|1960 ESO||Electricity Supply Ordinance of 1960|
|1994 ESA||1994 Electricity Supply Act|
|1997 RFA||Request for Arbitration filed by WRB Enterprises Limited, 17 July 1997|
|2016 Acts||Electricity Supply Act 2016, Act No. 19 of 2016, and Public Utilities Regulatory Commission Act 2016, Act No. 20 of 2016|
|CDC||Initially, Colonial Development Corporation; now, Commonwealth Development Corporation|
|CESI||Caribbean Energy Security Initiative|
|DCF||Discounted Cash Flow|
|Domlec||Dominica Electricity Services|
|ECERA||Eastern Caribbean Energy Regulatory Authority|
|ECH||Eastern Caribbean Holdings Limited|
|GRENLEC||Grenada Electricity Services Company Limited|
|GPP||Grenada Private Power Limited|
|GOG||Government of Grenada|
|Government||Government of Grenada|
|IDB||Inter-American Development Bank|
|IRENA||International Renewable Energy Agency|
|Local Directors||Rupert Agostini, Nelson Louison, Chester Palmer, and Lawrence Samuel|
|MOU||Memorandum of Understanding|
|NDC||National Democratic Congress|
|NIS||National Insurance Scheme|
|NNP||New National Party|
|OAS||Organization of American States|
|OECS||Organisation of Eastern Caribbean States|
|PURC||Public Utilities Regulatory Commission|
|RET||Renewable Energy Technology|
|RFP||Request for Proposals|
|RMI||Rocky Mountain Institute|
|SPA||Share Purchase Agreement between the Government of Grenada and Grenada Private Power Limited and WRB Enterprises, Inc. Relating to Shares of Grenada Electricity Services Limited, dated 14 September 1994|
|TCU||Turks and Caicos Utility Company|
|WRB||WRB Enterprises Limited|
|USAID||U.S. Agency for International Development|
(a) the Respondent says that its repurchase obligation is "void and unenforceable" under Grenadian law. The Claimants counter that the SPA is governed by international law and, by its own terms, expressly excludes rules of Grenadian law inconsistent with the repurchase obligation. Moreover, the GOG is estopped by its words and conduct over the years from challenging the validity of the repurchase provisions;
(b) the Respondent argues that the SPA repurchase obligation constitutes a penalty under Grenadian law, which renders it unenforceable, and in any event, the repurchase provisions are void as unconstitutional because their effect (and perhaps intent) is to fetter the authority of the GOG to regulate the electricity sector in the public interest. The Claimants respond that the repurchase obligation is neither a penalty nor unconstitutional
(c) the Claimants argue that in 1994, the GOG was expertly advised by Price Waterhouse ("PwC" for both Price Waterhouse and PricewaterhouseCoopers) whose consultants analysed the bidding process, the evolution of the bids and the statutory formula and declared the transaction to be appropriate and fair. The Respondent disputes the degree of PwC participation and states that the Government representatives, including Ministers, lacked relevant experience, and did not adequately protect Grenada's interest;
(d) the Respondent says that the Claimants committed "wilful malfeasance" in their management of GRENLEC which (under the express terms of the SPA) disentitles the Claimants from insisting on the GOG repurchase of the Claimants' shares. The Claimants dispute the "baseless" allegations of "wilful malfeasance" and state that, in any event, the GOG cannot rely on that defence because the SPA explicitly requires an ICSID declaratory order to that effect be obtained prior to the GOG taking an action that would otherwise trigger the repurchase demand;
(e) the Respondent says that the repurchase price payable under the SPA should be limited to fair market value determined by Discounted Cash Flow ("DCF") methodology rather than pursuant to the formula in the Second Schedule of the 1994 ESA, which is a bizarre formula inherited from the colonial past. Its application would produce compensation "extravagantly disproportionate" to the actual fair market value of the shares. The Claimants say that while the Second Schedule was rooted in a pre-independence Ordinance of 1960, it was given fresh life by the Government itself and inserted at the GOG’s insistence into the 1994 privatization. The Claimants say they are entitled to the specific performance of the agreed bargain;
(f) the Respondent says that any award to the Claimants must be offset by the amount of its counterclaim. The Claimants respond that the counterclaim is "fabricated" for strategic reasons and is so frivolous that the Respondent has never even bothered to quantify it.
- Witness Statement of Mr. G. Robert Blanchard, Jr., dated 1 March 2018;
- Expert Report by Mr. John MH Ellison and Mr. Thomas Popovic, dated 1 March 2018, with Appendices 1 through 13, and Exhibits JETP-01 through JETP-49;
- Exhibits CE-0001 through CE-0055; and
- Legal Authorities CLA-0001 through CL-0028.
- Expert Report of Mr. Robert S. Mudge, The Brattle Group, dated 29 June 2018;
- Witness Statement of Mr. Chester Palmer dated 28 June 2018;
- Witness Statement of Mr. John Auguste dated 28 June 2018;
- Witness Statement of Minister Gregory Bowen dated 28 June 2018;
- Exhibits RE-0001 through RE-0119; and
- Legal Authorities RLA-0001 through RLA-0064.
