The Claimant, Azurix Corp., is a corporation incorporated in the State of Delaware of the United States of America (hereinafter "Azurix" or "the Claimant"). It is represented in this proceeding by:
Mr. Doak Bishop
King & Spalding
1100 Louisiana, Suite 4000
Houston, TX 77002
United States of America
Mr. Guido Santiago Tawil
Suipacha 268, Piso 12
C1008AAF Buenos Aires
As previously decided, the hearing on the merits was held, from October 4-13, 2004, at the World Bank's office in Paris, France. Present at the hearing were:
Members of the Tribunal
Dr. Andrés Rigo Sureda, President
The Hon. Marc Lalonde, P.C, O.C., Q.C., Arbitrator
Dr. Daniel H. Martins, Arbitrator
Ms. Claudia Frutos-Peterson, Secretary of the Tribunal
On behalf of the Claimant
Mr. R. Doak Bishop (King & Spalding, Houston, Texas)
Mr. John P. Crespo (King & Spalding, Houston, Texas)
Mr. Craig S. Miles (King & Spalding, Houston, Texas)
Ms. Zhennia Silverman (King & Spalding, Houston, Texas)
Ms. Carol Tamez (King & Spalding, Houston, Texas)
Mr. Guido Santiago Tawil (M & M Bomchil, Buenos Aires, Argentina)
Mr. Francisco Gutiérrez (M & M Bomchil, Buenos Aires, Argentina)
Mr. Federico Campolieti (M & M Bomchil, Buenos Aires, Argentina)
Also attending on behalf of the Claimant
Mr. Steve Dowd (Azurix Corp.)
Mr. Lou Stoler (Azurix Corp.)
On behalf of the Respondent
Mr. Osvaldo César Guglielmino (Procurador, Procuración del Tesoro de la Nación, Buenos Aires, Argentina)
Mr. Raúl Vinuesa (Procuración del Tesoro de la Nación, Buenos Aires, Argentina)
Mr. Gabriel Bottini (Procuración del Tesoro de la Nación, Buenos Aires, Argentina)
Mr. Juan José Galeano (Procuración del Tesoro de la Nación, Buenos Aires, Argentina)
Mr. Ignacio Pérez Cortés (Procuración del Tesoro de la Nación, Buenos Aires, Argentina)
Ms. María Soledad Vallejos Meana (Procuración del Tesoro de la Nación, Buenos Aires, Argentina)
Also attending on behalf of the Respondent
Ms. Guillermina Cinti (Provincia de Buenos Aires)
Mr. Roberto Salaberren (Provincia de Buenos Aires)
Mr. Juan Carlos Schefer (Provincia de Buenos Aires)
The Respondent considers that the Claimant takes for granted the highly debatable proposition that contractual breaches result in a violation of the BIT. The Respondent then refers, among others, to statements in the Annulment Decision in Vivendi II to the effect that: "As to the relation between breach of contract and breach of treaty in the present case, it must be stressed that Articles 3 and 5 of the BIT do not relate directly to breach of a municipal contract. Rather they set an independent standard", and "A state may breach a treaty without breaching a contract, and vice versa, and this is certainly true of these provisions of the BIT… It may be that "mere" breaches of contract, unaccompanied by bad faith or other aggravating circumstances, will rarely amount to a breach of the fair and equitable treatment standard …" From these statements, the Respondent concludes that "a claimant in similar cases may not invoke as events or facts giving rise to international responsibility the same facts that constitute a breach of contract … international rules are 'independent rules'. Therefore, a State's international responsibility may not be asserted by disguising mere contractual breaches." The Respondent concludes by recalling that to address the conflicts of a contractual nature raised by the Claimant, both ABA and Azurix have waived their right to submit them to any other jurisdiction other than the administrative courts of the city of La Plata.5
"The investment dispute which the Claimant has put before this Tribunal invokes obligations owed by the Respondent to Claimant under the BIT and it is based on a different cause of action from a claim under the Contract Documents. Even if the dispute as presented by the Claimant may involve the interpretation or analysis of facts related to performance under the Concession Agreement, the Tribunal considers that, to the extent that such issues are relevant to a breach of the obligations of the Respondent under the BIT, they cannot per se transform the dispute under the BIT into a contractual dispute".6
The Claimant adds that international law also applies under the second sentence of Article 42(1) of the Convention. The Claimant relies here again on the authority of Professor Weil,
"no matter how domestic and international law are combined, under the second sentence of Article 42(1), international law always gains the upper hand and ultimately prevails. It prevails indirectly through the application of domestic law where the latter is deemed consistent with international law or incorporates it. It prevails directly where domestic law is deemed deficient or contrary to international law. Thus, under the second sentence of Article 42(1), international law has the last word in all circumstances: international law is fully applicable and to classify its role as 'only' 'supplemental and corrective' seems a distinction without a difference."14
Article 42(1) has been the subject of controversy on the respective roles of municipal law and international law. It is clear from the second sentence of Article 42(1) that both legal orders have a role to play, which role will depend on the nature of the dispute and may vary depending on which element of the dispute is considered. The Annulment Committee in Wena v. Egypt considered that "The law of the host State can indeed be applied in conjunction with international law if this is justified. So too international law can be applied by itself if the appropriate rule is found in this other ambit."19
In its Reply, the Claimant alleges that the Respondent relies on formalisms. It disputes the meaning given by the Respondent to Article 15.1.1, since this section could only be invoked if the 'legal' transfer was not made. Equally, the Claimant considers misplaced the reference to Section 2.4, since this Section presumes good faith in the Province's discharge of its duties and cannot be invoked when insufficient information was not received because of obstruction and sabotage by provincial employees.22 The Claimant contests the affirmation that no complaints were ever made. In fact, numerous complaints were filed with the Privatization Commission, the ORAB, the Provincial Governor and Argentine federal officials.23
"Question No. 160: Annex Ñ Concession Contract. The information communiqué No. 12 leaves evidence that the tariff system, which will rule the concession, will be the one included in Annex Ñ, which does not contemplate zoning coefficients. Is it correct to assume that the new billing could surpass the one determined in the last billing previous to the taking over due to the fact that it was affected by such adjustment?"
