1) INTRODUCTION
After the last Argentine economic crisis, 37[1] different arbitral proceedings were launched against Argentina before the International Centre for Settlement of Investment Disputes (ICSID), for an amount of 17 billion dollars. Most of these disputes have been based on alleged breaches to a Bilateral Investment Treaty (BIT)[2] between Argentina and United States (US). There are still 24 cases pending resolution, all of them related to the major foreign investments that took place during the privatization period in Argentina, all of which were guaranteed a one-to-one peg to the dollar and periodic tariff adjustments.
Argentina´s strategy has been to negotiate with the companies that still hold the concession rights. The Argentine Government has also persuaded some of the investors into desisting their suits against Argentina, specially in view of the economic recovery of the country. In the suits that are still pending, Argentina has held the lack of jurisdiction of ICSID as its main defense, and in second term, that the measures adopted during the economic crisis were taken in a “state of necessity”, thus precluding their wrongfulness in accordance to the terms of the BIT and customary international law.
In a first ruling on the matter, a claim by CMS Gas Transmission Company[3] (CMS), an ICSID arbitral tribunal held that the state of necessity did not justify Argentina´s departure from the established regime of tariffs, thus was fully liable before the foreign investor. It mandated Argentina to compensate CMS in 133 million dollars.
In a second ruling on a similar case brought by LG&E Energy Corp.[4] (LG&E), a different ICSID arbitral tribunal held that although Argentina had violated certain provisions of the BIT in relation to its treatment of LG&E´s investments, Argentina was exempted from liability during its alleged state of necessity; a 17 month period from December 1st 2001 until April 26th 2003, the date President Nestor Kirchner was elected to office.
These radically opposed rulings challenge the legal certainty standard that the ICSID dispute resolution system is supposed to provide, and undermines the value of precedents and the potential formation of customary international investment law. They also bring questions on how far an arbitral tribunal can depart from a prior decision on the same matter without jeopardizing, as many jurists claim that there should be an appellate body for ICSID arbitrations.
The objective pursued in this paper is to see how these issues are dealt with in international investment law, taking the paradigmatic Argentine case as an example. It will first address the reasons of developing countries for entering into BITs and accepting ICSID as a dispute settlement venue, specially during privatization periods. Following this, the Argentine crisis will be briefly explained, as well as the Argentine claims that the Government acted under “state of necessity”. Finally, this will allow us to see how a country reacts when rendered two opposing decisions, and the consequences it brings when it still has to face several more arbitrations.
2) A ROAD TO LEGAL CERTAINTY: BITs AND INTERNATIONAL ARBITRATION
In the late 1980s, Argentina suffered an economic crisis characterized by deep recession and hyperinflation[5]. As part of its economic recovery plan, the Government began an ambitious privatization program. In 1991, Argentina enacted the Convertibility Law, which ordered the implementation of a fixed exchange rate, pegging the argentine currency to the US dollar.
One of the primary goals of the Government’s plan was the privatization of state owned Public Utility companies. The privatization scheme created by Argentina targeted foreign investors because foreign capital was deemed essential for the successful operation of the Government’s economic recovery plan. Foreign investors were encouraged to purchase shares with guarantees, such as tariffs calculated in US dollars, automatic and periodic adjustments to the tariffs based on foreign indexes, a clear legal framework that could not be unilaterally modified, and the granting of licenses instead of concessions, with a view to offering the highest degree of protection to prospective investors.
In the concession or license contracts, Argentina accepted the ICSID forum for dispute settlement resolution; the country also concluded several BITs with foreign nations. This modified the entire investment dispute resolution system for the Argentine State in an unprecedented way, which led to several criticisms from many political sectors, as they believed this was an excesive transfer of sovereignty. The presiding administration justified these changes, as it believed it was the only way to attract foreign investment and support the new economic policy.
2.A) Bilateral Investment Treaties (BITs) and Emerging Economies
A country can offer foreign investors flexible legislation, open and favoring investment. However, in order to grant sufficient guarantee for investment, the State has to commit before the international community that it will honor and respect these rules during an extended period of time. BITs create an environment of stability and predictability of the applicable legal framework, that encourages foreign investment. These agreements have led to a new legal regime for negotiation and conclusion of investments, economic development agreements, today within an evolving Law of International Development.[6]
A BIT is an international legal instrument used by States to bind themselves, and guarantee foreign investors protection of their investment, making the applicable legal framework more predictable[7]. Usual key clauses in protection of foreign investments are fair and equitable treatment, non discrimination, and an umbrella clause that binds States into respecting contracts and other agreements.