- Reply Expert Report of Mr. John MH Ellison FCA FSSBV MEWI dated 29 November 2018 with Exhibits JE-0001 through JE-0016;
- First Expert Report of Dr. Boaz Moselle dated 29 November 2018 with Exhibits BM-0001 through BM-0080;
- Reply Expert Report of Mr. Thomas Popovic, a Senior Manager in KPMG LLP dated 29 November 2018 with Exhibits TPII-0001 through TPII-0011;
- Legal Opinion of Professor Jan Paulsson dated 28 November 2018;
- Second Witness Statement of Mr. G. Robert Blanchard, Jr. dated 29 November 2018;
- Witness Statement of Mr. Robert Blenker dated 29 November 2018;
- Exhibits CE-0026 (resubmitted) and CE-0064 through CE-0207; and
- Legal Authorities CLA-0061 through CLA-0132 as well as resubmitted Legal Authorities CLA-0025 and CLA-0050.
- Second Witness Statement of Minister Gregory Bowen dated 29 March 2019;
- Second Witness Statement of Mr. John Auguste dated 29 March 2019;
- Second Witness Statement of Mr. Chester Palmer dated 29 March 2019;
- Expert Report of Mr. Robert S. Mudge of The Brattle Group dated 29 March 2019;
- Expert Report of Mr. Wilfred Baghaloo and Mr. Doran McClellan of PwC dated 29 March 2019, with Exhibits PWC SRL 01 to PWC SRL 16;
- Exhibits RE-0134 through RE-0437; and
- Legal Authorities RLA-0077 through RLA-0180 as well as Mudge II Workpapers.
- Third Witness Statement of Mr. G. Robert Blanchard, Jr. dated 24 May 2019, with Appendices A through B;
- Supplemental Witness Statement of Mr. Benedict Brathwaite dated 24 May 2019, with Appendices A and B;
- Second Reply Expert Report of Mr. John MH Ellison FCA FSSBV MEWI dated 24 May 2019, with Exhibits JE-17 through JE-18;
- Second Reply Expert Report of Mr. Thomas Popovic, an Independent Contractor of KPMG LLP (US) dated 24 May 2019, with Exhibits TPIII-001 through TPIII-003;
- Exhibits CE-0208 through CE-0235; and
- Legal Authorities CLA-0133 through CLA-0141.
Hon. Ian Binnie, C.C. Q.C. President
Ms. Olufunke Adekoya SAN Arbitrator
Mr. Richard Boulton, Q.C. Arbitrator
Ms. Jara Minguez Almeida Secretary of the Tribunal
For the Claimants:
Mr. Paul Friedland White & Case
Mr. Damien Nyer White & Case
Ms. Preeti Bhagnani White & Case
Mr. Barry Cameron Brewer White & Case
Ms. Mila Owen White & Case
Mr. Daniel Shults White & Case
Ms. Lillian Siegel White & Case
Mr. Thomas Alexander Crawford White & Case
Mr. Charlie Friedlander Global Legal & Strategic Advisors
Mr. G. Robert Blanchard Jr. WRB Enterprises Inc.
Mr. Robert Blenker WRB Enterprises Inc.
Mr. Benedict Brathwaite Grenada Electricity Services
Mr. John Ellison FTI Consulting
Ms. Olivia Roberts FTI Consulting
Mr. Thomas Popovic KPMG
Dr. Boaz Moselle Compass Lexecon
For the Respondent:
Mr. Donald Francis Donovan Debevoise & Plimpton LLP
Ms. Natalie L. Reid Debevoise & Plimpton LLP
Ms. Akima Paul Lambert Debevoise & Plimpton LLP
Mr. Conway Blake Debevoise & Plimpton LLP
Mr. Romain Zamour Debevoise & Plimpton LLP
Mr. Adam Moss Debevoise & Plimpton LLP
Ms. Emily Hush Debevoise & Plimpton LLP
Ms. Perpetua Chery Debevoise & Plimpton LLP
Mr. Gregory Senn Debevoise & Plimpton LLP
Ms. Leslie-Ann Seon Seon & Associates
Ms. Linda Dolland Seon & Associates
The Hon. Gregory Bowen The Government of Grenada
Mr. Chester Palmer
Mr. John Auguste
Mr. Robert Mudge The Brattle Group
Ms. Lily Mwalenga The Brattle Group
Mr. Wilfred Baghaloo PricewaterhouseCoopers
Mr. Doran McClellan PricewaterhouseCoopers
Ms. Fiona Hyman PricewaterhouseCoopers
Mr. Roy Pacumio PricewaterhouseCoopers
Ms. Alaina Parris PricewaterhouseCoopers
Mr. David Kasdan Worldwide Reporting, LLP
On behalf of the Claimants:
Mr. G. Robert Blanchard Jr. WRB Enterprises Inc.
Mr. Robert Blenker WRB Enterprises Inc.
