Sector involved: Water and Sewage Concession
Applicable BIT: U.S.-Argentina BIT
Members of the Annulment Committee: Dr. Gavan Griffith Q.C. (Chairman), Judge Bola Ajibola and Mr. Michael Hwang S.C.
Amount of damages under review: US$165,240,753 (plus interest compounded semi-annually)
Grounds raised for annulment in relation to damages: (1) Tribunal manifestly exceeded its powers when it determined applicable standard of compensation and (2) Tribunal failed to state reasons and/or issued contradictory reasons for the amount of damages awarded
Case Overview: Azurix v. Argentina involved a U.S. company’s successful bid for privatization of an Argentinean company, owned and operated by the Province of Buenos Aires, which was in charge of providing potable water and sewage services in the Province. In 1999, Azurix, through its Argentinean subsidiary, ABA, paid the Province a Canon payment of approximately US$438.5 million, in exchange for a 30-year concession. Over the next several years, Azurix made additional capital contributions to ABA of almost US$113 million. Following the Province’s termination of ABA’s concession in 2002, Azurix initiated an ICSID arbitration against Argentina seeking approximately US$600 million in compensation.
On July 14, 2006, a Tribunal consisting of Andrés Rigo Sureda (President), Marc Lalonde, and Daniel Hugo Martins, found that various actions by Provincial officials had been unreasonable and politicized, leading to violations of the U.S.-Argentina BIT. The Tribunal found that Argentina (through the actions of the Province) had violated the BIT by: (1) failing to accord fair and equitable treatment to Azurix’s investment; (2) failing to accord full protection and security to Azurix’s investment; and (3) taking arbitrary measures that impaired Azurix’s use and enjoyment of its investment.
The Tribunal determined that the fair market value standard was appropriate for Argentina’s breaches of the fair and equitable treatment, full protection and security, and arbitrary measures provisions in taking over the 30-year concession in only its third year.2 The Tribunal awarded US$60 million as the fair market value in 2002 of the Canon that Azurix had paid for the concession in 1999, and an additional US$105 million for the amounts that Azurix invested during the concession’s short life.3
On November 13, 2006, Argentina filed an application for annulment of the Tribunal’s award, citing among other grounds for annulment, issues relating to the Tribunal’s calculation of damages. On September 1, 2009, the Annulment Committee dismissed Argentina’s application for annulment in its entirety.
Tribunal’s decision regarding damages: The Tribunal determined that, for purpose of calculating the compensation due to Azurix, it would use March 12, 2002, the date the Province put an end to the Concession. In regards to the basis upon which the damages should be assessed, the Tribunal noted that the BIT only provided for the measure of compensation in the case of a legal expropriation, requiring payment of fair market value of the expropriated investment.
Despite dismissing Azurix’s claim for expropriation, the Tribunal decided that a compensation based on the fair market value of the Concession would be appropriate. Reviewing the two methodologies submitted by Azurix to measure fair market value (actual investment and book value), the Tribunal determined that the actual investment method should be applied. However, the Tribunal considered that a significant adjustment was required to arrive at the real value of the Canon paid by Azurix. The Tribunal considered its role to be to determine what an independent and well-informed third party would have been willing to pay for the Concession in March 2002, in a context where the Province would have honored its obligations. It concluded that the value should be established at US$60 million. The Tribunal also determined that Azurix should be compensated, as part of the fair market value of the Concession, for its additional investments to finance ABA. The additional investments of US$112,844,446 were reduced by US$7,603,693, the amount of damages the Tribunal found to be related to contractual claims that it believed should be borne by Azurix as part of its business risk. Thus, the amount awarded on account of additional investments was US$105,240,753.
The Tribunal therefore awarded compensation to Azurix on account of the fair market value of the Concession in the amount of US$165,240,753, including both the Canon and Azurix’s additional investments.
Annulment Committee’s decision regarding damages: First, the Committee determined that the Tribunal did not manifestly exceed its powers in determining the applicable standard of compensation. The Committee noted that, in order to justify annulment, the complaint had to relate to the nonapplication of the applicable standard of compensation, rather than the incorrect application of that standard. The Committee found no fault with the Tribunal’s identification of the applicable law for the purposes of determining the quantum of damages — the BIT itself and, failing any express provision in the BIT, general principles of international law. The Committee noted that “[t]he Tribunal decided to exercise a discretion pursuant to customary international law, and not to exercise a discretion instead of customary international law.”4
The Committee found nothing in the BIT that reserved the fair market value standard of compensation solely to cases of expropriation. If the Tribunal had discretion in the approach that it adopted to the assessment of damages, there is no logical reason why it might not, in the exercise of that discretion, in any case where it considered it appropriate to do so, also apply the fair market value standard to cases of non-expropriatory breaches of the BIT. Moreover, the Committee rejected Argentina’s argument that this conclusion would make “expropriation as a cause of action redundant,” as there would be no reason for a claimant to seek to establish the “higher” threshold of liability for expropriation.
Second, the Committee determined that the Tribunal did not fail to state reasons or issue contradictory reasons for the amount of damages awarded. The Committee determined that the Tribunal provided adequate reasons as to the causal link between the Tribunal’s findings of liability and its finding that the amount of damages would be the fair market value of the Concession on March 12, 2002. The Committee rejected Argentina’s argument that the Tribunal’s decision to apply the fair market value standard contradicted its finding that there was no expropriation. The Committee found that it was clear from the Tribunal’s reasoning that the Tribunal considered that the fair market value standard of compensation was not confined exclusively to cases of expropriation, but that it could also be applied in cases of breaches of other provisions of the BIT.
The Committee also considered it clear that the damages awarded under the “actual investment” method corresponded to the amounts actually invested by the claimant, which would include both the Canon payment and Azurix’s additional investments. Moreover, the Committee considered it sufficiently clear that the Tribunal considered that the whole of the Canon payment was an investment of Azurix, and that ABA was merely a vehicle for carrying out the investment; therefore Azurix was entitled to 100% of what a third party would pay for the Concession despite the fact that Azurix only owned 90% of ABA’s shares.
Finally, the Committee found that the Tribunal arrived at the US$60 million figure by applying a modified form of the “actual investment” method. Under that method, in determining the fair market value, the Tribunal took the actual amounts invested by Azurix as its starting point, but then reduced the relevant amounts when it considered that there were reasons justifying this. Thus, while the actual amounts invested by Azurix totaled over US$550 million, the Tribunal only took US$165 million into account in assessing damages.
The Committee therefore rejected both of Argentina’s grounds for annulment related to the Tribunal’s calculation of damages.
Costs: The Committee held that Argentina should bear all expenses incurred by ICSID in connection with the proceeding, including the fees and expense of the members of the Committee, but that each party should bear its own litigation costs and expenses, including costs of legal representation.