Arbitration. Challenge to Republic of Argentina v. AWG Group Ltd. arbitration award
Lexology | 30 January 2017
Arbitration. Challenge to Arbitration Award. District court denies request to vacate award, finding that arbitrator was not partial and that tribunal did not exceed its authority in awarding damages for lost profits.
by David Zaslowsky, Grant Hanessian and Robyn Lym
Petitioner, the Republic of Argentina ("Argentina"), sued to vacate a $20,957,809 international arbitration award entered in favor of Respondent AWG Group Ltd. ("AWG"). Argentina sought to vacate based on claims that (1) there was evident partiality in an arbitrator who failed to disclose a possible conflict, and (2) the tribunal exceeded its authority by awarding damages outside the boundaries of the relevant bilateral investment treaty ("BIT"). AWG countered for confirmation, recognition, and enforcement of the award. The court denied Argentina’s vacatur petition and confirmed the award.
In 1992, Argentina had awarded Aguas Argentinas S.A. ("AASA")—an Argentinian company composed of a consortium of AWG and other foreign and domestic entities—a concession to provide water and sewerage services to Buenos Aires and the surrounding area. AASA then entered into a 30-year contract with Argentina under which AASA would receive tariff payments in Argentine pesos and repay loans in U.S. dollars. Anticipating the concession, and to encourage foreign direct investment in certain previously public service sectors, Argentina had established a regulatory framework that pegged the Argentine peso to the U.S. dollar and permitted tariff adjustments for changed circumstances.
However, in 2002, facing economic challenges, Argentina adopted a series of economic policies that radically departed from this regulatory framework. The newly adopted laws, among other things, (1) abolished a currency board linking the Argentine peso to the U.S. dollar, which caused significant depreciation of the peso; (2) abolished the adjustment of public services contracts according to agreed-upon indexations; and (3) authorized the executive branch to renegotiate all concession contracts. It also forbade concessionaries from suspending or altering their contractual performance. The revised laws severely impacted AASA’s business, which received tariff payments in pesos but had to repay debt in U.S. dollars. In 2002, Argentina and AASA began renegotiating the concession contract, while Argentina ignored or rejected AASA’s requests for tariff adjustments and insisted AASA provide services to areas outside the scope of the concession contract. In 2005, AASA requested termination of the concession contract, which Argentina refused. In 2006, Argentina terminated the concession contract for fault by AASA.
In 2003, AASA’s foreign investors requested arbitration against Argentina, alleging that Argentina’s actions violated the UK-Argentina BIT protections against expropriation and the standards of fair and equitable treatment. Ultimately, the tribunal found that Argentina’s refusal to revise the tariff pursuant to the legal framework of the concession and its forced renegotiation of the contract violated its fair and equitable treatment obligations under the BIT.
Argentina sought to vacate the award. First, Argentina urged vacatur of the arbitration award under 9 U.S.C. § 10(a)(2) of the Federal Arbitration Act (the "FAA"), arguing that one of the arbitrators, Professor Kaufmann-Kohler, was partial because she failed to disclose that she had been appointed to a three-year, non-executive UBS board position during the pendency of the arbitration. During the arbitration, Argentina alleged that UBS’s approximate 2% ownership in the shares of two AASA members rendered Kaufmann-Kohler partial. Kaufmann-Kohler explained that she was unaware of the holdings and was an independent, non-executive director with no involvement in UBS’s investment decisions. UBS confirmed that the alleged AASA shareholdings were fairly small and had no strategic meaning. The unchallenged arbitrators dismissed Argentina’s challenge for failure to prove any facts that would impugn Kaufmann-Kohler’s independence or impartiality. Considering this procedural background, the court recognized that to vacate an arbitration award for partiality, a claimant must prove that an arbitrator had improper motives. The alleged partiality must be direct and definite, not remote or speculative. The court found Argentina’s proofs wanting. It noted that UBS’s interests in AWG’s consortium partners were relatively small, in the context of its holdings, and that Kaufmann-Kohler’s UBS board position was trivial because she was not involved in investment decisions or individual transactions. The court also found that Kaufmann-Kohler had no duty to disclose these "marginally disclosable" facts, given the tenuous, minor business connection between UBS and AWG’s consortium partners.
Second, Argentina urged vacatur under 9 U.S.C. § 10(a)(4) of the FAA, arguing that the tribunal awarded damages outside the boundaries of the BIT. Argentina claimed that the tribunal (1) lacked authority to award damages sustained subsequent to termination of the concession contract; and (2) calculated damages assuming that Argentina had to ensure AASA’s viability. The court found that the tribunal properly calculated damages using the appropriate, customary international law standard because damages awards must extinguish the consequences of illegal acts, which includes compensation for any natural and probable future revenue stream. It noted that Argentina’s challenges to the damages calculations mischaracterized the tribunal’s rationale. The tribunal did not award damages for termination of the concession or assume Argentina would ensure AASA’s viability. Instead, it found that Argentina’s treaty violations entitled Claimants to future lost profits post-termination. The court held that, on this record, there was no basis to find the tribunal exceeded its powers.
Finding that Argentina failed to establish any grounds for vacatur, the court denied its petition and confirmed AWG’s award.