Mr. Benedict Brathwaite Grenada Electricity Services
Mr. John Ellison FTI Consulting
Mr. Thomas Popovic KPMG
Dr. Boaz Moselle Compass Lexecon
On behalf of the Respondent:
The Hon. Gregory Bowen The Government of Grenada
Mr. Chester Palmer
Mr. John Auguste
Mr. Robert Mudge The Brattle Group
Mr. Wilfred Baghaloo PricewaterhouseCoopers
Mr. Doran McClellan PricewaterhouseCoopers
An adequate regulatory framework should be developed accompanying the privatization of public utilities with monopolistic features. This is particularly urgent in the case of the Grenada Electricity Company, where private investors have indicated their interest in purchasing the operations.22 (emphasis added)
|1993: Bidder's Scoring Summary|
|1 Utility Expertise||13||39||65||65||26||39||46|
|2 Financial Strength of Bidder||13||33||65||65||13||26||39|
|3 Participation of Local investors||6||12||18||24||30||30||21|
|4 Net Present Value of Bid||5||23||13||16||25||14||19|
|5 Cash Value of Bid||10||47||21||7||50||27||39|
|6 Management Plan||10||15||25||35||10||40||50|
|7 Business Development Plan||8||28||28||28||16||28||28|
|8 Investment Plan||13||39||39||46||33||52||59|
|9 Employee Plan||10||30||15||35||40||50||50|
|10 Environmental Plan||8||28||8||24||16||16||32|
|11 Other Conditions of Sale||4||12||8||10||4||12||16|
• "to utilize existing employees and improve their skills rather than rely on a system of expatriate management";
• to make EC $17 million worth of capital investments projected through the end of 1998, including investments in renewable energy, wind turbines and hydro generation plants;
• WRB's "expectation" that "substantially all of the earnings of GRENLEC will be required to fund future capital investments to assure the long-term viability of GRENLEC. This plan will leave no funds available for dividend payments."42
If an act provides the method of determining rates payable... whether on the basis of an identified formula (such as the Retail Price Index - X (RPI-X) formula or formulas) or otherwise, the Commission shall adhere to such method... and to this extent, the concept of a fair Rate of Return on investment shall not apply. (emphasis added)55
|Other non-GoG shareholders||5,122,571||26.96%|
|Other Grenadian statutory authorities:|
|- Grenada Development Bank||2,500||0.01%|
|- Grenada Ports Authority||270,094||1.42%|
|- National Insurance Board of Grenada||2,204,838||11.60%|
|Source: Exhibit JETP01 - Grenlec's shareholder register as at 18 July 2016|
(a) established, as mentioned, a Commission of Inquiry to investigate the sale of GRENLEC;66
(b) constituted a legislative committee to investigate its allegation that GRENLEC was charging illegally high rates;67
(c) declared that for procedural reasons, the 1994 ESA had never taken effect;68 and
(d) sought renegotiation of various provisions of the SPA (including the purchase price for the GRENLEC shares).69
(a) the amendments to the rate-setting mechanism under the 1994 ESA, modified "GRENLEC’s rate adjustment, recovery or collection rights, privileges or procedures or service requirements," so as to engage Section 7.9(a)(iii).107 The Respondent denies that this change constitutes a "repurchase event" because the PURC has yet to make regulations and there has therefore been no "adverse effect on the business or shares in GRENLEC" as required by Section 7.9(a)(iii). Moreover, the Respondent suggests that a drop in rates for electricity will eventually increase demand and ultimately benefit GRENLEC;
(b) the elimination of GRENLEC’s exemption from customs and other duties on imported materials, "increased [GRENLEC’s] operating costs" within the terms of Section 7.9(a)(vii).108 The Respondent counters there is no evidence that GRENLEC has thereby actually experienced any increase in costs; and
(c) the modification of the term of GRENLEC’s licence and abrogation of its exclusivity come within the terms of Section 7.9(a)(iv).109 The Respondent does not dispute that the 2016 Acts modified GRENLEC’s monopoly and narrowed its scope. As to this ground, the Respondent acknowledges in the Counter-Memorial that:
There is no dispute that the 2016 ESA has truncated the eighty-year GRENLEC licence and heralded the end of the Company’s monopoly of all generation, transmission and distribution of electricity in Grenada.110
In the event of a Repurchase Event, the GOG "shall...purchase and acquire all GRENLEC shares then owned by [GPP]," and the "purchase price payable... shall be calculated on the basis specified in the Second Schedule to the  ESA."111 Eventually the Claimants pursued only the third ground, namely abrogation of the monopoly. Even on this ground, however, the Respondent takes the position that the Claimants’ "extreme or wilful malfeasance" in the conduct of GRENLEC’s business disentitles the Claimants from relying on the truncation of the GRENLEC monopoly to justify a "put" of the GRENLEC shares to the Government for repurchase.
