(Originally published in 2011 in International Investment Law and Sustainable Development: Key cases from 2000\u20132010<\/em><\/a>; republished on this website on October 18, 2018. Read more here.<\/a>)<\/p>\n Decisions and award available at\u00a0https:\/\/www.italaw.com\/cases\/329<\/a><\/p>\n Expropriation, fair and equitable treatment, legitimate expectations,\u00a0margin of appreciation, necessity defence, reference to other bodies\/principles of law,\u00a0umbrella clause<\/p>\n Request for Arbitration: 17 July 2003<\/p>\n Decision on Jurisdiction: 22 February 2006<\/p>\n Award: 5 September 2008<\/p>\n Decision on Preliminary Objection to Application for Annulment: 23 October 2009<\/p>\n Decision on Stay of Enforcement of Award: 23 October 2009<\/p>\n Decision on Annulment: Pending[1]<\/a><\/p>\n Prof. Giorgio Sacerdoti (president)<\/p>\n Mr. V. V. Veeder (claimant appointee)<\/p>\n Lic. Michell Nader (respondent appointee)<\/p>\n International Centre for Settlement of Investment Disputes (ICSID<\/span>)<\/p>\n ICSID Rules of Procedure for Arbitration Proceedings<\/p>\n United States\u2013Argentina Bilateral Investment Treaty (BIT<\/span>)<\/p>\n This case is one of the more than forty investment treaty arbitrations brought by investors challenging measures taken by Argentina in response to its 2001\u20132002 financial crisis. In June 1997, prior to the crisis, Continental Casualty (\u201cContinental\u201d), a U.S. company, acquired a 70 per cent shareholding in one of Argentina\u2019s leading providers of workers\u2019 compensation insurance services. In December 2000, Continental increased ownership of its Argentine subsidiary to 99.9995 per cent and the subsidiary\u2019s name was changed to CNA ART.<\/p>\n According to Continental, prior to March 2001, the CNA ART investment portfolio was primarily in assets denominated in Argentine pesos, which were at the time fully convertible to U.S. dollars at a one-to-one exchange rate. In order to hedge the risk of devaluation during the financial crisis, CNA ART\u2019s management decided to invest assets within Argentina in low-risk U.S.-denominated assets. Continental claimed that commencing in December 2001, Argentina enacted a series of decrees and resolutions that destroyed the legal security of the assets held by CNA ART and frustrated CNA ART\u2019s ability to hedge against the risk of the devaluation of the peso. Inter alia, Argentina restricted transfers out of its territory, pesified U.S. dollar deposits, and pesified and defaulted on its debt instruments. Continental claimed that, due to these measures, it suffered losses of US$46,412,000 (paras. 16\u201319).<\/p>\n The Tribunal held that Continental failed entirely in its claims based on freedom of transfer and the umbrella clause (regarding non-contractual obligations). The Tribunal further held that the defence of necessity in the United States\u2013Argentina Bilateral Investment Treaty (BIT) precluded Argentina\u2019s liability for breaching the BIT\u2019s umbrella clause (regarding contractual obligations) and for failing to ensure fair and equitable treatment (other than regarding certain treasury bills). The sole claim on which Continental prevailed was that of breach of fair and equitable treatment regarding the 2004 restructuring of certain treasury bills (known as \u201cLETEs\u201d). For this breach, the Tribunal held Argentina liable to pay compensation of US$2,800,000 plus interest (paras. 304\u2013305).<\/p>\n Both Continental and Argentina have sought annulment of the award; a decision on annulment is pending as of 31 December 2010.<\/p>\n This case is important in two main respects. First, it is notable for its discussion of umbrella clauses requiring the host state to observe \u201cany obligations it may have entered into with regard to investments.\u201d The Tribunal held that obligations contained in the general law of the host state are not covered by umbrella clauses; rather, to be covered, laws must address a specific business sector and its investors. Moreover, the Tribunal held that obligations contained in a contract entered into regarding the investment may be covered, even if the claimant was not a party to the contract. This contrasts with the finding of the tribunal in Siemens v. Argentina<\/em>, which held that an umbrella clause did not cover obligations contained in a contract to which the host state was not a party. The Continental Casualty <\/em>award is also notable for its finding that Argentina qualified for the defence of necessity under Article XI of the BIT, in particular its view that the standard of \u201cnecessary\u201d should be based not on the customary law standard set out in Article 25 of the Draft Articles on State Responsibility, but rather on the standard used in World Trade Organization (WTO<\/span>) law regarding Article XX of the General Agreement on Tariffs and Trade (GATT<\/span>).