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The International Lawyer

The International Lawyer, Volume 55, Number 2, 2022

Anatomy of an Investor-State Arbitration: The Case of Aguas Argentinas

Jeswald W Salacuse


  • Investor-state arbitration is a revolutionary innovation in international litigation.
  • States achieved this revolution in the second half of the twentieth century through the negotiation of bilateral and multilateral investmenttreaties that afforded this revolutionary innovation to foreign investors.
  • Investment treaties, often referred to as “international investment agreements" (IIAs), are essentially instruments of international law by whichstates (1) make commitments to other states with respect to the treatment they will accord to investors and investments from those other states and (2) agree to some mechanism for enforcement of those commitments.
Anatomy of an Investor-State Arbitration: The Case of Aguas Argentinas
Domingo Leiva via Getty Images

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I. Introduction: From Diplomatic Protection to Investor-State Arbitration

Investor-state arbitration is a revolutionary innovation in international litigation. States achieved this revolution in the second half of the twentieth century through the negotiation of bilateral and multilateral investment treaties that afforded this revolutionary innovation to foreign investors. Investment treaties, often referred to as “international investment agreements” (IIAs), are essentially instruments of international law by which states (1) make commitments to other states with respect to the treatment they will accord to investors and investments from those other states and (2) agree to some mechanism for enforcement of those commitments. As of 2021, the number of such investment treaties in force was 2,646. The preferred method of investment treaty enforcement has been to grant foreign investors the right to sue a host government for compensation before an international arbitration tribunal when they have been aggrieved by that government’s actions. By 2021, investors had relied on those treaty rights in over 1,100 known investor-state cases, suing 124 separate governments. Many, but certainly not most, of these cases ended in awards of substantial compensation to complaining investors, reaching hundreds of millions (occasionally billions) of dollars.

Investor-state arbitration represents a radical departure from earlier methods of settling such disputes, which forced injured investors to rely on “diplomatic protection” by their home countries. Asserting that an injury to a national of a state was also an injury to that person’s home state, home country governments took the position that, under international law, they had a right to pursue claims against foreign countries that had illegally injured their nationals. The legal basis for such actions was explained by the Permanent Court of International Justice in the Mavromatis case:

It is an elementary principle of international law that a State is entitled to protect its subjects, when injured by acts contrary to international law committed by another State, from whom they have been unable to obtain satisfaction through the ordinary channels. By taking up the case of one of its subjects and by resorting to diplomatic action or international judicial proceedings on his behalf, a State is in reality asserting its own rights—its right to ensure, in the person of its subjects, respect for the rules of international law. . . . Once a State has taken up the case on behalf of one of its subjects before an international tribunal, in the eyes of the latter the State is sole claimant.

Several states, particularly in Latin America, influenced by the Calvo Doctrine, opposed that view, arguing that a sovereign independent state was entitled, by reason of sovereign equality, to complete freedom from interference in any form, whether by diplomacy or by force, from other states.

Aside from such opposition, foreign investors found diplomatic protection to be an uncertain and often ephemeral remedy for several reasons. First, the existence of diplomatic protection depended entirely on the willingness of the investor’s home country to provide it in any given situation. Home country governments are not now, nor have they been, required to take up, or “espouse,” a national’s claim against an offending host state, “no matter how egregious [the offending state’s] conduct might have been.” The investor’s home state has complete discretion on whether to take up a claim, much less pursue it with vigor. Second, once the home country government has espoused a national’s claim, the home country government effectively “owns” it, thus allowing that government to control how the claim will be made, what settlement, if any, to accept, and whether any portion of that settlement should be paid to the aggrieved national. Third, diplomatic protection of investments had no effective enforcement mechanism. Often, nothing more than an exchange of oral or written statements took place between the two states, with the injured investor receiving nothing. An aggrieved investor’s home state could bring the matter to an international tribunal only if the offending state agreed to submit the case to that tribunal, the jurisdiction of which always depended on the consent of the states concerned.

A more effective means of protecting a foreign investment was for the investor to secure an agreement to arbitrate with the host country government in the event that governmental actions violated the investor’s rights, but the ability to achieve this remedy depended crucially on the investor’s negotiating power and the permissiveness of local legislation and policy. Nonetheless, “after World War II, with the growth in international business activity, arbitration became an increasingly common method of resolving international commercial disputes.” Thus, arbitration agreements and clauses found their way, with growing frequency, into international contracts for the sale of goods, the transfer of technology, and the undertaking of foreign investments. The parties to these arrangements often agreed to accept the rules and arbitral services of established institutions, such as the London Court of Arbitration and the International Chamber of Commerce, which became increasingly experienced in facilitating investor-state arbitrations. Further support for the international arbitral system came with the 1958 conclusion of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, known as the New York Convention, which provided for the enforcement of arbitration agreements and decisions, and the subsequent adoption in 1966 of the UNCITRAL Arbitration Rules. Although both instruments were primarily designed to support international commercial arbitration between private parties, they were also applicable to investor-state disputes.

In the early 1960s, the staff of the World Bank concluded that an institution specifically designed to deal with the special problems of settling investment disputes between foreign private investors and host country governments would facilitate the international flow of capital. The staff’s work resulted in the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which entered into force on October 14, 1966, and established a new international institution, the International Centre for Settlement of Investment Disputes (ICSID). By the end of 2021, ICSID had 164 member states.

Article 25(1) of the Convention establishes the basis of ICSID jurisdiction over investment disputes:

The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre. When the parties have given their consent, no party may withdraw its consent unilaterally.

Thus, in the event of a dispute with a host state, an investor, without the need for the approval or support of its home government, could initiate an ICSID case against that host government, provided that the disputants had consented in writing to submit their dispute to ICSID. The investor, not its home government, would be in complete control of pursuing its claim against the host state. A second important feature of the ICSID Convention is that it provided for an enforcement mechanism for resulting arbitral awards by obligating all ICSID member states “ . . . to recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State.” Unlike the New York Convention, the ICSID Convention neither permits appeals of awards to national courts nor stipulates exceptions that justify non-enforcement. On the other hand, ICSID does provide for an internal review process known as “annulment.”

It is probable that the “consent in writing” prerequisite originally contemplated by the ICSID treaty negotiators primarily concerned arbitration clauses in investment contracts and compromis made by the parties to submit a specific dispute to ICSID arbitration. But shortly after the adoption of the ICSID Convention, investment treaties began to provide a third basis for arbitrating investor-state disputes: a standing offer by the host state to arbitrate disputes with investors concerning the host state’s alleged failure to respect its treaty commitments toward protected investments. The first bilateral investment treaty (BIT) to include such a clause was the Netherlands–Indonesia treaty, signed in 1968, just two years after the ICSID Convention went into effect. Article 11 of that treaty states:

The Contracting Party in the territory of which a national of the other Contracting Party makes or intends to make an investment, shall assent to any demand on the part of such national and any such national shall comply with any request of the former Contracting Party, to submit, for conciliation or arbitration, to . . . any dispute that may arise in connection with the investment.

Through the treaty, each contracting state provided the essential element of jurisdictional consent to ICSID arbitration but left the decision as to whether to arbitrate to the investor. “Unlike the arbitration clauses used in contracts, treaty provisions such [as] this could not be considered an arbitration agreement with the investor because the investor, while a national of a contracting state, was not a party to the treaty.” Conceptually, such treaty provisions constitute an irrevocable offer to arbitrate disputes arising in connection with investments covered by the treaty. “An investor may accept that offer in different ways, including the submission of a request for arbitration or some other mechanism stipulated in the treaty.” Such offer includes the various terms and conditions contained in the applicable investment treaty.

Treaties negotiated in the following years increasingly provided for investor-state arbitration, and, today, such provisions have become standard in investment treaty practice. Moreover, multilateral treaties such as the Energy Charter Treaty and the ASEAN Comprehensive Investment Agreement have also adopted investor-state arbitration as their fallback dispute resolution mechanism. But the specific nature of these provisions, their scope, their conditions, and their legal consequences are not uniform across investment treaties.

The growth in the frequency with which aggrieved investors have resorted to investor-state arbitration and the number and size of some resulting arbitral awards have provoked efforts at what one might call a “counter-revolution”: an attempt to limit and, in certain situations, terminate the ability of foreign investors to resort to international arbitration to protect their interests. Scholars participated in this effort by questioning the “legitimacy” of investor-state arbitration on a variety of grounds, including the inconsistency of arbitral decisions in similar cases, the arbitrator’s alleged conflicts of interests, the lack of arbitrator accountability, and the supposed failure of arbitral tribunals to take account of the public interest in rendering their decisions.

Less analytically, but perhaps more powerfully, political and public debates about foreign investment provisions in free trade agreements have consistently condemned their use of “secret international tribunals” as nefarious instruments of corporate interests that undermine national sovereignty. Indeed, a Google search will confirm that, for many people, the words “secret international tribunals” mean just one thing: investor-state arbitration.

One may ask whether both scholarly and public discussion of investor-state arbitration is hampered by a lack of detailed knowledge of how this form of dispute settlement works in practice. To draw an analogy from medical science, physicians know that a patient’s external symptoms alone, such a fever or chest pains, without a thorough internal examination of the patient’s anatomy, are not a good basis for a diagnosis because those symptoms may be indicators of several different diseases. Similarly, one may ask, therefore, whether critics of investor-state arbitration have identified certain external factors or symptoms, such as large monetary awards and arbitrators’ professional relationships, as reflecting a disease in the body of investor-state arbitration without ever undertaking an anatomical study to understand how investor-state arbitration really works. In short, are large monetary awards and arbitrator relationships a reflection of an illegitimate system—a defective anatomy—or the results of other factors and dynamics? Functional in-depth analyses of actual investor-state cases would help resolve this question, but few seem to exist in the available literature.

In hopes of contributing to the debate on the future of investor-state arbitration, this article will examine the anatomy of this form of dispute settlement to reveal its inner workings by dissecting in some detail an actual investor-state case from start to finish, the case of Aguas Argentinas, which involved a long-running dispute between Argentina and a group of foreign companies who invested in the Buenos Aires water and sewage systems. The author of this article served as president of the ICSID arbitral tribunal in that case.

II. The Facts of the Aguas Argentinas Case

A. The Situation of Argentina and Buenos Aires Before the Investment

Any investor-state arbitration is based on a complex set of facts: facts about the parties and their goals, facts about the investment transaction and the resulting relationship among the investors and between the investors and the host country’s governing authorities, facts about the actions or inactions of the parties, and facts about the alleged resulting injuries to the investment. To understand an investor-state arbitration, one, therefore, first must know and understand the significance of the facts that led to the dispute between the investors and the government of the host state. Because of the factual differences among investor-state cases, no two arbitrations are exactly alike. This factor may be one reason for differing arbitral awards in cases that seem similar on the surface. Arbitral tribunals’ concerns to determine, analyze, and articulate the facts of complicated investor-state cases are reflected in lengthy transcripts of arbitral proceedings, detailed affidavits submitted by the parties, and extensive restatements of the facts in tribunal decisions. To understand fully the facts of the Aguas Argentinas case, one must begin by knowing something about Buenos Aires.

Bueno Aires, Argentina is one of the world’s great cities. A sophisticated city with a rich culture, it is the capital and commercial center of Argentina. In 1993, when the story of Aguas Argentinas begins, the city itself had a population of slightly under two million persons, but its metropolitan area, which includes the Province of Buenos Aires, had over 10.9 million inhabitants, thirty percent of whom had incomes below the poverty level.

During the 1980s, the Argentine economy, and particularly the country’s public enterprises, suffered from severe problems, including extremely high inflation, steep budgetary and fiscal deficits, a serious lack of investment capital, and no less than four monetary crises, each resulting in a currency devaluation of over ninety percent. Its state enterprises, particularly those providing public services, suffered from under-investment in their plants and services, poor management, over-staffing, and an inability to meet the demands and needs of the public. In metropolitan Buenos Aires, one result of this situation was a deterioration in the quality and quantity of water and sewage services provided to the public by the responsible state entity, Obras Sanitarias de la Nación (OSN). From 1912 to 1980, OSN, a corporation owned by the federal government, provided water and sewage services throughout most of the territory of Argentina. In 1980, the Argentine government decentralized water and sewage services, transferring this function to provincial authorities, except for the City of Buenos Aires and certain surrounding municipalities, which remained the responsibility of OSN.

In 1993, the area covered by OSN comprised the city of Buenos Aires and seventeen suburban districts. Of the 8.6 million inhabitants in this area, only 5.7 million were connected to the water supply and 4.9 million to the sewerage. The lack of connections was concentrated in the poorer, suburban areas. Additionally, sudden, temporary stoppages contributed to a deterioration in the quality and quantity of water and sewage services provided to the public and the inability to expand the service to all inhabitants of the area, a situation that raised concern in the public and the press for the health and safety of the population.

B. The Argentine Government’s Decision to Privatize Water and Sewage Services

In response to deteriorating public services, the Argentine legislature enacted the State Reform Law in 1989, declaring the country’s public services to be in a state of emergency and proposing a broad program of privatization to remedy the situation. The State Reform Law also invited the country’s provinces to participate in the privatization process. The State Reform Law that authorized the privatization of thirty-two state-owned enterprises included those in water, oil, natural gas, electricity, telecommunication, steel, transportation, and petrochemicals. Argentina privatized approximately ninety percent of its state-owned companies between 1990 and 1994. The proceeds, exceeding nineteen billion dollars, were used largely to refinance and reduce public debt.

