Article I(1)(a) of the Treaty between the United States of America and the Argentine Republic concerning the Reciprocal Encouragement and Protection of Investment (the BIT) provides that the investments protected by the BIT are those in the territory of one party "owned or controlled directly or indirectly" by nationals or companies of the other party.

The term "investment" is defined in Article I(1)(a) as "every kind of investment", with a non-exhaustive list of types of investment which would be included in that definition. That list includes:

Article VII(1)(a) defines an "investment dispute" as including:

The Vienna Convention on the Law of Treaties 1969 (the Vienna Convention) sets out the principles governing the construction and interpretation of treaties. Article 31(1) of the Vienna Convention provides that:

Article 32 of the Vienna Convention sets out the circumstances in which reference may be made to "supplementary means of interpretation". These include where application of the principles in Article 31 leads to a meaning which is "ambiguous or obscure" or a result which is "manifestly absurd or unreasonable".

1n 1996, the province of Buenos Aires (the province) started privatising water and sewerage services. In 1999, Azurix Buenos Aires SA (ABA), a company incorporated in Argentina, was granted a concession to provide water and sewerage services in the province under a concession agreement with Administracion General de Obras Sanitarias de la Provincia de Buenos Aires (AGOSBA) and the province. ABA was owned by two companies in the Azurix group, which were in turn indirectly owned by the claimant, Azurix Corp (Azurix), a company incorporated in Delaware.

A dispute arose and in September 2001 Azurix filed a request for arbitration with ICSID against Argentina, alleging that Argentina had violated the BIT, in that it had expropriated Azurix's investment, failed to provide fair and equitable treatment and full protection and security, and had taken arbitrary measures.

The tribunal first gave a decision on jurisdiction in December 2003, finding that it had jurisdiction over the dispute and, in particular, that Azurix had standing to bring the claim. A hearing on the merits took place in late 2004. After that hearing, Argentina challenged the appointment of the president of the tribunal, Dr Rigo Sureda. That challenge was dismissed and the tribunal went on to make its award on the merits.

In its substantive award of 14 July 2006, the tribunal:

It awarded Azurix compensation of some US$165 million, representing the fair market value of the concession, plus compound interest.

Argentina applied for the annulment of the award. It argued that:

Enforcement of the tribunal's award was stayed pending the outcome of the annulment application.

The committee considered that an ad hoc committee could only annul an award on this ground (Article 52(1)(a) of the ICSID Convention) if there had been a failure to comply with the procedure for constituting the tribunal, including challenging members of the tribunal, set out in the ICSID Convention.

In this case, there had been no failure to comply with the procedure for challenging or disqualifying an arbitrator.

The committee took the opportunity to make the following observations on the scope of Article 52(1)(a):

The committee considered this issue at some length. Following the views of previous ad hoc committees, the starting point was that an ad hoc committee could intervene under Article 52(1)(b) where it was obvious, without deeper analysis, that the tribunal lacked or exceeded jurisdiction.

The committee identified two distinct issues which arose in connection with Argentina's complaint that Azurix did not have standing to bring the claims as it was not a party to the concession agreement.

These issues were a matter of interpretation and application of the BIT and the ICSID Convention. Applying Article 31 of the Vienna Convention, the committee was satisfied, in connection with the first issue, that Azurix had an investment which was protected by the BIT and the ICSID Convention. It found that:

The committee did not regard the tribunal's conclusion on this issue to be manifestly inconsistent with that interpretation of the BIT.

As to the issue of Azurix's standing to bring the claim, the committee concluded that:

In light of these factors, the committee did not consider that the tribunal's conclusion regarding Azurix's standing was manifestly inconsistent with an interpretation of the BIT made in accordance with the principle in Article 31(1) of the Vienna Convention.

The committee did not consider that there was any need to have recourse to supplementary means of interpretation under Article 32 of the Vienna Convention, on the basis that the interpretation that resulted from application of Article 31(1) of the Vienna Convention did not lead to a result which was manifestly absurd or unreasonable. Even if it did, the supplementary resources to which the committee was referred did not require a different interpretation than that achieved by applying Article 31(1).

The committee emphasised that, in order to succeed, a complaint under this head must relate to the non-application of the law applicable under Article 42 of the ICSID Convention, rather than the incorrect application of the applicable law.