BITs were originally used by countries conforming the Organization for Economic Cooperation and Development (OECD), industrially developed countries with the idea to create a special framework of protection for their nationals while investing in a foreign country (usually less developed). These treaties were designed as a tool to establish a special regime of protection for investments in an incipient globalization, and with a notable interest in emerging markets and a new policy of privatization of Public Utilities, encouraged by the “Washington Consensus”[8] and triggered by highly inefficient state owned companies and high foreign debt of these emerging economies.
The proliferation of Bilateral Investment treaties has led to the creation of an ad hoc quasi separate legal regime for foreign investment. The growing tendency of smaller or developing countries to enter into these types of agreement comes in order to reduce the uncertainty of foreign investors to put their money in a risky market, may it be for economic or political reasons.
2.B) ICSID Arbitration and Legal Certainty for Investors
Legal certainty is one of the main pillars on which States support their foreign policy, in order to attract investments[9]. As investments multiply, so do the chances of dispute and controversy, and the need to have an adequate dispute settlement system.
The International Centre for Settlement of Investment Disputes (ICSID) has aimed to provide for a suitable dispute settlement mechanism for foreign investors. ICSID is an international organization of dispute settlement between States and private foreign investors. Its legal basis is the ICSID Convention, which sets the rules of arbitration for the institution, as well as the obligations incumbent on the parties to the Convention, ie. Contracting States. The main goal of this agreement is to improve the legal framework on investment law and create a neutral institution, impartial and non political, that could suit the interest of foreign investors and not rejected by states.
The main advantages of the system are that it is voluntary, flexible and efficient[10]. It is voluntary because it depends on the consent of the parties to be triggered. It is flexible because the rules have been established in order to fit the needs of the parties, which can choose applicable law, arbitrators, extent of the powers of the tribunal, etc. It is efficient because once consent is given, it becomes irrevocable, and the dispute is always resolved.
In order to isolate the arbitral procedure from any external influence, it was designed to be exclusive; hence, there is no influence from domestic courts; ICSID procedure is autonomous. The whole process follows ICSID rules of procedure, with no influence of domestic rules, and is exempt from any control from higher courts of the contracting states. It is completely independent and self sufficient.
2.C) International Investment Law
Proliferation of ICSID arbitrations has led to the development of what some authors name jurisprudence on international investment law[11]. As a consequence, there are certain fixed rules generally recognized by the contracting parties to ICSID. Arbitral awards, when repeating the same criteria over time, ascertain an interpretation of law that becomes a legal rule, or at least an authoritative precedent.
In this sense, the value of precedent in practice has to be acknowledged, and it is noticeable that most awards refer to past decisions when justifying or supporting their arguments. This regardless of the fact that arbitral awards are not binding precedents, and each case has to be solved in light of the specific circumstances of the case.
The ICSID system is based on legal certainty, which works not only in favor of the investor, but also frames the limits of sovereignty that Contracting States grant to the organization for dispute settlement. When, for instance, two different awards based on the same circumstances, provide essentially opposite outcomes, the foundations of ICSID start shaking, as there is no instance of review for conflicting awards and unifying jurisprudence. This is the case of parallel investment arbitrations against Argentina.
3) THE ARGENTINE CRISIS AND CONFLICTING ARBITRAL AWARDS
In mid 1998, the Argentine economy succumbed into a period of recession that was to last four years and triggered the worst economic crisis in Argentine history[12]. In 1999, Argentina’s GDP decreased causing a dramatic fall in domestic prices. Private consumption and investments began falling and Argentina entered a deflationary period. Argentina’s country risk premium increased, gradually excluding the country from the international credit market. These economic indicators were accompanied by social problems –unemployment, poverty and indigence levels began to increase.
Argentina’s crisis deepened at the end of 2001. The Government experienced increased difficulties in repaying its foreign debt. As poverty and unemployment soared, Argentines feared that the Government would default on its debt and immobilize bank deposits[13]. Therefore, savings were massively withdrawn from the banks. In response, the Government on 1st December 2001 restricted bank withdrawals and prohibited any transfer of currency abroad. This led to widespread discontent and public demonstrations, looting, rioting, including violence that claimed tens of lives. President De la Rúa and his Cabinet resigned on 20 December 2001. A succession of presidents took office and quickly resigned.
Finally, President Duhalde took office and implemented a new economic plan. On 6th January 2002, Congress enacted an “Emergency Law”[14], which abrogated the Convertibility Law so that the one-to-one peg of the Argentine peso to the US dollar no longer existed. The Emergency Law provided for the switch into Argentine pesos of debts owed to the banking system, public law contracts and private agreements. The law further provided for the renegotiation of private and public agreements to adapt them to the new exchange system; it abolished indexation and tarikk adjustment, and called the Federal government to renegotiate the public-service contracts.
