Argentina on the hook for breach of Fair and Equitable Treatment
Suez, Sociedad General de Aguas de Barcelona S.A., and Vivendi Universal v. Argentine Republic (ICSID Case No. ARB/03/19)
On 30 July 2010, the ICSID tribunal in Suez, Sociedad General de Aguas de Barcelona S.A., and Vivendi Universal v. Argentina issued a decision unanimously finding Argentina liable to the claimants in three separate, but procedurally consolidated, cases.
In 1993, in connection with a privatization program, Argentina granted a 30-year concession to operate water and waste-water services in and around the city of Buenos Aires to an Argentine company, AASA. That company had been formed and funded to operate the concession by a group of foreign investors, including the claimants, Suez, Vivendi Universal S.A., Sociedad General de Aguas de Barcelona S.A. and Anglian Water Group Ltd. (AWG).
After roughly ten years of the concession’s operation, in April 2003 the foreign investors in AASA initiated these cases against Argentina, alleging that a number of government actions and omissions related to the country’s financial crisis derailed the concession and destroyed the value of the investment.
The claimants charge that the governments’ conduct violated Argentina’s obligations to the investors under applicable Bilateral Investment Treaties (BITs) with Spain, the UK and France.
Specifically, the claimants argued that Argentina breached the treaty because it (1) unlawfully expropriated the investors’ property, (2) failed to grant the investors “full protection and security,” and (3) failed to provide the investors fair and equitable treatment (FET).
According to the Claimants, these breaches arose from general legal and regulatory measures enacted by Argentina, Argentina’s conduct to “force” renegotiations of the concession, and Argentina’s unwillingness to raise the tariff for water and waste-water services.
In 2006, Argentina terminated the concession and transferred the water and waste-water services system to a state entity. Argentina supported that action by alleging AASA had breached its obligations under the concession agreement by, among other failures, providing water with excessive levels of nitrate. The Claimants added Argentina’s termination of the contract to their list of purportedly wrongful conduct supporting their claims.
The Tribunal first rejected the Claimants’ arguments that general legal and regulatory measures enacted by the government expropriated the investors’ property. The Tribunal stated that such actions were within the country’s general police powers and therefore could not be expropriatory.
Second, the Tribunal reasoned that the government’s unwillingness to raise the tariffs likewise did not constitute an expropriation because such inaction did not substantially deprive the investors of their investment.
Third, the Tribunal determined that although the government’s actions in connection with terminating the concession might have constituted a contract breach, they did not rise to the level of a treaty violation.
Next, the Tribunal evaluated and rejected the investors’ “full protection and security” claim. In doing so, the Tribunal stated it would not follow other recent decisions’ expansive interpretations of the obligation. Instead, it adopted the obligation’s “traditional” meaning, which, according to the Tribunal, essentially only requires governments to protect investors and investments from physical injury.
The Tribunal then turned to the FET obligation. It interpreted the obligation as requiring states to protect investors’ objective and reasonable “legitimate expectations” taking into account all relevant circumstances. Those circumstances, noted the Tribunal, include such factors as the nature of the investment, Argentina’s rights and interests to exercise its regulatory authority, and Argentina’s history and political, economic and social conditions.
Applying that interpretation, the Tribunal concluded that Argentina breached the FET obligation by refusing to adjust the tariff and through its “forceful” treatment of AASA in attempts to renegotiate the terms of the concession contract. However, it rejected the Claimants’ arguments that the government’s termination of the agreement violated the standard. The Tribunal explained that although that the termination might have breached the contract, it did not rise to the level of a treaty breach.
Notably, one of the members of the tribunal, Professor Pedro Nikken, wrote separately to critique the tribunal’s interpretation of the FET obligation. In particular, he disputed the notion advanced by the Tribunal in this case and others that the standard aimed to protect investors “legitimate expectations.” Nevertheless, Professor Nikken stated that he agreed with the Tribunal’s ultimate conclusion that Argentina breached the FET obligation.
Finally, the Tribunal addressed whether the “necessity” defense under customary international law absolved Argentina of liability. It accepted Argentina’s argument that the country experienced a severe economic crisis that could in theory justify the defense. Nevertheless, the defense did not protect Argentina in these cases because, the Tribunal reasoned, Argentina could have taken other actions to respond to the crisis that did not violate the investors’ rights.
Argentina had urged the Tribunal to take into account the fact that the concession dealt with water and impacted the human right to that resource. The Tribunal also noted that an amicus curiae brief submitted by a group of five NGOs had made similar arguments.
However, the Tribunal rejected the notion that a government’s human rights obligations to assure its population the right to water trump its obligations to investors under BITs. According to the Tribunal, states must respect both its human rights and treaty obligations equally.
The Tribunal’s decision only addresses liability. It will now proceed to determine the amount of damages, fees and expenses Argentina must pay.
Award against Argentina annulled
Sempra Energy International v. Argentine Republic (ICSID Case No. ARB/02/16)
On 29 June 2010, the ad hoc Annulment Committee in one of the many investment cases against Argentina annulled the Tribunal’s previous award against that country.
This dispute, like the vast majority of the investment disputes filed against Argentina, arose out of actions taken by the government in response to its financial crisis during the late 1990s and early 2000s.
The Claimant, a US investor that held shares in two Argentine natural gas distribution companies, initiated its ICSID action on 11 September 2002. It alleged that the government’s conduct violated the investor’s rights and breached the country’s obligations under the applicable Bilateral Investment Treaty (BIT) between the United States and Argentina.
On 28 September 2007, the Tribunal found that Argentina had breached the fair and equitable treatment (FET) obligation and the “umbrella” clause.
Argentina filed an application for annulment of the decision on 25 January 2008.
In support of its application, Argentina argued that the Tribunal erred in assuming jurisdiction over the dispute, in its treatment of an arbitrator challenge, in admitting and interpreting certain items of evidence, and in interpreting and applying the FET standard, the “umbrella” clause, and the “necessity” defenses.
These flaws, Argentina further asserted, supported annulment pursuant to Article 52 of the ICSID Convention on the grounds that the Tribunal (1) was not properly constituted, (2) manifestly exceeded its powers, (3) seriously departed from a fundamental rule of procedure, and (4) failed to state reasons on which the award was based.
The Annulment Committee first addressed the issue of jurisdiction. Argentina had argued that Sempra, as a minority shareholder in the natural gas distribution companies affected by Argentina’s measures, did not have standing to bring claims relating to harms allegedly suffered by those companies.
However, the Committee quickly rejected that argument, stating that it was “clearly of the opinion that Sempra” could bring its ICSID claims as they alleged damage to its investment, the minority shareholdings.
Next, the Annulment Committee examined Argentina’s claim that the Tribunal manifestly exceeded its powers by equating the Article XI necessity defense with the CIL necessity defense. According to Argentina, the Article XI defense was distinct from, and required application of a different, less stringent test than the CIL defense. Thus, it continued, the Tribunal was obligated to, but did not, apply the Article XI test, and that failure to apply the applicable law constituted a manifest excess of powers.
The Annulment Committee agreed that the Tribunal manifestly exceed its powers by failing to distinctly apply the applicable law, Article XI of the BIT. In reaching its conclusion that the CIL defense and treaty provision were in fact different and required separate analysis and application, the Committee highlighted a key distinction between the two.
According to the Committee, the CIL defense assumes the conduct it covers is “not in conformity with an international obligation of the State.” In contrast, the Article XI provision states that, if it applies, the State’s action will not be incompatible with its treaty obligations in the first place. (para. 200).
The Committee then concluded that because the Tribunal manifestly exceeded its powers by failing to apply the applicable treaty provision, the Committee had to annul the award in its entirety.
Second Argentine award annulled in one month
Enron Creditors Recovery Corporation and Ponderosa Assets, L.P. v.
Argentine Republic (ICSID Case No. ARB/01/3)-Annulment Proceeding
Following on the heels of the Sempra annulment decision, on 30 July 2010, the ad hoc Annulment Committee in this case annulled significant parts of the ICSID Tribunal’s May 2007 award. This decision relieved Argentina of the obligation to pay the claimants, Enron Creditors Recovery Corporation and Ponderosa Assets L.P., the roughly US$ 100 million in compensation that had been ordered by the Tribunal.
The Claimants were minority shareholders in an Argentine gas transportation company, TGS. They invested in the company in 1992 after Argentina privatized its gas distribution and transportation sectors. The dispute arose when Argentina took various measures in response to its financial crisis that affected the legal and regulatory framework governing TGS’s operations.
The foreign investors’ initiated their case arguing that the government’s actions harmed their investment in TGS and violated various provisions in the Bilateral Investment Treaty (BIT) between the United States and Argentina.
The Tribunal determined that Argentina’s actions violated the treaty’s Fair and Equitable (FET) obligation and the “umbrella” clause and ordered Argentina to pay the Claimants US$ 106.2 million.
Argentina then sought to annul the decision. It argued to the ad hoc Annulment Committee constituted to hear the matter that the Tribunal’s decision should be annulled based on several of the limited grounds for annulment that are permitted in Article 52 of the ICSID Convention.
More specifically, Argentina asserted that the Tribunal (1) had manifestly exceeded its powers, (2) seriously departed from a fundamental rule of procedure, and (3) failed to state reasons on which the award was based. The Tribunal’s failures, Argentina asserted, were numerous and included its acceptance of jurisdiction, admission and evaluation of evidence, and the Tribunal’s interpretation of Argentina’s obligations and defenses under the BIT.
When evaluating the merits of Argentina’s application, the Annulment Committee peppered the decision with statements regarding its restricted role. It explained that per the ICSID Convention and guidance from other annulment decisions, its function was to ensure that the award was legitimate, not correct or convincing. Further, the Committee stated that it was not responsible for ensuring consistency in jurisprudence. That responsibility, it added, more properly belonged to the investment tribunals.
One by one, the Committee rejected Argentina’s contentions regarding the Tribunal’s findings that it had jurisdiction and that Argentina’s conduct breached the FET obligation and the “umbrella” clause.
However, based on arguments the Committee seemed to raise on its own accord, it annulled the Tribunal’s finding that Argentina could not rely on the defense of “necessity” under customary international law (CIL).
The Committee stated that annulment on this issue was warranted because, when considering the CIL defense, the Tribunal had failed to apply the applicable law and failed to state reasons for its finding.
More specifically, among the Tribunal’s failures were that it too promptly concluded that the CIL necessity defense would only apply if the challenged measures were the “only” means available to the state to protect its essential interests. Similarly, the Committee stated that even if that were the proper test, the Tribunal was too quick to conclude that Argentina did not satisfy it.
Another error supporting annulment was that the Tribunal was too cursory in its determination that Argentina could not benefit from the CIL defense because it itself had contributed to the state of necessity in the country.
In the award, the Tribunal had relied on its determination that the CIL defense of necessity did not apply in order to also find that the necessity exception contained in the applicable BIT did not cover Argentina’s actions. Consequently, based on its decision annulling the aspect of the award regarding the CIL necessity defense, the Committee also annulled the aspect of the award in which the Tribunal stated that the treaty defense did not apply.
The Committee specified, however, that it was not expressing any view on the relationship between the CIL defense and the treaty defense, nor on the Tribunal’s conclusion that the meaning of those two defenses was essentially the same.
The Committee then proceeded to annul the Tribunal’s findings that Argentina had breached the FET obligation and violated its obligations under the “umbrella” clause. According to the Committee, these decisions had to be annulled because, had the Tribunal determined the necessity defenses applied, it might have found that Argentina was not liable for any breach of the BIT.
Claim against Turkey deemed “frivolous”
Mr. Saba Fakes and Republic of Turkey, (ICSID Case No. ARB/07/20) – Award
An ICSID tribunal has struck down a claim by the Saba Fakes*, a Dutch and Jordanian national, for lack of jurisdiction, marking the latest of several unsuccessful bids against Turkey by claimants linked to the Uzan family.
The Uzans, a Turkish family that controlled a vast business empire, have faced multiple criminal proceedings in Turkey related to fraud and money laundering, as well a high-profile 2001-2002 lawsuit in New York brought by Nokia Corporation and Motorola Credit Corporation.
The present case involves shares held by members of the Uzan family in Telsim, a major mobile phone company in Turkey. The Claimant in this dispute argues that he became legal owner of those shares in 2003, before they were seized and sold by Turkish authorities.
Mr. Fakes brought his US$ 19 billion claim before ICSID in 2007, alleging multiple breaches of the Dutch-Turkey BIT
The Tribunals deliberations centered primarily on the question of whether Mr. Fakes had an investment in Turkey, as intended by the ICSID Convention and the Dutch-Turkey BIT.
Determining the existence of an investment often poses a challenge in ICSID arbitrations because the ICSID Convention does not provide a definition or criteria for the term ‘investment’. Lacking clear guidance, tribunals have taken widely diverging approaches.
The so-called Salini test, used by some tribunals, holds that the ICSID Convention requires that an investment consist of four criteria: (1) a contribution (2) a certain duration (3) an element of risk and (4) a contribution to the host State’s economic development. Some tribunals have added criteria to the list, while others have stripped them away.
In this case, the Tribunal settled on three criteria: contribution, duration and risk, explaining that:
“These three criteria derive from the ordinary meaning of the word ‘investment’, be it in the context of a complex international transaction or that of the education of one’s child: in both instances, one is required to contribute a certain amount of funds or know-how, one cannot harvest the benefits of such contribution instantaneously, and one runs the risk that no benefits would be reaped at all, as a project might never be completed or a child might be up to his parents’ hopes or expectations.”
Ultimately, the Tribunal determined that the Mr. Fakes arrangement with Mr. Uzan failed to meet any of these criteria, in large part because Mr. Fakes never realized legal ownership over the Telsim shares.
According to Mr. Fakes’ testimony, his role was to act as “bait” to lure potential buyers of the Telsim shares, by masking the role of Mr. Uzan as the true owner of the shares.
To discourage similarly “frivolous” claims, Mr. Fakes has been ordered to cover the full cost of the proceedings. Therefore, in addition to his own costs, the Mr. Fakes is also on the hook for US$ 182,500.00 of Turkey’s expenses.
Tribunals have taken a similarly dim view of other claims against Turkey involving members of the Uzan family. For reporting on these cases, see:
Tribunal dismisses claim by Europe Cement against Turkey; Claimant ordered to bear cost of the arbitration”, by Damon Vis-Dunbar, September 2009, available here: http://www.investmenttreatynews.org/content/archives.aspx
“Cementownia claim against Turkey found to be ‘manifestly ill-founded’”, By Elizabeth Whitsitt, November 2009, available here: http://www.investmenttreatynews.org/cms/news/archive/2009/11/01/cementownia-claim-against-turkey-found-to-be-manifestly-ill-founded.aspx