- International Centre for Settlement of Investment Disputes (ICSID)
- International Centre for Settlement of Investment Disputes (ICSID)
- Azurix Corp. vs The Argentine Republic
APPLICATION FOR ANNULMENT OF AN ICSID AWARD RENDERED BETWEEN A UNITED STATES CORPORATION AND THE ARGENTINIAN GOVERNMENT - REFERENCE TO UNIDROIT PRINCIPLES TO INTERPRET APPLICABLE LAW (INTERNATIONAL LAW)
DETERMINATION OF EXTENT OF HARM - DISCRETIONARY POWER OF COURTS WHERE AMOUNT CANNOT BE ESTABLISHED WITH SUFFICIENT DEGREE OF CERTAINTY - REFERENCE BY CLAIMANT TO ARTICLE 7.4.3 (3) UNIDROIT PRINCIPLES - STANDARD OF COMPENSATION CONFIRMED BY BOTH ARBITRAL TRIBUNAL AND AD HOC COMMITTEE
In an ICSID arbitral proceeding between Azurix Corp. (Claimant) and Argentina (Defendant) one of the issues at stake concerned the rules of compensation to be adopted by the Arbitral Tribunal for the alleged violations of the BIT standards of fair and equitable treatment, full protection and security, and arbitrary measures. While according to Defendant the Arbitral Tribunal, absent special standards of compensation provided in the BIT for breaches of its provisions other than in case of expropriation, the Arbitral Tribunal was obliged to refer to customary international law to fill that lacuna and not to determine the standard of damages as a matter of discretion, Claimant pointed out that "[...] [i]t is essential that tribunals are granted the discretion to exercise their own judgement to determine the best manner in which to compensate for harm. In both common law countries and in civil law countries there is a broad discretion in fixing the amount of damages awarded. International treaties also provide tribunals discretion in calculating damages", and in this context expressly referred to the CISG, Secretariat Commentary para. 4, in the Guide to CISG Article 74, and to the UNIDROIT Principles of International Commercial Contracts, Article 7.4.3(3)(2004).
In its award of 14 July 2006 the Arbitral Tribunal, though not repeating the references to CISG and the UNIDROIT Principles, basically followed Claimant's argument.
In its Decision on the Application for Annulment of Argentina, the Ad hoc Committee confirmed with respect to this issue the decision of the Arbitral Tribunal.
Azurix Corp. v. The Argentine Republic
(ICSID Case No. ARB/01/12)
Decision on the Application for Annulment of the Argentine Republic
297. Argentina argues, inter alia, that:
(a) The BIT does not expressly provide for the standard of compensation for breaches of provisions of the BIT other than in the case of expropriation. The tribunal was obliged to refer to customary international law to fill that lacuna, and not to determine the standard of damages as a matter of discretion.
(b) The Tribunal's decision on the appropriate standard of compensation is contained in five paragraphs of Award. There is no attempt in this section of the Award to divine principles of law and the standard of compensation for a breach of the fair and equitable standard of treatment or any other obligation in the BIT. The Tribunal's ultimate decision on the appropriate standard of compensation is contained in paragraph 424 of the Award in a single sentence, which is an assertion of an unfettered discretion, and not an adequate statement of the Tribunal's legal reasons for its decision.
(c) The need for supporting reasons is particularly acute as the idea that the same standard of compensation should be applied to a breach of each and every investment protection obligation of the BIT makes expropriation as a cause of action redundant.
(d) The “fair market value” standard of compensation applies only to situations of expropriation, and in cases of breaches of other treaty provisions, the standard of compensation is “the amount of loss or damage that is adequately connected to the breach” or the “amount of the loss or damage actually incurred”.
(e) The Tribunal did not have the discretion to apply the standard of compensation for an expropriation (fair market value of the investment) to breaches of other obligations in the BIT. By exercising a discretion that it did not have and failing to decide the standard of compensation in accordance with the applicable law, the Tribunal manifestly exceeded its powers.
298. Azurix argues, inter alia, that:
(e) Like the present Tribunal, several other investment arbitral tribunals have used the fair market value standard for calculating damages for violations of the fair and equitable treatment standard, even though no expropriation was found in those cases. This is an exercise by the tribunal of assessing the best way to compensate given the full and specific factual circumstances of the case. Expropriation requires different elements from other BIT standards, but it is not a higher standard, merely a different one. There is no law or rule or BIT provision mandating that only acts of expropriation can give rise to an award of full compensation or fair market value.
(f) Other tribunals have exercised their judgement to apply different methodologies to compensate for non-expropriatory violations for which the BIT provided no explicit standard. These varying approaches show that arbitral tribunals possess discretion in determining how damages are best calculated in the full circumstances of the case in the absence of a lex specialis in the BIT.
