Telecommunications Arbitration in Latin America

In line with the ‘Washington Consensus’ led by the World Bank and the International Monetary Fund, Latin America underwent a privatisation process of most of its key sectors, including telecommunications, during the 1990s. In many countries, the existing public monopolies in charge of providing this public service were replaced by private monopolies tasked with making substantial investments to build, expand and develop the infrastructure and technologies necessary to serve the public’s growing demand for connectivity.^[2] Landline home phones were quickly replaced by mobile cellphones, a trend that, in turn, caused operators to demand access to larger portions of the spectrum, and make constant investments in technology to provide users with faster broadband speeds (from 2G, to 3G, to LTE or 4G and the future deployment of 5G).^[3] Moreover, following the initial oligopolistic scheme, the industry gradually liberalised to allow competition, though the market seems to still be dominated by a few companies.^[4] Today, following the covid-19 pandemic, the demand for connectivity and high speeds to improve productivity is ever-growing.^[5]

Since the Latin American telecommunications sector opened to private investment, it has seemed that arbitration is set to become the prevalent means of dispute resolution in the industry. Arbitration clauses were and continue to be incorporated in many contracts governing the legal relationships between the industry’s different actors.^[6] Furthermore, qualifying foreign investors in the telecoms sector have the possibility to submit their investment-related disputes to arbitration with most Latin American states, pursuant to the plethora of investment protection treaties signed by the latter starting in the 1990s.^[7]

Moreover, being a highly regulated sector, subject to constant market and technological changes, as telecommunications markets open to increased competition, one could have also expected that friction between the different actors in the industry would be inevitable (between operators and regulators and amongst operators themselves), leading to disputes that could end up in commercial or investment treaty arbitrations, which, in turn, would provide robust arbitral caselaw concerning the telecommunications sector.

To date, however, the Latin American telecommunications sector has not been prolific in terms of arbitral case law that could shed light as to how the sector-specific issues are decided (compared to, for instance, the energy sector). We believe, however, that the latter is not necessarily due to absence of friction between the sector’s players.

As to commercial arbitration, many proceedings remain confidential, making it difficult to gauge any trends in terms of number and reasons of dispute, as well as the conclusions reached by the corresponding arbitral tribunals.^[8] However, the available public information shows that the region has seen some highly complex post-acquisition, joint-venture and shareholders disputes in the telecommunications sector.^[9]

In investment arbitration, where public information is more abundant, the overall balance shows that only 35 per cent of the existing cases in the telecommunications sector have concluded with an award and, out of those few cases, most cases were dismissed on jurisdictional grounds. Indeed, out of 20 initiated arbitration proceedings: (1) seven cases have been settled or discontinued;^[10] (2) six cases are still pending;^[11] (3) four cases were dismissed on jurisdictional grounds;^[12] and (4) three cases were dismissed on the merits, of which only two awards have become public.^[13] Based on these numbers, one can conclude that, to date, the parties to investment treaty arbitration in the Latin American telecommunication sector have preferred to solve their disputes amicably,^[14] and that, failing a settlement, investors have not fared well in their investment treaty claims.

Considering the availability of public information, our analysis will focus on investment treaty disputes concerning the telecommunications sector.^[15] Following an overview of the motives of dispute, we will describe the reasons that have led to the dismissal of all investment treaty claims decided to date. As it will be seen, there is an uncanny pattern of coincidences in the available case law, but, in some cases, one could hardly say that it evidences sector-specific issues.

Investment treaty disputes have been rooted in diverse sets of circumstances and do not reflect recurrent industry-specific issues

The motives of dispute in the Latin American telecommunications sector have been rather diverse. For purposes of this chapter, we have broadly classified them pursuant to certain common underlying themes, such as:

• The termination of concession contracts, including:
  • a decision by the Peruvian Ministry of Transportation and Communications to deny the renewal of certain concessions for the provision of fixed-line services (pending);^[16]
  • challenges to the Colombian government’s decision not to renew a concession contract for the administration of the country’s internet domain (pending);^[17]
  • the termination of a concession contract for the administration, management, and control of the Argentinian radio spectrum due to alleged breaches of the contract by the claimants, a case dismissed on jurisdictional grounds in 2008;^[18] and
  • the enforcement of a clause contained in six mobile concession agreements signed in the 1990s requiring the concessionaire to revert to the state all assets related to the concession upon its termination (including equipment, such as towers), without compensation, which gave rise to two separate arbitrations, one case decided in favour of the state in May 2021,^[19] and one pending.^[20]
• The revocation of telecommunications licences, including (1) a set of decisions by the Venezuelan National Television Commission revoking the company’s broadcasting licences, tendering them to its competitors, and transferring their assets to a third entity, a case dismissed on jurisdictional grounds in 2022,^[21] and (2) a decision by the Uruguayan telecommunications regulatory agency concerning the revocation of a licence for the exclusive use of certain spectrum frequencies, a case dismissed on jurisdictional grounds in 2019.^[22]
• The termination of contracts for the construction of telecommunications’ infrastructure, including:
  • the unilateral termination of a contract for the construction and operation of telecommunications kiosks in rural areas in Ecuador, due to the claimant’s alleged breaches (initiated in June 2009 and settled in August 2013);^[23] and
  • the alleged wrongful termination of a contract by Peru for the delays in the construction of certain telecommunication networks (pending).^[24]
• Interconnection conditions between operators, including two decisions by the regulatory agency of Mexico:
  • a decision concerning the applicable interconnection rates between two operators, a case decided in favour of Mexico in June 2020;^[25] and
  • a decision that required all operators to reduce their interconnection tariffs,^[26] a case initiated in June 2012 and settled in February 2018.
• Nationalisation policies in the region, including:
  • the nationalisation of a telecommunications company in Venezuela, a case dismissed on jurisdictional grounds in 2011;^[27] and
  • the transfer of the claimant’s 50 per cent stake in the national telecoms company ENTEL to Bolivia following its nationalisation, a matter that gave rise to two separate arbitrations,^[28] one discontinued in 2009 and one settled in 2010.
• The modification of two investors’ tariff regimes due to Argentina’s early 2000s financial crisis,^[29] one case settled in 2006 and the other discontinued in 2009.
• A contractual requirement obliging the claimant to allocate certain satellite capacity for the Mexican government’s use, a matter decided in favour of the state in September 2021, but whose award remains confidential.^[30]
• Costa Rica’s decision to deny the renewal of a contract that granted the claimant exclusive rights to distribute telecommunications products of a certain brand, including rechargeable calling cards and telephone lines, in certain provinces, and assigning it to a competitor, an arbitration initiated in August 2020 and discontinued in March 2022 as per one of the parties’ request.^[31]
• The seizure of a telecommunications company in Venezuela (pending).^[32]
• A dispute whose precise motive is still unknown, but where the claims presumably concern the annulment request by the Peruvian Superintendence of Customs and Tax Administration of a local court’s judgment that declared unenforceable tax liabilities owed by the prior administration of a television station (pending).^[33]

Two remarks can be made concerning possible trends in the motives underlying these disputes.

First, before 2016, disputes were mainly associated with economic or political shifts in the region that affected all major sectors in Latin America (e.g., the Argentinian economic crisis, or Venezuela’s and Bolivia’s nationalisation policies). After 2016, arbitrations have arisen out of more specific events, be they contractual or regulatory, affecting a specific legal relationship between the state and the telecommunications investor.

Second, it is not possible to discern a predominant or recurrent motive of dispute that is particular to the sector. The only quintessential telecommunications dispute that seems to stand out concerns interconnection conditions between operators. Generally, interconnection conditions are mutually agreed by the operators within the limits imposed by the telecommunications regulators. Regulators, in turn, will only impose those conditions if the operators cannot reach an agreement among themselves.

Interconnection disputes could surge as the market moves towards increased competition, and the demand for interconnection amongst a larger number of operators increases. Such disputes may give rise not only to investment treaty arbitrations but also to commercial arbitrations.