Dr. Mitchell told reporters...WRB has been written to by the Minister of Public Utilities (Gregory Bowen) through the Attorney General office about their request to government to buy the shares. As you know in any disputes and any request for cost of a particular buy out in any situation usually it’s a negotiating process and clearly what we did was write WRB saying you just stated what the buyout should be, it's just the basis (to start the process[)]." (emphasis added)
So, now we are being asked to pay goodwill and I can't blame [WRB] so we have to negotiate. We may have to pay some goodwill indeed unfortunately...115
(a) declaring that a "Repurchase Event" has occurred and that the Government is therefore obligated to purchase and acquire all GRENLEC shares owned by GPP at the price calculated on the basis specified in the Second Schedule to the 1994 ESA, namely a value of EC $361,882 million [USD $134 million] for 100% of GRENLEC, and EC $180,941 million [USD $67 million] for the Claimants' 50% interest in GRENLEC;
(b) declaring that the Government has breached its obligations to the Claimants under the SPA by failing to purchase and acquire, by no later than 3 May 2017, all GRENLEC shares owned by GPP;
(c) ordering that the Government complete, within 30 days of the Tribunal's award, its purchase and acquisition of all GRENLEC shares owned by GPP, and by no later than such time, to pay the Claimants, in immediately available funds, the sum of not less than EC $180,941 million [USD $67 million];
(d) awarding the Claimants pre-and post-award interest on the repurchase price of EC $180,941 million (and on all other amounts awarded), at a rate of 6% compounded semi-annually, from 3 May 2017 up until the date of payment;
(e) declaring that all sums to be paid by the Government pursuant to the Tribunal’s award must be paid net of, and exempt from, all Grenadian taxes, levies, and other duties and may be repatriated by the Claimants free and exempt from all Grenadian taxes, levies, and other duties;
(f) dismissing the Government’s counterclaim;
(g) awarding the Claimants the costs, including attorneys’ fees, associated with enforcing its rights prior to these proceedings; and
(h) awarding the Claimants the costs, including attorneys’ fees, associated with these proceedings, including all professional fees and disbursements.116
(a) the Claimants have failed to establish that a rate-adjustment repurchase event has occurred;117 or that a cost-increase repurchase event has occurred118 and that wilful malfeasance precludes any finding of a Repurchase Event on the basis of the abrogation of the monopoly ;
(b) even if there had been a Repurchase Event, the Respondent is under no liability to pay Second Schedule compensation because:
(i) Second Schedule compensation constitutes an unenforceable penalty;
(A) the Claimants’ demand is not just the specific performance of a put option but a remedy by way of liquidated damages for the failure of the GOG to repurchase the GRENLEC shares;
(B) the repurchase demand of revised to USD $67 million is grossly disproportionate to any legitimate expectation the Claimants could have in obtaining compensation for their shares;
(ii) moreover, imposition of Second Schedule compensation is an unconstitutional attempt to fetter the lawful exercise of governmental authority and contractual provisions that contravene the constitution are void and can have no legal effect;
(c) on the issue of Quantum, the Respondent contends that if a repurchase event is established, the Claimants should nevertheless receive no more than the fair market value of their shares;
(i) the Discounted Cash Flow ("DCF") method is the appropriate method to estimate the fair market value of the Claimants’ shares;
(ii) the fair market value of the Claimants’ shares under the 2016 ESA is no more than EC $63.6 million (USD $23.6 million);
(iii) in the alternative, the fair market value of the Claimants’ shares under the 1994 ESA is no more than EC $82.3 million (USD $30.5 million);
(iv) in the further alternative, should the Tribunal apply the Second Schedule, it should disregard the Claimants’ inflated valuation and apply the updated PwC assessment of EC $276,239 million (USD $51.2 million);
(d) and by way of Counterclaim, the Respondent contends that the Claimants have unfairly prejudiced GRENLEC’s minority shareholders including the Government through "disadvantageous transactions and subsequent litigious behavior", the Claimants’ payment of "improper dividends" and promotion of "discrimination" between shareholders.119 The amount of claimed damages is not quantified.
Price Waterhouse produced a Privatization Project in June 1993, a valuation of GRENLEC in June 1993, a review of its valuation in May 1994, an analysis of the best and final offers in December 1993, a summary of the finalists’ proposals in December 1993, and a comparison of the best and final offers in December 1993.126
The existing legislative and regulatory framework has enabled a monopolistic, fossil fuel-biased development of the electricity sector, severely hampering the development of renewable energy technologies. Furthermore, the ability of external forces, such as the government, to implement changes to encourage the use of renewable energy is limited under the current framework.143
Q. Excuse me, Mr. Blenker. No utility-scale renewables project in Grenada by the end of 2017; right?
A. That is correct.
Q. No geothermal energy project?
Q. No utility-scale solar?
Q. No wind power connected to the grid.
A. Nothing significant, no.
Q. Okay. Now, in the current plan that is the 2014 to 2020 renewable energy Strategic Plan, you set a new goal for GRENLEC of increasing renewable energy penetration to 20 percent of the nation's electricity usage by 2020; right?
Q. Okay. It's 2019 now. GRENLEC isn't going to hit that target, is it?
(a) despite potential for solar development on the island, in 2015 only 0.6% of generation capacity came from solar,145 and two-thirds of this solar power came from interconnected private owners.146 The Claimants say they were unable to acquire the necessary land for utility scale facilities;147
(b) despite the potential for wind generation, a very promising site on the island of Carriacou remains undeveloped;148
(c) despite the potential for geothermal generation,149 GRENLEC and the Government could not advance its development beyond preliminary Heads of Agreement. The Claimants blame the Government, as testified by Mr. Blenker:
Q. To be clear, Mr. Blenker, it's your testimony that the reason that the geothermal resource has not been developed is because the Government has not engaged with GRENLEC?