This triggered 37 different arbitral proceedings Argentina, for an amount of 17 billion dollars. Argentina articulated its defense based on lack of jurisdiction, and that it acted under “state of necessity”. This last argument was interpreted by two different arbitral tribunals, arriving to conflicting conclusions.
3.A) Conflicting Interpretations of “State of Necessity”
The defense raised by Argentina in both CMS and LG&E proceedings was that the country acted in a “state of necessity”, thus the wrongfulness of its acts was precluded. Argentina claimed that the severity of the crisis threatened the existence of the Argentine State, founding the defense both under customary international law[15] and Article XI of the US – Argentina BIT.
Article XI of the Bilateral Treaty provides that “This Treaty shall not preclude the application by either Party of measures necessary for the maintenance of public order, the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.” Article 25 of the ILC Articles on State Responsibility states that there is a “state of necessity” when there is an essential interest of the state is at grave and imminent peril.
The first question that arose for both arbitral tribunals was whether an “economic crisis” could affect an essential interest or amount to grave and imminent peril that might have given rise to the “state of necessity” exception. Although there was mixed case law on whether economic circumstances could constitute such grave and imminent peril, both arbitral tribunals in LG&E and CMS agreed that it was possible to extend the “state of necessity” defense to economic emergencies[16]. The legal interpretation on the extent of the BIT clause and ILC article was then, the same in both cases.
However, the comparison of the LG&E and CMS cases yield an unsatisfactory result. Based on the same facts, and having established a similar legal interpretation on the relevant clause, they arrived to conflicting results as to whether the Argentine economic situation had in fact threatened essential interests of the country or not. Neither Tribunal gave a detailed explanation of its conclusions.
This is not a minor detail. The tribunals disagreed in how to assess the facts in light of the applicable law. The lack of an appellate body in ICSID makes this circumstance very dangerous, as what was at stake was a country´s sovereign ability to pursue its public policies and leave behind an excruciating crisis.
The second interesting issue that arose was whether the Argentine State had contributed to the necessity situation. The CMS Tribunal[17] found that Government policies and their shortcomings significantly contributed to the crisis and the emergency and while exogenous factors did fuel additional difficulties they do not exempt the Respondent from its responsibility in the matter. The LG&E Tribunal[18] concluded that there was no serious evidence in the record that Argentina contributed to the crisis resulting in the state of necessity. The comparison is again unsatisfactory
These differences in judgments of fact, but not in legal interpretation, led the CMS Tribunal to rule that Argentina had treated CMS unfairly and inequitably[19], thus found the State liable for U$S 133 million. On a completely opposed ruling, the LG&E Tribunal found that Argentina was equally liable, except for the period where the emergency took place, as it had acted under “state of necessity”. The tribunal assessed that such period extended from December 1st 2001 until April 26th 2003[20], the date when current President Nestor Kirchner was elected to office.
3.B) Consequences of Conflicting Awards in the Argentine Case
The LG&E award brought hope to Argentine authorities[21], who understood that the pending disputes would follow the same criteria. This also allowed the Argentine State to have a better negotiating position, as this new ruling was not only more beneficial for Argentina, but also brought a the issue of legal uncertainty to the other claimants.
The second reaction to the ruling was harsh. It brought of generalized disbelief[22] in a system that evidently lacked coherence, and manifestly produced inconsistent results. Many jurists critizised the entire process, specially after Argentina requested the nullity of the CMS award for manifest lack of jurisdiction (an ICSID Tribunal granted a stay on the first award[23]). There was a belief that the grant of sovereignty might have been too broad, in a system that had no way of unifying its criteria and produced conflicting awards.
The final reaction was of defiance. Many believed that in light of this legal clash, the domestic courts might review the awards before enforcing them, as Argentina might claim they are arbitrary or unconstitutional[24]. There could be constitutional grounds for this, even though it could lead to Argentina breaching its international obligations once more.
So far, the Government affirmed that Argentina would enforce the awards, but there is no way of predicting what might happen once the CMS award becomes enforceable.
4) POSSIBLE SOLUTIONS FOR CONFLICTING ICSID AWARDS
There is great concern in academic forums for the potential difficulties arising from parallel proceedings. Parallel proceedings[25] take place when disputes are based on the same set of facts or the same applicable law, and the awards are rendered by different tribunals. The serious proliferation of BITs has multiplied the opportunities available to aggrieved investors, thus enhancing the chances for this to happen.
Moreover, during recent years, as negotiation of BITs continues to grow, new strategies from foreign investors take different shapes. In order to invest their assets in foreign markets, they create companies in the receiving and in other countries which might have a more favorable BIT treatment. This sort of “BIT shopping”[26] allows them to eventually choose the most convenient forum and applicable rules. The situation becomes more complex in cases where “parallel proceedings” are undertaken, as chances of contradictory rulings are enhanced, hence the likelihood of legal uncertainty.