Azurix's claims were for breach of the BIT, which was governed by international law, not municipal law. The question whether or not there had been a breach of the treaty must be determined by applying the terms of the treaty to the facts of the case, in accordance with general principles of international law, including principles of the international law of treaties. Further, in proceedings brought under the ICSID Convention, the tribunal must also comply with the terms of that Convention. The committee considered that in a claim for breach of an investment treaty, the application by the tribunal of the terms of the treaty and of international law as the applicable law was consistent with Article 42(1) of the ICSID Convention.

The committee concluded that the tribunal correctly identified the law applicable under Article 42 of the ICSID Convention to be "the ICSID Convention, ... the BIT and ... applicable international law". Further, in relation to each of the three claims it had upheld, the tribunal had applied the correct applicable law. Therefore, the committee rejected this ground of annulment.

The committee reiterated that, in order to justify annulment, the complaint had to relate to the non-application of the applicable standard of compensation, rather than the incorrect application of that standard.

The committee considered that the tribunal had correctly identified the applicable law for the purposes of determining the quantum of damages as the BIT itself and, failing any express provision in the BIT, general principles of international law. The tribunal had decided that, under general principles of international law, it had a discretion to determine a reasonable approach to damages. In other words, the tribunal had decided to exercise a discretion pursuant to, not instead of, customary international law. Even if the tribunal were wrong to conclude that under international law it had such a discretion, that would be a case of incorrect application of the applicable law, which was not a ground for annulment, rather than non-application of the applicable law. Therefore, the committee rejected this ground of annulment.

The committee rejected this ground for annulment. The power to call upon a party to produce documents under Article 43(a) of the ICSID Convention and ICSID Arbitration Rule 34(2)(a) was discretionary. Therefore, a decision by a tribunal not to accede to a party's request to exercise that power could never, of itself, be a departure from a fundamental rule of procedure. There would only be grounds for annulment under Article 52(1)(d) of the ICSID Convention where the exercise of the tribunal's discretion amounted to a serious departure from another fundamental rule of procedure.

The two fundamental rules of procedure relied upon by Argentina were its "right of defence" and "the principle of equality of the parties". However, the committee did not consider that either of these fundamental rules of procedure implied a right of a party to obtain evidence from the opposing party. In any event, in order to be a "serious" departure from a fundamental rule of procedure, the violation of the fundamental rule must have caused the tribunal to reach a result substantially different from what it would have awarded had the rule been observed. In the committee's view, on the evidence before it, that requirement was not satisfied.

The committee noted that it was generally accepted that this ground of annulment should only apply in a clear case where there has been a failure by the tribunal to state any reasons or has given contradictory or frivolous reasons, not where the tribunal has merely failed to state correct or convincing reasons.

The committee rejected Argentina's argument that the tribunal expressed contradictory reasons with respect to the law applicable to disputed issues arising out of the concession agreement. The tribunal's reasoning, right or wrong, was quite clear. Even if it were wrong in law, that would not be a ground for annulment.

The committee had a discretion to determine how and by whom the costs of the annulment proceedings should be paid, under Article 61(2) of the ICSID Convention and ICSID Arbitration Rule 47(1)(b), read in conjunction with Article 52(4) and Rule 53. Several previous ad hoc committees (for example, in MTD Equity Sdn Bhd and another v Republic of Chile (ICSID Case No. ARB/01/7) (Annulment proceeding)) had followed each other in ordering parties to annulment proceedings to bear their own costs, however anomalous that might seem. However, the committee took the view that that practice "fails to accord proper deference" to Regulation 14(3)(e) of ICSID's Administrative and Financial Regulations (the Regulations), which required the applicant in annulment proceedings to make the necessary advance payments to ICSID. That was different to the regime in the original proceedings, where the norm was for the parties each to pay half of the advance (Regulation 14(3)(d)). (In both cases, this position was without prejudice to any order as to costs that might be made at the conclusion of the proceedings.)

The committee concluded that under the Regulations and as a matter of discretion, the usual order should be for an unsuccessful applicant for annulment to bear the whole of ICSID's costs advanced by it, including the fees and expenses of the tribunal. Although exceptional circumstances might justify departure from that norm, the fact that the proceedings raised novel and complex issues would not, of itself, amount to "exceptional circumstances".

With regard to the parties' own legal costs, the committee noted that unsuccessful applicants had only been ordered to pay all or some of the other party's costs in two of the six previous cases in which an ad hoc committee had rejected the whole application for annulment. In the other four cases, there had either been no order for costs or parties were ordered to bear their own costs. In this case, the parties had borne their own legal costs throughout the proceedings and the committee did not think that an order requiring Argentina to pay some or all of Azurix's costs would be justified.