Azurix v. Argentina
Water
Investor win (awarded $165 million plus interest)

 

U.S. water company Azurix Corp. (an Enron subsidiary) filed a claim against Argentina under the U.S.-Argentina BIT in 2001 over a dispute related to its controversial water services contract in the province of Buenos Aires. During a 1999 water privatization deal, the company won a 30-year concession to provide water and sewage treatment to 2.5 million people. Within a few months, residents complained of foul odors coming from the water. Local governments advised against drinking or paying for tap water and street protests against the water service were held. After the problem was identified as algae contamination of a reservoir, Azurix alleged the algae was the government’s responsibility and demanded compensation for associated costs. The government argued that Azurix had a contractual responsibility to ensure clean drinking water. In the following year, residents experienced a series of water outages and were repeatedly over-billed by Azurix for water, resulting in government fines. Azurix withdrew from its contract in 2001.

 

Azurix then launched its claim under the BIT, claiming that the government had expropriated its investment and denied the firm “fair and equitable treatment” by not allowing rate increases and not investing sufficient public funds in the water infrastructure. In its deliberations, the tribunal weighed whether legitimate public interest policies could constitute BIT violations. The three tribunalists decided, “the issue is not so much whether the measure concerned is legitimate and serves a public purpose, but whether it is a measure that, being legitimate and serving a public purpose, should give rise to a compensation claim (emphasis added). The Tribunal ruled that Argentina violated Azurix’s right to “fair and equitable treatment,” among other breaches, and ordered the government to pay the Enron subsidiary $165 million plus interest, in addition to covering almost all of the tribunal’s costs.

 

Investor-State Attacks: Essential Services

 

RDC v. Guatemala
Transportation
Investor win (awarded $18.6 million)

 

U.S.-based Railroad Development Corporation (RDC) launched an investor-state claim in 2007 under the U.S.-Central America Free Trade Agreement (CAFTA) after the government of Guatemala initiated a legal process to consider revoking a disputed railroad contract with the firm. RDC was engaged in the domestic legal process but still alleged that it had been denied fair and equitable treatment.

 

Guatemala privatized its railroad system in 1997. RDC’s contract in that privatization provided for rehabilitation of the entire railway network in five phases and significant investment in rolling stock and rail lines. After its first eight years of operation, RDC had only completed the first phase. The Guatemalan government initiated a review of an RDC contract in a process that could result in its termination, and after multiple assessments concluded that it did not comply with Guatemalan law. This process, called lesivo, provided RDC the opportunity to present its case before an administrative court, and then appeal the resulting decision to the country’s Supreme Court. Most lesivo actions taken by the Guatemalan government pertained to domestic firms.

 

While taking advantage of this domestic due process and continuing to earn money from its investment, RDC launched its CAFTA claim. It alleged that the lesivo itself was an indirect expropriation and a violation of CAFTA’s national treatment and “minimum standard of treatment” rules. The tribunal not only allowed the ISDS claim to move forward despite the unresolved domestic process, but opined that in such instances of parallel ISDS claims, investors should be allowed to access extrajudicial investor-state proceedings before the conclusion of domestic legal processes.

 

In 2012 the tribunal ruled in favor of RDC, ordering the government to pay the firm $18.6 million. The tribunal upheld the allegation that Guatemala’s initiation of the lesivo process had failed to afford RDC a “minimum standard of treatment.” In doing so, the tribunal ignored the definition of that standard found in a CAFTA Annex that was ostensibly designed to limit tribunalist discretion. CAFTA governments had inserted the annex after a series of investor-state tribunals had interpreted the “minimum standard of treatment” obligation to mean that investors must be guaranteed a stable regulatory framework that does not frustrate the expectations they held at the time they established their investment. In defending itself against an investor-state challenge that tried to invoke this sweeping interpretation, the U.S. government stated, “if States were prohibited from regulating in any manner that frustrated expectations – or had to compensate for any diminution in profit – they would lose the power to regulate.” By defining “minimum standard of treatment” in the CAFTA Annex as derived from customary international law that “results from a general and consistent practice of States that they follow from a sense of legal obligation,” the U.S. and other CAFTA governments attempted to constrain “minimum standard of treatment” to an obligation to afford such basic rights as due process and police protection. But the RDC tribunal ignored the annex and rejected the official submissions of four CAFTA governments, including the U.S. government, arguing that the foreign investor right was limited. Instead, the tribunal borrowed a broad interpretation of “minimum standard of treatment,” one that included protection of investors’ expectations, from another investor-state tribunal and used it to rule against Guatemala.

 

TCW v. Dominican Republic
Electricity
Case settled (investor received $26.5 million)

 

In 2007 TCW Group, a U.S. investment management corporation that jointly owned with the government one of the Dominican Republic’s three electricity distribution firms, claimed that the government violated CAFTA by failing to raise electricity rates and failing to prevent electricity theft by poor residents. The French multinational Société Générale (SG), which owned the TCW Group, filed a parallel claim under the France-Dominican Republic BIT.

 

TCW launched its claim two weeks after CAFTA’s enactment, arguing that decisions taken before the treaty’s implementation violated the treaty. TCW took issue with the government’s unwillingness to raise electricity rates, a decision undertaken in response to a nationwide energy crisis. TCW also protested that the government did not subsidize electricity rates, which would have diminished electricity theft by poor residents. The New York Times noted that such subsidization was not feasible for the government after having just spent large sums to rectify a banking crisis. TCW alleged expropriation and violation of CAFTA’s guarantee of fair and equitable treatment.

 

TCW demanded $606 million from the government for the alleged CAFTA violations, despite having spent just $2 to purchase the business from another U.S. investor. The company also admitted to having “not independently committed additional capital” to the electricity distribution firm after its $2 purchase in 2004. After a tribunal constituted under the France-Dominican Republic BIT issued a jurisdictional ruling in favor of SG, allowing the case to move forward, the government decided to settle with SG and TCW. The government paid the foreign firms $26.5 million to drop the cases, reasoning that it was cheaper than continuing to pay legal fees.