Privatization is a process by which governments transfer state assets or state functions from the public or governmental sector to the private sector—in many cases to foreign private investors. Beginning in the 1980s, both developed and developing country governments in many parts of the world engaged in vast efforts at privatization, so that, by the year 2000, over a trillion dollars in assets in over 100 countries had been “privatized”—that is, transferred from governmental to private hands. Governments often undertook such actions with the encouragement and financial support of multilateral financial institutions, such as the World Bank, and regional development banks like the Inter-American Development Bank. Depending on the country concerned, governments engaged in privatization with various goals including: (1) the reduction of governmental budget deficits caused by the annual need to subsidize inefficient public services; (2) the relief of debts incurred by state enterprises; and (3) the improvement in efficiency by placing government enterprises under private management that would hopefully bring them new capital, modern technology, equipment, and management skills.

In most countries, the privatization of state assets requires an elaborate legal framework and, in many cases, some form of continued government regulation of the privatized enterprise. The privatization of the Buenos Aires water and sewage system was no exception, and a series of legal steps characterized the process.

Having launched the process with the 1989 State Reform Law, the government of Argentina next enacted the Decree of October 5, 1990, to establish a framework for designating which public services, including OSN, would be privatized and transferred to private and foreign investors through a bidding process that would grant investors long-term concession agreements to run designated public services with an obligation to develop and modernize them.

In 1991, to control Argentina’s inflation and depreciating currency that had inhibited both domestic and foreign investment, the Argentine government adopted the Convertibility Law, which tied or “pegged” the value of the Argentine Peso to the United States Dollar—one dollar to one peso—and established a currency board, while requiring that the amount of Argentine currency in circulation could not exceed the country’s foreign currency reserves.

Starting in 1990, the government added an international law dimension to its legal framework for investment by concluding bilateral investment treaties, known as “BITs,” to encourage international investment by firms in major capital exporting countries. By 2000, Argentina had made fifty-seven BITS, including one with the United Kingdom in 1990 and others with France and Spain in 1991. In 1991, Argentina also signed the ICSID Convention and, after its ratification in 1994, became a member of ICSID on November 18 of the same year. “The [Argentine] government actively publicized its desire to privatize [public] services and made significant [promotional] efforts, including a road show in Brussels, to interest particularly qualified foreign enterprises to invest in the privatized entities, preparing and distributing a prospectus” for this purpose.

On June 30, 1992, the Argentine government issued the “Water Decree”:

. . . to establish a regulatory framework for the privatization of OSN and to provide for the rights and obligations of the future concessionaire, the related regulatory bodies, and the users of the service. To attract the most qualified and experienced investors and to secure investment on the most favorable terms, the government established a rigorous international bidding process . . . with detailed bidding rules.

Based on the principles set down in the Water Decree, the Federal Ministry of Public Works and Services promulgated detailed Original Bidding Rules (Pliego de Bases y Condiciones) that stated the object, terms, and rules of the concession, defined the bidding procedure, specified the rules concerning the concession contract, and also set out a model of the future concession contract. These rules, as subsequently revised, and the related model contract specified certain important provisions governing the financial aspects of the proposed concession, including investment commitments, tariffs, and standards of efficiency to be achieved by the concessionaire. Argentina was not seeking just any investor, but an investor who would provide comprehensive and efficient service at the lowest cost to users. The cost to users was determined by the tariff charged by the concessionaire for the service provided. Throughout the process, various international institutions, particularly the World Bank and the Inter-American Development Bank, strongly supported Argentina’s privatization program with advice, financing, and encouragement.

In addition, Argentina engaged the services of international consultants on both technical and financial matters related to its privatization efforts.

C. The Foreign Investment Consortium

Attracted by what appeared to be a profitable opportunity, four experienced foreign water companies—Suez and Vivendi Universal (formerly Compagnie Générale des Eaux) from France, Sociedad General de Aguas de Barcelona S.A. (AGBAR) from Spain, and AWG Group Ltd. from the United Kingdom—formed a consortium with three local Argentine companies to bid on the concession. In December 1992, having been declared the winners of the bidding, they began negotiations with the government on a detailed thirty-year concession contract, covering the period 1993-2023. This complex document of 129 pages (plus annexes) specified the investors’ rights, obligations, investment commitments, and rules for fixing the tariffs to be paid by consumers, as well as the standards of efficiency to be achieved by the concessionaire.

[T]he consortium subsequently formed an Argentine company, Aguas Argentinas S.A. (AASA) with an initial capitalization of US$120 million, to hold and operate the Concession. At the company’s foundation, AASA’s capital stock was owned in the following proportions: (i) Suez (25.3%); (ii) Vivendi (known at the time as Compagnie Générale des Eaux) (8%); (iii) AWG (4.5%); . . . and AGBAR (12.6%) . . .

The remaining capital came from local investors and AASA’s Employee Stock Ownership Program.

“On April 28, 1993, AASA formally concluded a thirty-year Concession Contract with the Argentine Government,” and, on May 1, took “control and management of the [Buenos Aires] water distribution and waste water systems,” achieving the largest privatization of its type in the world. The same consortium of foreign investors would also win concessions to operate the water and sewage systems in the Argentine Provinces of Santa Fe and Cordoba.

D. The Nature of the Concession: A Public-Private Partnership

Under the concession contract, “the Concessionaire did not own the assets of the water and sewage service [that] it was to manage and develop.” Moreover, “it was required at the end of the [thirty-year] Concession to return the service to the Argentine State in good operating condition.”

The concession contract required the investors to make substantial investments to modernize and upgrade the Buenos Aires water and sewage system, and the investors also had “to post a performance bond [of $150,000,000] to protect Argentina against injury due to deficient operation of the . . . systems entrusted to them. Following the legal requirements, Claimant Suez was designated as the operator of the Concession,” for which it was to receive six percent of AASA’s annual gross revenues for its services. The concession remained subject to strict governmental regulation throughout its life and was an example of a “public-private partnership,” a type of arrangement favored by development organizations like the World Bank.

To secure the necessary capital to improve the system, an amount estimated at over $1 billion, AASA obtained loans amounting to more than $700 million from multilateral agencies, such as the World Bank’s International Finance Corporation and the Inter-American Development Bank, because long-term loans at reasonable interest rates were not available in Argentina. Concerned about the risk of lending to AASA, the multilateral agencies required the four foreign investors to guarantee repayment of the multilateral agencies’ loans to AASA.

AASA’s net revenues were to consist of the payments received from consumers, less its operational investment and costs. The tariffs charged to consumers had to be approved by the government regulator; however, the Water Decree directed the regulator to fix the tariff in such a way as to enable the concessionaire to make a profit. Article 44 of the Water Decree stated: “The prices and tariffs shall tend (tenderán) to reflect the economic cost of the water and wastewater services, including a margin of profit for the Concessionaire and incorporating all costs arising from the approved expansion plans.” Thus, the era of government subsidies to the water and sewage system was to come to an end.

Because the concession was to last thirty years, a period during which untold, unforeseeable events could reduce the concession’s cash flow, the concession contract had numerous elaborate provisions requiring adjustments in the tariff for various macroeconomic changes like significant inflation, increases in required investments, and currency devaluations.

E. The First Eight Years of Operation

“[B]y 2001 AASA had invested a total of US$1.7 billion” in the Buenos Aires water and sewage systems, “an amount consisting of US$120 million in AASA’s initial capital, US$706.1 million primarily from loans by multilateral lending institutions, and the remainder from cash flows generated by AASA.” These investments led to the system’s “substantial improvement and expansion;” compared to the situation in 1993, when AASA assumed the Concession, and 2005, when the Concession was near its end and the population with access to drinking water increased from 5,559,270 persons to 7,859,000 persons (an increase of 41.37%) and the population with access to sewage services increased from 4,532,856 persons to 5,989,000 persons (an increase of 32.12%). Moreover, during that same period, the production of drinking water increased from 3,398,000 cubic meters a day to 4,700,000 cubic meters a day (an increase of 38.32%), the sewage treatment capacity increased from 27,305,000 cubic meters a day to 80,334,603 cubic meters a day (an increase of 294.21%), and the water network expanded from 11,913 kilometers to 16,459 kilometers (an increase of 38.16%).

Thus, it seems that the concession was achieving “at least some of the goals that [the Argentine government] had sought in” privatizing the Buenos Aires water and sewage system.

During the eight-year period from 1993 to 2001, relations between the investors and the Argentine government appeared to be relatively harmonious and cooperative. Any difficulties encountered during that time were resolved amicably through consultations and negotiation:

[Since] . . . the Concession was to extend over thirty-years until the year 2023, the legal framework and the Concession Contract provided defined procedures to make adjustments in tariffs, investment commitments, and other factors, according to specified conditions, in the face of changing and unexpected circumstances. During the period between 1994 and 2001, the Argentine authorities agreed to two such [significant] adjustments. The first took place in 1994 when the Ente Tripartito de Obras y Servicios Sanitarios (ETOSS), the regulatory authority, and the municipality of Buenos Aires requested AASA to incur additional investments in order to expand the system beyond the requirement of its then current investment plan. By ETOSS Resolution 81/94 of 30 June 1994, with the approval of the relevant government authorities, an extraordinary tariff revision was effected under the regulations to allow for the requested increased investments. A second adjustment in the terms of the Concession came about as a result of a renegotiation that took place during the period 1997-1999. On 12 April 1996, AASA sent a note to ETOSS formally requesting a “structured discussion” of various issues concerning the Concession and asking for a tariff revision that could take account of Argentine realities and various difficulties that the Concession was experiencing. These difficulties included the country’s higher than anticipated inflation rate, the refusal of some sectors of the community to pay the infrastructure charge for water and sewage connections, a tariff regime considered inadequate because of being subject to political pressures, and higher than expected per capita consumption of water, among others. The Argentine government formally authorized a renegotiation on various issues of concern including the “economic and financial parameters of the concession,” the incorporation of new areas into the Concession, investment deferral, and master plans for wastewater and drinking water, among others.

The relationship between the investors and the government appeared to be an effective public-private partnership. The ICSID Tribunal would later conclude:

The significance of these revisions and renegotiations lies not in the details of what the parties discussed and agreed to but rather in what they suggest about the parties’ relationship with and intentions toward each other . . . it seems clear that the parties considered that any difficulties encountered could be resolved through consultations and negotiations. The Concession Contract, . . . required the Concessionaire and the government “. . . to establish and maintain a fluid relationship that facilitates the performance of this Concession Contract.” It seems clear from the manner in which the parties resolved difficulties during the first eight years of the concession that such a desired fluid relationship did exist.

AASA’s financial condition was also sound, as evidenced by the fact that the rating agency, Standard and Poor’s, awarded it an investment grade rating of BBB-. Other rating agencies gave it a similar grade. During each of its first eight years of operation (1994-2001), AASA earned a net profit.

F. The Argentine Financial Crisis of 2001–2003

In the year 2000, however, this situation would change drastically as Argentina began to have significant difficulties in meeting its foreign financial obligations, eventually leading the country into the most serious financial crisis in its history, a crisis that would have grave consequences for “its people, and its investors, both foreign and national.” It also began AASA’s slow tango of death. According to the Tribunal:

The government’s [initial] response to [the crisis] was . . . an austerity program [of] tightened fiscal policies, reduced public spending, and raised taxes. These measures did not reverse the deteriorating situation and indeed appear to have had a negative effect on AASA’s tariff collections. In early 2001, AASA’s financial situation worsened when its credit rating was downgraded by Standard & Poor’s, resulting in a substantial increase in costs to access financing necessary to meet its investment obligations under the Concession.

This was followed by several emergency measures that repealed important legal provisions, causing extremely negative effects on AASA’s operations. In its Decision on Liability, the Tribunal noted the effects of these measures:

One of the most important of these was the Emergency Law No. 25,561 of 6 January 2002 that: (i) abolished [the link between] the Argentine Peso [and] the U.S. dollar, resulting in a significant depreciation of the Argentine Peso; (ii) abolished the adjustment of public service contracts according to [contractual provisions]; and (iii) authorized the Executive branch of government to renegotiate all public service contracts. . . . Claiming that these measures injured their investments in violation of the commitments made to them in securing the Concession, [AASA investors] sought to obtain from the government adjustments in the tariffs that AASA [could charge the public for its service], as well as modifications of other operating conditions. But the government rejected all AASA’s proposals. On . . . March [6,] 2002, AASA sent a new request for a tariff revision to the [U]ndersecretary of [W]ater [R]esources. The Tribunal summarized these events. In April 2002, the Ministry of the Economy issued a resolution prohibiting all regulatory agencies . . . from taking any measures that directly or indirectly affected the tariffs of any entities subject to their regulatory supervision until the end of the renegotiation period. On . . . May [16,] 2002, the Renegotiation Commission rejected the Emergency Plan requested by AASA. In the meanwhile, AASA’s financial situation became increasingly difficult so that in July it [was able] to pay its creditors only part of the accrued interest it owed . . . . [T]he government’s [persistent] refusal to allow a revision of the tariff in these circumstances meant that AASA began to sustain losses. . . . [B]y February 2003, AASA’s costs of operation had increased 63%, with no increase in tariffs. A particular source of increased costs and therefore losses was the fact that [its loans from the multilaterals required] payments in U.S. dollars, the costs of which in Argentine pesos had tripled [because of currency devaluation].