After a series of conflicting awards came several criticisms to international arbitration as means investment dispute settlement. As an immediate response, solutions were proposed in order to achieve an acceptable level of legal certainty and harmony in arbitral awards. These could be partial solutions to the ongoing Argentine problem.
4.A) An ICSID Appellate Body
The first proposal has been to create a body of appeal, might it have been under ICSID or under each BIT. An appellate body, with power to revise arbitral decisions would provide the perception of consistency and predictability. This would in turn help in institutionalizing and legitimizing investor-state dispute settlement, making the system more sustainable.
In 2004 ICSID released a Discussion Paper About Possible Improvements to the Framework for ICSID Arbitration[27]. This opened for discussion the prospect of a single appeal mechanism, as an alternative to multiple appellate mechanisms arising from different appellate mechanisms under a number of investment treaties. The proposal was that ICSID would pursue an Appeals Facility on the basis that this would operate as a single appellate mechanism.
This proposal had little support, as it was believed that it would undermine the celerity and efficiency of the process[28]. Nonetheless, this institute was introduced in the latest US BITs, and may have a certain influence in the future.
4.B) Accumulation of procedures
A second proposal was to allow and regulate the accumulation of arbitral procedures[29]. This was actually proposed in the Lauder – CME cases, but inexplicably rejected by the Czech Republic. Accumulation was introduced in the NAFTA agreement, and has had been already used.
Accumulation of parallel proceedings in not a new institution in international commercial arbitration, but it requires consent of the parties to trigger the mechanism. The reasons that justify accumulation are clear: on one hand, it makes it possible to avoid conflicting awards, harmonizing the dispute settlement procedure. On the other hand, it is a principle of procedural economy that demands good and efficient administration of justice.
Against accumulation, an arbitration tribunal under NAFTA ruled that this mechanism would impair the proper development of the case. It was of the opinion that due process would be jeopardized, as parties should not have the burden of taking into account everything all the other parties allege in the procedure. Also, it would make it difficult for the tribunal to asses each separate damage, and how it is distributed between the claimants.
In the end, accumulation is still not a widespread procedure, but might prove useful in a case like the one Argentina and the foreign investors are facing.
5) CONCLUSION
The international investment legal framework is characterized by the search for legal certainty that will reduce related risks to foreign investors. To do this, developing countries with low institutional quality have been encouraged to enter into BITs and accept to be taken to the forum of international arbitration.
This system was originally structured in order to protect investors, but new developments have challenged the effectiveness the system of international arbitration. This has happened because of new creative ways of investors to seek for the best system of protection, “BIT shopping”, as well as critical situations in countries´ economic health that have forces Stated to depart from the stipulated treatment.
In the cases reviewed, Argentina saw its sovereign right to adopt necessary measures challenged; the legitimacy such decisions was left in the hands of international arbitrators. The fact that opposing awards were rendered has led to a critical situation, where still many other cases await resolution and there is total uncertainty of their possible outcome.
In conclusion, a system of review or appeal should be established in ICSID and other international dispute resolution organizations. It should be deemed desirable in order to fix embarrassing cases like the one described in the present paper. In the meantime, a possibility to avoid more conflicting awards would be the accumulation of the arbitration processes, such as in the Argentina claims caused by the economic crisis, which should be dealt with simultaneously and jointly, reducing the possibility of conflicting awards and more embarrassment and disbelief in the system.
After the last Argentine economic crisis, 37[1] different arbitral proceedings were launched against Argentina before the International Centre for Settlement of Investment Disputes (ICSID), for an amount of 17 billion dollars. Most of these disputes have been based on alleged breaches to a Bilateral Investment Treaty (BIT)[2] between Argentina and United States (US). There are still 24 cases pending resolution, all of them related to the major foreign investments that took place during the privatization period in Argentina, all of which were guaranteed a one-to-one peg to the dollar and periodic tariff adjustments.
Argentina´s strategy has been to negotiate with the companies that still hold the concession rights. The Argentine Government has also persuaded some of the investors into desisting their suits against Argentina, specially in view of the economic recovery of the country. In the suits that are still pending, Argentina has held the lack of jurisdiction of ICSID as its main defense, and in second term, that the measures adopted during the economic crisis were taken in a “state of necessity”, thus precluding their wrongfulness in accordance to the terms of the BIT and customary international law.
In a first ruling on the matter, a claim by CMS Gas Transmission Company[3] (CMS), an ICSID arbitral tribunal held that the state of necessity did not justify Argentina´s departure from the established regime of tariffs, thus was fully liable before the foreign investor. It mandated Argentina to compensate CMS in 133 million dollars.