(g) It is essential that tribunals are granted the discretion to exercise their own judgement to determine the best manner in which to compensate for harm. In both common law countries and in civil law countries there is a broad discretion in fixing the amount of damages awarded. International treaties also provide tribunals discretion in calculating damages. Note No. 203
Note No. 203: Referring to United Nations Convention on Contracts for the International Sale of Goods, Secretariat Commentary ¶ 4, in Guide to GISG article 74; UNIDROIT Principles of International Commercial Contracts, Article 7.4.3(3) (2004).
(c) The Tribunal’s findings with respect to damages
305. The third issue was the question of the basis upon which damages should be assessed. In relation to this issue, the Tribunal found:
(a) that the only BIT provision establishing the measure of compensation was Article IV(1), which provides for “[c]ompensation ... equivalent to the fair market value of the expropriated investment immediately before the expropriatory action was taken or became known”, in cases of an expropriation that meets the BIT’s requirements that it be done for a public purpose and be non-discriminatory;
(b) that in the CMS Award, the tribunal, when faced with a similar situation, applied “the standard of fair market value” to assess damages in a case where there had been breaches of provisions other than the expropriation provision of the same BIT;
(c) that case law indicates that under NAFTA, which also provides for a measure of compensation only in cases of expropriation, tribunals have in cases of non-expropriatory breaches “exercised considerable discretion in fashioning what they believed to be reasonable approaches to damages consistent with the requirements of NAFTA”;
(d) that case law indicates that under NAFTA it is “open to the tribunals to determine it [compensation] in light of the circumstances of the case taking into account the principles of both international law and the provisions of NAFTA”;
(e) that in the MTD case, where the tribunal found a breach of the fair and equitable treatment obligation of the relevant BIT, the tribunal accepted the claimants’ proposal to apply the standard of compensation formulated in Chorzów Factory case;
(f) that in the present case, the Tribunal was “of the view that a compensation based on the fair market value of the Concession would be appropriate, particularly since the Province has taken it over”.
(e) Failure to apply the correct law as a ground of annulment under Article 52(1)(b) of the ICSID Convention: the Committee’s views
315. It is not in dispute between the parties, nor in the Committee’s view could it seriously be disputed, that the Tribunal had the power in this case to award damages for any loss that the Tribunal found to have been suffered by Azurix as a result of breaches of the BIT for which Argentina was responsible.
316. In considering how to assess damages, the Tribunal began by noting that the only BIT provision providing for the measure of compensation was the expropriation clause in Article IV(1).The Tribunal then proceeded to consider how damages were assessed for non-expropriatory treaty breaches in the CMS Award (which involved the same BIT as the present case), and in certain arbitrations under NAFTA and a BIT between Malaysia and Chile (both of which, analogously to the BIT in the present case, provide an express standard of compensation only in cases of expropriation). The Tribunal noted that in the NAFTA cases, it was found that in cases of non-expropriatory breaches of the treaty “the tribunals exercised considerable discretion in fashioning what they believed to be reasonable approaches to damages consistent with the requirements of NAFTA”, and that
... the lack of a measure of compensation in NAFTA for breaches other than a finding of expropriation reflected the intention of the parties to leave it open to the tribunals to determine it in light of the circumstances of the case taking into account the principles of both international law and the provisions of NAFTA.
317. The Committee considers that it is implicit from this discussion that the Tribunal considered that the law that it was to apply in determining the quantum of damages was the BIT itself, and that failing any express provision in the BIT, the matter was governed by general principles of international law. The Committee finds no fault with the Tribunal’s identification of the applicable law for purposes of determining the quantum of damages, which is in fact consistent with Argentina’s position.
318. The Committee finds that it is also implicit from the Tribunal’s discussion of these cases that the Tribunal considered that under such general principles of international law, in the absence of any express provision in the BIT dealing with assessment of damages for breach of a particular provision of the BIT, the tribunal will have a discretion to determine what it considers to be a reasonable approach to damages.
319. Even if the Tribunal were wrong in its conclusion that under general principles of international law it has such a discretion, the Committee considers that this would be a case of incorrect application of the applicable law (which is not a ground of annulment), rather than a case of non-application of the applicable law. Whether the Tribunal applied the applicable law rightly or wrongly, the Tribunal did in the Committee’s view apply the correct applicable law, namely the BIT itself and general principles of international law.
320. The Committee therefore cannot accept Argentina’s argument that the Tribunal determined the standard as a matter of discretion rather than applying principles of customary international law. The Tribunal decided to exercise a discretion pursuant to customary international law, and not to exercise a discretion instead of customary international law.