To date, two commercial arbitrations concerning interconnection have become public. In both, discrimination claims were at the heart of the debate. In Telefónica v. Ospitel, for instance, Telefónica managed to prove that the Peruvian telecommunications regulator – Ospitel – had violated its rights to equal access and non-discrimination granted by the concession contracts Telefónica had with the state, by issuing certain asymmetrical regulations (meaning only applicable to the preponderant economic agents of the market) concerning the operator’s interconnection conditions.^[34] Conversely, in Americatel v. CTE, Americatel failed to show that its contractual counter-party in an interconnection agreement in El Salvador – CTE – had breached a contractual clause that aimed to prevent discriminatory practices, since CTE proved that it had granted more favourable conditions to another operator that had different technical, economic and use conditions.^[35]

The tribunal’s lack of jurisdiction ratione personae has been a preponderant cause of dismissal of investment treaty claims

Out of the four cases that were dismissed on jurisdictional grounds, three were dismissed based on the tribunal’s lack of ratione personae jurisdiction. However, one cannot say that such pattern evidences a sector-specific issue:^[36]

• In Trapote v. Venezuela, the tribunal found that Mr Fernando Fraiz Trapote, a dual national of Spain and Venezuela, could not bring a claim against his home country under the Spain–Venezuela bilateral investment treaty (BIT), which did not specifically regulate claims by dual nationals. The tribunal concluded that Mr Fraiz’s dominant and effective nationality was Venezuelan, proved by the fact that the Venezuelan born businessman had studied, married and had children in Venezuela, developed his business in Venezuela, resided for most of this life in Venezuela (eventually moving to the United States, but never to Spain), and participated in public life in Venezuela.^[37]
• In Italba v. Uruguay, the tribunal found that Italba, a US company that claimed 100 per cent ownership and control of a Uruguayan company, Trigosul, which in turn held the alleged protected investment, could not access ICSID arbitration under the US-Uruguay BIT. The tribunal found that Italba did not (1) own Trigosul, a matter that needed to be determined pursuant to Uruguayan law; or (2) control Trigosul’s activities (e.g., negotiation of contracts, capital contributions, and funding of transactions). Both the ownership and control of Trigosul seemed to reside with Italian citizens not protected by the BIT.^[38]
• Finally, in TSA Spectrum v. Argentina, the tribunal concluded that TSA, an Argentinian company allegedly controlled by Dutch nationals, could not access ICSID arbitration under the Netherlands–Argentina BIT. The tribunal pierced the corporate veil of the Dutch companies and found that the objective control of TSA resided in a German–Argentinian citizen. The tribunal posited that if it was expected to pierce the corporate veil of the Argentinian claimant and the intermediary companies to establish its objective Dutch control, it could not ‘stop short at the second corporate layer, rather than pursuing its objective identification of foreign control up to its real source.’^[39]

While states have been successful in defeating investment treaty claims through ratione personae jurisdictional objections, they have failed to do so on ratione materiae jurisdictional objections, particularly, those involving seemingly contractual claims. In TSA v. Argentina, for example, the tribunal dismissed Argentina’s contention that the dispute needed to be resolved pursuant to the relevant contract’s dispute resolution clause (which included arbitration).^[40] The tribunal considered that this clause could not exclude recourse to a remedy under the BIT, unless otherwise stated, because it would allow governments to avoid their treaty obligations.^[41] Moreover, in América Móvil v. Colombia, a case explained in detail below, the tribunal dismissed Colombia’s contention that América Móvil’s claims were merely contractual and had already been decided in a contractual commercial arbitration involving América Móvil’s wholly-owned subsidiary and the state. The tribunal found that América Móvil’s claims also concerned sovereign acts of certain public authorities that had not participated in the commercial arbitration and that Colombia’s arguments concerned the merits and not the tribunal’s jurisdiction.^[42]

Two different tribunals dismissed the investor’s claims concerning expropriation of rights that did not exist under the host state’s law, as well as their disagreement with decisions of the host state’s judiciary not amounting to a denial of justice

As anticipated above, we have found only three cases that have been decided on the merits, all in favour of the state.^[43] However, only two of the awards are publicly available, namely the final award rendered in June 2020 in Joshua Dean Nelson v. Mexico and the final award rendered in May 2021 in América Móvil v. Colombia.

Following the same pattern of uncanny coincidences in the existing telecommunications case law, in both cases, the tribunals dismissed the investor’s claims concerning expropriation of rights that did not exist under the host state’s law, as well as their disagreement with decisions of the host state’s judiciary not amounting to a denial of justice. In both cases, the tribunals accorded (1) decisive importance to the laws and regulations of the host state when analysing the merits of the investor’s claim under international law, and (2) significant deference to the interpretation of domestic laws and regulations by domestic tribunals.