In a second ruling on a similar case brought by LG&E Energy Corp.[4] (LG&E), a different ICSID arbitral tribunal held that although Argentina had violated certain provisions of the BIT in relation to its treatment of LG&E´s investments, Argentina was exempted from liability during its alleged state of necessity; a 17 month period from December 1st 2001 until April 26th 2003, the date President Nestor Kirchner was elected to office.
These radically opposed rulings challenge the legal certainty standard that the ICSID dispute resolution system is supposed to provide, and undermines the value of precedents and the potential formation of customary international investment law. They also bring questions on how far an arbitral tribunal can depart from a prior decision on the same matter without jeopardizing, as many jurists claim that there should be an appellate body for ICSID arbitrations.
The objective pursued in this paper is to see how these issues are dealt with in international investment law, taking the paradigmatic Argentine case as an example. It will first address the reasons of developing countries for entering into BITs and accepting ICSID as a dispute settlement venue, specially during privatization periods. Following this, the Argentine crisis will be briefly explained, as well as the Argentine claims that the Government acted under “state of necessity”. Finally, this will allow us to see how a country reacts when rendered two opposing decisions, and the consequences it brings when it still has to face several more arbitrations.
2) A ROAD TO LEGAL CERTAINTY: BITs AND INTERNATIONAL ARBITRATION
In the late 1980s, Argentina suffered an economic crisis characterized by deep recession and hyperinflation[5]. As part of its economic recovery plan, the Government began an ambitious privatization program. In 1991, Argentina enacted the Convertibility Law, which ordered the implementation of a fixed exchange rate, pegging the argentine currency to the US dollar.
One of the primary goals of the Government’s plan was the privatization of state owned Public Utility companies. The privatization scheme created by Argentina targeted foreign investors because foreign capital was deemed essential for the successful operation of the Government’s economic recovery plan. Foreign investors were encouraged to purchase shares with guarantees, such as tariffs calculated in US dollars, automatic and periodic adjustments to the tariffs based on foreign indexes, a clear legal framework that could not be unilaterally modified, and the granting of licenses instead of concessions, with a view to offering the highest degree of protection to prospective investors.
In the concession or license contracts, Argentina accepted the ICSID forum for dispute settlement resolution; the country also concluded several BITs with foreign nations. This modified the entire investment dispute resolution system for the Argentine State in an unprecedented way, which led to several criticisms from many political sectors, as they believed this was an excesive transfer of sovereignty. The presiding administration justified these changes, as it believed it was the only way to attract foreign investment and support the new economic policy.
2.A) Bilateral Investment Treaties (BITs) and Emerging Economies
A country can offer foreign investors flexible legislation, open and favoring investment. However, in order to grant sufficient guarantee for investment, the State has to commit before the international community that it will honor and respect these rules during an extended period of time. BITs create an environment of stability and predictability of the applicable legal framework, that encourages foreign investment. These agreements have led to a new legal regime for negotiation and conclusion of investments, economic development agreements, today within an evolving Law of International Development.[6]
A BIT is an international legal instrument used by States to bind themselves, and guarantee foreign investors protection of their investment, making the applicable legal framework more predictable[7]. Usual key clauses in protection of foreign investments are fair and equitable treatment, non discrimination, and an umbrella clause that binds States into respecting contracts and other agreements.
BITs were originally used by countries conforming the Organization for Economic Cooperation and Development (OECD), industrially developed countries with the idea to create a special framework of protection for their nationals while investing in a foreign country (usually less developed). These treaties were designed as a tool to establish a special regime of protection for investments in an incipient globalization, and with a notable interest in emerging markets and a new policy of privatization of Public Utilities, encouraged by the “Washington Consensus”[8] and triggered by highly inefficient state owned companies and high foreign debt of these emerging economies.
The proliferation of Bilateral Investment treaties has led to the creation of an ad hoc quasi separate legal regime for foreign investment. The growing tendency of smaller or developing countries to enter into these types of agreement comes in order to reduce the uncertainty of foreign investors to put their money in a risky market, may it be for economic or political reasons.
2.B) ICSID Arbitration and Legal Certainty for Investors
Legal certainty is one of the main pillars on which States support their foreign policy, in order to attract investments[9]. As investments multiply, so do the chances of dispute and controversy, and the need to have an adequate dispute settlement system.
The International Centre for Settlement of Investment Disputes (ICSID) has aimed to provide for a suitable dispute settlement mechanism for foreign investors. ICSID is an international organization of dispute settlement between States and private foreign investors. Its legal basis is the ICSID Convention, which sets the rules of arbitration for the institution, as well as the obligations incumbent on the parties to the Convention, ie. Contracting States. The main goal of this agreement is to improve the legal framework on investment law and create a neutral institution, impartial and non political, that could suit the interest of foreign investors and not rejected by states.
The main advantages of the system are that it is voluntary, flexible and efficient[10]. It is voluntary because it depends on the consent of the parties to be triggered. It is flexible because the rules have been established in order to fit the needs of the parties, which can choose applicable law, arbitrators, extent of the powers of the tribunal, etc. It is efficient because once consent is given, it becomes irrevocable, and the dispute is always resolved.
In order to isolate the arbitral procedure from any external influence, it was designed to be exclusive; hence, there is no influence from domestic courts; ICSID procedure is autonomous. The whole process follows ICSID rules of procedure, with no influence of domestic rules, and is exempt from any control from higher courts of the contracting states. It is completely independent and self sufficient.
2.C) International Investment Law
Proliferation of ICSID arbitrations has led to the development of what some authors name jurisprudence on international investment law[11]. As a consequence, there are certain fixed rules generally recognized by the contracting parties to ICSID. Arbitral awards, when repeating the same criteria over time, ascertain an interpretation of law that becomes a legal rule, or at least an authoritative precedent.
In this sense, the value of precedent in practice has to be acknowledged, and it is noticeable that most awards refer to past decisions when justifying or supporting their arguments. This regardless of the fact that arbitral awards are not binding precedents, and each case has to be solved in light of the specific circumstances of the case.
The ICSID system is based on legal certainty, which works not only in favor of the investor, but also frames the limits of sovereignty that Contracting States grant to the organization for dispute settlement. When, for instance, two different awards based on the same circumstances, provide essentially opposite outcomes, the foundations of ICSID start shaking, as there is no instance of review for conflicting awards and unifying jurisprudence. This is the case of parallel investment arbitrations against Argentina.
3) THE ARGENTINE CRISIS AND CONFLICTING ARBITRAL AWARDS
In mid 1998, the Argentine economy succumbed into a period of recession that was to last four years and triggered the worst economic crisis in Argentine history[12]. In 1999, Argentina’s GDP decreased causing a dramatic fall in domestic prices. Private consumption and investments began falling and Argentina entered a deflationary period. Argentina’s country risk premium increased, gradually excluding the country from the international credit market. These economic indicators were accompanied by social problems –unemployment, poverty and indigence levels began to increase.
Argentina’s crisis deepened at the end of 2001. The Government experienced increased difficulties in repaying its foreign debt. As poverty and unemployment soared, Argentines feared that the Government would default on its debt and immobilize bank deposits[13]. Therefore, savings were massively withdrawn from the banks. In response, the Government on 1st December 2001 restricted bank withdrawals and prohibited any transfer of currency abroad. This led to widespread discontent and public demonstrations, looting, rioting, including violence that claimed tens of lives. President De la Rúa and his Cabinet resigned on 20 December 2001. A succession of presidents took office and quickly resigned.
Finally, President Duhalde took office and implemented a new economic plan. On 6th January 2002, Congress enacted an “Emergency Law”[14], which abrogated the Convertibility Law so that the one-to-one peg of the Argentine peso to the US dollar no longer existed. The Emergency Law provided for the switch into Argentine pesos of debts owed to the banking system, public law contracts and private agreements. The law further provided for the renegotiation of private and public agreements to adapt them to the new exchange system; it abolished indexation and tarikk adjustment, and called the Federal government to renegotiate the public-service contracts.
This triggered 37 different arbitral proceedings Argentina, for an amount of 17 billion dollars. Argentina articulated its defense based on lack of jurisdiction, and that it acted under “state of necessity”. This last argument was interpreted by two different arbitral tribunals, arriving to conflicting conclusions.
3.A) Conflicting Interpretations of “State of Necessity”
The defense raised by Argentina in both CMS and LG&E proceedings was that the country acted in a “state of necessity”, thus the wrongfulness of its acts was precluded. Argentina claimed that the severity of the crisis threatened the existence of the Argentine State, founding the defense both under customary international law[15] and Article XI of the US – Argentina BIT.
Article XI of the Bilateral Treaty provides that “This Treaty shall not preclude the application by either Party of measures necessary for the maintenance of public order, the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.” Article 25 of the ILC Articles on State Responsibility states that there is a “state of necessity” when there is an essential interest of the state is at grave and imminent peril.
The first question that arose for both arbitral tribunals was whether an “economic crisis” could affect an essential interest or amount to grave and imminent peril that might have given rise to the “state of necessity” exception. Although there was mixed case law on whether economic circumstances could constitute such grave and imminent peril, both arbitral tribunals in LG&E and CMS agreed that it was possible to extend the “state of necessity” defense to economic emergencies[16]. The legal interpretation on the extent of the BIT clause and ILC article was then, the same in both cases.