(a) the 1994 rate setting mechanism, which until 2016 operated predictably according to a statutory formula, was replaced with a regulatory procedure administered by the PURC. The jurisdiction of the PURC includes a public interest discretion;
(b) the abolition of the tax exemption will necessarily result in higher capital and operating costs going forward;
(c) the termination of the 80-year monopoly and the substitution of a shorter and narrower period of exclusivity made GRENLEC shares a fundamentally different investment than in 1994.
(a) GRENLEC’s first major purchase under the Claimants’ control was two Caterpillar generator units. The purchase was made without consultation with the rest of the Board, and without disclosing the nature and extent of the relationship between Caterpillar and WRB;161
(b) WRB has repeatedly used its control of the Board to favour the Claimants and in particular to declare dividend payments without the approval of non-WRB Board members.162 The Respondent particularly complains about the Special Dividend of EC $57 million issued in 2016, just as this dispute was coming to the fore;163164
(c) WRB has continued to collect for over 20 years management fees under an arrangement that in 1994 was intended to be transitional to provide time to train qualified Grenadians to take over the senior positions;
(d) the Claimants’ fees for lawyers and forensic accountants have caused GRENLEC to pay for work of benefit only to the Claimants. GRENLEC paid the Claimants’ legal fees in the early phase of the current ICSID dispute with the GOG.165 GRENLEC paid for the KPMG valuation report that served as the basis for Claimants’ "exorbitant repurchase demand."166 Only the Claimants, not GRENLEC, would stand to gain from any award this Tribunal might render against the Government.
(a) in negotiating with an inexperienced Government team, the Claimants secured a legal regime that combined monopoly power with no cap on returns all of which was protected by the looming threat of a repurchase penalty;168
(b) the Claimants caused GRENLEC to issue almost all its profits in dividends, over 60% of which go directly to WRB and its principals or directors,169 without regard to the capital needs of GRENLEC and the Grenadian economy;
(c) the Claimants caused the Company to maintain legal proceedings against Local Directors for two decades for publicly and appropriately challenging the Claimants’ management of GRENLEC. Moreover, the Claimants have caused GRENLEC to refuse to pay the legal costs of the four local directors even though the non-WRB directors spoke out in their capacity as directors in what they consider to be the best interest of the company;170
(d) the Claimants have not implemented a single utility-scale renewable energy project;171 and
(e) in 1997, the Claimants successfully used the threat of the Repurchase Penalty in the earlier ICSID arbitration to force the Government to retreat from its energy sector reforms.172
Q. Okay. You would agree with me, though, that the work product reflected in the Ellison/Popovic Report is virtually the same as the work product in the Indicative Valuation Report that had been produced a year earlier?
A. Well, it's largely the same. I wouldn't say "virtually," but it's largely the same.
Q. I'm willing to concede on that one word. That may be the only point we agree on for the entire cross-examination.
So, largely the same, and that had been the work product that at least as far as we've discussed in this Hearing that GRENLEC had paid for?
A. Yes, that's right.197
In effect, the GOG as shareholder was being required to fund in part the litigation against itself.
In view of the implications for job creation, foreign direct investment, the overall development of the economy of Grenada and the international commitment of the Government to the production of cleaner and more renewable energy, it is imperative that relevant changes are made to pertinent legislation and attendant regulations. The Government considers that the public interest must be viewed as overriding to the interests of WRB/GRENLEC...205
... [I]f detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense. (emphasis added)
Moreover, the Eastern Caribbean Court of Appeal in Grenada Tech212 held that the proper interpretation of an agreement should not be limited to the plain text.213
[T]he clearer the natural meaning the more difficult it is to justify departing from it... [W]hile commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed.215
any annulment, cancellation, limitation, infringement or other impairment of the term, scope or exclusivity of the GRENLEC License.
The GOG agrees that it shall within thirty (30) days following demand by [the] Buyer upon the occurrence of a Repurchase Event, purchase and acquire all GRENLEC shares then owned by [the] Buyer...the purchase price payable in such event shall be calculated on the basis specified in the Second Schedule to the ESA as in effect on the Closing Date. (emphasis added)219
(a) first, as a matter of contract law, the provisions constitute an unlawful and unenforceable penalty;
(b) second, as a matter of constitutional law, the provisions are void and of no legal effect because they fetter Government action contrary to fundamental principles enshrined in the Constitution of Grenada.
(a) the SPA repurchase obligation lists an extensive list of repurchase events that fall short of revocation;222
(b) the 1960 arrangement required compensation for goodwill only during the first 40 years of the licence.223 The 1994 ESA and SPA require payment for goodwill throughout the entire duration of the licence for all but a Repurchase Event arising under Section 7.9(xi) - that is, for an "act of God".224
The rule against penalties is applicable to liquidated amounts payable, as here, under a contract of purchase and sale of shares where the purchaser refuses to complete the transaction.