The claim in Joshua Dean Nelson v. Mexico was a case brought in September 2016 under the North American Free Trade Agreement (NAFTA) by Joshua Nelson on behalf of Tele Fácil, a Mexican company he controlled.^[44] The dispute concerned certain rights that the claimant alleged Tele Fácil had, which constituted a protected investment that had been expropriated by the state. To properly understand the tribunal’s reasoning, it is necessary to outline the complex factual matrix of the case.

Mexico granted Tele Fácil a concession to operate a public communications network for a period of 30 years (the Concession Agreement). To provide its services, Tele Fácil had to interconnect with a Mexican carrier. Otherwise, Tele Fácil’s customers would only be able to communicate with other customers within its network.

Tele Fácil decided to interconnect with Teléfonos de México and Teléfonos del Noroeste (Telmex) and, in August 2013, Telmex offered Tele Fácil a draft standard interconnection agreement, which, inter alia, included a reciprocal interconnection rate of US$0.00975 per minute (the Draft).

In March 2014, the recently created Federal Institute of Telecommunications of Mexico (IFT) declared Telmex’s parent company, América Móvil, S.A.B. de C.V. (América Móvil), a preponderant economic agent in the telecommunications sector. That same month, the IFT issued certain asymmetrical regulations (meaning only applicable to the preponderant economic agents) that, inter alia, imposed on Telmex the obligation to provide a special interconnection rate lower than the one proposed in the Draft Agreement (US$0.00172) (the Asymmetric Regulation).

In July 2014, Tele Fácil sent Telmex its comments on the Draft Agreement, but did not comment on the interconnection rate. Three days thereafter, Tele Fácil requested the IFT to resolve a dispute between Tele Fácil and Telmex over certain matters regulated in the Draft, but not the interconnection rates. Telmex, for its part, argued that the parties had a disagreement on the applicable interconnection rates and requested the IFT to determine the applicable rates.

In November 2014, the IFT issued Resolution 381 where it, inter alia, rejected Telmex’s request because it found no proof of a disagreement on the interconnection rates defined in the Draft. Therefore, the IFT ordered the parties to interconnect and execute an interconnection agreement. Thereafter, Tele Fácil and Telmex failed to reach an agreement as to the applicable interconnection rates, based on their different interpretations of Resolution 381. Tele Fácil held that both parties had reached an agreement on the rates contained in the Draft, as confirmed by Resolution 381. Telmex’s position was that no such agreement existed, and they should agree on the rates pursuant to the new legal framework. As the tribunal later explained, Tele Fácil intended to charge the interconnection rate reflected in the Draft (US$0.00975), while Telmex could only charge the maximum rate allowed by the Asymmetric Regulation (US$0.00172), which would have given Tele Fácil an important profit margin.^[45]

In April and October 2015, the IFT issued Decree 77 and Resolution 127, which stated that Resolution 381 had not taken a decision on the matter of interconnection rates, concluded that the Draft was null and void because Telmex had not signed it, indicated that the applicable interconnection rate was USD 0.000253, and ordered the parties to interconnect. Tele Fácil filed amparo actions against Decree 77 and Resolution 127, as well as an appeal, all of which were dismissed by the Mexican courts.

In light of these facts, Mr Nelson claimed that Mexico had expropriated its investments by repudiating Resolution 381 and by imposing an interconnection rate through Resolution 127 that destroyed Tele Fácil’s capacity of earning any revenue in Mexico.^[46] Specifically, Mr Nelson claimed for the expropriation of ‘“Tele Fácil’s rights under the Interconnection Agreement as determined by the IFT in Resolution 381” or . . . the “rights . . . to interconnect with Telmex and to earn revenues based on the interconnection rate (US$0.00975 per minute)”’ (the Interconnection Rights).^[47]

The parties agreed that, as a first step to examine Mr Nelson’s expropriation claim, the tribunal had to establish whether there was an investment capable of being expropriated. While it was undisputed that Tele Fácil’s shares and the Concession Agreement constituted a protected investment capable of being expropriated, the parties disputed whether Mr Nelson could claim the expropriation of the alleged Interconnection Rights.

