Siemens v. Argentina

Siemens A.G. v. Republic of Argentina, ICSID Case No. ARB/02/8

Decision, award and other documents available at https://www.italaw.com/cases/1026

Keywords

Corruption, damages, expropriation, interpretation, investor obligations, margin of appreciation, most favoured nation, proportionality, umbrella clause

Key dates

Request for Arbitration: 23 May 2002

Decision on Jurisdiction: 3 August 2004

Award: 6 February 2007

Request by Argentina for Annulment of Award: 16 July 2007

Request by Argentina for Revision of Award: 9 July 2008

Order Taking Note of Discontinuance: 9 September 2009

Arbitrators (original proceeding)

Dr. Andrés Rigo Sureda (president)

Judge Charles N. Brower (claimant appointee)

Prof. Domingo Bello Janeiro (respondent appointee)

Ad hoc Annulment Committee

Judge Gilbert Guillaume

Judge Florentino P. Feliciano

Judge Mohamed Shahabuddeen

Arbitrators (revision proceeding)

Same as original proceeding

Forum and applicable procedural rules

International Centre for Settlement of Investment Disputes (ICSID)

ICSID Rules of Procedure for Arbitration Proceedings

Applicable treaty

Germany–Argentina Bilateral Investment Treaty (BIT)

Alleged treaty violations

  • Expropriation
  • Fair and equitable treatment
  • Full protection and legal security
  • Obligation to not impair investments through arbitrary and discriminatory measures
  • Umbrella clause

Other legal issues raised

  • Damages
  • Interpretation—reference to other bodies/principles of law
  • Investor obligations—obligations to comply with domestic/international law
  • Jurisdiction—most favoured nation treatment
  • Margin of appreciation

1.0 Case Summary

1.1 Factual background

This case is one of the more than forty arbitrations against Argentina related to measures taken during its financial crisis in 2001–2002, although the financial crisis was more peripheral to the facts of this case than it was to most of the others. In 1996, Argentina called for bids to provide an integrated immigration control system, personal identification system and electoral information system. In accordance with the bidding terms, Siemens A.G. incorporated an Argentine company (SITS) for the purposes of the bid. Argentina selected the SITS bid, taking into consideration Siemens’ credentials and financial soundness.

The contract for the provision of the system (“the Contract”) was executed and approved by decree in October 1998. The Contract had a six-year term, automatically renewable for two further three-year terms, with parties agreeing to give notice of intent not to renew only if the purpose of the Contract had been fully met. The execution of the project had two stages: an engineering stage, which consisted of designing the specifications and acquiring all equipment necessary for its implementation, and an operation stage, managed by the government. Under the Contract, SITS would receive compensation only during the operation stage.

In August 1999, Argentina requested SITS postpone production of the new national identity cards for several months, allegedly due to fear that their introduction shortly before the upcoming national elections would burden the public with inconveniences that should be avoided. In January 2000, government officers indicated to SITS and Siemens that the government would seek to renegotiate the national identity card price and increase the number of free-of-charge national identity cards. The immigration control system started to operate in February 2000 but was halted by the government one day later and continued to be interrupted indefinitely. In late February 2000, Argentina suspended production and distribution of all new national identity cards because a system error had resulted in the left thumbprint being printed where the right thumbprint should have been. Argentina prohibited SITS from introducing any modification to the system to correct this problem. In March 2000, the government set up a special commission under the Ministry of the Interior (“the Commission”) to review the Contract. Following negotiations, Siemens reached agreement with the Commission on a proposal in November 2000. The government gave Siemens a “Contract Restatement Proposal” in the renegotiated terms.

Also in November 2000, the Argentine Congress approved an Emergency Law to address the financial crisis that, inter alia, empowered the President to renegotiate public sector contracts. Siemens did not object to the government’s proposal to include the Contract under the provisions of the 2000 Emergency Law, allegedly hoping that this step would speed up approval of the Contract Restatement Proposal. In a meeting in December 2000, the President of Argentina promised Siemens to issue the decree approving the Contract Restatement Proposal by the end of the month; however, in March 2001, the Minister of the Interior claimed to have been unaware of the Contract Restatement Proposal. In early May 2001, SITS received a new Draft Proposal from the government, differing from the Contract Restatement Proposal. SITS was later informed that the new proposal was not negotiable. Two weeks later, the Contract was terminated by decree under the terms of the 2000 Emergency Law. SITS filed an administrative appeal, which was rejected by another decree. In May 2002, Siemens filed its request for arbitration at ICSID (paras. 81–97).

1.2 Summary of Legal Issues, Award and Subsequent Developments

In its award dated 17 January 2007, the Tribunal held that Argentina had breached its obligations under the Germany–Argentina Bilateral Investment Treaty (BIT) by expropriating Siemens’ investment, failing to accord fair and equitable treatment to the investment, failing to provide full protection and legal security for the investment, and taking arbitrary measures with respect to the investment. The Tribunal ordered Argentina to pay Siemens compensation of approximately US$208 million for its investment, a further US$9 million for consequential damages and US$220,000 for unpaid bills for services by SITS to the government. The Tribunal also ordered Argentina to return the US$20 million performance bond provided by SITS under the Contract. The Tribunal rejected Siemens’ claim for US$124.5 million in lost profits (paras. 378–379).