(a) the Respondent is estopped from contesting the validity of the terms of a contract that it has repeatedly affirmed over the past quarter century, and the benefit of which it has freely and fully accepted;
(b) even if there is no estoppel, the provisions of the SPA expressly exclude the application of Grenadian law that might serve to invalidate the Repurchase Obligation;
(c) in any event, the Respondent misconceives the rule against penalties which does not permit courts and tribunals to rewrite terms of purchase agreed to by sophisticated parties. The rule against penalties operates only when assessing damages for a breach of contract (e.g. where there is a liquidated damages clause) not for specific performance of a contract of purchase and sale;
(d) the requirement of Second Schedule compensation does not fetter Government action but specifically contemplates Government action at a time of the Government's choosing provided only that the contractual compensation is subsequently paid; and
(e) international law precludes the Respondent from invoking its domestic constitutional principles to avoid its commitments to the Claimants.
This Agreement has been, and the documents to be delivered by the GOG at Closing will be, duly executed and delivered by the GOG and constitute the lawful, valid and legally binding obligations of the GOG, enforceable in accordance with their respective terms.231
The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby...(ii) are not prohibited by and do not violate or constitute a default under any contract, agreement or other instrument to which GRENLEC or the GOG is a party, or any provision of Grenadian Law applicable to GRENLEC or the GOG.232 (emphasis added)
Mr. Blanchard, the CEO of WRB, testified that without these representations and warranties, the Claimants would never have entered into the SPA and would never have invested the initial capital.233
[W]hen, after receiving top class international legal advice, Hungary enters into and performs these agreements for years and takes the full benefit from them, it lies ill in the mouth of Hungary now to challenge the legality and/or enforceability of these Agreements....Hungary entered into these agreements willingly, took advantage from them and led the Claimants over a long period of time, to assume that these Agreements were effective. Hungary cannot now go behind these Agreements.238
This Agreement and the rights and obligations of the Parties hereunder shall be governed by and construed in accordance with Grenadian Law (with the understanding that the provisions of Section 7.9 [the Repurchase Obligation], Article X, and Sections 11.2, 11.3, 11.4 and 11.5 are intended by the Parties to control the implementation, interpretation and enforcement of this Agreement with regard to the subject matter of said Sections notwithstanding inconsistent provisions of Grenadian Law).242 (emphasis added)
The obligations of the GOG under this Section 7.9 with respect to any Repurchase Event shall, subject to Section 7.9(c), be irrevocable and unconditional regardless of...the invalidity or unenforceability of this Agreement against the GOG,...or...any other defence which the GOG may from time-to-time to assert as a defence to any payment under this Agreement in respect of a Repurchase Event, excepting only the defence that the payment in question has been paid-in-full to Buyer when and as required hereunder.243 (emphasis added)
No court...will give effect to a choice of law...if the parties intended to apply it in order to evade mandatory provisions of that legal system with which the contract has its most substantial connection.252
it is not competent for the Government to fetter its future executive action, which must necessarily be determined by the needs of the community when the question arises. It cannot by contract hamper its freedom of action in matters which concern the welfare of the State.255 (emphasis added)
[O]ne can readily envisage situations or areas of economic activity (e.g. power or water supply, air traffic routes) where it may well be in the public interest to restrict licences or concessions to one or two players...Equally, one can also envisage that with changing circumstances it may be in the public interest to liberalise or change a licencing or regulatory regime.257
[A] State cannot invoke its sovereignty to disregard commitments freely undertaken through the exercise of this same sovereignty and cannot, through measures belonging to its internal order, make null and void the rights of the contracting party which has performed its various obligations under the contract.262
(a) the Respondent relies in particular on the opinion of Lord Hodge that the key consideration is whether there is "an extravagant disproportion between the stipulated sum" to be paid, "and the highest level of damages that could possibly arise from the breach"270 (the "extravagant disproportion" test);
(b) the Claimants rely in particular on the lead opinion expressed by Lords Neuberger and Sumption which frames the question somewhat differently. In the majority view, disproportionate compensation only comes within the rule against penalties if the clause or clauses in question arise in the context of "a secondary obligation" - typically, a remedy in the form of payment of a sum of money - "which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation"271 (the "secondary obligation" test). On this view, a court or tribunal must consider at the outset whether the Claimants seek enforcement such as specific performance of the agreed purchase price (a "primary" obligation) or a remedy for breach of contract agreement by a contract-breaker (a secondary obligation).
(a) a finding that the Government had inadequate legal representation or specialist advice;
(b) a showing of uneven bargaining power;
(c) that Claimants imposed the relevant provisions on the Government; or
(d) a showing that the Government was ignorant of the details of the Second Schedule methodology or its outcome.272
(a) Part I of the Second Schedule sets out an asset valuation, which would normally accompany a liquidation of the company.293 But, at the same time, Part II sets out a profit valuation, which would normally pertain only to a going concern.294 These inconsistent approaches, in combination, create double-accounting and therefore inflated compensation in the result. For example, the Respondent contends that Mr. Ellison double-counted EC $10 million (once as part of the assets under Part I and a second time as profits under Part II);295
(b) the result of the Second Schedule formula (EC $21 per share)296 is incompatible with the EC $8.27 per share which the Claimants were willing to accept in 2012/2013, and which better reflects the true value of GRENLEC shares;
(c) the result of the KPMG valuation using the Second Schedule is vastly in excess of the DCF valuation of the Respondent’s expert, Mr. Mudge. The Claimants did not put forward a DCF report and Mr. Mudge’s analysis is the only reliable guide to Fair Market Value.
