Some help appears to be on the way for foreign investors who find themselves discriminated against during public tenders in host countries. In several recent arbitration rulings, international tribunals have offered relief to jilted bidders that can show that they suffered obvious discrimination or arbitrary treatment at the hands of host-state authorities.
The most notable recent case saw the award of nearly $9m to a US investor in Ukraine’s radio industry. The investor in question, Joseph Lemire, has operated a successful Ukrainian radio company, Radio Gala, for some years now. However, Mr Lemire turned to arbitration in 2006, alleging that his efforts to expand his business in Ukraine were being thwarted by broadcasting regulators, while other seemingly politically connected stations were being awarded dozens of new radio frequencies in public tendering processes.
After reviewing the case, arbitrators found that some tenders were conducted without transparency or due process, and that the American investor was facing onerous bureaucratic hurdles that were not placed in the path of other (sometimes politically connected) companies.
While finding that Mr Lemire had been mistreated – contrary to the protections owed in a US-Ukraine investment protection treaty – the arbitrators made sure to award monetary compensation only after verifying that it was “probable” that Mr Lemire would have won certain radio frequency licences in a free and fair contest. After satisfying themselves that Mr Lemire’s company had the experience and the financial backing to expand his radio business in Ukraine, the arbitrators ruled that he did suffer legitimate measurable losses as a result of being shortchanged in successive tender processes.
Not all foreign investors are so lucky.
In a more recent arbitration, an international tribunal has held that Lithuania mishandled a tender for a formerly state-owned distillery, but the arbitrators declined to bestow a financial windfall on the affected foreign investor.
Arbitrators found that an Italian bidder, Luigi Bosca, had submitted the highest of four bids for the distillery, Alita AB, but that Lithuanian authorities then failed to follow proper procedures in negotiating with Mr Bosca. After Mr Bosca’s bid was derailed, he sued Lithuania under the Italy-Lithuania investment protection treaty.
Mr Bosca asked arbitrators to award him more than $250m in damages. However, the arbitrators reportedly held in a May 2013 decision that Mr Bosca had not persuaded them that the procedural irregularities were the only hurdle to his acquiring the distillery and proceeding to run a profitable enterprise. In other words, Lithuania should have dealt more fairly with Mr Bosca, but there was not enough certainty that the businessman would have acquired the distillery if negotiations had been handled properly by local officials.
(As a consolation prize, arbitrators ruled that Mr Bosca deserved to recoup the expenses incurred during the mismanaged tendering process.)
One of the emerging lessons from the Lemire and Bosca cases appears to be that foreign bidders have some international legal recourse when they are not treated with due process by host country authorities.
However, a second lesson appears to be that arbitrators are not prepared to assume that every mistreated bidder – if given a level playing field – would have automatically emerged as the winning bidder and gone on to run a lucrative business.
Luke Eric Peterson is the publisher of Investment Arbitration Reporter (http://www.iareporter.com), an online news and analysis service monitoring foreign investment law disputes.