"It is clarified that as regards the tariff system, it is governed by what is established in Annex Ñ of the Concession Agreement and the tariffs set not only for metered system but also for the non-metered system in Section 4 of the aforesaid Annex should be especially taken into account."
The Committee of Control for Privatized Public Services and Companies, and the Consumer and User Defense Committee of the Provincial Legislature held hearings on the algae incident. According to the Claimant, ABA, MOSP and the ORAB were summoned to appear before said committees. MOSP and the ORAB arranged for a separate meeting closed to the public. In that meeting, the MOSP Minister stated:
"We are aware that, in association with the ORAB, we have forced certain decisions that are of a political nature, particularly by requesting the ORAB to apply a resolution whereby the Concessionaire is to receive no payment for each day in which water supply quality is not as agreed; by doing so, we breached the concession agreement, and this was a political decision. We took a step further beyond the general meaning of the agreement itself."56
According to the Claimant, the MOSP Minister also recognized that the problems that occurred had pld causes and the Mayor of Bahía Blanca attributed them to the lack of investments for many years.57
The Respondent explains that, under the Concession Agreement, the Concessionaire was responsible for carrying out all tasks to guarantee efficient provision to users, the protection of public health and the rational use of resources, and it was specifically responsible for the quality of unfiltered water and the quality and quantity of drinking water. The Respondent further notes that the Concessionaire was also responsible for the quality of unfiltered and drinking water taken from the Paso de las Piedras dam. The Respondent affirms, based on Article 1 of Exhibit O to the Concession Agreement, that "even when the Province was in charge of the operation and maintenance of the Dique Paso de las Piedras dam, the latter was explicitly exempted from any responsibility regarding the 'quality and quantity of water delivered' to the Concessionaire."60
In its Reply, Azurix finds that Argentina has failed to address the evidence presented in the Memorial. Azurix notes that it took five months for the ORAB to authorize ABA to assume operation of the Florencio Varela wells, to conduct tests, to adapt them and to complete them in order to address the summer increased demands.94 Azurix contests the significance of the quoted reports and the measurement statement. According to Azurix, the purpose of the Service Report was "to evaluate the condition of the water system 'at the time of ABA’s take over of the Concession".95 The Report noted that the four wells were not in operation and the equipment was missing. The date of origin in the Fixed Assets Inventory does not have the relevance that Argentina attributes to it. Date of origin is merely a technical term that does not explain why the ORAB did not authorize ABA to take material possession till December 27, 1999. Prior delivery of the wells was essential for the installation of the water pipes. Once ABA obtained the authorization, it immediately proceeded to complete them at its own expense and connect them to the network. Only three wells were put in operation, the fourth could not be used due to construction problems, was abandoned and new drillings had to be made at ABA’s own expense.96
In the Rejoinder Argentina contends that the completion of the works during the first month of the Concession was duly proved by Argentina. Argentina points out that Azurix quoted only partially from the Service Report which stated that "only the ducted well was available. The equipment is missing. The equipment is stored at the 'Centro' operating location".97 Contrary to Azurix's allegations, it was not necessary to equip the wells to interconnect them. In any case, no fine was imposed since no fines could be imposed during the first six months of the Concession.98
"We understand that since our meeting in Argentina during November 2000, ABA has continued discussions with ORAB and Buenos Aires Provincial government and no significant progress has been made regarding the core issues related to tariff setting and the capital expenditures program. From a creditworthiness perspective, this failure to reach an agreement regarding modifications to the concession to restore a sustainable situation for ABA precludes us from moving forward with potential financing."