However, the comparison of the LG&E and CMS cases yield an unsatisfactory result. Based on the same facts, and having established a similar legal interpretation on the relevant clause, they arrived to conflicting results as to whether the Argentine economic situation had in fact threatened essential interests of the country or not. Neither Tribunal gave a detailed explanation of its conclusions.
This is not a minor detail. The tribunals disagreed in how to assess the facts in light of the applicable law. The lack of an appellate body in ICSID makes this circumstance very dangerous, as what was at stake was a country´s sovereign ability to pursue its public policies and leave behind an excruciating crisis.
The second interesting issue that arose was whether the Argentine State had contributed to the necessity situation. The CMS Tribunal[17] found that Government policies and their shortcomings significantly contributed to the crisis and the emergency and while exogenous factors did fuel additional difficulties they do not exempt the Respondent from its responsibility in the matter. The LG&E Tribunal[18] concluded that there was no serious evidence in the record that Argentina contributed to the crisis resulting in the state of necessity. The comparison is again unsatisfactory
These differences in judgments of fact, but not in legal interpretation, led the CMS Tribunal to rule that Argentina had treated CMS unfairly and inequitably[19], thus found the State liable for U$S 133 million. On a completely opposed ruling, the LG&E Tribunal found that Argentina was equally liable, except for the period where the emergency took place, as it had acted under “state of necessity”. The tribunal assessed that such period extended from December 1st 2001 until April 26th 2003[20], the date when current President Nestor Kirchner was elected to office.
3.B) Consequences of Conflicting Awards in the Argentine Case
The LG&E award brought hope to Argentine authorities[21], who understood that the pending disputes would follow the same criteria. This also allowed the Argentine State to have a better negotiating position, as this new ruling was not only more beneficial for Argentina, but also brought a the issue of legal uncertainty to the other claimants.
The second reaction to the ruling was harsh. It brought of generalized disbelief[22] in a system that evidently lacked coherence, and manifestly produced inconsistent results. Many jurists critizised the entire process, specially after Argentina requested the nullity of the CMS award for manifest lack of jurisdiction (an ICSID Tribunal granted a stay on the first award[23]). There was a belief that the grant of sovereignty might have been too broad, in a system that had no way of unifying its criteria and produced conflicting awards.
The final reaction was of defiance. Many believed that in light of this legal clash, the domestic courts might review the awards before enforcing them, as Argentina might claim they are arbitrary or unconstitutional[24]. There could be constitutional grounds for this, even though it could lead to Argentina breaching its international obligations once more.
So far, the Government affirmed that Argentina would enforce the awards, but there is no way of predicting what might happen once the CMS award becomes enforceable.
4) POSSIBLE SOLUTIONS FOR CONFLICTING ICSID AWARDS
There is great concern in academic forums for the potential difficulties arising from parallel proceedings. Parallel proceedings[25] take place when disputes are based on the same set of facts or the same applicable law, and the awards are rendered by different tribunals. The serious proliferation of BITs has multiplied the opportunities available to aggrieved investors, thus enhancing the chances for this to happen.
Moreover, during recent years, as negotiation of BITs continues to grow, new strategies from foreign investors take different shapes. In order to invest their assets in foreign markets, they create companies in the receiving and in other countries which might have a more favorable BIT treatment. This sort of “BIT shopping”[26] allows them to eventually choose the most convenient forum and applicable rules. The situation becomes more complex in cases where “parallel proceedings” are undertaken, as chances of contradictory rulings are enhanced, hence the likelihood of legal uncertainty.
After a series of conflicting awards came several criticisms to international arbitration as means investment dispute settlement. As an immediate response, solutions were proposed in order to achieve an acceptable level of legal certainty and harmony in arbitral awards. These could be partial solutions to the ongoing Argentine problem.
4.A) An ICSID Appellate Body
The first proposal has been to create a body of appeal, might it have been under ICSID or under each BIT. An appellate body, with power to revise arbitral decisions would provide the perception of consistency and predictability. This would in turn help in institutionalizing and legitimizing investor-state dispute settlement, making the system more sustainable.
In 2004 ICSID released a Discussion Paper About Possible Improvements to the Framework for ICSID Arbitration[27]. This opened for discussion the prospect of a single appeal mechanism, as an alternative to multiple appellate mechanisms arising from different appellate mechanisms under a number of investment treaties. The proposal was that ICSID would pursue an Appeals Facility on the basis that this would operate as a single appellate mechanism.
This proposal had little support, as it was believed that it would undermine the celerity and efficiency of the process[28]. Nonetheless, this institute was introduced in the latest US BITs, and may have a certain influence in the future.