(a) the 1994 Government also conducted due diligence testing of the Second Schedule methodology by applying it under two scenarios: (i) a repurchase after 15 years; and (ii) a repurchase after one year. Under both scenarios, the valuation was within the range of the valuations of GRENLEC that the Government had received from its financial consultants, Price Waterhouse and Ewbank Preece, based on the discounted cash flow model and the replacement value respectively;299
(b) the Second Schedule formula, while unusual, is of the Respondent’s own design. It has been on the statute books in one form or another since 1960. The Government itself dictated the Second Schedule approach to the Claimants. The GOG’s initial objective was to establish the specific formula to calculate the repurchase payment following a Government "call" for GRENLEC shares under section 28 of the 1994 ESA. The GOG then agreed with Claimants to use the same methodology in conjunction with any "put" by the Claimants under Section 29 of the 1994 ESA;
(c) the GOG was aware of the "Goodwill" component of the statutory methodology. In a presentation to the public,300 the Government explained that it represented the "profit opportunity foregone in [the] remaining term of the license";301
(d) in December 2012 negotiations, the Government confirmed that it considered the Repurchase Obligation to be reasonable by incorporating the Second Schedule methodology into its proposed terms of the onward sale to a proposed Canadian investor of the Claimants’ stake in GRENLEC once repurchased;302
(e) in any event, the Claimants argue, the Respondent’s attack rests on a false premise, i.e., that the Second Schedule yields a valuation of GRENLEC that is out of proportion with the fair market value of the company.303 The Claimants rely on its expert, Mr. Ellison, who contended that when corrected for Mr. Mudge’s errors and other required adjustments, the DCF valuation proffered by the Respondent and its quantum expert is in fact higher than a statutory valuation under the Second Schedule.304
|Price Waterhouse original 1994 valuation of 100% of GRENLEC||EC $21 million to EC $38.4 million305|
|WRB 1994 purchase price of 50% of shares||EC $15 million for 50% implied that 100% worth EC $30 million306|
|WRB demand in 1997 Request for Arbitration||USD $18.7 million or EC $50.49 million|
|WRB's 2012 offer to sell its GRENLEC investment||USD $8.27|
|Mr. Mudge's Revised DCF valuation (for the Respondent)||(i) 2016 ESA EC $51.9 million or USD $19.2 million307||2016: EC $5.50|
|(ii) 1994 ESA EC $76.9 million or USD $28.5 million308||1994: EC $8.10|
|PwC Second Schedule valuation as presented at the hearing (for the Respondent)||EC $276,239,000309|
|KPMG/FTI's calculation of Second Schedule valuation as presented at the hearing (for the Claimants)||EC $361,882,000 million310||EC $21|
Leaving aside challenges going to the reality of consent, such as those based on fraud, duress or undue influence, the courts do not review the fairness of men’s bargains either at law or in equity. The penalty rule regulates only the remedies available for breach of a party's primary obligations, not the primary obligations themselves.325 (emphasis added)
Section 7.9 of the SPA enables a shareholder to exit its investment at a certain price "upon the occurrence" of one or more of the fifteen events listed in Section 7.9(a).326 Payment of the agreed repurchase price is a primary obligation.
The rule against penalties is a rule of contract law based on public policy.
It is a question of construction of the parties’ contract judged by reference to the circumstances at the time of contracting; the public policy is that the courts will not enforce a stipulation for punishment for breach of contract333.
and Lords Neuberger and Sumption at para. 28:
The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.334
|Fixed Assets — Land||EC$m 18,288|
|Fixed Assets — Property. Plant and Equipment Other Real Property (Buildings)||14 182|
|Personal Property (e g Plant & Equipment)||202,303|
|Non-PPE Fixed Assets and inventories||28,072|
|Value of Grenlec (according to the statutory formula)||364,082|
|Value of GPP's 50% shareholding||182,041|
|Source: Table 38|
|Ellison-Popovic Valuation - November 2018||364,282|
|Amendment to value of buildings||(2,582)|
|Amendment to value of fixed assets (not including buildings) Deferred tax liability||(19,904) (40,352)|
|Contributions to hurricane reserve||(10,000)|
|Customer contributions to line extensions||(7,000)|
|Non-PPE fixed assets (customs duties)||(754)|
|PwC’s Indicative Valuation - March 2019||273,239|
|Corrections made by PwC|
|Revised PwC Valuation||276,239|
|Ellison-Popovic Initial Valuation||364,282|
|Adjustment based on testimony (customer contributions)||(2,400)|
|Revised Ellison-Popovic Valuation||361,882|
Note: The Claimants’ 50% share of the US dollar valuations requires dividing these figures by 5.4.339
(a) Part I sets out a methodology for calculating the value of GRENLEC's net assets;341
(b) Part II sets out a methodology for calculating GRENLEC's goodwill;342 and
(c) Part III sets out certain depreciation rates to be used in calculations under Part I and Part II.343
|% depreciation p.a.|
|Buildings - Permanent||2.0%|
|Buildings - Temporary||5.0%|
|Furniture and Office Equipment||5.0%|
|Oil Storage Tanks, Pipelines and Equipment||3.0%|
|Alternators, switchboard, switchgear and transformers||4.0%|
|Transmission and Distribution Lines||2.5%|
|Land clearance equipment||10.0%|
|Hydro-electric turbines and control gear||4.0%|
|Dams, intake works and water conduits||2.0%|
|Source: Part III of the Second Schedule of the 1994 ESA|
ARBITRATOR ADEKOYA: Mr. McClellan, I have just one question. In Paragraph 4.2.1 of your Report, you have indicated the restrictive nature of the site visits, the lack of access to supporting materials and to information.