In its final award, the tribunal’s main analysis sought to establish whether, under Mexican law, the Interconnection Rights existed at all. In sum, the tribunal concluded that they did not and, therefore, the expropriation claim was unfounded.^[48] The tribunal concluded that it was clear that the Draft had not been signed by either Telmex, or Tele Fácil, so there was no agreement concerning the interconnection rates.^[49] Moreover, even though Resolution 381’s drafting was ‘unfortunate’ and suggested that the Draft contained Telmex and Tele Fácil’s agreement concerning the interconnection rates, a reading of such Resolution in light of the IFT’s legal powers under Mexican law led to the conclusion that:

Resolution 381 did not decide a dispute on the rates because it considered that there was no dispute. The IFT has no authority to decide whether or not the parties to an interconnection agreement have agreed on certain terms and conditions, it only has the authority to decide on those terms and conditions that are disputed and submitted for its consideration. The IFT may have erred in drafting Resolution 381 and indicating that Tele Fácil and Telmex had agreed on the rates. Clearly the IFT could have done better. But a party cannot attempt to benefit from such errors, much less when the party’s interpretation based on those errors would be contrary to Mexican law as it would result in the regulator clearly exceeding its powers.^[50]

The tribunal also dismissed Mr Nelson’s claims under NAFTA’s fair and equitable treatment (FET) clause, mainly because it found that the IFT had consistently acted within its powers and most of Mr Nelson’s claims were premised on its incorrect interpretation of Resolution 381.^[51] Notably, the tribunal dismissed Mr Nelson’s claim that the Mexican courts had incurred in denial of justice, finding that (1) ‘a mere disagreement with the reasoning does not amount to a lack of reasoning nor does it allow this Tribunal to consider that the Court administered justice in a seriously inadequate way or that it clearly and maliciously misapplied the law;’^[52] (2) it was not for the tribunal ‘to second-guess the decisions made by domestic courts or to act as a court of appeals;’ and (3) Mr. Nelson’s ‘allegations [did] not evidence a serious flaw or malice in the application of the law but simply a disagreement on the reasoning’.^[53]

The issue of the extent to which an international tribunal may review the conduct of domestic tribunals was also at the heart of the expropriation claim brought by América Móvil against Colombia under the Mexico-Colombia Free Trade Agreement (FTA). While the FTA did not contain a FET clause, América Móvil initially presented a FET claim pursuant to the FTA’s most-favoured-nation (MFN) clause. However, América Móvil quickly dropped the FET claim because Colombia had expressly excluded the application of the FTA’s MFN clause to matters concerning the telecommunications sector.^[54] To properly understand América Móvil’s expropriation claim, a brief summary of the case’s factual matrix is also necessary.

In 1994, a Colombian telecommunications company acquired by América Móvil in 2004 – Comcel – entered into a concession contract with the Colombian Ministry of Communications to provide mobile phone services in the country (the Concession). The Concession imposed Comcel the obligation to revert to the state all assets related to the concession upon its termination, without any compensation (the Reversion Clause). The initial 10-year duration of the contract was extended in 1997 for a total period of 20 years, expiring in November 2013.

In 1998 and 2009, Colombia enacted two telecommunications laws providing that the reversion obligation concerned the spectrum only (the Laws). However, the text of the Reversion Clause was not modified.

In 2013, the Constitutional Court addressed a constitutionality action brought against the Laws, and held that the Laws were in conformity with the Constitution, but that they did not apply retroactively to concession contracts that predated the Laws, such as Comcel’s.

In 2016, the Ministry initiated arbitration under the Concession’s arbitration clause to enforce the reversion obligation. In 2017, the arbitral tribunal seated in Bogotá found that the Reversion Clause had not been modified pursuant to Colombian law and ordered Comcel to pay to the state US$950 million corresponding to the value of the assets that should have reverted to Colombia (the Commercial Award).

In 2016, América Móvil initiated investment arbitration against Colombia seeking US$1.26 billion plus interest, claiming that the Laws granted Comcel a ‘right to the non-reversion of assets’ that had been expropriated by the Constitutional Court’s decision. América Móvil claimed that the ‘right to the non-reversion of assets’ had been recognised by the state, which gave rise to América Móvil’s legitimate expectation that said right would be enforced. For América Móvil, the conclusions of the Constitutional Court and those of the Commercial Award were not binding on the investment tribunal, and América Móvil did not need to prove a denial of justice for the latter to declare that the Constitutional Court’s decision had perpetrated an illegal expropriation.

