By Elizabeth Whitsitt
2 March 2009
In a recently published award, a tribunal convened pursuant to a request for arbitration under the arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL) found the Argentine Republic liable to the British firm National Grid p.l.c. for damages totaling more than US$53 million.
The dispute, like dozens of others, relates to measures taken by Argentina in 2002 in the midst of its financial crisis.
In 1989 and 1991, Argentina enacted laws providing for the privatization of, among other things, its electricity sector, while also pegging the peso to the US dollar at a fixed exchange rate of one peso to one US dollar. As a result of such changes and through a series of corporate transactions, National Grid became a shareholder in two corporations, Transener and Transba, which were granted 95-year concessions to provide high-voltage electricity transmission services.
In addition to the concessions, National Grid, via Transener, made investments in the upgrading and expansion of Argentina’s electricity transmission system. In 1997, 1999 and 2001, Transener was awarded three contracts to construct, operate and maintain transmission lines in return for periodic payments from the beneficiaries of the lines. These payments, or cánones, were to be calculated in US dollars and adjusted periodically in accordance with the US Consumer Price Index (“CPI”) and the US Producer Price Index (“PPI”).
In response to its economic crisis, however, the Argentine Republic amended its State Reform and Convertibility Laws in early 2002. As a result, the following changes occurred: (i) the claimant lost its right to calculate public utility tariffs in dollars and to adjust those tariffs on the basis of international price indices, (ii) public service tariffs were converted into Argentine pesos at the rate of one peso to one US dollar and were frozen at that rate, (iii) other dollar-denominated payment obligations and their adjustment by international indices became subject to those same exchange-rate restrictions, and (iv) electricity transmission and public utility companies could not suspend or modify compliance with their obligations under their concessions and licenses.
Asserting that the above amendments destroyed the remuneration regime provided for under the concessions and the previous regulatory framework, National Grid commenced arbitral proceedings against Argentina in April 2003. Specifically, National Grid argued that the Argentine Republic: (i) expropriated its investment, (ii) treated its investment unfairly and inequitably, (iii) failed to provide its investment protection and constant security, (iv) implemented laws that were unreasonable and discriminatory against the energy sector, and (v) breached the protections afforded investments pursuant to the umbrella clause in the UK-Argentine BIT.
While Argentina countered the above assertions using a number of arguments, its main contention was that “…its conduct was licit and exempt from responsibility because the Measures were taken in response to a state of necessity.” Specifically, the Argentina argued the economic crisis was the result of a number of external factors including but not limited to: (i) increases in the dollar rate of interest, (ii) collapsing emerging markets, (iii) the devaluation of the Brazilian currency, and (iv) falling prices of exported goods.
In its 3 November 2008 decision, released to the public in February 2009, the tribunal first assessed the claims of National Grid. In so doing, the tribunal rejected the claimant’s assertions regarding expropriation, discrimination and the UK-Argentine BIT umbrella clause. It did find, however, that the Argentine Republic breached the “fair and equitable treatment” and “protection and constant security” standards owed to the claimant’s investment under Article 2(2) of the UK-Argentina BIT. With respect to both violations, the tribunal noted that in 2002 the Argentina fundamentally changed the legal framework that had been used to solicit National Grid’s investment.
After finding the Argentine Republic in breach of those standards, the tribunal went on to consider the “state of necessity” defense. Referring to the International Law Commission’s draft articles on state responsibility, the tribunal noted that necessity may not be invoked as a defense by a state if that state has contributed to the situation of necessity. Applying this principle to the facts of this case, the tribunal was not convinced that Argentina’s economic crisis was solely attributable to external factors. Rather, the tribunal found that “[i]nternal factors such as external indebtedness, fiscal policies or labor market rigidity were under the control of the Respondent and created fertile ground for the crisis to develop when in the late nineties the external factors adduced by the Respondent came to play.”
National Grid p.l.c. v. Argentine Republic is not the first time an arbitral tribunal has considered the Argentine Republic’s argument that a change in domestic law was a necessary response to the economic crisis it had experienced in early 2002. The differing results, however, reflect the continued difficulty arbitral tribunals have in assessing the legitimacy of the necessity defense and whether domestic measures in this case were justifiable.
A copy of the award, National Grid plc v The Argentine Republic, is available from the website of Investment Treaty: http://ita.law.uvic.ca/documents/NGvArgentina.pdf