Ultimately, AASA’s failure to meet its loan repayment obligations led the multilaterals to require the four foreign investors to purchase AASA’s loans in accordance with their loan guarantees.

Accordng to the Tribunal, “Negotiations between AASA and the government on the future of the Concession continued with varying degrees of intensity over [the next] four years but the [two sides could not] resolve their differences, despite . . . hopeful signs from time to time.” “At the same time, . . . the Argentine government [insisted] that AASA comply fully with its investment obligations under the Concession Contract. Failure to meet specified investment targets resulted in fines imposed on AASA by the regulator.”

During the renegotiation process, Argentina also accused AASA of certain performance failures, including high levels of nitrates in the water. AASA rejected these claims, viewing them as pretexts for the government’s refusal to revise the tariffs as required by the Concession Contract.

Ultimately, in September 2005, the AASA shareholders requested termination of the concession contract, but the government refused the request. The following year, on March 17, 2006, the government opened a formal investigation into the nitrate levels in the water distributed by AASA. “On March [21,] 2006, the government . . . terminated the Concession, alleging various faults committed by AASA and demanded payment of the performance bond established by the project sponsors . . . .” The water distribution and sewage system was immediately transferred to a new public corporation owned, financed, and managed by the Argentine State, thus ending “Argentina’s thirteen-year experience with the privatization of the Buenos Aires water and sewage system.” It also ended the investors’ efforts to build a profitable business in providing water and sewage services to that city as they withdrew from Buenos Aires, claiming a loss of over $1 billion.

Earlier, on April 17, 2003, when it appeared that the AASA would never persuade the government to allow AASA to increase its prices, its four foreign investors took the crucial step of initiating international arbitration against Argentina at ICSID, thus beginning another slow tango that would last for the next fifteen years. On the same date, the investors also filed requests for arbitration seeking damages for Argentina’s treatment of its investments in the water systems of the Provinces of Córdoba and Santa Fe.

III. The Aguas Argentinas Arbitration

A. The Nature of International Arbitration

Arbitration is basically a method of dispute settlement by which the parties to a dispute agree to submit their dispute to a third person or persons for a binding decision according to agreed norms or rules and then to carry out that decision. Occasionally, people confuse arbitration with other forms of third-person dispute intervention, such as mediation and conciliation, both of which are very different from arbitration. The difference is this: arbitrators have the power to decide a dispute because the parties to the dispute have given them that power by agreement. Mediators and conciliators, on the other hand, have no such power. In addition, unlike mediators, arbitrators rely on the application of rules to settle disputes. Arbitration is, therefore, a form of adjudication. But, whereas judges in courts gain their authority to decide cases from the law, arbitrators’ authority comes from the parties’ agreement to arbitrate their dispute. And unlike courts, which are normally permanent institutions created by law to decide whole classes of disputes, arbitration tribunals, in most cases, are ad hoc organizations established by agreement of the parties to decide a specific dispute and then disband when that task is completed.

The legitimacy of the arbitral process resides in the fact that the parties have consented to the process. Despite claims to the contrary by some critics of investor-state arbitration, the parties, because of their resources (like governments and multinational companies), are fully knowledgeable about the arbitral process; consequently, there is little doubt that they have given fully informed consent. That certainly was the situation in the Aguas Argentinas case.

Arbitration gains further legitimacy from the principle of party autonomy, which gives the parties to a transaction the power to agree upon the law and dispute resolution processes applicable to their transactions. Party autonomy is thought to increase the predictability of transactions and thereby encourage economic activity. It also assumes that the parties to a transaction, rather than a government or other third person, are in the best position to determine the legal principles and rules applicable to their transaction. Party autonomy is a recognized principle of private international law and can be found in almost all national legal systems, although it is subject to various conditions and exceptions from country to country.

B. The Arbitral Process

1. In General

The proceedings of investor-state arbitrations tend to follow a basic model. First, an arbitration is a process, that is, a progressive movement toward a desired end. In virtually all arbitrations, that desired end is an arbitral decision that will settle the parties’ dispute. Second, far from being some sort of rough justice where decisions are made informally with an eye toward factors other than the legal rights of the disputants, arbitration is a rule-driven process managed by lawyers and imposes upon arbitrators, disputants, and their counsel definite roles with clear norms on how to play them. Arbitration is a principled and rational method of dispute resolution that seeks to arrive at a result based on the applicable rules of law, the evidence, and the arguments presented to the arbitrators. Unlike the free-wheeling processes of international mediations, such as the one conducted by President Jimmy Carter at Camp David, interstate arbitration proceedings, following minutely defined steps and stages, tends to resemble a tightly choreographed ballet.

2. Step One: Instituting the Proceeding

Like the Argentine tango, an international arbitration follows basic forms and proceeds according to basic steps. The first step in the dance is to formally institute or begin the arbitration, a process in the ICSID system governed by Article 36 of the ICSID Convention and by a separate set of ICSID rules known as the “Institution Rules.” The Convention and the Institution Rules require a disputant seeking ICSID arbitration to make a written Request for Arbitration that, at a minimum, contains information on three elements: (1) the identities of the parties in the dispute; (2) the issues in dispute, and (3) their consent to ICSID arbitration. In the Aguas Argentinas case, the four foreign investors, Suez, Vivendi, AGBAR, and AWG Ltd., initiated the process by sending a written Request for Arbitration (the Request) against the Argentine Republic to ICSID’s Secretary-General on April 17, 2003.

Any arbitration requires the consent of the disputants to be valid. The ICSID Institution Rules require information on that consent in addition to basic information about the nature of the dispute. The four investors relied on Argentina’s consent to arbitration in the individual BIT that each of their home countries had concluded with Argentina. Thus, Suez and Vivendi invoked Argentina’s consent to arbitration in Argentina’s 1991 BIT with France, AGBAR relied on Argentina’s consent to ICSID arbitration in its 1991 treaty with Spain, and AWG relied on Argentina’s 1990 BIT with the United Kingdom. Following a common pattern, in each of the BITs, Argentina promised investments and investors from its treaty partner various protections. It also specified that, if a dispute arose about whether a government had lived up to those promises, an investor from a contracting state would be entitled under various conditions to invoke international arbitration against Argentina to settle the matter.

In the case of the U.K.-Argentina BIT on which the AWG investors relied, there was a complication. Whereas the France and Spain BITs made an unconditional promise of ICSID arbitration in the event of an investor-state conflict, the U.K. BIT stated that, in case of a dispute, “Argentina and the investor concerned may agree to refer their dispute either to ICSID arbitration or to arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL Rules).” If they did not reach an agreement after three months, they had to submit their dispute to arbitration under the UNCITRAL Rules. In the Aguas Argentinas case, Argentina refused to submit AWG’s claim to ICSID jurisdiction, but it did allow AWG’s claim to be administered by ICSID under the UNCITRAL Rules. The case would proceed on that basis. That is, the same tribunal would hear the claims of all four investors but apply two sets of arbitration rules to the case—ICSID rules would govern the claims of Vivendi, Suez, and AGBAR, but the UNCITRAL Rules would govern AWG’s claims.

While the ICSID Convention and rules refers to the “parties”—that is, the investors as the “Claimants” and the state as the “Respondent”—taking certain actions in the case, in reality, it is the parties’ lawyers who drive the arbitration process. Virtually all investors engage lawyers—often from major international laws firms to press their case—and governments being sued may also hire foreign law firms to defend them. In the Aguas Argentinas case, the investors engaged the international firm of Freshfields Bruckhaus Deringer LLP, while Argentina chose to rely on the lawyers from its attorney general’s department, Procurador del Tesoro de la Nación, supported by skilled Argentine lawyers from private practice. At arbitration hearings, each side would usually be represented by a team of ten or more persons, consisting of lawyers, paralegals, experts, and administrative assistants. It was the legal teams that prepared all the pleadings and documents in the case, including the Request for Arbitration, and participated in the oral hearings.

After the ICSID Secretary-General received the investors’ Request for Arbitration, a copy was forwarded to the government of Argentina. The ICSID Convention requires the ICSID Secretary-General to register the request unless it “is manifestly outside the jurisdiction of the [ICSID].” On July 17, 2003, the acting secretary-general registered the investors’ request, gave it a formal name and number, informed the parties of its registration, and asked them to constitute a tribunal as soon as possible. That action began the second step in the Aguas Argentinas case.

3. Step Two: Constituting the Arbitral Tribunal

The Arbitral Tribunal, usually called the Tribunal, is the body authorized by international law and rules to decide the dispute. It, therefore, performs a judicial function. For the parties, the selection of the persons to carry out that judicial function is crucial. ICSID’s basic approach to arbitrator selection is to leave both the number and choice of arbitrators to be decided by agreement of the parties. When the parties cannot agree, a fallback procedure managed by the ICSID Secretary-General comes into play. So, the basic rule under Article 37(2) of the Convention is that “[t]he Tribunal shall consist of a sole arbitrator or any uneven number of arbitrators appointed as the parties shall agree.” As a practical matter, the parties almost never agree on this issue, so ICSID applies the fallback position as stated in Article 37 of the Convention: “the Tribunal shall consist of three arbitrators, one arbitrator appointed by each party and the third, who shall be the president of the Tribunal, appointed by agreement of the parties.”

In the Aguas Argentinas case, the parties could not agree on the number or choice of arbitrators, so, on September 22, 2003, they asked that the tribunal be constituted according to the formula just mentioned: three arbitrators—one appointed by each side and a third, the tribunal president, selected by agreement of the parties. The foreign investors proceeded to appoint Professor Gabrielle Kaufmann-Kohler, a Swiss national, and Argentina designated Professor Pedro Nikken, a national of Venezuela, both distinguished jurists and arbitrators. Professor Kauffman-Kohler was a member of the faculty of law of the University of Geneva and had served as arbitrator in over 100 cases. Professor Nikken had served as President of the Inter-American Court of Human Rights, Legal Adviser to the United Nations Secretary-General on El Salvador’s peace process, Special Envoy of the United Nations Secretary-General to Burundi, and Dean and Professor at the Law School of the Universidad Central de Venezuela.

The parties could not agree on a person to serve as tribunal president, so, on October 21, 2003, they invoked yet another fallback formula provided by Article 38 of the ICSID Convention: they asked ICSID to do that job. In early 2004, “[w]ith the agreement of both parties, the Centre appointed Professor Jeswald W. Salacuse, a national of the United States of America, as the President of the Tribunal.” Salacuse was a chaired Professor of Law at the Fletcher School of Law and Diplomacy, Tufts University, and previously had served as the school’s dean. On February 17, 2004, the ICSID Secretary-General declared that all the arbitrators had accepted their appointments and that the tribunal was therefore constituted.

4. Step Three: Preliminary Meeting of the Tribunal and Parties

On June 4, 2004, the Tribunal convened a session with the parties in Washington D.C. at ICSID’s headquarters to decide important but basic organizational matters for the arbitration, including that the following rules be followed: the use of two languages, Spanish and English, in pleadings with simultaneous translation during hearings and verbatim transcripts also in both languages; the making of an initial deposit by each party of funds with ICSID to cover arbitration and costs during the early part of the proceeding; and a time table for the submission of written pleadings along with a tentative schedule for hearings. The time table took account of two possibilities: (1) a tentative schedule in the event that Argentina did not raise objections to the Tribunal’s jurisdiction and (2) a tentative schedule if Argentina did object to jurisdiction, in which case it was agreed that the Tribunal would deal with the matter in a separate proceeding as authorized by Article 41(2) of the ICSID Convention. The stage was then set for the arbitral ballet to begin. It became like many investor-state arbitrations, which in ballet is known as a “pas de trois”—a dance for three persons—the claimant, the respondent, and the Tribunal.

5. Step Four: Submission of Written Pleadings

In most investor-state arbitrations, the parties present their cases both in writing and orally. The written part, which comes first, consists of lengthy documents known in the ICSID system as “memorials,” often accompanied by equally long annexes. They are introduced in a sequence. The claimant first files its memorial, which is followed sometime later by a counter-memorial from the respondent. This first round of written pleadings is often followed by a second round in which the claimant files a reply memorial, responding to arguments raised by the respondent, and that, in turn, is followed by a rejoinder memorial from the respondent. Once the hearing takes place, the parties will usually file post-hearing briefs. In addition to the pleadings filed by the parties, the record also includes lengthy hearing transcripts in more than one language, along with various other documents presented by the parties. As a result, the written record in a significant investor-state arbitration can be voluminous, running to many thousands, even hundreds of thousands, of pages.

On January 1, 2005, the Claimants filed their memorial, stating their case against Argentina’s acts and demanding compensation for the injuries caused by those acts. This important document set out in detail for the Tribunal and Argentina the full particulars of the Claimants’ case with supporting legal authorities. Their case was based on allegations that Argentina violated its promises of investor protection contained in the three BITs covering the investors’ investments. To establish a treaty violation, an investor must identify the applicable treaty standard and then prove that a host country has violated it. In the Aguas Argentinas case, the investors in their memorial based their case on Argentina’s alleged violation of three treaty standards found in all three of the applicable treaties: “[(]1) guarantees against direct and indirect expropriation of their investments; [(]2) guarantees to accord their investments full protection and security; and [(]3) guarantees to accord their investments fair and equitable treatment.”