<\/p>\n The Tribunal held that the ordinary meaning of Article XI[2]<\/a>\u00a0of the BIT indicated that any measure properly taken because it was necessary \u201cfor the maintenance of the public order\u201d or for \u201cthe protection of essential security interests\u201d would lie outside the scope of the BIT, so that the party taking it would not be in breach of the treaty (para. 164). The Tribunal differentiated Article XI of the BIT from the defence of necessity under customary international law and held that Article XI was not subject to the same strict requirements as the plea of necessity under customary international law (para. 167). The Tribunal noted that the parties disagreed over the application of Article XI, in particular (i) whether the 2001\u20132002 crisis involved the \u201cmaintenance of public order\u201d and\/or the protection of Argentina\u2019s \u201cessential security interests,\u201d (ii) whether Article XI was \u201cself- judging,\u201d and (iii) whether the challenged measures were \u201cnecessary\u201d in order to maintain the public order and protect the essential security interests of Argentina (para. 169).<\/p>\n The Tribunal held that \u201cmaintenance of public order\u201d was intended as a synonym for \u201cpublic peace,\u201d which could be threatened by insurrections, riots and violent disturbances of the peace. Actions by central government to preserve or restore civil peace, even when due to significant economic and social difficulties, could fall within the scope of Article XI. As to \u201cessential security interests,\u201d the Tribunal recalled that international law was not blind to states\u2019 needs to exercise their sovereignty in the interest of their populations, free from internal as well as external threats to security. Such national interests might include protecting the health, safety and welfare of a state\u2019s people.<\/p>\n The Tribunal held that it was impossible to deny that, inter alia, the near collapse of the domestic economy, the social hardships bringing more than half the population below the poverty line, the real risk of political disturbances, the abrupt resignations of successive presidents, and the resort to emergency legislation, taken together, qualified as a situation where the maintenance of public order and the protection of essential security interests of Argentina were vitally at stake. According to the Tribunal, the protection of essential security interests under Article XI does not require \u201ctotal collapse\u201d of the country \u201cbefore responsible national authorities may have recourse to its protection\u2026. There is no point in having such protection if there is nothing left to protect\u201d (para. 180). The Tribunal adds, \u201cMoreover, in the Tribunal\u2019s view, this objective assessment [of the scope of the exception] must contain a significant margin of appreciation for the state applying the particular measure: a time of grave crisis is not a time for nice judgments, particularly when examined by others with the [advantage] of hindsight\u201d (para. 181).<\/p>\n The Tribunal held that, contrary to Argentina\u2019s assertion, Article XI of the BIT was not self-judging (para. 187).<\/p>\n The Tribunal disagreed with the tribunal in Enron v. Argentina <\/em>that the standard of \u201cnecessary\u201d under the BIT was inseparable from the customary law meaning of \u201cnecessary.\u201d[3]<\/a> Rather, the Tribunal held that because the text of Article XI reflected the formulation of Article XX of the GATT, it was more appropriate to refer to WTO case law. With regard to the necessity test under Article XX of the GATT, the Tribunal held that it was well established that \u201cnecessary\u201d is not limited to that which is \u201cindispensable,\u201d although it was located on a continuum significantly closer to \u201cindispensable\u201d than merely \u201cmaking a contribution to.\u201d To determine whether a measure that is not indispensable may nevertheless be \u201cnecessary,\u201d one should weigh the relative importance of interests furthered by the measure, the measure\u2019s contribution to realizing the ends pursued, and the impact of the measure on international commerce.<\/p>\n Under WTO law, a measure is not necessary if another treaty-consistent or less inconsistent alternative measure that the concerned member state could reasonably be expected to employ is available. An alternative measure is not \u201creasonably available\u201d where it is merely theoretical in nature, e.g., where the member state is not capable of taking it or where the measure imposes an undue burden, such as prohibitive costs or technical difficulties. Moreover, a \u201creasonably available\u201d alternative must be a measure that would preserve the state\u2019s right to achieve its desired level of protection with respect to the objective pursued (paras. 191\u2013195).<\/p>\n The Tribunal assessed each of the challenged measures in light of the principles drawn from WTO law. It noted that it was not called upon to make any political or economic judgment on Argentina\u2019s policies but only to evaluate if the plea of necessity was well-founded (paras. 