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August 04, 2010

Economists Don't Count in Enron Attack on Argentina

Economists don't count. At least, that's the conclusion of the arbitral committee that was reviewing the annulment request in the Enron v. Argentina case.

Before I delve into their conclusion, I should mention a bit more by way of (dramatically simplified) history about this case.

As far as most folks are concerned, Enron fell well off the public radar screen when they lost the public's trust, the firm imploded and its leaders were imprisoned.But, almost ten years later, Enron survives as a walking corpse, and has persisted as a legal shell trying to shake down Argentine taxpayers for compensation related to that country's financial crisis in the early 2000s.

Take a step back even further. Argentina's right-wing government in the 1990s (led by Carlos Menem and Domingo Cavallo) pursued what locals called "carnal relations" with the U.S., and with U.S. capital. They privatized electric and gas utilities, auctioned these off (or contracted them out) to private U.S. and European companies, and then signed a series of "Bilateral Investment Treaties" (BIT) that gave these companies outrageous rights not even available to Argentine corporations.

The Menem-Cavallo plan to destroy Argentina's prospects for development succeeded, and the country faced a series of economic crises, culminating in the early 2000s. As part of this response, Argentina's post-Menem caretaker governments took a set of extraordinary measures, including changing the sweetheart terms that companies like Enron got through the privatizations (for instance, getting paid at a fixed dollar-peso exchange rate).

In Enron's morbid second life (now renamed Enron Credit Recovery Corporation - even less clear what Enron produces nowadays), the company took advantage of the U.S.-Argentina BIT to claim that their rights were violated, and Argentine taxpayers should compensate them for not shielding them from the economic and legal fallout of the crisis (fallout which, by the way, regular Argentines had to suffer through in the brutal experience of lost jobs, increasing poverty, and other social ills on the scale of a tragic Great Depression). Under the Bush-Clinton-Bush vision of international investment protection, however, corporations can claim a lifeboat for themselves in these situations, even when ordinary folks are left to drown.

Stunningly, the BIT tribunal sided with Enron in its May 2007 award, and ordered Argentine taxpayers to cough up $106.2 million. Argentina claimed that it should be allowed to use an "exception" in the BIT that (supposedly) allows for countries to deviate from the BIT when their essential security is at stake. The tribunal rejected Argentina's argument. (Believe it or not, five out of five US-Argentina BIT tribunals that examined the essential security claim made the same call on all or some of the government policies challenged by corporations.)

In the last few years, Argentina, outraged with these anti-democratic tribunals that effectively second-guess the country's crisis responses, has used special procedures to ask for annulment of several of these awards. In the Azurix v. Argentina and CMS v. Argentina cases, the annulment committee told Argentina "see ya, wouldn't wanna be ya" on most or all counts. In the original tribunals, Argentina was ordered to cough up over $165 million and $135 million, respectively. (The Azurix case did not raise the essential security question, note.) Annulment proceedings in the Continental v. Argentina and LG&E v. Argentina cases are pending. In these cases, awards of $2.8 million and $57.4 million are at stake, respectively.

In the Sempra case from earlier this summer, however, the annulment committee, in an apparent last-ditch effort to save the dying legitimacy of the BIT system, sided with Argentina and annulled the $128 million award. And now, with this Enron annulment committee decision earlier this week on the $106 million award, we have a similar tactic occurring.

In a decision probably upsetting to economists everywhere who hoped to cash in as expert witnesses in the posh investor-state world, the Enron annulment committee decided that economists aren't really "experts" for the sake of BITs (I quote at length):

the Tribunal said that it did not find convincing the argument that the economic crisis “compromised the very existence of the State and its independence so as to qualify as involving an essential interest of the State”. By this wording, the Tribunal rejected the argument of Argentina, referred to in paragraph 289 of the Award, that the crisis “threatened in its view the very existence of the State and its independence”. The Tribunal’s reason for rejecting this argument appeared to be that regardless of how serious the crisis may have been, “[q]uestions of public order and social unrest could be handled”, “questions of political stabilization were handled”, and “there is no convincing evidence that the events were out of control or had become unmanageable” (Award, paragraphs 306-307). In other words, the Tribunal was not satisfied that the existence of the State was threatened because the evidence was that the Government of Argentina continued to exist and to function and to deal with the crisis...

[the tribunal stated] “there are always many approaches to address and correct such critical events, and it is difficult to justify that none of them were available in the Argentine case”. The Tribunal indicated at paragraph 309 that it was not the Tribunal’s role to say what alternative Argentina should have adopted, and that the Tribunal confined itself to finding that there were alternatives that Argentina could have adopted.

363. Although the Tribunal did not in this paragraph identify what any of these alternatives might have been, this paragraph must be read in the context of the Award as whole, and in particular in the light of paragraph 300 of the Award, which states that:

The Claimants also argue that options other than pesification were available and thus this measure was not the only way to address the crisis; among the options discussed there was the structural reforms indicated, the agreed restructuring of its debt, dollarization and devaluation without pesification. Such alternative plans have worked in other countries, such as Uruguay, the expert explains.

364. The reference to the “expert” in the final sentence of this quote must from context be a reference to the expert report of Professor Sebastián Edwards...

366. For instance, in relation to the time at which the Emergency Law was adopted in January 2002, the only alternative to the adoption of the Emergency Law that is identified in the Edwards Report is devaluation of the peso without pesification of contracts denominated in US dollars..

The Committee considers it sufficiently implicit that the Tribunal’s reasoning was that the Claimants (via the Edwards Report) had identified alternative ways in which Argentina could have sought to address the economic crisis, that the Tribunal was not satisfied that none of these alternatives would have been available to Argentina, and that the Tribunal was therefore not satisfied that the “only way” requirement in Article 25(1)(a) of the ILC Articles was satisfied.

368. The Committee finds that this reasoning of the Tribunal does not address a number of issues that are essential to the question of whether the “only way” requirement was met...

371. A ... question not addressed by the Tribunal is whether the relative effectiveness of alternative measures is to be taken into account. In adopting measures to safeguard an essential interest, a State may in practice not be in a position to know with certainty whether a given measure will prove to be effective, and reasonable minds may judge that some measures are likely to be more effective than others. For instance, suppose that there are two possible measures that a State might take in order to seek to safeguard an essential interest. One is 90 per cent probable to be 90 per cent effective to safeguard that essential interest, while the other is 50 per cent probable to be 60 per cent effective. Suppose that the former measure would (subject to the potential application of the principle of necessity) be inconsistent with obligations of the State under international law, while the latter measure would not. Would the State be precluded from invoking the principle of necessity if it adopted the former measure, on the basis that there was an alternative available? Or could the State claim that the measure taken was the “only way” that stood a very high chance of being very effective?

372. A third question that is not specifically addressed by the Tribunal is who makes the decision whether there is a relevant alternative, and in accordance with what test? Does the Tribunal determine this at the date of its award, when the Tribunal may have the benefit of knowledge and hindsight that was not available to the State at the time that it adopted the measure in question? Or does the Tribunal determine whether, on the basis of information reasonably available at the time that the measure was adopted, a reasonable
and appropriately qualified decision maker would have concluded that there was a relevant alternative open to the State? Or does customary international law recognise that reasonable minds might differ in relation to such a question, and give a “margin of appreciation” to the State in question? In that event, the relevant question for the Tribunal might be whether it was reasonably open to the State, in the circumstances as they pertained at the relevant time, to form the opinion that no relevant alternative was open.

373. It is not for the Committee in these annulment proceedings to provide answers to these questions...

374. On no view could Professor Edwards be said to have expressed an expert opinion on these questions. Professor Edwards is an economist and not a lawyer, and his report does not purport to address the principle of necessity under customary international law or the interpretation of Article 25 of the ILC Articles. When Professor Edwards states that Argentina had other options for dealing with the economic crisis, he so states as an economist, and does not suggest that these other options would have amounted to relevant alternatives for purposes of the “only way” requirement of Article 25 of the ILC Articles...

The Committee considers that a reading of the cursory reasoning of the Tribunal in paragraphs 300 and 311-312 of the Award clearly suggests that the Tribunal accepted the expert evidence of Professor Edwards to the effect that Argentina’s own “misguided” policies contributed to the magnitude of the economic crisis, and that from this the Tribunal directly concluded that the measures adopted by Argentina “contributed to the situation of necessity”.

393. The Committee finds that in reaching that conclusion, the Tribunal did not in fact apply Article 25(2)(b) of the ILC Articles (or more precisely, customary international law as reflected in that provision), but instead applied an expert opinion on an economic issue. While an economist might regard a State’s economic policies as misguided, and might conclude that such policies led to or amplified the effects of an economic crisis, that would not of itself
necessarily mean that as a matter of law, the State had “contributed to the situation of necessity” such as to preclude reliance on the principle of necessity under customary international law.

++

So, that's pretty funny. I guess economists can't rule the world after all.

What's notable in both the Sempra and Enron annulment cases is that so many of Argentina's arguments were nonetheless rejected, and/or the annulment committee decided that there were certain matters that are just not subject to appeal on the merits. For instance, in the Enron committee decision:

1. The committee noted that it couldn't review whether the original panel had come to the wrong conclusion on the merits, only whether it has failed to state its reasons for its conclusion, or had not simply not applied the applicable law. So, key questions as to whether these essential security exceptions are "self-judging" were not considered by the committee.

2. Argentina alleged that the original tribunal had failed to consider whether the country's government had been following its own law, something Argentina argued the tribunal was required to do. The annulment committee quoted the Azurix annulment committee, which said:

226. As the ad hoc committee then went on to say in the Azurix Annulment Decision:

In some cases, it may be an express term of the investment treaty that the host State is required to comply with specified provisions of its own municipal law. In such cases, a breach by the host State of municipal law may thus amount to a breach of the treaty. Although municipal law does not as such form part of the law applicable to a claim for breach of a treaty, in such cases it may be necessary to determine whether there has been a breach of municipal law as a step in determining whether there has been a breach of the treaty. ……

However, even in this situation, municipal law would not thereby become part of the applicable law under Article 42 of the ICSID Convention for purposes of determining whether there was a breach of Article II.2(c) of the BIT. Rather, any breach of municipal law that might be established would be a fact or element to which the terms of the BIT and international law would be applied in order to determine whether there was a breach of Article II.2(c)...

232. From a reading of these paragraphs, it is in the Committee’s view apparent that on the reasoning adopted by the Tribunal, Argentine domestic law was not relevant to the Tribunal’s decision in respect of the claimed violation of the fair and equitable treatment clause, except in relation to the finding referred to at (a) in the previous paragraph. That is to say, in determining whether the Claimants were attracted to invest in Argentina by particular guarantees provided for in the regulatory framework for the gas sector, it was necessary to determine whether the alleged guarantees (including the semi-annual US PPI adjustments and the calculation of tariffs in US dollars) were indeed part of the regulatory framework at the time that the investment was made. If the regulatory regime did include these particular guarantees, it would in the Committee’s view follow from the Tribunal’s reasoning that any subsequent measures taken by Argentina to dismantle those guarantees in circumstances where the Claimants had reasonably relied on them when making their investment (other than measures taken in accordance with the mechanisms provided for in the regulatory framework and Licence itself) would amount to a breach of the fair and equitable treatment clause, even if those measures were entirely lawful under Argentine domestic law, and even if those measures gave rise to no liability on the part of Argentina under Argentine domestic law. In those circumstances, the measures, although lawful under Argentine law, would in international law be contrary to the protections afforded by the BIT.

The committee did not rule against the original tribunal on this point.

3. Argentina took issue with the original tribunal taking a hortatory pro-investor phrase in the preamble to the BIT, saying that the Tribunal "turned it into a legal obligation to maintain a stable framework for investment" - i.e. don't change your laws, it'll upset the capitalists. Enron responded that the tribunal had not said that the preamble established a legal obligation, but that the tribunal only "gave weight" to the pro-investor preambular language. The annulment committee sided with Enron on this point.

This is troubling because the record of such preambular language is that it typically counts when its pro-investor, but not when it is, say, pro-environment. So, whether its a "weight" or a legal obligation, the pro-investor clauses seem to be an axe to wield against regulators in investor-state cases.

4. The annulment committee wrote:

302. At paragraph 258, the Tribunal expressed the view that the international minimum standard was insufficiently elaborate and clear for the fair and equitable treatment to be equated with it, that the fair and equitable treatment standard may be more precise than the customary international law minimum standard, and that the fair and equitable standard, in the context of the BIT, could require a treatment additional to, or beyond that of, customary law.

This is a very controversial point, and one that the annulment committee didn't contradict the panel or Enron on. (Stating that "the Tribunal applied the applicable law, whether or not it did so correctly.")

++

Anyway, Luke Eric Peterson has a good summary of where the Enron annulment decision leaves the debate. My takeaway from all of it is that, the BIT/FTA rules continue to be very overreaching, and very tilted against the public interest. Not only are the rules bad, but there's an inadequate opportunity for meaningful appeal. The Enron annulment committee had to do some 170 pages of acrobatics to be able to annul the decision, and then left a lot of Enron's awful winning arguments untouched. Stay tuned...

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