It should be noted that the investors were not claiming that Argentina breached the concession contract. The treaties did not protect investors from contract breaches; consequently, the arbitration tribunal had no jurisdiction—that is, no authority—to hear and decide such claims. Treaty claims and contractual claims are distinctly different causes of action.

In response, on February 28, 2005, Argentina filed a memorial, which not only denied the allegation made by the investors but also asserted six specific grounds as to why ICSID and the Tribunal were without jurisdiction to hear and decide the Claimants’ claim for damages.

6. Step Five: Bifurcation and Jurisdictional Issues

Upon receiving Argentina’s memorial asserting lack of jurisdiction, the Tribunal suspended the merits phase so that Argentina’s six jurisdictional objections might be considered and decided separately, as had been agreed upon in the preliminary meeting of the parties and the Tribunal. This action is generally referred to as “bifurcation” because it cuts the proceeding into two parts—a portion on jurisdiction and a portion on the merits. If the respondent succeeds in proving that the Tribunal is without jurisdiction, then the Tribunal must terminate the case and enter a decision in favor of the respondent. Arbitrators have only as much authority to decide matters as an arbitration agreement or a treaty gives them. That authority is called “jurisdiction.” If a tribunal decides that it has no jurisdiction over a person or a matter, a tribunal may not decide any issue affecting them. So, an initial move for a state defending itself against a treaty violation claim is often to argue, as Argentina did in the Aguas Argentinas case, that the Tribunal had no jurisdiction. In response, the investors filed a separate counter-memorial on jurisdiction on April 6, 2005, and the Tribunal held an all-day hearing on the matter in Washington D.C. on May 11 to hear oral arguments from the parties’ lawyers on the jurisdictional issues.

7. Step Six: Tribunal Hearing and Decision on Jurisdictional Objections

Following the hearing in Washington D.C. on May 11, 2005, the Tribunal deliberated and issued a forty-page decision on jurisdiction on August 3, responding to each of Argentina’s six objections to the tribunal’s jurisdiction.

The first of Argentina’s six objections to jurisdiction was that the dispute did not arise directly out of an investment as required by Article 25 of the ICSID Convention. Finding support in other ICSID cases that had faced a similar issue, the Tribunal rejected this first objection. Drawing on the International Court of Justice’s definition of “dispute” to mean “a disagreement on a point of law or fact, a conflict of legal views or interests between parties,” and referring to the facts at hand, it concluded: “[t]hat a disagreement exists between the Claimants and the Respondent about law, facts, and legal views is beyond doubt.” It then found that disagreement arose directly out of the investors’ investment in the Buenos Aires water and sewage system.

Argentina’s second objection to jurisdiction was that the dispute was not legal, as required by Article 25, but about economic policy. Drawing on the Report of the Executive Directors that accompanied the ICSID Convention, as well as scholarly commentary, the Tribunal stated that “[a] legal dispute is . . . a disagreement about legal rights or obligations” and that the parties’ disagreements about the nature of the Claimant’s legal rights under the applicable BITs was central to the case. It, therefore, rejected Argentina’s second objection to jurisdiction.

In its third objection, Argentina asserted that AASA, an Argentine corporation, did not qualify as a French investor under the France-Argentine BIT and, therefore, could not bring a case against Argentina under the treaty. Because the Tribunal, at the request of AASA and without opposition from the Respondent, had ordered the discontinuance of the proceedings in this case with respect to AASA, the Tribunal concluded that it did not need to consider and decide upon this objection to jurisdiction.

Argentina based its fourth objection to the Tribunal’s jurisdiction on the fact that the concession contract contained a provision agreeing to submit all disputes relating to its interpretation and execution to the federal administrative courts in the City of Buenos Aires, thus precluding submission of disputes to arbitration. Referring to several earlier ICSID arbitral decisions, the Tribunal in the Aguas Argentinas case declared that “[b]y its terms, the dispute resolution clause covers all controversies arising out of the concession contract. . . . [t]he dispute resolution clause makes no mention of Claimants’ rights under the Argentina-France BIT, the Argentina-Spain BIT, the Argentina-U.K. BIT, or their right to seek recourse in international arbitration for violation of those rights.” Following the annulment decision in the Vivendi case, which involved one of the BITs applicable to the Aguas Argentinas case, the Tribunal stated that “BIT claims and contractual claims are two different things” and that “the existence of the dispute resolution clause in the concession contract does not preclude the Claimants from bringing the present arbitration.” It, therefore, dismissed Argentina’s fourth jurisdictional objection.

In its fifth objection, Argentina asserted that Suez, Vivendi, AGBAR, and AWG, as mere shareholders of AASA, were not legally qualified to bring claims in international arbitration for alleged injuries done to AASA. The Tribunal stated:

In support of this position, the Respondent, drawing analogies to domestic corporation law, argue[d] that any injury to the shareholders is derivative of [the] alleged injury to the company in which they hold shares, as opposed to a direct injury to the shareholders themselves. The alleged injury is done to the corporation, not to the shareholders whose shares, because of an alleged wrongful action done to the corporation, may have diminished in value. Thus, the shareholders have no right to bring an action on grounds that they have sustained a direct injury by virtue of the alleged wrongful actions of the Respondent. The right to bring an action for any alleged injury lies with the corporation itself, not its shareholders.

Relying on the specific language of each BIT, which gives shareholders the right to have recourse to arbitration to protect their shares, the Tribunal held that Suez, Vivendi, and AGBAR had standing to bring an ICSID arbitration and that AWG had standing to bring an UNCITRAL arbitration, citing many other ICSID cases, including several involving Argentina that had made similar holdings. As the Tribunal pointed out, the issue was a matter of international law, not domestic corporation law.

And finally, in its sixth objection, Argentina argued that, because Claimants AGBAR and AWG had not complied with the provisions of the Spain-Argentina BIT and the UK-Argentina BIT, respectively, by pursuing their claims through litigation in Argentina’s courts for a minimum period of eighteen months, neither claimant had a right to invoke international arbitration under those treaties. In fact, neither of these two claimants had brought suit against the government in the local courts; however, both argued that by virtue of the most-favored nation clause in the two BITs applicable to their investment, they were entitled to take advantage of the more favorable treatment granted by Argentina to investors in the France-Argentina BIT, which did not require investors to bring suit in Argentine courts before commencing international arbitration. In resolving this issue, the Tribunal undertook a careful analysis of the Spain-Argentina treaty text and concluded that it clearly states that “[‘]in all matters[’] (en todas las materias) a Contracting party is to give a treatment no less favorable than that which it grants to investments made in its territory by investors from any third country.” It next determined that “dispute settlement is certainly a ‘matter’ governed by the Argentina-Spain BIT.” Although the treaty text does not define the word “treatment,” the Tribunal stated that “the ordinary meaning of that term within the context of investment includes the rights and privileges granted and the obligations and burdens imposed by a Contracting State on investments made by investors covered by the treaty.” It continued:

In specific terms, granting a treatment to Spanish investments that is no less favorable than that granted to French investments would mean that the holders of Spanish investments would be able to invoke international arbitration against Argentina on the same terms as the holders of French investments. That is to say, Spanish investors, like French investors, may have recourse to international arbitration, provided they comply with the six months negotiation period but without the need to proceed before the local courts of Argentina for a period of eighteen months.

After reviewing various cases cited by the parties, the Tribunal concluded:

. . . AGBAR, relying on Article IV of the Argentina-Spain BIT, and AWG, relying on Article 3 of the Argentina-U.K. BIT, may invoke the more favorable treatment afforded in the Argentina-France BIT and may therefore bring an international arbitration without the necessity of first having recourse to the local courts of Argentina. The Respondent’s sixth objection to jurisdiction therefore fails.

Finding none of the six grounds raised by Argentina to be a valid bar to the Tribunal’s jurisdiction in the case, the Tribunal decided that ICSID and the Tribunal had jurisdiction over ICSID Case No. ARB/03/19 and over the UNCITRAL arbitration of AWG and the Argentine Republic.

The parties then filed memorials on the merits, as planned, in contemplation of a hearing on the merits scheduled to held in Washington D.C. during the two-week period from October 28 through November 8, 2007. But before that hearing could take place, the Tribunal had to address four novel and unexpected issues.

8. Step Seven: Dealing with Four Novel and Unexpected Issues

Like the Argentine tango, which occasionally requires improvisation, a complicated arbitration, no matter how well planned and tightly choreographed, will often encounter unexpected demands that necessitate new, unplanned solutions. That occurred in the Aguas Argentinas case when, before the scheduled hearing on the merits, the Tribunal suddenly had to answer four novel and unexpected questions: the right of a party to withdraw from the arbitration; the ability of non-disputing parties to participate in the arbitration; and two separate proposals to disqualify a member of the Tribunal on grounds of lack of independence for two different reasons.

a. The Right of a Party to Withdraw

The first question concerned the right of a party to withdraw from the arbitration. The matter is worth mentioning not only for its own sake but also to illustrate what a tribunal may do when no specific rule governs a procedural matter. Aguas Argentinas S.A, the corporation that the investors had created to operate the concession, had been named as a claimant in the arbitration along with the four foreign investors. On February 9, 2006, the counsel for the Claimants wrote a letter to the Tribunal stating that the Claimant shareholders of AASA were in the process of selling their interests in AASA to third parties and that “‘in order to facilitate the required approval by the [Argentine government] of such sale AASA has decided to withdraw its claim in the above-referenced arbitration but that such withdrawal was expressly without prejudice to the Claimant Shareholders’ claims in this proceeding.” Argentina indicated that it did not oppose this request, but it argued that the withdrawal of AASA would have serious consequences for the Tribunal’s jurisdiction over the investor’s claims.

“In [deciding] on this request, the Tribunal found that neither the ICSID Convention nor the Rules specifically provide[d] for the withdrawal of one party from an arbitration proceeding that [was] to continue” afterwards. The Tribunal, therefore, relied on Article 44 of the ICSID Convention, “which grants ICSID tribunals the power to decide procedural questions not covered by the Convention or the Rules.” It concluded that it had the power to order the discontinuance of proceedings with respect to one party at its request, when the other party did not object. It also said that permitting such discontinuance was consistent with the basic objective of the ICSID Convention of facilitating the settlement of investment disputes and that the continued participation of AASA in the case would serve no useful purpose in bringing about a fair and correct resolution of the arbitration. On April 14, 2006, the Tribunal, therefore, issued a procedural order directing that AASA, the corporation, cease to be a claimant but that the case continue in all other respects.

b. The Ability of a Non-Disputing Party to Participate in the Arbitration

The second novel question faced by the Tribunal concerned the confidentiality of the arbitration proceeding and the intervention of non-parties in the proceedings. Traditionally, arbitration has been viewed as a confidential matter that concerns only the parties directly involved in the case. Unlike a court proceeding, arbitration hearings are not open to the public, its documents are not available for public consultation, and its decisions are often not officially published unless all parties agree. On the other hand, in more recent times, the development of the internet and of many valuable unofficial websites that make arbitral documents available to the public has served greatly to increase public knowledge of investor-state arbitral proceedings and, thereby, diminish somewhat the criticism that investor-arbitration is of questionable legitimacy because information of its workings is withheld from the public.

The ICSID Convention and the Rules have not totally abandoned this tradition of confidentiality. While neither the Convention nor the Rules permit public access to the proceedings, under ICSID Arbitration Rule 32(2), the Tribunal, after consultation with the Secretary-General, may allow a person not connected with either party to attend proceedings but may not do so if any party objects. Similarly, Article 48(5) of the Convention provides that ICSID may only publish a tribunal’s decision with the consent of the parties. And finally, ICSID Arbitration Rule 6 requires that each arbitrator, at the beginning of the case, make a declaration to “keep confidential all information coming to my knowledge as a result of my participation in this proceeding . . . .”

Against this background, the Tribunal, on January 28, 2005, received a “Petition for Transparency and Participation as Amicus Curiae” from five nongovernmental organizations—four Argentine and one American—concerned with the advancement of social rights and environmental protection. “Asserting that the case involved matters of basic public interest and the fundamental rights of people living in the area” covered by the concession, the five petitioners asked the Tribunal to do three things: “to allow [the] Petitioners access to the hearings in the case; to allow [the] Petitioners opportunity to present legal arguments as amicus curiae; and to allow [the] Petitioners timely, sufficient, and unrestricted access to all of the case documents.”

Amicus curiae is Latin for “friend of the court.” In many legal systems, a court may permit a person who is not a party to a court case to offer its special views as an amicus curiae on the matters in dispute to help the court arrive at a just decision. For example, the United States Supreme Court accepts amicus curiae briefs under its rules in connection with cases it is hearing. At the time of the petition, neither the ICSID Convention nor the ICSID rules provided for the intervention of a third party as amicus curiae in ICSID cases. An earlier ICSID tribunal that had received a similar request to intervene as an amicus rejected the request on the ground that neither the Convention nor the Rules authorized third-party intervention.

The Tribunal in the Aguas Argentinas case took a different approach. It noted that the case involved issues of public interest and that, therefore, the views of organizations representing civil society were relevant. Moreover, it felt that greater openness and transparency of the arbitral process would be desirable. At the same time, it was concerned that the actual parties to the dispute not be unduly burdened by such interventions. While the Tribunal acknowledged that neither the ICSID Convention nor the Rules specifically allowed such intervention, it also noted that no provision prohibited it either. In the end, it concluded that by virtual Article 44 of the Convention, the Tribunal had residual power in procedural matters not covered by the Convention or the Rules and that the intervention of an amicus curiae was such a matter.