In July 2007, Argentina filed an application for annulment with ICSID. Additionally, in July 2008, Argentina filed an application for revision of the award on the basis that a Siemens senior executive had given evidence before German courts that Siemens had won the Contract with the Argentine government through bribery. Argentina asserted that if this evidence had gone before the Tribunal in the arbitration proceeding, it might have rendered Siemens’ investments unlawful and ineligible for protection under the BIT.[1]In December 2008, Siemens A.G. and its Argentine subsidiary, Siemens Argentina S.A., each pleaded guilty to breaches of the U.S. Foreign Corrupt Practices Act. According to a statement of facts agreed to by the U.S. Department of Justice and Siemens Argentina, “Siemens Argentina made and caused to be made significant payments to various Argentine officials, both directly and indirectly, in exchange for favourable business treatment in connection with a $1 billion national identity card project.”[2] On 9 September 2009, following an undisclosed settlement between the parties, ICSID registered an order for the discontinuance of the arbitral proceeding.

2.0 Select Legal Issues

This case is notable in several respects. For one, it concludes that an investor can use a BIT’s most favoured nation (MFN) clause to get access to a more favourable dispute resolution clause in another BIT to which the host state is party. Additionally, it distinguishes the margin of appreciation that international human rights law allows states in meeting their human rights obligations,[3] holding that there is no such margin of appreciation in either customary international law or the BIT. And regarding umbrella clauses, it found that a clause that requires a host state to “observe any other obligation it has assumed with regard to investments” covered obligations contained in a contract, but only if both the host state and investor were party to the contract.

Important from the host state perspective, the award in Siemens v. Argentina clarified that not every breach of a contract is capable of being considered a potential expropriation, but rather only those interferences made through the use of the host state’s “superior governmental power.” Finally, although the award itself did not address investor corruption, the events in its aftermath support the growing view that investors should not be entitled to protection under a BIT when they have themselves acted unlawfully with respect to their investment. During the arbitration proceeding, Argentina had attempted to introduce evidence regarding the alleged corruption of Siemens, but the Tribunal refused on the basis that Argentina was raising the allegations too late.[4] However, the fact that the proceedings were settled and discontinued after Siemens’ senior executive gave evidence before the German courts that Siemens had won the Contract through bribery (and after Siemens pled guilty to violations of the U.S. Foreign Corrupt Practices Act) provides further support for the view that investors who have engaged in unlawful conduct should be ineligible for protection under a BIT. These issues are discussed further below.

2.1 Most favoured nation (MFN) treatment: Allowing a BIT’s MFN clause to import rights related to dispute settlement

Siemens sought to use the MFN clause in the BIT to avoid the treaty’s requirement that disputes be submitted to local courts for 18 months before investors can resort to arbitration. Siemens claimed that the BIT’s MFN clause entitled it to import a more favourable dispute resolution clause from the Chile–Argentina BIT, which did not require recourse to local courts first. Argentina filed a preliminary objection to jurisdiction, inter alia, objecting to Siemens’ use of the MFN clause in this way.

The Tribunal held that access to the special dispute settlement mechanism provided under the BIT was part of the “treatment” of foreign investors and investments protected under the BIT’s MFN clause.[5]  The Tribunal referred to the much-cited case of Maffezini v. Spain, where the investor was likewise allowed to use an MFN clause to access a more favourable dispute settlement clause in another Spanish BIT. TheSiemens Tribunal noted that the MFN clause at issue in Maffezini v. Spain referred to “all matters subject to this Agreement,” while the MFN clause in the BIT applicable to the Siemens dispute (the Germany–Argentina BIT) referred only to “treatment.” The Siemens Tribunal concurred with the Maffezini Tribunal’s finding that the formulation used in the Germany–Argentina BIT was a narrower formulation of the MFN obligation, but held that the term “treatment” and the phrase “activities related to the investments” were still sufficiently wide to include dispute settlement. The Tribunal, in fact, held that the term “treatment” was so general that its application could not be limited except as specifically agreed upon by the parties. The Tribunal concurred with the Maffezini Tribunal that an MFN clause may not override public policy considerations judged by the BIT’s parties as essential, but held that the public policy considerations adduced by Argentina were not applicable (paras. 103–109, Decision on Jurisdiction). The Tribunal thus dismissed Argentina’s preliminary objections to jurisdiction.