"the MOU implicitly recognized that the guarantees given by the Privatization Commission (including Circular 52(A) were essential to the attraction of qualified investors. Moreover, it implicitly recognized that the Province, as the granting authority, had the ability to revisit the purpose and goals of the Concession Agreement to optimize intended social purposes. Finally, and importantly, it recognized implicitly that the economic equilibrium of the contract was broken. These principles were incorporated into the MOU under the mutual understanding by ABA and the Province that the economic equilibrium of the Concession needed to be restored."108
"As a condition to the signing of MOU II, the Province asked Azurix to withdraw its arbitral claim with ICSID and to release the Province from any claims... when ABA stressed the urgent need to increase cash flow, the Province responded that ABA should address this at the first tariff review at the end of the five-year period … ABA was not in a position to wait until the end of the five-year period, and needed immediate solutions to the threat of its financial collapse."110
"Although the Province did not issue ex-ante details on regulatory methodology and accounting principles for the tariff reviews, it issued Circular 52(A). In this Circular, the Province indicates very clearly that the initial payment will be treated as an investment. As such, bidders, including Azurix Corp. must have properly assumed that, in the context of a price-cap regime, the canon would be included in the asset base for tariff review purposes, after accounting for its amortization.
This expectation was based on international and Argentine regulatory experience."134
Argentina refers to the expert report of Mr. Chama, one of Argentina's experts, who explains that the bidding process for the Concession sought to select "the economic player that is willing to pay the highest price, usually called 'fee', for the right to exercise the monopoly; and the selection consists simply of determining who is willing to pay the highest price as from a certain rate level, with a rate adjustment system primarily based on service conditions established in the bidding documents and in the regulatory framework governing the service."136
Azurix dismisses the concept of "unbounded risk" claimed by Argentina. According to Azurix and relying on LECG rebuttal: "The 'unbounded risk' concept introduced by Mr. Chama, is deadly off the mark. Were concessions based on the 'unbounded risk' concept, no private investor will ever pay anything for the concession."150
Azurix affirms that it was the behavior of the Province that was opportunistic. The additional capital contributions made by Azurix and exceeding US$106 million do not indicate behavior of an opportunistic investor seeking additional advantages through a post-bid negotiation. Azurix observes that if the Province, advised by Mr. Chama himself during the bidding process judged Azurix's bid opportunistic or reckless could have rejected the bid and did nothing of the sort.153 On this point, Azurix concludes that, 'in light of the guarantees offered by the Regulatory Framework, the Concession Agreement and Circular 52(A), the Province should have recognized the implications of accepting Azurix bid. If the Province chose to ignore long-term effects for the benefit of short-term political interests, then it did so under the legal obligation to honor commitments made."154
"…operators should be held accountable to their bids, and if petitions for renegotiation are turned down, operators ought to feel free to abandon the projects, if they choose to do so (with the corresponding penalties). The appropriate behavior for the government is to uphold the sanctity of the bid and not concede to opportunistic request for renegotiation and, in such cases, allow concessions to fail. Such outcomes would reduce the incidence of renegotiation. That is a key issue in private concessions of infrastructure services –yet one that is often resolved in favor of operators. Thus aggressive bidding and the high incidence of renegotiation should not be surprising."156
"What clearly should not be used for the value of the concession in the capital base –from which the operator is allowed to earn a fair rate of return- is the value paid at the bidding stage, regardless of depreciation method. Doing that would take away the efficiency-competitive angle of the auction, by allowing a rate of return on whatever price was paid for the concession."157
"Regulatory amortization is the annual percentage of the asset base that is deducted from the regulatory book value in accordance with the standards established by the regulator. Accounting amortization is the percentage of the asset base that may be written off the accounting books every year in accordance with the standards set by the tax authority and the professional council of economic sciences. These are two different concepts. While regulatory amortization serves the purpose of setting rates, accounting amortization is used to calculate taxes and determine the accounting book value."162
According to Argentina, ENRE, the regulator, took into account these observations.
"A modification of the contracting conditions as the one provided for in the Circular under analysis should have necessarily meant a new call for bids to enable the possible participation of any potential bidders that would have been self excluded under the original conditions. Since that was not the case, the equality guarantee has been clearly violated, thus corrupting the whole procedure."169
It will be useful to quote first in full the relevant legislative and contractual provisions:
Article 28 of the Law:
"Prices and tariffs will tend to reflect the economic cost of providing potable water and sewer services, including the Concessionaire's margin of profit for and the resulting basic infrastructure costs of the POES."
"Determination of the tariff level required under Article 28-II of Law No. 11,820, shall be based on the general principle under which tariff values shall cover the operating, maintenance and amortization costs of the services and allow for a reasonable rate of return on the amounts invested by Concessionaire within an efficient operation and management environment, as well as full achievement of the agreed-upon service expansion and quality goals."
"The Service-related assets acquired or built by the Concessionaire and belonging to it as well as all improvements made thereon shall be capitalized by accounting procedures and shall be depreciated integrally over the term of the Concession or over their Useful Lives, whichever term is shorter; the provisions of the fourth paragraph hereof notwithstanding.
The investments the Concessionaire makes in the assets received by/from the Province upon Take Over shall be considered as acquisition and/or maintenance costs of the Concession in accordance with provisions of clause 1.8 and shall be amortized over the term of the Concession."
"The grant of the Concession shall be in consideration of payment of an initial canon equal to … by the Concessionaire. Said amount has been paid up by the Concessionaire to the Province upon the signing of the Agreement, and it is equivalent to the amount offered by the Awardee [sic] under the Bidding Process, to be credited as the price for the Concession Area. However, the Concessionaire does hereby undertake to make all necessary investments to execute the POES and to secure the correct provision of Service under the Agreement, the description of which is detailed in Annex F hereto, the tariffs increments being subject to the guidelines stated in Annex Ñ being subject to compliance with said obligations."
"It is clarified that the initial royalty which is referred to in Section 1.8 of the Concession Contract constitutes an amortizable investment during the concession period (article 7.8 correlative and concordant of the Concession Contract)."
In arguing that Article 12.1.1 of the Concession Agreement is not extraneous to the Concession regime, the Claimant states that: "it is Azurix's view that Article 12.1.1 is consistent with Article 28-II(d) of Law 11,820, Article 7.8 of the Concession Agreement and Circular 52(A). They all fit together into a harmonious and systematic whole. Therefore, suggestions that this introduction substantially changed the scope of the Concession Agreement are wrong. It merely clarified it."172 In support of this statement, the Claimant refers to the expert opinion of Professor Fernández who affirms:
"Section 12.1.1 of the Contract is not a word-by-word reproduction of the section with the same number of the sample agreement attached to the Bidding Terms and Conditions; however, under no means does it imply a modification to the agreed-upon terms since it merely incorporates into the contract the provisions of Section 28(ii) of Law 11,820 and the statement made at the time by means of Circular 52(A), acknowledging that the Canon was an 'investment to be amortized throughout the term of the concession.'"173
"The strong incentives for greater efficiency are probably the major innovation of the price cap regulatory regimes, and reflect an essential benefit of the system. A second benefit…is the reduction in regulatory costs as compared to the traditional rate of return regulation, which required continuous supervision of investments and costs, thus increasing regulatory costs."177
"For a concessionaire that has paid a transfer to government to operate a business at a predetermined set of prices, these issues [asset valuation and depreciation] could be important. Regulatory disputes could emerge relating to what the concessionaire actually bought with that transfer – a stream of future earnings or a return on the preexisting and future asset base ? Issues relating to the depreciation profile of both old and new assets therefore assume particular importance and should be signaled by the government during the bidding process.
[…] If the criterion is the largest lump sum offered to run a franchise, however, the outgoing concessionaire could receive the highest bid, since this bid reflects the value of the assets as they currently exist. However, this value is based on the future stream of earnings, which is determined by the price set by the regulator throughout the new franchise. If the regulator unreasonably ratchets down prices for the period of the new concession, this effectively expropriates the value of the assets built in the previous concession. Generally, therefore, new investment by the concessionaire needs to be transparently treated by the regulator at each review, as part of the process of rolling forward the asset base and charging depreciation on it."178
"At the first ordinary rate review the regulator, following standard regulatory practice as well as the regulatory framework and the Concession Contract, would consider the expected investment and operating costs, add the amortization of capital additions for the previous four years, and derive a tariff rate that would provide a normal rate of return only on the additions to the capital following the privatization. The result would be a price that would fall substantially below the long run marginal cost of the system. This is because such rates would remunerate only the capital added since privatization but not the capital already in place when the company started operations. Since, to be able to provide the service efficiently and effectively, both kinds of assets (i.e., that in place prior to privatization and the additional post-privatization) are needed, rates have to remunerate both of them."179
"Observe that although the investor bids the expected net present value of future cash flows, the investor makes money on the investment. Indeed, when discounting future cash flows, the investor uses a discount rate. This discount rate is the rate of return the investor gets on the initial investment (the canon) over the life of the concession."181
"The Tribunal finds difficulty in following the Respondent's reasoning on the basis of the definition of investment in Article I.1(a) of the BIT. First, a concession contract, such as that entered by ABA with the Province, qualifies as an investment for purposes of the BIT given the wide meaning conferred upon this term in the BIT that includes "any right conferred by law or contract." The Concession Agreement itself refers repeatedly to investments. For instance, in the context of the determination of the tariff level, the Concession Agreement refers to "a reasonable return on the amounts invested by the Concessionaire," [Article 12.1.1] and "the Concessionaire does hereby undertake to make all necessary investments to execute… [Article 7.8]"
The Claimant also addresses the need for the competent authorities to intervene in case of termination of a concession required by Article 49-II of the Law. According to the Claimant, this Article has to be construed appropriately and can "only be interpreted as appointing the competent governmental authorities for the purposes of declaring termination of the Concession Agreement upon the occurrence of events allowing the grantor its right of termination […] It cannot be construed as a reference to termination when it is not declared by 'an authority'".183
"whenever the Law or the agreement recognizes in contractors the right to terminate said agreement, the general rule that sets forth that the termination of the agreement always requires a formal pronouncement by the Government must be replaced by the maxim exceptio non adimpleti contractus, as the only possible way of avoiding an abuse by the Government under this rule, disregarding the contents of its provisions and forcing the contractor into a ruinous situation."187
"The Concessionaire may claim termination of the Agreement based on the Concession Grantor's fault where a rule, act, fact or omission by the Concession Grantor results in a substantial noncompliance with the obligations undertaken by the Concession Grantor under the Agreement reasonably impairing its performance.
In such event, within thirty (30) days from knowledge or occurrence of said event, the Concessionaire shall demand the Concession Grantor to cease such noncompliance, and grant a reasonable term of at least thirty (30) days. In the event that Grantor fails to observe its obligations, the Agreement shall terminate."
This interpretation fits with Article 49-II of the Law that provides:
"The rescission of the contract or the salvaging of the services must be resolved by the Provincial Executive Authority with the intervention of ORAB."
This text does not differentiate between rescission at the initiative or the nonperformance of one or the other of the parties. In all cases, the issue must be resolved by the Grantor. In the specific case of the Concession Agreement, the Grantor had no alternative but to declare the termination if its noncompliance continued, but this is where the parties disagreed. Both parties alleged noncompliance as a cause for their respective rescission of the Concession Agreement.
As to the damage sustained by the Province, the Respondent defends the calculation of the economic impact of the termination of the Concession as part of the damages for which ABA is liable and quotes from the UNLP Report: "The reasons that led the Province to start the bidding process – in which Azurix voluntarily submitted its bid – were to achieve positive environmental, sanitary, economic, fiscal, and operating results. All these privatization purposes may be assessed in economic terms. Azurix assessed them in order to submit the bid that secured Azurix the award of the contract; and the Province should assess them in order to determine the costs of the failure and seek fair compensation."212
According to Azurix, the Province took away Azurix's rights under the tariff regime of the Concession, compromised the ability of ABA to obtain financing, saddled ABA with unexpected expenses by not finishing the promised infrastructure included in Circular 31(A), and took away Azurix's right to recover fully the Canon. After paying for the Concession, "Provincial officials used Azurix's investment as their personal 'whipping boy' to stir the pot of ratepayer anger caused by years of neglect of the water infrastructure and misdirect it towards ABA." The Province broke the Regulatory Compact and signaled that it was not committed to a sustainable Concession. To conclude, "Under any plausible construction of expropriation, the Province and the Republic deprived Azurix of the use and enjoyment of the reasonably-to-be-expected economic benefits of the Concession and expropriated its investments."217
The Respondent contests the definition of creeping expropriation arrived at by the Claimant. The Respondent argues that a central aspect of the test related to the notion of unlawfulness or unreasonableness is missing in that definition: "only if Buenos Aires Province has ignored ABA's contractual rights may an evaluation be made about whether or not an expropriation has occurred. If Buenos Aires Province has not ignored Azurix's contractual rights, there is no expropriation to complain about."218 According to the Respondent, the Province acted at all times in accordance with the Law and the Concession Agreement. On the other hand, there has been a gradual violation of both by ABA which, from the beginning, attempted to renegotiate the Concession Agreement under more convenient terms to its own satisfaction and has failed to meet its obligations under the POES. According to Argentina, citing Lauder and S.D. Myers, in order to determine whether or not an expropriation has occurred the government's intention may not be disregarded:
"Detrimental effect on the economic value of property is not sufficient; Parties to [the Bilateral Treaty] are not liable for economic injury that is the consequence of bona fide regulation within the accepted police powers of the State.219
"Both words ['tantamount' and 'expropriation'] require a tribunal to look at the substance of what occurred and not only at form. A tribunal should not be deterred by technical or facial considerations from reaching a conclusion that an expropriation has occurred. It must look at the real interests involved and the purpose and effect of the government measure." (emphasis added by the Respondent).220
"According to Azurix's conduct … the investment conflict had already arisen by January 5, 2001, that is to say only a few months after having executed the contract. This position is untenable and purely speculative. The operability of a Concession such as Azurix had in its hand is not defined in less than eighteen months. Moreover, validating the way Azurix acted would mean rewarding selffulfilling prophecies. Azurix could not have negotiated in good faith because the investment conflict it was claiming could not have possibly arisen."225
The Claimant argues that, in any case, breaches of contract may constitute an expropriation and cites internal legislation of the United States, a party to the BIT, where it is stated that 'any abrogation, repudiation, or impairment by a foreign government of its own contract with an investor … and [which] materially adversely affects the continued operation of the project …'"228 According to the Claimant, breach of contract or actions affecting contract rights may constitute an expropriation in certain situations: a breach of contract which is part of a series of acts that combined would have the effect of a creeping expropriation (Waste Management), a fundamental breach of contract, which goes to the heart of the performance promised and adversely affects the continued operation of the project subject of the contract (BP v. Libyan Arab Republic), regulatory conduct that denies contract rights or requires their alteration (CME v. Czech Republic), repudiation of specific contract rights or a contract as a whole (Phillips Petroleum v. Iran), and a breach of a stabilization clause in a contract (Agip v. Congo).229
According to the Claimant the notion advanced by the Respondent - that there cannot be an expropriation without an effect on an investor's contractual rights -ignores the authorities and the case law. According to the Claimant, "Conduct contrary to an investor's legitimate expectations that constitute a norm or were induced by the government also can amount to expropriation."231 The Claimant refers to a long line of case law to prove this point, "Middle East Cement, Goetz, Metalclad, Tecmed, and other recent cases," demonstrate that a State's actions need not affect formal contractual rights in order to constitute expropriation. Contrary to the GOA's assertions, the case law shows that actions that have the effect of depriving a foreign investor of the 'reasonably-to-be-expected economic benefit' of an investment can amount to an expropriation even if the actions do not affect or alter contract rights."232
Argentina alleges that, in the Reply, the Claimant tries to reformulate the standard so that it can be read "exactly in the same way as what is under the protection of the general clauses (umbrella clauses)." According to Argentina, the Claimant alleges that some of the actions were expropriatory per se. The Respondent explains that in a progressive expropriation no action in itself is expropriatory. The Respondent relies on the dissident opinion of Keith Highet in Waste Management :
"a 'creeping expropriation' is comprised of a number of elements, none of which can - separately – constitute the international wrong. These constituent elements include non-payment, non-reimbursement, cancellation, denial of judicial access, actual practice to exclude, non-conforming treatment, inconsistent legal blocks, and so forth. The ‘measure' at issue is the expropriation itself; it is not merely a sub-component part of expropriation."239
"As it is well known, there is a wide spectrum of measures that a state may take in asserting control over property, extending from limited regulation of its use to a complete and formal deprivation of the owner's legal title. Likewise, the period of time involved in the process may vary – from an immediate and comprehensive taking to one that gradually and by small steps reaches a condition in which it can be said that the owner has truly lost all attributes of ownership. It is clear, however, that a measure or a series of measures can still eventually amount to a taking though the individual steps in the process do not formally purport to amount to a taking or to a transfer of title. What has to be identified is the extent to which the measures taken have deprived the owner of the normal control of his property."240
"Predictability is one of the most important objectives of any legal system. It would be useful if it were absolutely clear in advance whether particular events fall within the definition of an ‘indirect' expropriation. It would enhance the sentiment of respect for legitimate expectations if it were perfectly obvious why, in the context of a particular decision, an arbitration tribunal found that a governmental action or inaction crossed the line that defines acts amounting to an indirect expropriation. But there is no checklist, no mechanical test to achieve that purpose. The decisive considerations vary from case to case, depending not only on the specific facts of a grievance but also on the way the evidence is presented, and the legal bases pleaded. The outcome is a judgment, i.e., the product of discernment, and not the printout of a computer program."244
"The fact that an investment has become worthless obviously does not mean that there was an act of expropriation; investment always entails risk. Nor is it sufficient for the disappointed investor to point to some governmental initiative, or inaction, which might have contributed to its ill fortune. Yet again, it is not enough for an investor to seize upon an act of maladministration, no matter how low the level of the relevant governmental authority; to abandon his investment without any effort at overturning the administrative fault; and thus to claim an international delict on the theory that there had been an uncompensated virtual expropriation. In such instances, an international tribunal may deem that the failure to seek redress from national authorities disqualifies the international claim, not because there is a requirement of exhaustion of local remedies but because the very reality of conduct tantamount to expropriation is doubtful in the absence of a reasonable – not necessarily exhaustive – effort by the investor to obtain correction."