4.B) Accumulation of procedures
A second proposal was to allow and regulate the accumulation of arbitral procedures[29]. This was actually proposed in the Lauder – CME cases, but inexplicably rejected by the Czech Republic. Accumulation was introduced in the NAFTA agreement, and has had been already used.
Accumulation of parallel proceedings in not a new institution in international commercial arbitration, but it requires consent of the parties to trigger the mechanism. The reasons that justify accumulation are clear: on one hand, it makes it possible to avoid conflicting awards, harmonizing the dispute settlement procedure. On the other hand, it is a principle of procedural economy that demands good and efficient administration of justice.
Against accumulation, an arbitration tribunal under NAFTA ruled that this mechanism would impair the proper development of the case. It was of the opinion that due process would be jeopardized, as parties should not have the burden of taking into account everything all the other parties allege in the procedure. Also, it would make it difficult for the tribunal to asses each separate damage, and how it is distributed between the claimants.
In the end, accumulation is still not a widespread procedure, but might prove useful in a case like the one Argentina and the foreign investors are facing.
5) CONCLUSION
The international investment legal framework is characterized by the search for legal certainty that will reduce related risks to foreign investors. To do this, developing countries with low institutional quality have been encouraged to enter into BITs and accept to be taken to the forum of international arbitration.
This system was originally structured in order to protect investors, but new developments have challenged the effectiveness the system of international arbitration. This has happened because of new creative ways of investors to seek for the best system of protection, “BIT shopping”, as well as critical situations in countries´ economic health that have forces Stated to depart from the stipulated treatment.
In the cases reviewed, Argentina saw its sovereign right to adopt necessary measures challenged; the legitimacy such decisions was left in the hands of international arbitrators. The fact that opposing awards were rendered has led to a critical situation, where still many other cases await resolution and there is total uncertainty of their possible outcome.
In conclusion, a system of review or appeal should be established in ICSID and other international dispute resolution organizations. It should be deemed desirable in order to fix embarrassing cases like the one described in the present paper. In the meantime, a possibility to avoid more conflicting awards would be the accumulation of the arbitration processes, such as in the Argentina claims caused by the economic crisis, which should be dealt with simultaneously and jointly, reducing the possibility of conflicting awards and more embarrassment and disbelief in the system.
[1] “Inversiones y estado de necesidad”, La Nacion, Editorial, 04/12/2006
[2] "Treaty between the United States of America and the Argentine Republic Concerning the Reciprocal Encouragement and Protection of Investment.", 1991
[3] CMS Gas Transmission Company v. Argentine Republic (ICSID Case No. ARB/01/8)
[4] LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v. Argentine Republic, (ICSID Case No. ARB/02/1)
[5] Source: Ibid. LG&E Case, Paras 31-42
[6] David Howell, “International Investment Arbitration, Part 2” Fulbright & Jaworski, United Kingdom, 2006
[7] Sara Lidia Feldstein de Cárdenas, “Arbitraje e Inversiones Extranjeras”, Programa Derecho Internacional, pag. 1 www.caei.com.ar
[8] Ibid. Feldstein de Cárdenas, pag. 8
[9] Ibid. Feldstein de Cárdenas, pag 9
[10] For arguments against this, see: Horacio Rosatti “Atrapados frente al tribunal” La Nacion, 12/10/2003
[11] Law of int development
[12] Source, LG&E and CMS cases, Facts.
[13] Presidential Decree 320/2002
[14] Argentine national law nbr. 25.561
[15] ILC Articles on State Responsibility, 2001. Art 25
[16] Ibid. CMS Case Para., Ibid. LG&E Case Paras. 251 – 257.
[17] Para. 329 CMS Case
[18] Para. 257 LG&E Case
[19] Para 335 CMS Case
[20] Paras. 262 - 266 LG&E Case
[21] Luke Eric Peterson “Investment Treaty News, October 5, 2006” Published by the International Institute for Sustainable Development (http://www.iisd.org/invetment/itn)
[22] www.clarin.com/diario/2005/05/17/elpais/p-01301.htm
[23] Forbes “Argentina to seek annulment of arbitration court ruling in favour of CMS Energy” 05.13.2005
[24] Ibid. Forbes
[25] Enrique Fernández Masiá. PRESENTE Y FUTURO DE LA ACUMULACION DE PROCEDIMIENTOS ARBITRALES EN MATERIA DE INVERSIONES EXTRANJERAS
[26] Ibid Enrique Fernandez Masìa.
[27] www.iisd.org/pdf/2004/investment_icsid_response.pdf
[28] Ibid.
[29] Ibid Enrique Fernandez Masià
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