2.2 Expropriation: Clarifying that a state can only be found to have expropriated property if it acted in its sovereign capacity

The Tribunal held that not every breach of a contract was an expropriation and that, for the state to incur international responsibility, it must use its public authority, i.e., it must interfere with the contract using its “superior governmental power.” The Tribunal held, in this case, that Argentina had used its superior governmental power to interfere with the Contract in a number of ways, e.g., permanently suspending the printing of national identity cards, forcing changes in the Contract, and terminating the Contract by decree (paras. 245–260, Award). As to whether the expropriation was in accordance with Article 4(2) of the BIT, the Tribunal noted that this required the expropriation be for a public purpose and compensated. The Tribunal held that the 2000 Emergency Law (under which the decree terminating the contract was issued) was enacted to face the dire fiscal situation of the government and that the decree therefore met the public purpose requirement for expropriation under the BIT. The Tribunal held, however, that there was no evidence of a public purpose in the measures taken prior to the issuance of the decree (e.g., the permanent suspension of printing identity cards, and the forced contract changes).

The Tribunal held that, in any case, Argentina had not paid compensation for the expropriation as required under the BIT. For these reasons, the expropriation was unlawful (para. 273, Award).

2.3 The umbrella clause: Elevating contract breaches to treaty breaches only if both the state and investor are party to the contract

The Tribunal held that the umbrella clause in Article 7(2) of the BIT meant what it said, namely, that a failure to meet any obligation undertaken by the state with respect to any particular covered investment is converted into a breach of the BIT.[6] However, to the extent that the obligations assumed by the state are of a contractual nature, such obligations must originate in a contract between the state and the foreign investor. The Tribunal noted that in this case Siemens was not a party to the Contract and SITS was not a party to the arbitral proceedings (paras. 204–206).

2.4 Compensation: Addressing whether the amount of compensation owed is affected by the public interest nature of the state’s unlawful actions

The Tribunal held that the BIT itself only provided for compensation with respect to expropriation and that the measure of compensation for the other breaches identified by the Tribunal therefore was to be determined in accordance with customary international law. The Tribunal noted that the International Law Commission’s Draft Articles on State Responsibility currently are considered to most accurately reflect customary international law on this point. Article 36 on Compensation provides[7]:

  1. The State responsible for an internationally wrongful act is under an obligation to compensate for the damage caused thereby, insofar as such damage is not made good by restitution.

  2. The compensation shall cover any financially assessable damage including loss of profits insofar as it is established.

The Tribunal noted that the key difference between compensation under the Draft Articles and Article 4(2) of the BIT (on expropriation) is that under the former, compensation must take into account “all financially assessable damage” or “wipe out all the consequences of the illegal act” as opposed to compensation “equivalent to the value of the expropriated investment” under the BIT. Under customary international law, Siemens would be entitled not only to the value of its enterprise as of 18 May 2001 (the date of expropriation) but also to any greater value that enterprise gained up to the date of the award, plus any consequential damages to wipe out all the consequences of the illegal act.

Argentina argued that, when a state expropriates for social or economic reasons, fair market value should not apply because this would limit the sovereignty of countries, in particular poor countries, to introduce reforms. The Tribunal held that Argentina had not justified on what basis it would be considered a poor country, nor had it specified the reforms it sought to carry out. Argentina further relied on Tecmed v. Mexico to support its view of the need to consider the purpose and proportionality of the measures taken by the host state. Yet the Tribunal distinguished the Tecmed approach, observing that the Tecmed Tribunal considered the challenged measures’ purpose and proportionality when determining whether an expropriation had occurred and not when determining the compensation owed. TheSiemens Tribunal further observed that neither the Germany–Argentina BIT nor customary international law permitted a margin of appreciation as found in Article I of the First Protocol to the European Convention on Human Rights (paras. 348–357).


Notes

[1] L. E. Peterson (2008), “Argentina and Siemens ask annulment committee to suspend proceedings, following request by Argentina for revision of arbitral award in light of recent evidence of alleged bribes paid by German firm Siemens,” Investment Arbitration Reporter, 28 July.

[2] L. E. Peterson (2008), “Siemens, and its Argentine subsidiary, plead guilty to certain breaches of Foreign Corrupt-Practices Act (FCPA) in deal that brings U.S. bribery investigation to a close,” Investment Arbitration Reporter, 17 December.

[3] Article 1 of the First Protocol states: “The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.”

[4] Peterson (2008), “Argentina and Siemens ask annulment committee.”

[5] Article 3(1) of the Germany–Argentina BIT states, “None of the Contracting Parties shall accord in its territory to the investments of nationals or companies of the other Contracting Party or to investments in which they hold shares, a less favorable treatment than the treatment granted to the investments of its own nationals or companies or to the investments of nationals or companies of third States.”

Article 3(2) of the Germany–Argentina BIT states, “None of the Contracting Parties shall accord in its territory to nationals or companies of the other Contracting Party a less favorable treatment of activities related to investments than granted to its own nationals and companies or to the nationals and companies of third States.”

[6] Article 7(2) states, “Each Contracting Party shall observe any other obligation it has assumed with regard to investments by nationals or companies of the other Contracting Party in its territory.”

[7] Article 36, “Compensation,” is based on the judgment of the Permanent Court of International Justice in the Factory at Chorzów case, which held:

The essential principle contained in the actual notion of an illegal act—a principle which seems to be established by international practice and in particular by the decisions of arbitral tribunals—is reparation must, so far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed. (Factory at Chorzów, Merits, PCIJ, Series A, No. 17, 1928, p. 47)