"There is, of course, no formal obligation upon the Claimant to exhaust local remedies before resorting to ICSID arbitration pursuant to the BIT. Nevertheless, in the absence of any per se violation of the BIT discernible from the relevant conduct of the Kyiv City State Administration, the only possibility in this case for the series of complaints relating to highly technical matters of Ukrainian planning law to be transformed into a BIT violation would have been for the Claimant to be denied justice before the Ukrainian courts in a bona fide attempt to resolve these technical matters."245
"In the Tribunal's view, an enterprise is not expropriated just because its debts are not paid or other contractual obligations towards it are breached. There was no outright repudiation of the transaction in the present case, and if the City entered into the Concession Agreement on the basis of an over-optimistic assessment of the possibilities, so did Acaverde. It is not the function of Article 1110 to compensate for failed business ventures, absent arbitrary intervention by the State amounting to a virtual taking or sterilising of the enterprise."249
"The Tribunal concludes that it is one thing to expropriate a right under a contract and another to fail to comply with the contract. Non-compliance by a government with contractual obligations is not the same thing as, or equivalent or tantamount to, an expropriation. In the present case the Claimant did not lose its contractual rights, which it was free to pursue before the contractually chosen forum. The law of breach of contract is not secreted in the interstices of Article 1110 of NAFTA. Rather it is necessary to show an effective repudiation of the right, unredressed by any remedies available to the Claimant, which has the effect of preventing its exercise entirely or to a substantial extent."250
"Both the authorization to operate as landfill, dated May 1994, and the subsequent permits granted by INE, including the Permit, were based on the Environmental Impact Declaration of 1994, which projected a useful life of ten years for the Landfill [footnote deleted]. This shows that even before the Claimant made its investment, it was widely known that the investor expected its investments in the Landfill to last for a long term and that it took this into account to estimate the time and business required to recover such investment and obtain the expected return upon making its tender offer for the acquisition of the assets related to the Landfill. To evaluate if the actions attributable to the Respondent – as well as the Resolution – violate the Agreement, such expectations should be considered legitimate and should be evaluated in light of the Agreement and of international law."261
The Claimant argues that, on the basis of the text of Article II(2)(a), doctrine and case law, the phrase in question does not refer to the minimum standard. In particular, the Claimant relies on the opinion of F.A. Mann:
"[t]he terms ‘fair and equitable treatment' envisage conduct which goes far beyond the minimum standard and afford protection to a greater extent and according to a much more objective standard that any previously employed form of words. A tribunal would not be concerned with a minimum, maximum or average standard. It will have to decide whether in all the circumstances the conduct in issue is fair and equitable or unfair and inequitable. No standard defined by other words is likely to be material. The terms are to be understood and applied independently and autonomously."264
"Azurix's Investment was subjected by the Province to refusals to provide necessary information (DPTC records), indefinite delays in verifying information and taking decisions (Resolution 7/00, property improvements and ABA's proposal for equivalence of Valuations 1958), assertions of non-existent policy reasons and requests for unnecessary information (cost study for RPI adjustment), manipulation of contract language while ignoring express representations during the contracting process (Resolution 1/99 and Information Communiqué No. 12), changes of position (Canon), public vilification and administrative fines for actions for which the Province was responsible (Circular 31(A) Works), and threats of criminal action against ABA's directors."268
Argentina argues that there are very few awards and authors that postulate the assertion that the standard of fair and equitable treatment is different from the minimum international standard. Based on the findings of the tribunals in Genin, Azinian, and S.D. Myers, Argentina considers that the meaning of this standard is "related to the purpose of providing a basic and general principle", "constitutes a minimum international standard", and "for it to be violated it is necessary that the State receiving the investment incur in acts that demonstrate a premeditated intent to not comply with an obligation, insufficient action falling below international standards or even subjective bad faith."270 The Respondent emphasizes that in Myers the tribunal stated that Article 1105(1) of the NAFTA imposes "fair treatment at a level acceptable to the international community, measured with the highest degree of deference towards domestic authorities." Thus, "[o]nly the reasonableness of the measure claimed to be grievous must be measured, and this, with deference."271
"1. Article 1105(1) prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another Party.
2. The concepts of ‘fair and equitable treatment’ and ‘full protection and security’ do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens.
3. A determination that there has been breach of another provision of the NAFTA, or of a separate international agreement, does not establish that there has been a breach of Article 1105(1)."
"unfair treatment can never be characterized as the loss of a property right because that is precisely the core of an expropriation … The unfair treatment should generate some other form of damage, a detrimental consequence other than the alleged loss of property rights. It should be a consequence as independent from the expropriation damage consequence as the acts that trigger the application of this second standard are (or ought to be) independent and autonomous of the events that caused the application (or non-application) of the first standard."277
"The only conceivably relevant substantive principle of Article 1105 is that a NAFTA investor should not be dealt with in a manner that contravenes international law. There has not been a claim of such a violation of international law other than the one more specifically covered by Article 1110. In a feeble attempt to maintain Article 1105, the Claimants’ Reply Memorial affirms that the breach of the Concession Contract violated international law because it was ‘motivated by non-commercial considerations, and compensatory damages were not paid.’ This is but a paraphrase of a complaint more specifically covered by Article 1110. For the avoidance of doubt, the Arbitral Tribunal therefore holds that under the circumstances of this case if there was no violation of Article 1110, there was none of Article 1105."
