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ICSID 'Annulment Committee'
An ICSID "Annulment Committee" Annuls the Key Part of an ICSID Arbitral Award in the Vivendi/Aconquija - Tucuman Province Dispute: Lessons for post-Privatisation and Concession Foreign Investments in Public Service Utilities
(42 International Legal Materials 1135-1163 (2002); also at www.worldbank.org/icsid)
The euphoria of private infrastructure investment - purchasing state-owned public services or building new ones - in the 1990s is now giving way to an aftermath full of disappointments. Most of the investor's financial analysis was based on economic growth projections forecasting increasing use - and ability to pay - for public services, on public acceptance of such post-privatisation deals, on the investor's ability to effectively collect tariffs and finally on the willingness (and capacity) of governments to stick to the deals made. But life has in general not been kind to most privatised public-service concessions.
First, growth projections did not materialise, and in particular in countries in financial and economic crisis, e.g. Asian countries following the 1998 financial crisis (Indonesia; Thailand; Pakistan), but also India or now Latin American countries, foremost (at this time Argentina, but also, so far, Venezuela and Bolivia). Second, the money - or the public and governmental willingness to pay - was not there to pay the generally increased charges for public services. Such increases may have been excessive (as possibly the case with Enron's Dabhol project) or justified by the need to invest to rehabilitate decades of underfunding and neglect by public owners, but the users were not ready, or capable, of paying for both the purchase price and the rehabilitation cost.
State-provided services throughout the developing and transition countries were lousy, but also cheap and often available at little or not cost (e.g. widely accepted theft or other forms of non-payment). Their low standard perhaps reflected better the users' willingness and ability to pay than was realised. So privatisation and new-investment concession agreements have run into troubles throughout. The general mistake was probably to apply Western country standards (of technical quality, standards, but also collection and respect for contract) to fundamentally different social and political situations. This situation has led throughout the developing and transition countries to a confrontation of "Western" contracts with the realities of life in these societies.
Contracts are there much less sacrosanct - plus, very often, even with the best of will the means to fulfil contractual promises of tariff payment and repatriation simply do not exist (See J. Tagliabue, New York Times, August 26, 2002: As Multinationals Run the Taps, Anger Rises Over Water for Profit) . There was also usually a contradiction between the "Westernising" approach of central and high-level government (populated by Westernised elites) which largely accepted the idea of privatisation and its implications (increased tariffs and effective collection; iron-clad contractual guarantees and externalisation of contract discipline by way of arbitration) and the much more nationalistic, bureaucratic, protectionist and anti-foreigner attitudes lower down in government, public agencies and outlying provinces.
These may have been nudged towards privatisation, may have accepted privatisation (and in particular new investment) grudgingly, but are not ready to accept the contractual straitjacket often negotiated on a higher level or a previous regime. In particular, on the lower level, social protest and resistance (against higher tariffs; against effective collection of user charges; against lay-off of overstaffed public service companies) are felt much more acutely than on the more rarefied level of the central government ministers. This applies in particular to bilateral investment treaties; local and lower-level authorities have virtually no role in BIT-negotiations and often - perhaps mostly - do not have a clue about their implications for them. Most of all, they rarely bear the financial and reputational risk of BIT-based investment arbitration.
The end-game strategy by the Western investors has been recourse to international arbitration, usually on the basis of specific contracts or the new direct access of investors on the basis of bilateral investment treaties. Countries defense has usually been allegation of corruption (India - Enron; Pakistan- Hubco); of contractual malperformance (e.g. quality standards promised); fundamental change of circumstance implicit in a fundamental national economic and financial crisis and simple inability to pay. In procedural terms, host states rely mainly on attempts to oust the jurisdiction of international arbitral tribunals by easily obtained national court injunctions (Indonesia in the infamous PLN/Himpurna case; India in the Enron/Dabhol arbitration) and arguments in favour of the exclusive jurisdiction of national courts, in effect a revival of Calvo-doctrine.
Foreign investors tend to be successful in international arbitration, mainly because the law (BIT; contract) is largely on their side. This does not mean that a litigation win is necessarily the end of the story. The compensation awards will often be difficult to enforce, though the award will stay on the agenda for settlement at a later date. The relationship will probably be ruined. I wonder if investors are often not better served to try to come to a settlement (possibly by mediation) after the agitation has died down, perhaps after the main arguments have been advanced in arbitration; such negotiated or mediated solution will probably include some "stretching" out of obligations to take into account the inability to pay of the host state and some restructuring of the contractual relationship, both to solve current problems and to provide a symbolic message for the domestic constituency.
The Aguas del Aconquija/Vivendi - Tucuman dispute, played out as an ICSID arbitration under the France-Argentina BIT against the federal government of Argentina (not the province of Tucuman) is part of this larger picture.
In Argentina as elsewhere, several if not (at present) most, public-service investments have gone sour. An earlier award on jurisdiction (Lanco v Argentina, icsid Case ARb 97/6 40 ILM 457(2001)) was rendered in a port concession case; here, the contractually agreed recourse to the Argentine federal administrative tribunal was not considered a hindrance for BIT-based ICSID arbitration. In effect, the investor was not obliged to "exhaust domestic remedies". A much more troubling award was rendered in a dispute about a water concession between French companies and the province of Tucuman (Aguas del Aconquija/Cie generale des eaux, v. Argentina, 40 ILM 426 (2001). Here, the tribunal had to judge what looks prima facie as highly obstructive conduct by the provincial government against the successful running of the concession.
