Argentina ordered to pay over USD320 million for unlawful expropriation in airlines case

Teinver S.A., Transportes de Cercanías S.A. and Autobuses Urbanos del Sur S.A. v. The Argentine Republic, ICSID Case No. ARB/09/1

A majority tribunal at the International Centre for Settlement of Investment Disputes (ICSID) has held Argentina liable for unlawful expropriation and for failure to accord fair and equitable treatment (FET) in a case relating to Argentinian airlines, awarding over USD320 million in damages.

Background and claims

Three Spanish companies—Teinver S.A., Transportes de Cercanías S.A. and Autobuses Urbanos del Sur S.A.—brought the case against Argentina under the Argentina­–Spain bilateral investment treaty (BIT). The dispute arose out of Argentina’s measures related to the claimants’ investments in two Argentinian airlines: Aerolíneas Argentinas S.A. and Austral-Cielos del Sur S.A.

In 2001 the claimants’ Spanish subsidiary Air Comet purchased Interinvest, an Argentinian intermediary company that owned the majority of the shares of the airlines and operated them. In July 2008 Argentina and the three claimant companies concluded the purchase agreement of the two airlines, which provided that the price would be determined by agreement of two different valuators appointed by each party, or by a third and neutral valuator in case of disagreement. Argentina rejected the investors’ valuation, refused to agree on a neutral valuator and decided that a formal expropriation using a different valuation method was the only way to keep the airlines operating.

The claimants initiated arbitration in December 2008 alleging that Argentina violated the BIT, international law and Argentinian law by unlawfully expropriating their investment and failing to accord FET, among other breaches.

Argentina asserted that the claimants’ mismanagement was the cause of the declining financial condition and ultimately of the insolvency of the airlines. It also raised a counterclaim for damages for its losses due to the poor state of the airlines at the time of expropriation, allegedly caused by the claimants’ failure to undertake proper due diligence of the airlines.

Tribunal finds breaches of FET and expropriation clauses and dismisses counterclaim

The claimants alleged that Argentina took a series of measures that breached the expropriation and FET clauses.

The first act analyzed was Argentina’s alleged failure to set economically reasonable airfares. The claimants stated that Argentina set the airfares too low, impairing their right to earn a reasonable return. After examining Argentinian law, the tribunal concluded that airlines had a substantive right to the setting of economically reasonable airfares and that airfares set below a reasonable threshold entitled airlines to compensation under domestic law. Furthermore, the tribunal pointed out that the airfare increases did not match the increases in the costs incurred by the airlines.

The second issue was whether the investment was not profitable because of the claimants’ management or because of Argentina’s failure to establish economically reasonable airfares. The tribunal concluded that while some of Argentina’s criticism to the claimants’ performance appears to be valid and may have had affected the investment, ultimately the low airfares had a “substantial impact” on the profits (para. 637). However, the tribunal concluded that Argentina’s conduct in the setting of airfares and the denial to increase them between 2001 and 2008 did not constitute an FET breach.

Regarding the allegation that Argentina violated its FET obligation by frustrating the investors’ legitimate expectations, the tribunal analyzed the language of the treaty guided by the VCLT. It considered that “while the term legitimate expectations is also not found in the Treaty, the fair and equitable treatment language has been interpreted to oblige a State not to frustrate an investor’s legitimate expectations” (para. 667). Even so, it concluded that the claimants could not reasonably have had the expectations claimed, in light of the state of the Argentinian economy and the financial difficulties faced by the airlines when the investment was made.

In sum, the only FET breach the tribunal found concerns Argentina’s failure to comply with the valuation method for the purchase of Interinvest’s shares in the airlines under the July 2008 purchase agreement (para. 857).

In its defence to the expropriation claim, Argentina asserted that, by providing a symbolic compensation of ARS1 (roughly USD0.06) for the shares of Interinvest given that the investment was unprofitable at the time of expropriation, it complied with the adequate compensation requirement. However, according to the tribunal, Argentina failed to provide adequate compensation by rejecting the agreed upon valuation method and proceeding to a formal expropriation on a different valuation methodology. The tribunal held that an unlawful expropriation took place because Argentina failed to pay adequate compensation as well as because it was not made in accordance with the law.

Finally, the tribunal dismissed Argentina’s counterclaim, having found that Argentina did not identify any substantive right or obligation on which it could rely or any legal basis under the BIT.

Tribunal rejects attempt to import umbrella clause through MFN, but accepts importation of full protection and security clause

The claimants also relied on the most-favoured-nation (MFN) provision of the BIT to attempt to import clauses of the Argentina–United States BIT.

First, the tribunal decided that the MFN clause was not restricted to the FET provision only, as Argentina had argued, but that it could be used to import more favorable provisions in respect to “all matters” governed by the BIT. It then went on to consider the claimants’ request to import the umbrella clause and the full protection and security (FPS) provisions from the Argentina–United States BIT as the Argentina–Spain BIT included no such provisions.

The tribunal rejected the importation of the umbrella clause, considering that it would imply the incorporation of a new right or standard that was not included in the base treaty while the MFN language specifically referred to “all matters” governed by the treaty.

Turning to the FPS clause, the tribunal accepted its importation, noting that Article III(1) of the Argentina–Spain BIT establishes the protection of investments as a matter governed by the treaty. Even so, the tribunal ultimately found no breach of the FPS standard, relying on its findings regarding the FET standard related to the regulatory framework governing airfares (para. 906).

Decision and costs: Argentina to pay over USD320 million in compensation

The tribunal decided by majority that Argentina unlawfully expropriated the claimants’ investment, breached its FET obligation and took unjustified measures that interfered with claimants’ rights to the investment. It awarded compensation of USD320,760,000 plus interest and requested Argentina to pay USD3,494,807 toward the claimants’ reasonable legal and other costs of these proceedings.

Dissenting opinion: was there really a protected investment?

Arbitrator Kamal Hossain noted that the award failed to settle certain unresolved jurisdictional issues, particularly regarding the claimants’ identity. The award merely explains that the claimants owned Air Comet, which acquired Interinvest, the Argentinian entity that owned and controlled the airlines. However, the dissent indicates that, when Air Comet bought the shares in Interinvest, Air Comet was owned by only two of the three claimants.

According to Hossain, in the award the term “claimants” appears to refer not only to the three companies but also to Air Comet and Interinvest. Given that Air Comet is formally not a claimant and that the claimants did not purchase any shares, the dissenting arbitrator indicated that the three claimant investors failed to prove their investment in the airlines.

In Hossain’s view, the acquisition of shares in Air Comet by the three Spanish claimants could not be treated as a protected “investment” under the BIT, considering Air Comet is also a Spanish entity. Accordingly, Hossain concluded that the tribunal had no jurisdiction given that the claimants failed to establish that they are investors protected under the BIT.

Notes: The arbitral tribunal was composed by Thomas Buergenthal (President appointed by the Chairman of the ICSID Administrative Council, U.S. national), Henri C. Alvarez (claimant’s appointee, Canadian national), and Kamal Hossain (respondent’s appointee, Bangladeshi national). The Award and the Dissenting Opinion of July 21, 2017 are available in English and Spanish at

Maria Florencia Sarmiento is a teaching and research assistant at the Catholic University of Argentina.