was Cotonou Convention arbitration (and not ICSID arbitration). Mozambique advanced a number of arguments in this regard, including that:

(i) the dispute around the validity and enforceability of the alleged Settlement Agreement related to the Contract and was therefore captured by the dispute resolution provisions in the Contract;

(ii) since the parties had not agreed otherwise, the dispute resolution provisions in the Contract provided for arbitration pursuant to the Cotonou Arbitration Rules; and

(iii) under the Cotonou Convention, the use of other arbitration rules is excluded and therefore ICSID does not have jurisdiction. Mozambique also noted that arbitration of this dispute pursuant to the Cotonou Arbitration Rules would be consistent with the BIT which permits a dispute under the treaty to be submitted to “other international arbitration arrangements, mechanisms, or instruments,” as an alternative to the ICSID Rules “at the[e]choice” of the parties. Therefore, CMC’s agreement to the dispute provisions of the Contract was “a clear waiver of ICSID jurisdiction”. Mozambique also cited Article 30 of Annex IV of the Cotonou Convention, which states that it applies to “any dispute arising between the authorities of an ACP State and a contractor, supplier or provider of services during the performance of a contract financed by the Fund [EDF],” and that those disputes “shall” be settled pursuant to the Cotonou Arbitration Rules.

The tribunal considered the impact of the Cotonou Convention both at a treaty level and at a contractual level:

• At a treaty level, the tribunal noted that Article 30 of Annex IV to the Convention applied only in respect of a dispute arising “during the performance” of the Contract. In the tribunal’s view, because the dispute around the validity and enforceability of the Settlement Agreement arose after the completion of CMC’s works, this was not a dispute arising ‘during the performance of’ the Contract.
• At a contractual level, whilst the parties had agreed to submit disputes arising under the Contract to arbitration under the Cotonou Arbitration Rules, the tribunal emphasised that the present claims were not merely claims for breach of contract. Rather, CMC’s claims all concerned disputes arising under the BITAs a result, the Contract provisions did not deprive the tribunal of jurisdiction.

Conclusion

This is an interesting decision insofar as it confirms that where the relevant provisions of the applicable investment treaty are sufficiently broad (as was the case here), there is sufficient scope for ICSID jurisdiction to extend to disputes arising from commercial agreements or issues that are incidental to, but not part of, a contract for construction works. Such types of agreements (which may include commercial agreements for the resolution of claims, advance payments, performance incentives or additional security) are not uncommon on construction projects. These contracts can often include little or no consideration, or may even simply be an affirmation of a commercial arrangement between the Parties. Despite the fact that the subject matter of these agreements may not satisfy the definition of an ‘investment’ for the purpose of the BIT or Article 25 of the ICSID Convention, this decision opens the door for disputes arising in relation to these ancillary agreements to be wrapped up in the claimant’s original ‘investment’ construction contract, and subject to ICSID jurisdiction.

By contrast, the tribunal’s findings in relation to the Cotonou Convention suggest that the dispute concerning the Settlement Agreement was not sufficiently connected to the works to be covered by the Cotonou Convention arbitration provisions. The tribunal’s decision leaves unclear which forum would be most appropriate for the resolution of subsequent disputes arising “during the performance” of contracts financed under the framework of the Cotonou Convention. In those cases there would appear to be a conflict between the investment treaty and the Cotonou Convention. Although the Cotonou Convention was dated later than the investment treaty in the present case, the tribunal noted that arguments for the priority of the investment treaty might have been made based on the fact that the Cotonou Convention is the last in a serious of treaties (the tribunal did not need to determine this point).

Parties involved in EDF projects should also take careful note of the Tribunal’s findings in relation to the dispute resolution provisions under the Contract. The Tribunal’s judgment indicates that where parties seek to maintain exclusive jurisdiction for investment-treaty disputes under an alternative regime or to exclude ICSID jurisdiction in particular; clear, express and narrow language in the drafting of dispute resolution provisions is required.

References:

CMC Muratori Cementisti CMC Di Ravenna SOC. Coop., CMC MuratoriCementisti CMC Di Ravenna SOC. Coop. A.R.L. Maputo Branch and CMC Africa, and CMC Africa Austral, LDA v. Republic of Mozambique, ICSID Case No. ARB/17/23.

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

Agreement between the Government of the Italian Republic and the Government of the Republic of Mozambique on the Promotion and Reciprocal Protection of Investments dated 14 December 1998 (the “BIT”).

Partnership Agreement between the members of the African, Caribbean and Pacific Group of States, of the one part, and the European Community and its Member States, of the other part (the “Cotonou Convention”).

Procedural Rules on Conciliation and Arbitration of contracts financed by the European Development Fund (the “Cotonou Arbitration Rules”) as adopted by Decision No 3/90 on 29 March 1990.