196\u2013199). The Tribunal concluded that for all but one of the challenged measures, there were no reasonably available alternatives. The one exception was Argentina\u2019s restructuring of certain treasury bills (LETEs) in December 2004. The Tribunal rejected the defence of necessity under Article XI with respect to the restructuring of the LETEs, inter alia, because of the late date in which the swap was offered, when Argentina\u2019s financial conditions were evolving toward normality. The Tribunal held that the same factor meant that Argentina could not avail itself of the alternative defence of necessity in customary international law, either (paras. 220\u2013221).<\/p>\n Continental claimed that \u201ca stable legal and business environment\u201d was an essential element of the fair and equitable treatment standard and that as an investor it had a \u201clegitimate expectation\u201d that the convertibility regime of Argentina would not be changed. The Tribunal, however, held that Continental\u2019s situation was significantly different from some of the other investor claims against Argentina regarding measures taken during the financial crisis. In particular, the legal or contractual measures at issue in the present case were addressed either to the generality of Argentina\u2019s public or to a wide range of depositors and subscribers of financial instruments. Moreover, Continental had not relied on the general legislative \u201cassurances\u201d in making its investment in Argentina, since it had entered into that market before these assurances were made.<\/p>\n In light of the above, the Tribunal concluded that Continental could not invoke legitimate expectations regarding the change of the currency convertibility regime, notwithstanding political declarations that convertibility would not be abandoned. As far as the pesification of debt securities contracts being considered contrary to fair and equitable treatment, the Tribunal noted that these measures were general and not discriminatory and moreover the necessity defence under Article XI precluded Argentina\u2019s liability. The Tribunal did find, however, that Argentina had breached fair and equitable treatment with respect to its 2004 restructuring of the LETE treasury bills and, as noted above, the Tribunal also held that, due to the late date of this restructuring, the defence of necessity was not available. The Tribunal held that the terms of the unilateral restructuring were unfair, in particular because they required holders to take substantial losses and to waive all rights, including the protection of the BIT (paras. 249\u2013265).<\/p>\n The Tribunal noted that arbitral tribunals\u2019 interpretations of umbrella clauses requiring a host state to observe \u201cany obligations it may have entered into with regard to investments\u201d remained inconsistent. It held that to be covered, obligations must address the investments with some degree of specificity, i.e., obligations contained in the general law of the host state would not be covered. The clause may however, cover unilateral commitments arising from the host state\u2019s law regulating a particular business sector and addressed specifically to the foreign investors therein. Provided that the obligations had been entered \u201cwith regard\u201d to investments, they might be entered into with persons or entities other than the investor itself, so that a contractual undertaking by Argentina to Continental\u2019s subsidiary CNA ART would not, in principle, be excluded.<\/p>\n The Tribunal held that the legislative assurances relied upon by Continental were not covered by the umbrella clause because they were directed either to Argentina\u2019s general public or to a wide range of depositors and subscribers. Regarding contractual assurances contained in the debt securities, the Tribunal held that such obligations were guaranteed by the umbrella clause, but that liability was precluded by Argentina\u2019s defence of necessity under Article XI. With respect to the LETE treasury bills, the Tribunal held that because it had already found a breach of fair and equitable treatment regarding the bills, it did not need to investigate further whether Argentina\u2019s actions regarding the LETEs also breached the umbrella clause (paras. 287\u2013303).<\/p>\n [1]<\/a>\u00a0As of 31 December 2010.<\/p>\nKeywords<\/h3>\n
Key dates<\/h3>\n
Arbitrators<\/h3>\n
Forum and applicable procedural rules<\/h3>\n
Applicable treaty<\/h3>\n
Alleged treaty violations<\/h3>\n
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Other legal issues raised<\/h3>\n
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1.0 Case Summary<\/h2>\n
1.1 Factual background<\/h3>\n
1.2 Summary of legal issues and decisions<\/h3>\n
2.0 Select Legal Issues<\/h2>\n
2.1 Accepting Argentina\u2019s defence of necessity<\/h3>\n
2.2 Fair and equitable treatment and\u00a0the issue of non-discriminatory laws of general application<\/h3>\n
2.3 Adopting a broad interpretation of the umbrella clause as encompassing a wide array of contractual commitments<\/h3>\n
\nNotes<\/h3>\n