So, on February 12, 2007, after receiving the parties’ observations, the Tribunal, in an Order in Response to a Petition By Five Non-Governmental Organizations For Permission to Make an Amicus Curiae Submission, permitted them to file a single joint submission under specified conditions and imposed a limitation on the length of their amicus curiae brief—the first time an ICSID tribunal had permitted such an intervention. But the Tribunal did not allow the NGOs to attend the hearing or to gain access to the documents in the case because the Claimants objected and existing Rules did not permit it.

On April 4, 2007, the five non-governmental organizations did, in fact, submit a joint amicus curiae submission, which was subsequently transmitted to the parties for their observations and made part of the record in the case. Afterwards, both the ICSID and the UNCITRAL rules would be amended to authorize tribunals to allow amicus curiae submissions. By 2021, non-disputing third parties had filed petitions in over 100 ICSID cases seeking to submit their views to tribunals in the cases concerned.

c. Two Proposals from Argentina to Disqualify a Member of the Arbitral Tribunal

i. The Law on Arbitrator Independence

A third question concerned the independence of a Tribunal member, Professor Gabrielle Kaufmann-Kohler, who had been appointed by the Claimants. On two separate occasions, Argentina submitted proposals to the Tribunal asking that Professor Kaufmann-Kohler be disqualified because she lacked the required quality of independence. Each proposal applied not only to the Aguas Argentina case but also to ICSID Case no. ARB/03/17, which concerned the Claimants’ investments in the Province of Santa Fe, a case that the Tribunal was also deciding at the parties’ request. A further complication was that the ICSID rules on independence that applied to ICSID cases were different from the UNCITRAL rules on arbitrator independence that applied to the AWG v. Argentina case.

Article 14 of the ICSID Convention states the basic qualifications that a person must have to be appointed to a tribunal:

(a) Persons designated to serve on the Panels [i.e., arbitration tribunals] shall be persons of high moral character and recognized competence in the fields of law, commerce, industry or finance, who may be relied upon to exercise independent judgment (emphasis supplied).

ICSID Arbitration Rule 6 imposes an obligation on arbitrators to disclose any factors that might cause an arbitrator’s independence of judgment to be brought into question. So any person appointed as an arbitrator must sign a declaration of a willingness to serve, affirming that there is no reason why that person should not serve; attach a statement of past and present professional, business, and other relationships with the parties; and disclose any other circumstance that might cause that person’s reliability for independent judgement to be questioned by any party. In addition, an arbitrator has a continuing obligation to promptly notify the ICSID Secretary-General of any relationship or circumstance that arises while the case is pending.

Chapter VI (Articles 56–58) of the Convention concerns the “Replacement and Disqualification of Conciliators and Arbitrators,” and ICSID Rule 9 on the “Disqualification of Arbitrators” sets out the procedure for challenging and removing from a tribunal an arbitrator who does not to meet the stipulated requirements. Article 57 states: “[a] party may propose to a . . . Tribunal the disqualification of any of its members on account of any fact indicating a manifest lack of the qualities required by paragraph (1) of Article 14.” Article 58 and Rule 9 set out a process for determining whether a challenged arbitrator does, in fact, fail to meet the requirements of Article 14. It provides that the decision on a proposal to disqualify an arbitrator shall be made by the other members of the Tribunal. The arbitration process is suspended while the other members carry out that task.

Under the UNCITRAL Rules, article 11 governs challenges to arbitrators. Paragraph 1 of that article provides:

A party who intends to challenge an arbitrator shall send notice of his challenge within fifteen days after the appointment of the challenged arbitrator has been notified to the challenging party or within fifteen days after the circumstances mentioned in articles 9 and 10 became known to [the] party.

The circumstances referred to in articles 9 and 10 are “. . . any circumstances likely to give rise to justifiable doubts as to [the challenged arbitrator’s] impartiality or independence.” Unlike the UNCITRAL Rules, the ICSID Rules do not specify a time limit within which a complaining party must send its request to disqualify an arbitrator; however, ICSID Rule 9(1) does state that it shall be made “promptly.” It should be noted that neither set of rules defines “independence,” “independent judgment,” or “impartiality” or suggest guidance for applying these terms.

ii. Argentina’s First Proposal to Disqualify an Arbitrator

As the Aguas Argentinas case was moving toward a hearing on the merits, Argentina sought the disqualification of Professor Kaufmann-Kohler as an arbitrator on two separate occasions. The first happened on October 12, 2007, shortly before the hearing on the merits was to take place, when Argentina filed a Proposal to Disqualify Professor Kaufmann-Kohler because she “had been a member of an ICSID tribunal in the case of Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentine Republic,” which had unanimously rendered an award against Argentina the previous August.

After receiving the Proposal, the Tribunal members suspended proceedings in the case on October 15, 2007, forwarded the Respondent’s Proposal to the Claimants with a request for their observations, and invited Professor Kaufmann-Kohler to furnish any explanations that she wished to make. After receiving submissions from the parties and from Professor Kaufmann-Kohler, the two remaining members of the Tribunal deliberated and, on October 22, 2007, rendered a Decision on the Proposal for the Disqualification of a Member of the Tribunal, rejecting the Respondent’s Proposal on the grounds that it was not promptly filed as required by the rules and that it failed to prove any fact indicating a manifest lack of independence or impartiality on the part of Professor Kaufmann-Kohler.

Regarding the first ground, the Tribunal noted that the ICSID and UNCITRAL Rules differ on the timeliness of presenting a challenge in that ICSID Rule 9(1) requires that the proposal for disqualification be filed “promptly,” while UNICITRAL Rule 11(1) requires such challenge to be made “within fifteen days after the circumstances” allegedly justifying disqualification become known to the complaining party. Because Argentina waited fifty-two days to file the proposal to disqualify Professor Kaufmann-Kohler after first learning of the Compañía de Aguas del Aconquija S.A. decision, Argentina failed to meet the deadline imposed by the UNCITRAL Rules. After undertaking an interpretation of the word “promptly,” as well as its equivalents in the French and Spanish versions of the ICSID Rules, while estimating the reasonable time necessary to prepare a petition on disqualification, the Tribunal concluded “that Argentina did not file its Proposal to disqualify Professor Kaufmann-Kohler ‘promptly’ within the meaning of Article 9(1) of the ICSID rules and that therefore it has waived such objection under Article 27.”

Regarding its second ground, the Tribunal noted at the outset that the English and Spanish versions of Article 14 of the Convention differ in that the English version requires arbitrators to be persons “who may be relied upon to exercise independent judgment,” while the Spanish version refers to a person who “inspira[r] plena confianza en su imparcialidad de juicio (i.e. who inspires full confidence in his impartiality of judgement).” Because the Convention, by its terms, makes both language versions equally authentic, the Tribunal decided to apply the two standards of independence and impartiality in making its decision. To distinguish the two concepts, the Tribunal stated that “independence relates to the lack of relations with a party that might influence an arbitrator’s decision” while “[i]mpartiality, on the other hand, concerns the absence of a bias or predisposition toward one of the parties.” Asserting that “Article 57 [of the ICSID Convention] requires a showing by a challenging party of any fact indicating a manifest lack of impartiality or independence,” the Tribunal asked: “What is the fact that Respondent alleges that manifestly demonstrates Professor Kaufmann-Kohler’s lack of independence and impartiality?” Its answer to that question was: “the only fact from which Argentina seeks to draw an inference of lack of impartiality and independence is that Professor Kaufmann-Kohler participated in and signed the award against Argentina in the Compañía de Aguas del Aconquija S.A.,” an award, which it noted, was unanimous. The Tribunal stated:

Implicit in Article 57 and its requirement for a challenger to allege a fact indicating a manifest lack of the qualities required of an arbitrator by Article 14, is the requirement that such lack be proven by objective evidence and that the mere belief by the challenge[r] of the contested arbitrator’s lack of independence or impartiality is not sufficient to disqualify the contested arbitrator.

After examining the record, the Tribunal concluded that Argentina had not advanced objective evidence to support its petition to disqualify Professor Kaufmann-Kohler. It, therefore, dismissed the petition and ordered the hearing on the merits to take place as scheduled.

iii. Argentina’s Second Proposal to Disqualify an Arbitrator for Lack of Independence

In late November 2007, Argentina filed a second proposal to disqualify Professor Kaufmann-Kohler on the grounds that she could not be “relied upon to exercise independent judgment” because she held the position of Director of the UBS Group, which held shares in Claimants Suez and Vivendi and engaged in certain other activities relating to the international water sector. Argentina also alleged that Professor Kaufmann-Kohler failed to disclose this fact to the parties and to ICSID as is required by the ICSID Rules.

The Tribunal determined that the “UBS Group, with headquarters in Switzerland, is among the world’s largest financial services companies, with operations in over fifty countries, some 80,000 employees, and over 200,000 registered shareholders,” noting also that it was a “market leader in commercial and retail banking in Switzerland, a major participant in investment banking on an international scale, and one of the world’s leading asset managers.” On April 19, 2006, two years after the Aguas Argentinas Tribunal was constituted, the UBS annual meeting of shareholders elected Professor Kaufmann-Kohler, a member of the corporation’s board of directors, for a three-year term. Argentina asserted that “Professor Kaufmann-Kohler did not inform the parties or her co-arbitrators of her . . . election to” the UBS board.” Argentina stated that, when it had learned of this fact, it immediately filed its second proposal to disqualify Professor Kaufmann-Kohler, alleging her impartiality and independence of judgment were negatively affected because UBS held “2.38 percent of Vivendi’s registered voting stock as of March 31, 2007” and “2.1 percent of Suez voting shares as of March 7, 2007.” Argentina also pointed to UBS activities that affected the parties, including its research and recommendations on investments in the water sector and the development and sale of financial products to permit investment in the water sector on a global basis. Moreover, UBS paid Professor Kaufmann Kohler a portion of her director’s compensation in UBS stock, making her a shareholder in UBS, which, in turn, owned stock in two of the Claimants in these cases. Argentina also alleged that Professor Kaufmann-Kohler failed to disclose these relationships as required by both the ICSID and UNCITRAL arbitration rules.

Once again, after receipt of Argentina’s proposal, the arbitral proceedings were suspended, Professor Kaufmann-Kohler withdrew from the case, and the remaining Tribunal members forwarded the proposal to the Claimants with a request for their observations, while inviting Professor Kaufmann-Kohler to furnish any explanations that she wished to make.

They also wrote to the parties on December 4, 2007, expressing:

their understanding that in keeping with the parties’ agreement that a single tribunal was to hear all three of the [arbitral] cases the parties were bestowing on the remaining members the authority to decide the challenge under the UNCITRAL Rules in the case of AWG Group Ltd. v. The Argentine Republic.

Neither party expressed any objection to the Tribunal’s proceeding on this basis.

In response to the Tribunal’s invitation, Professor Kaufmann-Kohler, by a letter dated December 21, 2007, offered certain “factual clarifications” in the form of a six-point explanation of her situation with the UBS. First, she stated “that she had no knowledge of the business relations alleged to exist between the Claimants and UBS before” receiving Argentina’s second proposal. Second, she stated:

after reading the . . . Proposal she requested UBS to verify the . . . shareholdings in the Claimants and was informed by the UBS Corporate Group General Counsel that UBS held 2.38% of the shares and voting rights of Vivendi Universal on March 31, 2007 and 2.13% of Suez’ share capital on March 7, 2007 and 1.3% on April 18, 2006, submitting a copy of the UBS communication of December 20, 2007 to her.

Third, she noted “that UBS, as a global financial institution, ha[d] many business relationships with many corporations and states worldwide but that she as an independent, non-executive director ha[d] no involvement in individual investment decisions and did not receive any information about such individual investment decisions.” Fourth, as a consequence, “she always considered that the [UBS] business relationships did not affect her impartiality and independence as an arbitrator.” Fifth, she stated that when she was appointed:

as a UBS director she submitted on a confidential basis a list of all her arbitrations to UBS and was subsequently informed by UBS that there were no conflicts of interest, except with respect to her position as a member of the America Cup Jury (since UBS sponsored a yacht in that competition), from which she resigned.

And sixth, she affirmed that UBS “non-executive directors do not deal with individual UBS client matters or transactions. In fact, regarding the UBS shareholdings in the Claimants, one of the grounds for the Respondent’s challenge to Professor Kaufmann-Kohler, she submited the communication of December 20, 2007, which was addressed to her, signed by UBS General Counsel and another Legal Advisor, and stated:

We would like to add that all these shareholdings are fairly small, if not fractional. They do not have a strategic meaning of any kind. UBS would invest in hundreds, if not thousands[,] of commercial enterprises around the globe in a similar way. Investment of this magnitude lies within the ordinary course of business of our bank.

The Claimants rejected each of the Respondent’s arguments and requested the Tribunal to dismiss this second proposal. Their arguments may be summarized as follows:

(1) Professor Kaufmann-Köhler is a fully independent, non-executive director of UBS, without any material involvement or interest in UBS’s financial performance; (2) UBS’s participation in Suez and Vivendi is mainly indirect as an investment manager and is in any case immaterial; (3) the Respondent made no allegations with regard to UBS participation or relationships with Claimants Sociedad General de Aguas S.A., Interaguas Servicios Integrales de Agua S.A. or AWG Group Limited, and therefore the challenge must fail as to those Claimants; (4) UBS’s investment research reports with regard to some of the Claimants are independent and not based on any financial interest in those companies; (5) UBS also gave advice to and had a client relationship with the Respondent Argentina; (6) the Respondent did not address the standard required for a successful challenge to an arbitrator, i.e., whether there is a real risk that Professor Kaufmann-Kohler may be truly biased and that Argentina failed to show that Professor Kaufmann-Kohler’s independence and impartiality is affected by her directorship in UBS; and (7) Professor Kaufmann-Kohler had no duty to disclose her appointment as a UBS director since that fact was notorious and in any case irrelevant to her independence and impartiality in the present case.

Since “the remaining members of the Tribunal . . . [desired] additional clarifications from Professor Kaufmann-Kohler,” The Tribunal President created an opportunity for Professor Kaufmann-Kohler to elaborate, by letter, on “the reasons why she disclosed certain information on her arbitrations to UBS” and “the reasons why she did not disclose the fact of her appointment as a UBS director to the parties” in the ICSID cases. She replied to these issues in a letter dated March 13, 2008. Regarding the first issue:

. . . she stated that she provided the information as part of the process of her selection as a UBS board member. [The] rules of corporate governance established by the Swiss Stock Exchange, the New York Stock Exchange, and the Swiss Code of Best Practices require that UBS ascertain that a prospective director meets specified independence and disclosure requirements. The submission of the list of her arbitrations was also intended to ascertain whether any connection existed between UBS and any parties in those arbitrations.

Regarding the second issue:

. . . she responded that she did not disclose the fact of her appointment as a UBS director to the parties because the Swiss banking law imposed a strict separation between the management and supervision of a bank through two distinct bodies—one for management and one for supervision and control—and that as a director her responsibilities were limited to supervision and control. As a member of the supervisory body, she was not involved in the management of the bank’s business, had no indication of any connections between the bank and a party in any of her arbitrations, and had never come across any indication of such a connection in her activities as a UBS director. She therefore saw no reason to advise any of the parties in her pending arbitrations of an unrelated appointment as a UBS board member.

In considering Argentina’s proposal, the remaining Tribunal members felt it necessary to treat the AWG Group Ltd. v. The Argentine Republic case separately from the other two cases for two reasons:

First, the AWG Case [was] governed by the UNCITRAL Arbitration Rules, while the other two cases [were subject to] the ICSID Convention and Arbitration Rules. Second, the facts alleged with respect to Professor Kaufmann-Kohler’s independence and impartiality differ from those alleged in the other two cases in that UBS [was] not a shareholder in [AWG]. At the same time, [the Tribunal] recognize[d] the possibility of a connection between the AWG case and the other two cases in the sense that if it were established that Professor Kaufmann-Kohler was predisposed to favor the Claimants in the ICSID cases such predisposition might also favor [AWG], which is a partner with the other Claimants in the Buenos Aires in Aguas Argentinas.

The remaining Tribunal members, therefore, decided to deal first with the AWG Group Ltd. v. The Argentine Republic case governed by the UNCITRAL Rules, particularly Article 10(1) which provides: “An arbitrator may be challenged if circumstances exist that give rise to justifiable doubts as to the arbitrator’s impartiality or independence.” They interpreted the words “justifiable doubt” as clearly indicating “that Article 10(1) establishes an objective, rather than a subjective, standard for determining the existence of a circumstance that creates justifiable doubts as to an arbitrator’s impartiality and independence.” After reviewing the facts of the AWG case, the two remaining members concluded:

the only connection, if one may call it that, between Professor Kaufmann Kohler and the Claimant AWG Group Limited is the fact that she is a director of UBS and that UBS, among its many other activities and interests throughout the world, conducts research and develops financial products related to the water sector.

They determined that “The existence of such purported connection is not enough to establish a ‘circumstance’ giving rise to justifiable doubts as to an arbitrator’s independence and impartiality.” That connection, according to the remaining Tribunal members, “must be significant and direct, such as an economic relationship causing an arbitrator to be dependent in some way on a party,” whereas any alleged connection “between Professor Kaufmann-Kohler and AWG Group Limited . . . [was] too remote and tenuous as to hardly be called a connection or relationship at all.” The two arbitrators then concluded that “an objective analysis of the facts as alleged by the Respondent [did] not establish a circumstance that would lead a reasonable, informed person to conclude that a justifiable doubt exist[ed] as to Professor Kaufmann-Kohler’s impartiality or independence” in the AWG case.

They then considered whether the UNCITRAL Rules required Professor Kaufmann-Kohler to disclose her UBS directorship to the parties. Interpreting UNICITRAL Rule 9 “to require disclosure of [only] such facts that if disclosed might give rise to justifiable doubts as to impartiality,” they concluded that “an arbitrator has no obligation to disclose facts that do not meet this test. . . .” They also concluded that Professor Kaufmann-Kohler’s appointment as a director of UBS “did not create a circumstance giving rise to justifiable doubts as to her impartiality or independence in the AWG Case, because of the lack of any business relationship between UBS or Professor Kaufmann-Kohler on the one hand and AWG Group Limited on the other . . .” The two remaining arbitrators similarly held that she had “no obligation under Article 9 of the UNCITRAL Arbitration Rules to disclose the fact of her directorship in UBS to the parties in the AWG Case.”

Professors Salacuse and Nikken then turned their attention to the two ICSID cases (ARB/03/19 and ARB/03/17). Following their approach to Argentina’s first proposal to disqualify Professor Kauffmann-Kohler, they noted the difference in the English version of the Convention’s Article 14 and the Spanish version, stating that “since the treaty by its terms makes both language versions equally authentic, in deciding on this challenge as in the previous challenge, . . . we will apply the two standards of independence and impartiality of judgment in making our decisions.” The two arbitrators acknowledged that these two key terms have distinct meanings in that “independence relates to the lack of relations with a party that might influence an arbitrator’s decision . . . [while] impartiality, on the other hand, concerns the absence of a bias or predisposition toward one of the parties.” Their interpretation of the rules led to the conclusion that the Respondent must prove such facts that would lead an informed reasonable person to conclude that Professor Kaufmann-Kohler clearly or obviously lacks the quality of being able to exercise independent judgment and impartiality.

The two arbitrators noted that the essence of Argentina’s allegation was that there was a “connection between Professor Kaufman-Kohler and the Claimants” by virtue of her directorship in a company that holds shares in two of the Claimants. But they also stated:

. . . the fact of an alleged connection between a party and an arbitrator in and of itself is not sufficient to establish a fact that would establish a manifest lack of that arbitrator’s impartiality and independence. Arbitrators are not disembodied spirits dwelling on Mars, who descend to earth to arbitrate a case and then immediately return to their Martian retreat to await inertly the call to arbitrate another. Like other professionals living and working in the world, arbitrators have a variety of complex connections with all sorts of persons and institutions.

They later pointed out that “[s]uch connections are increasingly easy to make as globalization of modern life rapidly advances and countless institutions engage in activities that are global in scope” and that “[i]t is perfectly possible for a person to be unaware of the links that connect him or her to others or at least to be unaware of their full implications.” Thus, they stated that the existence of such a connection does not, in and of itself, impair independence or impartiality. Rather, the “alleged connection must be evaluated qualitatively in order to decide whether it constitutes a fact indicating a manifest lack of the quality of independence of judgment and impartiality required of an ICSID arbitrator.” To develop a rational methodology to carry out that evaluation, the two arbitrators proposed the application of four criteria: (1) proximity (“How closely connected is the challenged arbitrator to one of the parties by reason of the alleged connection?”); (2) intensity (“How intense and frequent are the interactions between the challenged arbitrator and one of the parties as a result of the alleged connection?”); (3) dependence (“To what extent is the challenged arbitrator dependent on one of the parties for benefits as a result of the connection?”); and (4) materiality (“To what extent are any benefits accruing to the challenged arbitrator from the alleged connection significant and therefore likely to influence the arbitrator’s judgment?”).

Applying these four criteria to the facts of the case, Professors Salacuse and Nikken determined that Professor Kaufmann-Kohler had “no direct relationship with the Claimants by reason of her directorship”; that there was “no interaction at all between Professor Kaufmann-Kohler and the Claimants by virtue of her UBS directorship”; that she derived “no benefits or advantages from and is in no way dependent on the Claimants as a result of the alleged connection”; and, finally, that “UBS shareholdings in Claimants Vivendi and Suez are not material to UBS financial performance, profitability, or share price and in no way affect[ed] the compensation that Professor Kaufmann-Kohler earned as a director of UBS.” The two arbitrators concluded that the alleged connection asserted by Argentina “between Professor Kaufmann-Kohler and the Claimants does not create a fact indicating a manifest lack of the quality of her being a person of independent judgment and impartiality of judgment.”

Turning to the question of whether Professor Kauffman-Kohler had an obligation under ICSID Arbitration Rule 6 to inform the parties and the Tribunal of her election as a UBS director, the two arbitrators noted that “[t]he ICSID Arbitration Rules do not state the consequence of the arbitrator’s failure to disclose a relevant fact affecting independence or impartiality of judgment” but that failure to disclose may, nonetheless, give rise to doubts as to an arbitrator’s impartiality. More specifically, they noted that:

. . . whether nondisclosure raises such doubts depends on whether the failure to disclose was inadvertent or intentional, whether it was the result of an honest exercise of discretion, whether the facts that were not disclosed raised obvious questions about impartiality and independence, and whether the nondisclosure is an aberration on the part of the conscientious arbitrator or part of a pattern of circumstances raising doubts as to impartiality. . . .

They also noted that a “balancing is [necessary] for the deciding authority (in the present case, the remaining arbitrators) to perform in each particular case.”

They then proceeded to undertake an analysis of the facts in the Aguas Argentinas case. While finding that Professor Kauffman-Kohler was not obligated to disclose a fact that she did not know—that is, that UBS held shares in two of the Claimants—they also found that one needs to ask a further question: Should she have known that fact? The ICSID Rules impose no “requirement that an arbitrator make an investigation of possible compromising circumstances and they prescribe no standards [on] the extent and nature of such investigation.” On the other hand, “if an arbitrator has no reason to [believe] that a possible compromising situation exists,” the two arbitrators said that “it would not be reasonable to impose on him or her the duty to disclose.” They noted that “Professor Kaufmann Kohler informed UBS, as part of the process of determining her status as a potentially independent director, of the arbitrations in which she was engaged in to determine whether any of them conflicted with her future responsibilities as a UBS director.”

After reviewing this information, UBS informed her that only her position as an arbitrator for the America Cup races presented a problem. As a result, she resigned her position as an America Cup arbitrator. That resignation was reasonable, as was her abstention from any other action related to potential incompatibilities of which she was not aware.

The two arbitrators concluded that she had reasons to “rely on the UBS examination of her independence.” They, therefore, concluded that Professor-Kaufmann-Kohler did not violate ICSID Arbitration Rule 6 regarding obligations of disclosure to the parties. As result of their findings on the question, the two remaining arbitrators dismissed Argentina’s Second Disqualification Proposal and terminated the suspension of the case.

9. Step Eight: Hearing on the Merits

For ten days, from October 28 through November 8, 2007, the Tribunal held a hearing with the parties in Washington, D.C. to evaluate the investors’ claims that Argentina’s treatment of their investments in fact and in law violated three bilateral investment treaties that had promised investors protection. Argentina denied committing any treaty violations requiring it to compensate the investors.

As indicated earlier, the investors based their case on three alleged treaty violations: (1) expropriation of their investment; (2) denial of protection and security to their investment; and (3) denial of fair and equitable treatment of their investment. In response, Argentina denied any treaty violation and raised an affirmative defense: that it had acted out of necessity because of the financial crisis in the country at the time.

At the hearing, each side presented witnesses and witness statements in support of their cases, and each witness was examined and cross examined by the parties’ lawyers. At the close of the hearings, the Tribunal directed each side to submit post-hearing briefs in January 2008.

After protracted deliberation, the Tribunal, on July 30, 2010, issued a lengthy, 113-page decision on the merits, in which it held that Argentina had violated each of the three applicable treaties because it failed to give the investments “fair and equitable treatment” as the treaties required. On the other hand, it found the two other alleged treaty violations—expropriation and denial of full protection and security—to be without merit. It concluded that the measures that Argentina took to terminate the concession were ostensibly an exercise of its contractual rights but not measures of expropriation. It also undertook a detailed historical and textual analysis of the full protection and security clauses in the relevant treaties and decided that they obligated Argentina “to exercise due diligence to protect investors and investments primarily from physical injury, but . . . do not extend to encompass the maintenance of a stable legal and commercial environment.”

While all three arbitrators found that Argentina violated its treaty promises of fair and equitable treatment to the investors, they differed as to the basis of that finding. Professors Salacuse and Kaufmann-Kohler, adopting the reasoning of several other arbitral tribunals, took the position that, when a government acts in a way that frustrates the reasonable and lawful expectations of the investor in making the investment—expectations that the government itself may have contributed to—that government is denying fair and equitable treatment to the investment. It, therefore, concluded that Argentina’s actions in refusing to revise the tariff according to the legal framework of the concession and in pursing the forced renegotiation of the concession contract contrary to that legal framework violated its obligations under the applicable BITs to accord the investments of the Claimants fair and equitable treatment and that such treatment began on January 6, 2002.