Argentina considers that the same reasoning applies to the instant case.
In its Reply, the Claimant alleges that the interpretation of Article ll(2)(a) of the BIT by the Respondent is erroneous. According to the Claimant, the basic touchstone of fair and equitable treatment is to be found in the legitimate and reasonable expectations of the parties. The Claimant considers that, as recommended by Jan Paulsson, the Tribunal should examine "the impact of the measure on the reasonable investment backed-expectations of the investor, and whether the state is attempting to avoid investment-backed expectations that the state created or reinforced through its own acts."278 The Claimant finds support for this view in Tecmed where the tribunal held that fair and equitable treatment requires treatment by the Contracting Parties "that does not affect the basic expectations that were taken into account by the foreign investor to make the investment."279
The Claimant questions the interpretation of ICSID awards by the Respondent. According to the Claimant, in Genin the tribunal did not attempt to develop a comprehensive definition of the meaning of fair and equitable treatment, as opposed, for instance, to the full analysis provided in Tecmed. The standard in NAFTA is different from the standard in the BIT. Article 1105(1) of NAFTA states that investments must be provided "treatment in accordance with international law, including fair and equitable treatment and full protection and security" (emphasis added by the Claimant). This text differs from the corresponding provision of the BIT in the way "international law" and "fair and equitable treatment" are connected. For the Claimant, it is evident that, under the BIT, "fair and equitable treatment" is "a separate requirement and additional requirement from the international law standard, and that international law sets a floor, indicating that 'fair and equitable treatment' requires something different from and more, but never less, than international law."281
"When both Article 1102 and 1105 have been breached, as the Tribunal has found in this case, the usual principle to be applied is that rights and remedies under trade agreements are cumulative unless there is actual conflict between different provisions. The fact that a host Party has breached both Article 1102 and Article 1105 cannot be taken to mean that the investor is entitled to less compensation than if only Article 1103 were breached. A host Party does not reduce the extent of its liability by breaching more than one provision of the NAFTA."286
"…despite certain differences in emphasis, a general standard for Article 1105 arises. Taken together, cases S.D. Myers, Mondev, ADF and Loewen suggest that the minimum standard of fair and equitable treatment is infringed by conduct attributable to the State and harmful to the claimant if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes claimant to sectional or racial prejudice or involves a lack of due process leading to an outcome which offends judicial propriety- as may be the case with a manifest failure of natural justice in judicial proceedings or a complete lack of transparency and candour in an administrative process. In applying this standard it is relevant that the treatment is in breach of representations made by the host State which were reasonably relied on by the claimant."289
The Claimant observes that the ORAB was established as an autonomous entity under the Law and had exclusive authority to supervise the Concession. Regardless of this fact, the decisions of the ORAB were controlled and dictated by the MOSP. To this allegedly improper influence, the Claimant attributes the request of the RPI study and other instances may be established circumstantially:
"because the ORAB candidly told ABA that, although they believed it was correct in its position on Resolution 1/99, they could not undo it because of political pressures. This is confirmed by the statements to ABA by Minister Romero and Undersecretary García about the political problems created by increased water bills. And in fact (based on Minister's Romero's comments) newspapers reported that the ORAB would issue a resolution forcing withdrawal of the bills before the ORAB ever met to issue Resolution 1/99. Similarly, the ORAB President told ABA the ORAB could not grant the RPI adjustment because of political pressure from the MOSP, and ORAB directors said the Bahía Blanca 'crisis' was not ABA's fault, but when the Governor and the MOSP Minister publicly attacked ABA, the ORAB also took actions against the company. These actions are consistent with the Governor's pronouncement to Azurix and ABA."293
"The other element we consider worth mentioning is Resolution 16 under which controlling entities are to make public all their decisions. This is a point we should like to emphasize since we consider there used to be a great lack of transparency – and there still is – on the control of companies under concessions in Argentina".294
Azurix insists in its Reply that the case is analogous to the instant case and provides useful guidance on the application of the transparency standard: "the facts of the present case are more compelling than Metalclad since the BIT explicitly requires that '[e]ach party shall make public all…administrative practices and procedures […],' and the Province indisputably failed to do so."296 The Claimant also observes that this standard has been applied by other tribunals besides in Metalcald. In Maffezini the tribunal held that the lack of transparency in a loan transaction was incompatible with Spain's commitment to ensure fair and equitable treatment of the investor, and in Tecmed the tribunal found that the State had an obligation in applying the fair and equitable treatment standard to act 'totally transparently in its relations with the foreign investor…'"297
1. Whether the standard of fair and equitable treatment is a standard which entails obligations for the parties to the BIT in the treatment of foreign investment which are additional to those required by the minimum standard of treatment of aliens under customary international law;
2. What conduct attributable to the State can be characterized as unfair and inequitable? In other words, what is the substantive content of the standard?; and
3. Whether Article II(7) of the BIT has been breached.