Ad Hoc Committee confirms Argentina is on the hook to Azurix for US$165 Million

By Elizabeth Whitsitt
2 October 2009

Marking a final setback for Argentina in its protracted dispute with US-based water services firm Azurix Corp, on 1 September 2009 an ad hoc committee denied Argentina’s application to annul an ICSID tribunal’s previous decision awarding Azurix approximately US$165 Million for breach of Argentina’s obligations under the US-Argentina Bilateral Investment Treaty.

Problems between the US-based firm and Argentina began almost a decade ago when Azurix acquired the exclusive right to operate a water and sewage utility concession in the Argentine Province of Buenos Aires for a 30 year period. Less than a year after commencing operations in Argentina, concerns over water quality linked to the presence of algae was raised. As a result, the Province’s water regulator ordered Azurix not to charge customers for water for a number of weeks in 2000 and to pay for its failure to maintain certain water-quality standards.

In response, Azurix denied liability and claimed that the conditions resulting in the algae outbreak pre-dated its acquisition of the Concession. Specifically, Azurix alleged that liability lay with the provincial authorities who improperly constructed and maintained the water treatment system required for algae removal.

Subsequently, Azurix commenced arbitral proceedings against Argentina based upon the alleged violation of several articles of the US-Argentine BIT. In its claim, Azurix contended that: (i) Argentina’s treatment of Azurix’s investment was tantamount to expropriation, (ii) Argentina failed to provide fair and equitable treatment, and full protection and security to Azurix’s investment, and (iii) Argentina did not observe the obligations that it had entered into with respect to Azurix’s investment, had acted arbitrarily, and did not act transparently.

On 14 July 2006 the ICSID Tribunal unanimously found Argentina liable to Azurix on the basis of the latter two grounds.

Five months later, Argentina sought to annul that award. Under sub-paragraphs (a), (b), (d) and (e) of Article 52(1) of the ICSID Convention, Argentina identified numerous matters which it claimed were grounds for annulment, relating to the Tribunal’s jurisdictional findings, to its findings relating to the applicable law, to its consideration of evidence, to the constitution of the Tribunal, as well as to the Tribunal’s calculation of the damages.

In considering those arguments the ad hoc committee was clear that “[a]n ICSID award is not subject to any appeal or to any other remedy except those provided for in the ICSID Convention.”As a result, the ad hoc committee noted that it “is not a court of appeal, and cannot consider the substance of the dispute, but can only determine if the Tribunal’s award should be annulled on one of the grounds delineated in Article 52(1) of the ICSID Convention.”

Having so characterized its role, the ad hoc committee proceeded to reject all of Argentina’s arguments for annulment. In so doing, the committee confirmed that the standard of review applicable to all of Argentina’s arguments is very high, thus making successful annulment applications under the ICSID Convention extremely rare.

One example of the ad hoc committee’s reasoning in this regard can be seen in its consideration of arguments raised by Argentina that the Tribunal was not properly constituted, within the meaning of Article 52(1)(a) of the ICSID Convention.

In earlier proceedings Argentina attempted to have Dr. Rigo Sureda, the President of the Tribunal, disqualified pursuant to Articles 57 and 14(1) of the ICSID Convention. Citing Dr. Rigo Sureda’s relationship with a Houston law firm hired as counsel for foreign investors in other ICSID arbitrations, Argentina contended that Dr. Rigo Sureda was “immersed in various conflicts of interest” which “cast reasonable doubts on his impartiality.” These arguments were rejected by the other two members of the Tribunal who determined that Argentina’s application for disqualification failed on both procedural and substantive grounds.

In the subsequent annulment application, Argentina challenged this decision by contending that the Tribunal was not properly constituted, on account of the fact that “it was not possible for an objective observer to be confident that [Dr. Rigo Sureda] could be relied upon ‘to exercise independent judgment”. In rejecting Argentina’s argument, the ad hoc committee notes that “Article 52(1)(a) cannot be interpreted as providing the parties with a de novo opportunity to challenge members of the tribunal after the tribunal has already given its award. A Committee would only be able to annul an award under Article 52(1)(a) if there had been a failure to comply properly with the procedure for challenging members of the tribunal set out in other provisions of the ICSID Convention.”

Accordingly, a ground of annulment might exist under Article 52(1)(a) if an application for disqualification was made but not decided before an ICSID award was given, or if a decision on an application for disqualification was purportedly heard by a person or body other than an appropriate person or body prescribed by Article 58 of the ICSID Convention. Barring such manifest procedural errors, however, it seems clear that an ICSID tribunal decision is final and binding, not subject to further review pursuant to an annulment application.

Decision on the Application for Annulment of the Argentine Republic, Azurix Corp. v. The Argentine Republic, ICSID Case No. ARB/01/12 (United States/Argentina BIT), is availabe here: