It is not unreasonable to cry for Argentina in most of its cases at ICSID

Bernard Guerrero asks: “You mentioned in an earlier post that Argentina had justice on its side with regards to the various ICSID cases. How so?”

An excellent question! Short answer: most of Argentina’s cases are a direct result of the 2001 devaluation. The Argentine government acted prudently and responsibly in the aftermath of that economic collapse. In the face of 1.2 million job losses, and riots in the streets, it was entirely reasonable to freeze rates, cancel contracts, default on debt, and pesify dollar-denominated bank accounts. (The scale of the turn-of-the-century Argentine depression is immense.) Such actions were legal under Argentine law, and would have been legal in the United States. (FDR confiscated gold back in the day.) Unfortunately, the Washington Convention and associated bilateral investment treaties are more restrictive, which gave foreign companies operating in Argentina the right to sue for damages from the price freezes.

In other words, until Repsol, none of the Argentine cases at ICSID involved straight-up opportunistic property seizures without fair compensation. Rather, they involved emergency measures taken in the midst of a Depression-scale crisis. The companies could not have possibly expected the real value of their tariffs to quadruple in the middle of a 20% crash in GDP and 10% plunge in employment, which is what sticking to the original contracts would have meant. Argentine law sees things that way. American law sees things that way. European Union law sees things that way. But international law, as codified in the Washington Convention of 1965, does not. That is unjust.

Longer answer: Of Argentina’s 46 post-2001 arbitration cases, 32 are a direct result of the 2001 devaluation. If you add in the three cases brought by bondholders, that number rises to 35. Most of the remainder are contract disputes, which also come out of the turn-of-the-century Argentine depression: frex, a cancelled contract with Unisys to modernize the judiciary’s IT systems, or an abandoned project with Impregilo S.p.A. to build a highway. 

It is not hard to find the texts (or at least decent summaries) of the ICSID decisions. Latin Arbitration Law is a good source. UNCTAD also maintains a good database. The Investment Treaty Arbitration site has a list of cases, with all intermediate and annulment decisions. Finally, an easy-to-use list with summaries of the outcome can be found at the IIAPP website. I also recommend the Kluwer Arbitration Blog and (if you can get access) the Investment Arbitration Reporter.

All of the Argentine cases reject expropriation claims, but provide compensation for lost revenues due to contract violations. You can see the frustration by the Argentine lawyers when they argue that expropriation law should not apply in these cases. In fact, most of the arbitral decisions have a very sympathetic tone towards the Argentine arguments. But the law is the law, or at least what the arbitrators say that the law is, and that is that.

To be fair, Argentina has not done badly at ICSID. (If there is interest, I will put up another post with some data about that.) But it is understandable that the government feels that most of the post-2001 cases should not have been brought at all. This is not to support the YPF nationalization, or to claim that Argentina is run by a saintly government interested only in the public good. (To give one egregious example, Argentina settled the Unisys claim for $8 million in April 2007 ... but made no move to actually pay.)

It is to say that there is something wrong with the international system. It was designed to protect natural resource investors against predatory states without the need to call on their home governments. It is becoming a system of unlimited liability which essentially locks governments in to the letter of their initial contracts in a rigid way with no parallel in any domestic legal system on the planet.

In fact, the standards have been getting stricter, to the point where governments are required to grant a “guarantee of stability in a secure environment, both physical, commercial and legal” that may, for some countries, be impossible ... and is certainly more protection than that granted to domestic investors.

Practical upshot? Hard to say ... but the illegitimacy of most of the claims against Argentina will make life much harder for companies with a decent case in a straight-up expropriation. (You can guess which firm I might be talking about.) That is not, I think, a good thing ... but I may be wrong.

Comments

[Bernard Guerrero]

Hmmnn. re: "In fact, the standards have been getting stricter, to the point where governments are required to grant a “guarantee of stability in a secure environment, both physical, commercial and legal” that may, for some countries, be impossible ... and is certainly more protection than that granted to domestic investors."

Doesn't that makes some sense, though? As a domestic investor, I should be well placed to determine if, say, Newburgh is too dangerous to set up a retail establishment in or not. As an overseas outsider, though, I am not well placed to figure such things out easily. This must act as a barrier to entry. The upshot is, ceteris paribus, I will avoid overseas projects that I would do in a domestic context. I'd think the more stringent level of guarantees makes the playing field more even from the state looking to encourage FDI.

[Bernard Guerrero]

*from the POV of the state looking to encourage FDI.*

[Noel Maurer]

Hi, Bernard! It certainly makes some sense for governments to commit to protect property rights.

The problem is that most governments were not aware of what they were signing on to. The full protection clauses generally referred only to police protection: U.S. BITs are quite explicit about this. Your Newburgh example seems to show that this is what you were thinking of, and it certainly is what the signatories of the treaties had in mind.

Tribunals, however, have begun to extend the full protection standard to legal and commercial security. That is a lot more problematic, because it puts states in the position of granting foreigners greater protection than domestics. In addition, even the physical security standard, if taken too far, obviates the kind of force majeure clauses that are common in domestic law.

It would be one thing for a government to choose to do this, but in most cases the tribunals have made the decision for them. Too many cases holding states to an unintended and unachievable standard, and the legitimacy of the investor-state system will come under risk. Lose the legitimacy of the system, and it will disappear.

At which point we're back to sanctions, gunboats, and the CIA.