Colombia argued that such right to ‘non-reversion’ had never existed under Colombian law, because, pursuant to Colombian administrative law, the Laws enacted after the signing of the Concession could not modify its Reversion Clause, failing a written agreement between the parties to the contract. This interpretation had been confirmed by the Constitutional Court decision and the Commercial Award, and the investment tribunal could not depart from such conclusion unless the claimant argued and proved a denial of justice.

As in Nelson v. Mexico, both parties agreed that, at the outset, the tribunal needed to establish whether the ‘right to the non-reversion of assets’ existed. However, the parties disagreed on whether Colombian law and, specifically, the conclusions of the Constitutional Court’s decision and the Commercial Award were decisive and binding on the investment tribunal.

The majority of the tribunal found that, as Colombia contended, under international law, the existence of property rights capable of being expropriated is to be determined under domestic law. International law protects but does not create property rights.^[55] Moreover, the majority of the tribunal considered that, as a general rule, international tribunals must accept the interpretation of the domestic law made by domestic tribunals.^[56] The majority of the tribunal explained that there were very limited exceptions to this rule, including when the domestic decision is the product of a process – or even more exceptionally, the substantive result is – so egregiously flawed that it can be characterised as denial of justice.^[57] Conversely, an international tribunal cannot review a domestic judicial decision when it has ‘simply applied domestic law incorrectly, or reached a conclusion that was not foreseeable, and even contrary to precedent’.^[58] The tribunal further emphasised that these principles applied even when the domestic judicial decision was the alleged act of expropriation.^[59]

With these rules in mind, the majority of the tribunal found that the Constitutional Court’s decision and the Commercial Award led to the conclusion that Comcel did not have a ‘right to non-reversion’ and, as such, no right under Colombian law that could be expropriated. Further, the majority found no proof of denial of justice. As in Nelson v. Mexico, the tribunal concluded that the claimant’s criticisms to the domestic decisions ‘can be reduced to the fact that [the claimant] disagrees with such decisions’.^[60] In sum, the majority concluded that, as argued by Colombia, the Constitutional Court’s decision and the Commercial Award were ‘irreproachable under international law’.^[61]

The effects, if any, of the América Móvil v. Colombia ruling on the case initiated by Teléfonica against Colombia in 2018 are yet to be seen.^[62] The latter case is based on similar facts described above but was brought under the Spain–Colombia BIT, which, in addition to the expropriation clause, contains a FET clause.

Conclusion

Since its privatisation, the telecommunications sector has been characterised by constant technological changes and increased competition that have required private actors to make sizable long-term investments necessary to secure and protect their market share. States, in turn, have faced the challenge of keeping up to the market and the user’s needs in a constantly evolving highly regulated sector. Hence, it is surprising to find a relatively low number of investment treaty arbitrations in this ever-changing panorama. It seems that, traditionally, disputes in the sector have been resolved mainly through (confidential) commercial arbitration, investment treaty arbitration being considered only as a last resort.

However, foreign investors in the Latin American telecommunications sector seem to have become increasingly comfortable with resorting to investment treaty arbitration to resolve their disputes with Latin American states, even when they relate to issues around their contractual relationship with the state and not purely regulatory action. Yet, so far, investors have not fared well. Some of the reasons for the dismissal of their claims do not evidence sector-specific issues (for instance, in terms of jurisdiction), but, based on the current arbitral case law, one can conclude that investors would do well in ensuring that, pursuant to the law of the state they operate in, they actually hold the rights they believe to have.

Given the sector’s projections of increased growth, and its ever-increasing strategic importance in any national economy, one could forecast that arbitration will continue to grow, and the currently sparse industry-specific case law could also grow in the coming years. In investment arbitration, 30 per cent of all existing cases were initiated in the past five years and, to date, they are still pending. As to commercial arbitration, one can hope that the tendency towards increased transparency in arbitration may also result in more information about the sector’s disputes not only concerning public entities but also between private actors. Be that as it may, based on current trends and given the sector’s high settlement rates, it is unclear whether we will see enough final awards to create jurisprudence trends that would inform decision-makers.

Notes