THE WITNESS: Correct.
ARBITRATOR ADEKOYA: To what extent would you say that this impacts negatively on the figures that you have quoted in your Report?
THE WITNESS: Well, it's hard for me to assess what the negative impact would be...
And I would really like to address your point and say, well, it might have a 10 percent negative impact, but I don't know because we never, even were able to make any assessments whatsoever in that regard.
ARBITRATOR ADEKOYA: If you were my advisor and I’m trying to make an acquisition, based on this Report, what would you tell me? THE WITNESS: I would tell you that we need to do a thorough investigation of the assets and the asset records, the amounts recorded in the asset records, how the--what has been the capitalization policy into the asset record, what adjustments have you made over the years.349
(i) deferred taxes (EC $37.8 million) - PwC considers that GRENLEC has a deferred tax liability because of the restated value of fixed assets arising from the repurchase. FTI states that no such restatement or revaluation is necessary or appropriate as a result of a transaction between shareholders;
(ii) Hurricane Insurance Reserve Fund (EC $10 million) - is treated by PwC as a liability but by FTI as an "equity reserve" i.e. an appropriation of profit;
(iii) computer depreciation (EC $7.3 million) - PwC and Robert Mudge depreciated the GRENLEC computers at a 20% rate given the useful life of computer technology (estimated at 5 years), whereas FTI classifies computers as "furniture and office equipment" within the meaning of Part III of the 1994 Second Schedule, which calls for a depreciation rate of 5%;352
(iv) customer contribution to the cost of installing supply lines to the private premises distant by 400 feet or more (EC $4.6 million) - at issue is whether and to what extent these payments are refundable and therefore should be recognized as a liability.353 PwC recognizes a liability of EC $7 million. FTI recognizes only a lesser liability of EC $2.4 million, on the basis that the balance is non-refundable;
(v) FTI has inflated the valuation of assets by adding in an amount equivalent to "customs and import duties" that were never paid because of GRENLEC's then existing tax exemption (EC $754 thousand);
(vi) the Respondent says the Claimants' experts wrongly included in the valuation some of "the assets that were damaged or destroyed" by Hurricane Ivan (EC $22,486 million).354 In other words, according to the Respondent, the Claimants’ figures included assets which no longer exist and form no part of the GRENLEC enterprise.
(vii) Accounts receivable (EC $2,271 million); and
(viii) Other (EC $380 thousand).
Note: The Claimants’ 50% share of the US dollarvaluations requires dividing these by 5.4. Source: FTI Slide 11.355 The chart does not take account of concessions of EC$2.5 million (deferred tax) and EC$0.5 million (customs duties) made by PwC at the hearing.
THE WITNESS: Well, you could take - you could take a view on that, Mr. President. I took the view, as did Mr. Popovic, that it is office equipment and, therefore, one goes by the rates that in their wisdom those who drafted the Schedule came up, but I can see that you could say, well, it's actually not office equipment, it's in a category of its own. People did have computers back in 1994, so it's not something that - I had one then. It's not something that had only come along since.368
What happens here, sir, is that if a customer is more than 400 feet away from the supply line, he has to pay GRENLEC for the cost of installing an electricity supply line to his house - from his house to the main line going down the road. That line is the property of GRENLEC, that has to be paid for by the customer, and PwC and Mr. Popovic and I all agree that the asset - that line - should be included in the valuation of GRENLEC as an asset. There is no dispute about that. The issue is whether it is right to treat that cash coming in as, in effect, a profit or an offset against the cost, is probably more accurate, or whether it should be carried forward and recognized over the life of the line.
... but the current position appears to be that some of it [the customer contribution] is repayable, in which case I would agree with you that it should be or potentially repayable [to the customer] - not repayable, potentially repayable - in which case I agree it should be set up as a liability. And for that reason I moved my figure down from 7 million to 4 million in the slides.
Q. So, again, just to be clear for the record, to make this adjustment, you’re relying on information that you got from GRENLEC within the last week?
A. Yes.372 (emphasis added)