Professor Nikken rejected the legitimate expectations test and preferred to interpret the fair and equitable standards as requiring Argentina to treat investments in an even-handed manner. In his lengthy separate opinion, he concluded that Argentina’s action of holding tariffs frozen without arbitrating even a temporary remedy for the well-known financial difficulties that AASA was undergoing, requested by the investors, was without a doubt a violation of its obligation of fair and equitable treatment.

Argentina also raised an affirmative defense that, even if certain of its actions may have breached individual BIT provisions applicable to the cases, it was absolved of liability by virtue of the defense of necessity under customary international law. “Both the Claimants and Argentina agreed that the current state of the law on the defense of necessity is reflected in Article 25 of the International Law Commission’s (ILC) Articles on the Responsibility of States for Internationally Wrongful Acts (2001).” Stating that Article 25 of the ILC statement was the relevant provision on the defense of necessity, the Tribunal also noted that the “ILC Articles do not define the nature of the necessity defense in positive terms. Rather they limit themselves to stating the situations in which the defense of necessity may not be raised.” In making the case that it was protected from liability, “Argentina argues that it took the actions it did affecting the Claimants’ investments out of the necessity of dealing with the financial crisis in order to safeguard essential interests of the State.” It also alleged:

the crisis did not result from its own actions but from the crises that had previously struck other parts of the world, namely the financial and economic emergencies in Indonesia, Mexico, Brazil, and Russia. In order to protect its essential interests, it had to take various measures that it did and that no other means of protecting those interests were available to it.

In support of Argentina’s position, the amicus curiae submission from April 4, 2007, that was “filed by five non-governmental organizations” argued that “human rights law recognizes the right to water and its close linkages with other human rights, including the right to life, health, housing, and an adequate standard of living” and that human rights law “required that Argentina adopt measures to ensure access to water by the population.” The Claimants, on the other hand, rejected Argentina’s position on the defense of necessity.

The Tribunal acknowledged the severity of Argentina’s crisis of 2001-2003, but it also stated that “the severity of a crisis, no matter the degree,” is insufficient “to allow a plea of necessity to relieve a state of its treaty obligations,” since customary international law, as restated by ILC Article 25, imposes four strict conditions that a state must satisfy to benefit from the defense of necessity. It then proceeded to apply the four conditions to Argentina’s situation at the time of the crisis. The first condition requires that the act taken by the state be “the only way for the State to safeguard an essential interest against a grave and imminent peril.” The Tribunal stated it was “not convinced that the only way that Argentina could satisfy that essential interest was by adopting measures that would subsequently violate the treaty rights of the Claimants’ investments to fair and equitable treatment.” Instead, it “could have attempted to apply more flexible means to assure the continuation of the water and sewage services to the people of Buenos Aires and at the same time respected its obligations of fair and equitable treatment.” The second condition is that a state’s actions must not impair other states’ essential interests. The Tribunal found that Argentina satisfied this condition because “it is difficult to see how Argentina’s actions impaired an essential interest of France, Spain, the United Kingdom, or the international community.” The third condition is that the treaty obligation not exclude the defense of necessity. Here, too, the Tribunal found that Argentina had satisfied the condition because none of the treaties applicable to the case excluded the defense of necessity. The final condition for the defense of necessity under Article 25 is that the state asserting the defense must not have contributed to its situation of necessity. Therefore, an important question included:

whether Argentina contributed to the crisis of 2001-2003 to an extent sufficiently substantial to rule out a necessity defense in compliance with international law. . . . [T]he Claimants in their pleadings viewed the crisis as created primarily by endogamous factors, including the economic policies of various Argentine governments. The Respondent, on the other hand, portrayed the crisis as caused by exogenous factors, primarily the various global crises, such as the one that struck Russia in 1999.

The Tribunal found “that a combination of endogenous and exogenous factors contributed to the Argentine crisis at the beginning of this century.” Among the internal factors were “excessive public spending, inefficient tax collection, delays in responding to the early signs of the crisis, insufficient efforts at developing an export market, and internal political dissension and problems inhibiting effective policy making.”

In sum then, the Tribunal denied Argentina’s plea of the defense of necessity against the Claimants’ claims of BIT violations because Argentina’s measures in violation of the BITs were not the only means to satisfy its essential interests and because Argentina itself contributed to the emergency that it was facing in 2001-2003.

In a final effort to avoid liability for failing to accord the Claimants fair and equitable treatment under the relevant BITs, Argentina sought refuge in Article 5(3) of the Argentina-France BIT and a similar provision in the UK-Argentina BIT:

Investors of either Contracting Party whose investments have suffered losses as a result of war or any other armed conflict, revolution, state of national emergency or uprising in the territory or maritime zone of the other Contracting Party shall be accorded by the latter Party treatment which is no less favorable than that accorded to its own investors or to investors of the most-favored nation.

Argentina’s argument on this issue was “that the above-quoted BIT provisions constitute[d] a special regime for investors in situations of emergency and that in such emergency situations, the only treatment that Argentina owe[d] to investors [wa]s to treat them no less favorably than it treats its own investors or investors from any third country.”

The Tribunal rejected this argument, deciding:

The clear meaning of those provisions is to impose on Contracting Parties an obligation of equality of treatment of investments for losses resulting from war, civil disturbance, and national emergencies. The provision contains no reference whatsoever to other obligations imposed by the BITs on Contracting Parties, let alone to provide for an exemption from such obligations.

The Tribunal, therefore, rejected Argentina’s interpretation of the applicable BIT provisions and its claimed defense to its liability for violating BIT provisions on treatment owed to protected investors.

10. Step Nine: The Quantum Phase of the Case

In most investor-state cases, after finding that a state has violated treaty commitments to investors, the tribunal in the same decision determines the amount of compensation that the state owes to the investor. Arbitrators and counsel often refer to this process as “the quantum phase of the case.” In the Aguas Argentinas case, “[t]he four investors claimed that their total loss as of June 2008 was USD 1,019.2 million” and “Suez, as the designated operator of the Concession, claimed an additional USD 255.5 million for the loss of management fees.” Argentina denied all their claims.

Although both sides offered evidence and witnesses on the question of compensation during the merits hearing, the Tribunal in the Aguas Argentinas case chose another course. Because of the complexity in calculating damages and the amount of evidence offered by both sides on this question, the Tribunal decided to create a separate procedural phase devoted to damages and to engage its own independent financial expert to assist in the task of valuing the Claimants’ losses. In effect, the Tribunal was trifurcating the proceedings in the case. Before undertaking this step, the Tribunal consulted intensively with the parties on possible candidates and on the terms of reference that would guide such a person.

The Tribunal then conducted an international search for a person who had the competence and the independence to serve as its financial expert. The necessary expertise had to include not only deep knowledge of “the theory and practice of finance but also . . . the economic and financial dimensions of infrastructure projects.” To be independent:

. . . he or she should not have financial relationships with any of the parties and should not have been engaged in any litigation on behalf of or against any of the parties or for any law firm that had represented any of the parties in these cases or any law firm that had engaged in litigation against any of the parties.

The Tribunal eventually appointed, without opposition from the parties, Dr. Akash Deep, Senior Lecturer in Public Policy at Harvard’s Kennedy School of Government and a former Senior Economist of the Bank for International Settlements. The Tribunal then issued a procedural order on August 3, 2011, stating his basic mission:

The Expert shall examine, analyze, and provide the Tribunal with a written report (the Report) with respect to the financial injury sustained by the Claimants as a result of the breach of the relevant bilateral investment treaties by the Respondent, as determined by the Tribunal in its Decision on Liability of 30 July 2010.

A subsequent procedural order asked the parties to submit briefs on damages by March 15, 2012:

On December 24, 2012, pursuant to his Terms of Reference, Dr. Deep submitted a Preliminary Report of the Financial Expert to the Tribunal. Based on comments from the Tribunal, Dr. Deep prepared a revised version of the Preliminary Report on January 31, 2013, which after further examination by the Tribunal, was forwarded to the parties for their comments and observations . . .

Following his review of the comments and observations submitted by the parties on April 8, 2013, Dr. Deep prepared and submitted to the Tribunal on July 22, 2013, his Final Report of the Financial Expert to the Tribunal, “a 171-page document, plus detailed supporting annexes, which was then forwarded to the parties. On August 27 and 28, 2013, the parties submitted to the Tribunal their comments on Dr. Deep’s Final Report, along with supporting reports from their individual financial experts.”

Subsequently, “As agreed by the parties, the Tribunal held a hearing on damages, . . . from September 19 through 21, 2013,” at ICSID headquarters in Washington, D.C. During this hearing, Dr. Deep shared his thoughts on the appropriate amount of compensation that each claimant should receive and was examined by counsel on each side. “Thereafter, the parties’ financial experts testified as to their views on the amount of the losses sustained by the Claimants, . . . and they were in turn examined by opposing counsel.”

11. Step Ten: The Final Award

Based on that mass of data, the Tribunal had the task of determining the amount of compensation that the investors were entitled to receive from Argentina. An initial question it had to answer was: What is the law on the question of damages? Strangely, although a principal purpose of the treaties was to the protect investments, the three applicable treaties were entirely silent on the question of damages; therefore, the Tribunal had to look to customary international law, which, according to the three treaties, is to be applied on questions not covered by the treaties themselves. At the outset of its award, the Tribunal reaffirmed:

[the] acts and omissions of Argentina in denying the Claimants [investments’] fair and equitable treatment as required by the three BITs were international wrongful acts since the acts and omissions in question, [having been] done by state organs, were clearly attributable to the Argentine State and since, as the Tribunal’s Decision on Liability found, they constituted a breach of Argentina’s international obligations. . . .

As the responsible state, Argentina, according to the Articles on State Responsibility for Wrongful Acts, Article 31(1), “[was obligated] to make full reparation for the injury caused by [its] internationally wrongful act.” In this sense, “‘Injury’ includes any damage, whether material or moral, caused by the internationally wrongful act of a State . . . .”

Regarding the meaning of “full reparation,” which is required by Article 31, the Tribunal stated that Article 36 of the Articles on State Responsibility for Wrongful Acts clearly explains:

‘. . . the State responsible for an internationally wrongful act is under an obligation to compensate for the damage caused thereby, in so far as such damage is not made good by restitution . . .’ and that ‘[t]he compensation shall cover any financially assessable damage including lost profits insofar as it is established.’ Thus, the basic standard to be applied is that of ‘full compensation (restitutio in integrum)’ for the loss incurred as a result of the internationally wrongful act. This statement represents the accepted standard in customary international law and is often supported by reference to the Chorzów Factory Case in which the Permanent Court of International Justice stated, ‘[I]t is a principle of international law, and even a general conception of law, that any breach of an engagement involves an obligation to make reparation.’

The Tribunal also stated:

[t]he essential principle contained in the actual notion of an illegal act—a principle which seems to be established by international practice and in particular by the decisions of arbitral tribunals—is that reparation must, so far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed.

Therefore, according to the Tribunal:

[c]ustomary international law requires [t]he Tribunal to award full compensation to the Claimants for the injuries caused by Argentina’s treaty violations, [in order to] ‘wipe out all the consequences’ of Argentina’s illegal acts and to place the Claimants ‘in the situation which would, in all probability, have existed’ if Argentina had not committed its illegal acts. Moreover . . . in order to ensure full compensation to injured parties, customary international law authorizes payments of interest on the principal sum due to be made from the time the amount should have been paid until the date when the payment obligation is actually fulfilled.

The Tribunal considered that, in theory:

[the] application of the aforementioned customary international law principles on damages [was] in theory rather simple. It requires [a] Tribunal to follow a three-step process. First, it must determine the value of the investment in the hypothetical situation where Argentina did not take measures that violated its treaty obligations, a situation referred to by Dr. Deep in his Final Report as ‘without measures.’ Second, it must then determine the value of the investment as a result of the offending measures that Argentina did take, a situation which Dr. Deep calls ‘with measures.’ Third, the Tribunal must subtract the second value from the first and then actualize that amount by means of an appropriate interest rate to arrive at the damages owing to the Claimants to put them in the financial position they would have been had Argentina not breached the applicable BITs. Dr. Deep embodies this simple idea in the following equally simple formula, in which V is equal to the market value of the investment in the two situations: Damages = [V without measures] – [V with measures].

The application of this simple formula and its underlying customary international law was greatly complicated by the facts and circumstances of the Aguas Argentinas case, particularly because of:

the nature of the investments that the Claimants lost as a result of Argentina’s actions. Their investments were not fixed, physical assets, such as a factory or a pipeline, whose valuation usually may be made relatively easily. Instead, what the Claimants had was the stream of revenue, or ‘cash flow,’ that they expected to receive over the remaining years of the Concession Contract. That stream of revenue was intended by the parties to the Concession to compensate the Claimants for the substantial investments that they had made in the Buenos Aires’ water and sewage systems, particularly in the early years of the Concession, and to give them a reasonable profit for developing and operating those systems over a thirty-year period. Since the source of that revenue stream was the fees paid by consumers, its precise volume and value depended on many variables, both foreseen and unforeseen, over the next three decades, including population growth in the area, general economic conditions, technological changes, labor conditions, management efficiency, inflation, operating costs, and many others. . . .

