Case of the Month: Azurix v. Argentina

My vote for the most important international law case for the month of July is Azurix v. Argentina. The decision is available here and nice summaries of the decision can be found here, here, and here.

This ICSID arbitration is, at its essence, a case about water politics. Or as the locals might say, una problema de agua mala en la ciudad de Buenos Aires (a problem of bad water in the city of Good Air). A foreign investor agrees to provide water and sewage treatment services in Buenos Aires. Under the agreement, the Province of Buenos Aires agreed to complete certain repairs of historical problems before the foreign concessionaire, Azurix, would take over the water concession. Problem was, things go awry and the province never completed the necessary historical repairs of the filtering plant. Without the necessary repairs to the filtering system, algae bloomed in the reservoir. The result was water that was cloudy and hazy to the eye and offered to the palate an indeterminate earth flavor with a long musty finish. Consumers in Buenos Aires became outraged, and the politicians began looking for scapegoats. Rather than admit their own contribution to the problem, the provincial politicians blamed the foreign investor and encouraged consumers to not pay their water bills. Azurix eventually terminated the contract, complaining that “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….”

The Tribunal concluded that this “reaction of the provincial authorities shows a total disregard for their own contribution to the algae crisis and a readiness to blame the Concessionaire for situations that were caused by years of disinvestment…. It equally shows the willingness of high placed provincial officials, including the Governor, to interfere in the operation of the Concession for political gain….” (para. 144).

There is far too much to say about this 160-page opinion, but one aspect that is of particular importance is the tribunal’s conclusions regarding fair and equitable treatment. That doctrine, embedded in numerous bilateral investment treaties, is becoming extraordinarily important in the legal analysis of foreign investment claims. It is sometimes used not unlike a due process claim by foreign investors for any unfair treatment by host governments. Here is how the tribunal put it in the Azurix case: “It follows from the ordinary meaning of the terms fair and equitable and the purpose and object of the BIT that fair and equitable should be understood to be treatment in an even-handed and just manner, conducive to fostering the promotion of foreign investment….” (para. 360).

After analyzing recent arbitral awards interpreting the fair and equitable treatment obligation under international law, the tribunal concluded that “[t]he standards of conduct agreed by the parties to a BIT presuppose a favorable disposition towards foreign investment, in fact, a pro-active behavior of the State to encourage and protect it. To encourage and protect investment is the purpose of the BIT. It would be inconsistent with such purpose and the expectations created by such a document to consider that a party to the BIT has breached the obligation of fair and equitable treatment only when it has acted in bad faith or its conduct can be qualified as outrageous or egregious.” (para. 372). Applying that standard, the tribunal found “pervasive conduct of the Province in breach of the standard of fair and equitable treatment.” (para. 377).

I find that holding quite interesting. Foreign investors do not deserve mere equality. They deserve “pro-active behavior” by the State to positively encourage and protect a foreign investment. If a state invites foreign investors to invest in your country, it must be favorable disposed to their success. It almost reads as though the host government should place a thumb on the scale to ensure the success of the venture.

Fair and equitable treatment is the darling doctrine of investor-state arbitrations. It has the potential to be a broad and general principle offering due process guarantees for foreign investors. Those outside the investment community are only beginning to appreciate the importance that this international treaty obligation has for the future of international economic relations. Azurix robustly defines the doctrine to be not merely the negative obligation on host governments to refrain from bad faith, but the positive obligation to facilitate the success of the foreign investor.

More broadly, this case marks the first of many ICSID claims recently filed against Argentina that have reached the merits. While this case does not arise out of the 2000 financial crisis, it does not bode well for the host state given the multiple claims that have been brought against Argentina. As noted here, Argentina is party to a remarkable 35 of the 104 arbitrations currently pending before ICSID. That represents over $16 billion in claims and over one-third of all investment claims before ICSID. As Doak Bishop, counsel for Azurix, put in a recent essay in this book outlining the history of the Argentinian arbitrations, “this wave of claims against a single country is certainly new in the history of ICSID Investor-State arbitrations.”