It had to judge this against the "disciplines" of the BIT, mainly the "fair and equitable treatment" standard. It came to the conclusion that the federal authorities did what they could, but that the problem lay at the provincial level. While recognising - not unambiguously - that the Argentine government was strictly liable for conduct of the provincial government under international rules of state responsibility, it denied, in the end, its jurisdiction because the dispute centred on the concession agreement and because the concession agreement provided for jurisdiction of the provincial administrative courts. The tribunal in effect said: You need to look for justice on the dispute from the provincial administrative court because that court, and not we, are empowered to interpret the concession contract.
I have criticised this decision (in an article with Todd Weiler on ECT/NAFTA investment arbitration now published by the Swiss Arbitration Association, 2002, Ed. By G. Kaufmann-Koehler). My argument was that the tribunal contradicted itself by first rejecting the position that foreign investors have first to exhaust domestic remedies, but then, in effect, compelling them to exhaust domestic remedies. The decision to refer the investors to the provincial courts of Tucuman on interpretation of the contract - the core of the legal package of this investment - meant that in effect the investor was barred from relying on the BIT, its specific disciplines and an impartial ICSID tribunal.
It also meant, in practical terms, that the investor was asked to keep on litigating, with almost no chance of success before a provincial administrative tribunal surely more beholden to its social and political context than upholding a contract negotiated years ago and now much resented in Tucuman; it then had the chance to go back to the ICSID tribunal claiming "denial of justice" by a domestic courts, always difficult, in particular if the local court was intelligent enough to comply with formal qualities of judicial decision-making. The implications of this judgement are also that governments can in effect bypass the arbitration right and the obligations of a BIT by providing, by law or agreement, for mandatory recourse to a local tribunal. This would be tantamount to a resurgence of the traditional Calvo-clause.
Not surprisingly, the French investors used the quasi-appeal procedures of the ICSID (called "annulment", supposedly not a "real appeal", but more like the "appeal on limited legal grounds" as in the French "cassation" or the German "Revision"). An "annulment committee" (similar, but not identical to an "appeals' court") was set up. This is a very sensitive operation in international arbitration. Most arbitral procedures can not be appealed against - though the ICC and other arbitral institutions have some formal and informal ways to keep arbitrators' to some discipline. The procedure equivalent to an appeal is to try to get enforcement courts to review the legal argument (which they are not supposed to do, but sometimes do using the "excess of powers" methods).
But this quasi-appeal is closed to an arbitral complainant who has lost the case. The ICSID annulment procedure has been criticised in the past for excessive willingness of the annulment committees to in effect replace the earlier tribunal's award by its own legal reasoning. It was therefore a sensitive matter for this ad-hoc annulment committee to - again - quash the earlier tribunal's award and to state implicitly that the earlier tribunal had made a serious error in legal reasoning. The problem is compounded as the earlier tribunal - with its manifest reluctance to get engaged in the substance of the dispute - will now have to re-convene. In a normal appeal procedure before state courts, the original judges will often - for reasons of objectivity and impartiality - be no longer competent to hear a case that was appealed on a higher level. But this is not the case under the ICSID rules.
The "annulment committee" had only a very limited number of grounds - mainly absence of proper reasoning and manifest "excess of powers" - to examine the earlier award. It found that the unwillingness of the tribunal to accept jurisdiction over the conduct by the provincial authorities because of the available recourse to the provincial administrative tribunal was such an excess. The BIT entitle the investor to go straight to the ICSID arbitration tribunal, without having to first exhaust local remedies. The dispute involved the concession contract, but the ICSID tribunal had under the BIT to assess the conduct of Argentine authorities (here the provincial ones) under the standards of the BIT ("fair and equitable"). This did not exclude taking into account of the concession contract and interpreting it where necessary. But the key standard of control was not the contract, but the application of the "fair and equitable treatment" standard to the conduct of the provincial authorities. By not accepting jurisdiction over the conduct of the Tucuman authorities even if this were to include interpretation of the concession contract, the earlier tribunal, so the "Annulment Committee" committed a "manifest excess of jurisdiction".
I think the decision is right. The ICSID tribunal had in effect required exhaustion of local remedies when such exhaustion was clearly not required. Its task was to assess the conduct of the Tucuman authorities in their particular context - which includes the concession agreement. The standard of assessment was not the concession agreement, but rather the disciplines of the Argentina-France BIT. If the case had not been annulled, some authority (though contradicted by the Lanco-award) would have been created to give to governments a method to escape the disciplines of bilateral or multilateral treaties by forcing what amounts to a "waiver" of such rights on individual investors, i.e. where the bargaining power of a government is mostly much higher. That would undermine the effectiveness of international treaties. It is surprising that the original ICSID tribunal did not see or discuss such implications.
The decision is also right from a practical perspective. Leaving an investor with a local court means in most situations and countries an effective denial of justice. This is even more so in developing countries where public-service concessions are highly politicised and a national, and even more so a provincial, tribunal can not afford to decide against its own government.
While the decision by the "Annulment Committee" is legally and practically correct in this particular situation, it is doubtful that it will lead to a satisfactory solution of the dispute as such. First, the referral back to the original tribunal may not be that helpful to the complainant. Second, even a positive final decision (e.g. award of damages) may not lead to effective payment. Nor would such decision help the people of Tucuman who are now likely to be stranded with a system which neither the foreign investor nor government services can probably operate properly. My recommendation would be for both parties - in effect the three parties involved (federal government of Argentina; province of Tucuman; investor) - to take a deep breath, sit down and review the situation, with a mediator or facilitator(s) to find if there is not a way to salvage this project, with give-and-take on every side and an attempt to design (and politically sell) a solution that promises greater workability under more realistically understood conditions.