The Tribunal noted that the many variables present in the Aguas Argentinas case made it extremely difficult to calculate what the Claimants’ investments would have been worth by the year 2023 if Argentina had not violated the BITs:

It is however precisely that question [that the] Tribunal had to answer . . . . [T]o arrive at the values of the investments in the with and without measures scenarios, it would be necessary to calculate the cash flows for each and then discount those totals to present value using an appropriate discount rate which takes account of the weighted costs of capital and other factors applicable to the two situations. To assist the Tribunal in this process, Dr. Deep constructed an economic model of AASA’s operations which sought to capture numerous relevant economic variables and to determine with a certain degree of mathematical precision their impact on each other and on the costs, revenues, and profitability of the Concession. The model not only required the input of numerous data sources, but it also necessitated that Dr. Deep make certain macroeconomic assumptions about such matters as prevailing interest, exchange, and inflation rates . . . that would have an important impact on AASA’s operations. . . .

In undertaking this task, the Tribunal cautioned:

[I]t is worth remembering that international law does not demand absolute certainty in valuing the damages sustained by the Claimants but only, in the words of the Permanent Court of International Justice in the Chorzów Factory Case, to place the Claimants ‘in the situation which would, in all probability, have existed’ if Argentina had not committed its illegal acts.

The Tribunal further elaborated:

for the purpose of determining the but-for scenario required to calculate the compensation to which Claimants are entitled, it is not necessary to specify the details of various models or formulas or to speculate on which of them the parties would most likely have accepted. It is enough to determine that a model that meets the following requirements: (1) it ensures the viability of the service and of the Concession; (2) it accords with the original equation of the Concession and with the agreements and practices of the parties until December 2001; (3) it embodies the concept of shared sacrifices to ensure the viability of the service and of the Concession; and (4) it is deemed reasonably acceptable to both parties in a scenario of cooperation and not of confrontation between them.

The Tribunal concluded that Dr. Deep’s model met the specified criteria.

The details of the application of the model developed by Dr. Deep need not be discussed in depth here but may be seen in the award issued by the Tribunal on April 9, 2015. The Tribunal determined that the total loss to all four claimants was $404,539,050 as of November 1, 2014. The amounts that Argentina owed to each individual claimant were as follows: Suez, $223 million; AGBAR, $123.3 million; Vivendi, $37.3 million; and AWG, $21 million.

The Tribunal’s final step in the arbitration was the determination of costs that that each party should pay for the arbitration. The costs generally consist of two elements: (1) the expenses of administering the arbitration, which are generally paid in first instance from the parties’ deposits with ICSID, and (2) the parties’ costs in presenting their case, which are mainly attorney’s fees. The investors claimed litigation costs in excess of twenty million dollars. The Tribunal ultimately decided that each side was to share equally in the costs of the arbitral proceeding but to bear individually the other legal costs and expenses that they had each incurred.

IV. The Aftermath of the Case

A. Post-Award Accountability

One of the major criticisms of investor-state arbitration is that the process lacks accountability in that no means exist whereby arbitrators’ decisions can be reviewed for error by an independent body, such as a higher court might exert over a court of first instance. The importance of a process of accountability lies not only in correcting errors but also in establishing a beneficial discipline over arbitrators’ decision-making processes because they know their work will be subject to review. Contrary to such criticism, the arbitrators in the Aguas Argentinas case were, in fact, subject to rigorous accountability by three separate organs: (1) an ICSID annulment committee; (2) the United States District Court for the District of Columbia; and (3) the United States Court of Appeals for the District of Columbia Circuit. All three challenges to the ICSID award in favor of the Claimants were brought by Argentina in an effort to avoid payment of the Tribunal’s award.

1. Accountability #1: The ICSID Annulment Process

Once the Tribunal had issued its award on April 9, 2015, the arbitration was finished, but the case was not. For the Claimants, there remained the problem of enforcement of the award, and, for Argentina, there was the challenge of avoiding payment. Under the ICSID Convention, each member state must enforce an ICSID award as if it were a final judgment of a court of that state. Moreover, ICSID awards, including “any decision interpreting, revising or annulling such award,” are not subject to appeal. The Convention does, however, have a post-arbitration remedy of annulment that enables a party to ask ICSID to appoint a committee to review an award and to annul it if it finds that the arbitral tribunal committed any of five serious errors. Article 52(1) of the ICSID Convention states:

(1) Either party may request annulment of the award by an application in writing addressed to the Secretary-General on one or more of the following grounds:

(a) that the Tribunal was not properly constituted;

(b) that the Tribunal has manifestly exceeded its powers;

(c) that there was corruption on the part of a member of the Tribunal;

(d) that there has been a serious departure from a fundamental rule of procedure; or

(e) that the award has failed to state the reasons on which it is based.

On August 21, 2015, Argentina filed such an annulment request, claiming that, “a) the Tribunal was not properly constituted; b) the Tribunal has manifestly exceeded its powers; c) there was a serious departure from fundamental rules of procedure; and d) the Award has failed to state the reasons on which it is based.” On October 23, 2015, ICSID notified the parties that an ad hoc annulment committee had been constituted, consisting of Professor Dr. Klaus Sachs of Germany, Sir Trevor Carmichael of Barbados, and Mr. Rodrigo Oreamuno B. of Costa Rica, with Professor Sachs serving as the committee’s president. In the annulment proceedings that followed, Argentina alleged that the Tribunal’s Award, Decision on Liability, and Decision on Jurisdiction contained numerous errors that justified annulment of the Award. Argentina alleged that the Tribunal’s refusal to disqualify Professor Kauffman-Kohler as an arbitrator due to her UBS directorship resulted in the Tribunal being improperly constituted. It also argued that the Tribunal exceeded its powers in applying the law and, thereby, enabled AGBAR to circumvent local court procedures. Argentina also took issue with the Tribunal’s failure to state the reasons on which its decision was based and to consider the evidence submitted by Respondent in the context of its necessity defense. Lastly, Argentina argued that the Tribunal exceeded its powers or was otherwise improper in calculating damages. Among the last-mentioned of the challenged decisions were:

(i) the valuation period because the Tribunal allegedly awarded damages for losses sustained after the termination of the Concession Contract while finding that such termination did not amount to a breach of the Treaty; (ii) the construction of the valuation exercise because it allegedly adopted a series of presumptions for which it gave no reasons and which contradicted other statements made by the Tribunal; and (iii) the management fees because the Tribunal awarded losses in relation to the Management Contract without having previously determined that it was a protected investment under the Treaty.

At the outset of its Decision on Argentina’s Application for Annulment of May 5, 2017, the ad hoc Annulment Committee carefully defined its jurisdiction and the proper scope of review for the annulment process. Since an annulment is not an appeal, which is prohibited by the Convention, the Committee may not review the Tribunal’s findings de novo. The Committee stressed that the ICSID Convention does not provide “an appeal, but rather a very limited annulment proceeding, which is designed to ensure the fundamental integrity of the arbitral proceedings but must not be misused to re-litigate the case on the merits.” Before undertaking an analysis of the individual grounds advanced by Argentina, the Committee first determined the scope of review used in annulment cases. The Committee stated, “the facts advanced by Respondent can amount to a ground for annulment only if the decision not to disqualify Prof. Kaufmann-Kohler ‘is so plainly unreasonable that no reasonable decision-maker could have come to such a decision.’” It then proceeded to give an in-depth analysis of relevant ICSID cases and a careful examination of the facts surrounding Professor Kauffman-Kohler’s situation, concluding:

Having carefully examined the Tribunal’s Decision on Disqualification and having also taken into account the case law relied on by the Parties, the Committee has not identified any circumstances, which could give rise to a conflict of interest of such a seriousness that it would render the Decision “plainly unreasonable” in terms of compromising the fundamental integrity of the arbitration proceedings and that, thus, would warrant annulment of the Award.

In evaluating Argentina’s allegation that the Tribunal had seriously erred in interpreting and applying the BIT to allow the Claimants to avoid pursuing their claim in Argentine courts for eighteen months before initiating ICSID arbitration, the Committee took similar careful approach. At the end of its analysis, it stated:

In conclusion, the Committee finds that the Tribunal’s decision to allow the Claimant AGBAR to override the procedural requirement in Article X(3) of the Argentina-Spain BIT by virtue of the MFN clause in Article IV(2) does not amount to either a manifest excess of powers, a serious departure from a fundamental rule of procedure or a failure to state reasons. Consequently, the second annulment ground advanced by Respondent is dismissed.

Ultimately, the Committee completed this intensive and expensive exercise in accountability by denying Argentina’s request to annul the Tribunal’s award, stating:

The Committee has found that Respondent has failed to establish either of the four annulment grounds it advanced in its Application for Annulment. Consequently, Respondent’s request for annulment of the Award as well as the Decision on Jurisdiction and the Decision on Liability, which are an integral part thereof, is denied.

2. Accountability #2: United States District Court for the District of Columbia

The Tribunal’s award of $21 million to AWG was separate from the award to the other consortium members and not covered by the ICSID Convention. Instead, the award was covered by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which has been ratified by both Argentina and the United States, the latter having implemented and codified the Convention in Chapter Two of the Federal Arbitration Act. On July 6, 2015, Argentina petitioned the United States District Court for the District of Columbia in Washington, D.C. to vacate the Tribunal’s award under the Federal Arbitration Act on grounds that the Tribunal acted with evident partiality and that the Tribunal exceeded its powers by improperly calculating damages and failing to apply international law. In response, AWG filed a cross-petition asking the District Court to confirm, recognize, and enforce the Award. Thus, the case was set to be heard by a United States district court judge for a second exercise in tribunal accountability.

Argentina brought up three issues on appeal. The first was directed at the Tribunal’s decision not to disqualify Professor Kaufmann-Kohler because of her position as a director of UBS, basing its argument on section 10(a)(2) of the Federal Arbitration Act that authorizes the court to vacate an award “. . .where there was evident partiality or corruption in the arbitrators, or either of them.” The fundamental question for the court was whether there was evident partiality in Professor Kaufman-Kohler as an arbitrator. After a thorough analysis of the facts and the applicable law, Chief Judge Beryl A. Howell concluded:

Thus, the Court agrees with the conclusion of the two unchallenged arbitrators, whose decision is, in any event, due deference, that “[a]n objective analysis . . . does not . . . lead a reasonable, informed person to conclude that a justifiable doubt exists as to Professor Kaufmann-Kohler’s impartiality or independence” with respect to AWG.

Argentina’s second argument was that the Tribunal had committed various errors in calculating damages. Here too, Chief Judge Howell sustained the Tribunal’s methods and conclusions. And, for its third argument, Argentina asserted that the Tribunal had exceeded its powers when it elected not to apply Argentina’s defense of necessity that it had raised against liability under the BITS in the case. The Chief Judge dismissed all of Argentina’s arguments on this issue, finding that the Tribunal “. . . interpreted and applied the customary international law as was required.” Having rejected all of Argentina’s objections, the Court dismissed its petition to vacate the Tribunal’s award and instead granted AWG’s petition to confirm it.

3. Accountability #3: United States Court of Appeals for the District of Columbia

Having lost its case in the District Court, Argentina appealed that decision in 2017 to the United States Court of Appeals for the District of Columbia Circuit in Washington, D.C. The challenges to the Tribunal decisions that Argentina presented to a panel of three Federal circuit judges were essentially the same as those presented to the District Court: the Tribunal’s failure to disqualify Professor Kaufman-Kohler; its erroneous application of the international law on the defense of necessity; and a variety of errors in calculating damages. The answer that it received from the Circuit Court of Appeals was essentially the same as what it received from the District Court: “We conclude that Argentina has not satisfied the Act’s or the New York Convention’s elements required to vacate the award. We affirm the district court’s judgment.”

B. Post-Award Payoff

Ultimately, in 2018, according to unofficial press reports, Argentina and the Claimants negotiated a settlement payment of approximately $275 million, essentially a twenty-five percent discount from the amount awarded by the Tribunal, thus closing the case after fifteen years of an arduous, not to say costly, legal process. It was also rumored that Argentina paid the investors in Argentine sovereign bonds. After a fifteen-year dance, the arbitrations tango was finally at an end.

What about the other two ICSID water cases submitted to the same tribunal that decided Aguas Argentinas—one in the Province of Cordoba and the other in the Province of Santa Fe? The Cordoba case was settled in 2006 by agreement between the parties. The Santa Fe case, on the other hand, followed the pattern of Aguas Argentinas and was litigated to the bitter end. In 2016, the Tribunal issued an award in favor of the Santa Fe investors for slightly less than $226 million. Argentina challenged the award in an ICSID annulment proceeding, but the annulment committee upheld the award in December 2018.

V. Conclusion

The purpose of this article has been to demystify investor-state arbitration by analyzing an actual case decided by an international arbitral tribunal. The case demonstrates that the process of investor-state arbitration is driven by definite rules of international law created by states. Far from being nefarious, “secret international tribunals,” international arbitral tribunals are important instruments in implementing an international rule of law, even when state directives are sometimes unclear. In most investor-state cases, the stakes are high, both for the investors and the state, as was illustrated in the Aguas Argentinas case. As a result, investor-state arbitration is a form of international dispute resolution that can be complicated, lengthy, and expensive. Its complexity is derived in large part from the complexity of the investment transaction that underlies the dispute between the parties. That complexity contributes to the cost and length of the process, but so too does the system’s prevailing norm of giving each party ample opportunity to both present its case and to challenge its opponent’s case.