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January 18, 2012

Good and bad news from your corporate rulers

There's been a flurry of activity recently in the world of investor-state arbitration.

For the uninitiated, these are the foreign tribunals where corporations can directly sue governments for environmental and other policies. These proceedings take place outside of national judicial systems, where corporations can demand compensation from taxpayers for alleged interferences with future expected profits.

This very controversial system has generated some good and some bad news of late.

First, the good news. Last night, the U.S. Court of Appeals for the D.C. Circuit overturned a 2007 investor-state ruling under the U.K.-Argentina Bilateral Investment Treaty (BIT). [HT to Investment Arbtiration Reporter for catching this very quickly.]

Argentina has been hit by dozens of investor-state claims from U.S. and European companies following its 2001-03 financial crisis. (We detail some of these happenings here.)

In the 2007 ruling, Alejandro Garro (U.S./Argentina), Albert van der Berg (Netherlands) and Guillermo Aguilar-Alvarez (Mexico) comprised the panel of three unelected tribunalists that ruled in BG Group's (a U.K. corporation) favor. The panel wrote:

"Argentina adopted certain measures to address its economic, political and social crisis. It is not for this Tribunal to pass judgment on the reasonableness or effectiveness of such measures as a matter of political economy."

Such loving nods to sovereignty are but the preface for the slap-down. The panel wrote that Argentina guaranteed that the energy companies would be paid in dollars at a set rate. When the 2001-03 economic crisis forced revision of the dollar-peso peg (a key recommendation of neoliberal advisors), Argentina was acting "unreasonably" and therefore in violation of the BIT obligation to provide "fair and equitable treatment" (FET).

The panel ordered Argentine taxpayers, many of whom had been pushed into poverty after following the policy advice of the IMF, to cough up roughly $200 million. (This included paying the fees of the company's lawyers. Awesome.)

A U.S. court had jurisdiction to hear an appeal of the investor-state ruling under the U.S. Federal Arbitration Act. National courts hardly ever overturn these investor-state rulings, but the U.S. court wrote:

"Although the scope of judicial review of the substance of arbitral awards is exceedingly narrow, it is well settled that an arbitrator cannot ignore the intent of the contracting parties. Where, as here, the result of the arbitral award was to ignore the terms of the Treaty and shift the risk that the Argentine courts might not resolve BG Group’s claim within eighteen months pursuant to Article 8(2) of the Treaty, the arbitral panel rendered a decision wholly based on outside legal sources and without regard to the contracting parties’ agreement establishing a precondition to arbitration. Accordingly, we reverse the orders denying the motion to vacate and granting the cross-motion to confirm, and we vacate the Final Award."

This is is a positive sign that there are some limits on obscene investor-state rulings. However, U.S. trade and investment agreements don't even have this 18-month requirement, so don't expect any similar overturnings of rulings under NAFTA-style deals anytime soon.

++

Speaking of which, there was a ruling over very similar issues under the U.S.-Argentina BIT that was just recently released to the public. That award came down in favor of U.S. investor El Paso Energy International Company, which ordered Argentine taxpayers to pay out over $43 million.

Perhaps taking note of some of the skepticism about these awards against Argentina, the panel of Piero Bernardini (Italy), Brigitte Stern (France) and Lucius Caflisch (Switzerland) dialed back some of the rhetoric, stating:

“As far as the relation between FET and the minimum standard of international law is concerned, two main approaches have been adopted by ICSID tribunals, to which one may add an intermediate, undecided position. … Under the first approach, FET has to be equated with the minimum standard of treatment provided for by general international law. … The second approach deals with FET as an autonomous concept, considered in general as more demanding and more protective of investors’ rights than the minimum standard of treatment provided for by general international law. … The Tribunal considers this discussion to be somewhat futile, as the scope and content of the minimum standard of international law is as little defined as the BITs’ FET standard, and as the true question is to decide what substantive protection is granted to foreign investors through the FET."

But, then comes the slap:

"it could be said that the foreign investor is entitled to the most favourable treatment, be it national law, rules applied to some foreigners or the international minimum standard embodied in FET. The Tribunal thus considers that the FET of the BIT is the international minimum standard required by international law, regardless of the protection afforded by the national legal orders.”

Okay, we started hoping a little too soon.

The panel also went through every one of the specific complaints raised by the investor, and found that none of them violated the BIT. Just as my mood started to pick up a bit, I get to the punchline:

"The Tribunal considers that, in the same way as one can speak of creeping expropriation, there can also be creeping violations of the FET standard. According to the case-law, a creeping expropriation is a process extending over time and composed of a succession or accumulation of measures which, taken separately, would not have the effect of dispossessing the investor but, when viewed as a whole, do lead to that result. A creeping violation of the FET standard could thus be described as a process extending over time and comprising a succession or an accumulation of measures which, taken separately, would not breach that standard but, when taken together, do lead to such a result. 519. The Tribunal, taking an all-encompassing view of consequences of the measures complained of by El Paso, including the contribution of these measures to its decision to sell its investments in Argentina, concludes that, by their cumulative effect, they amount to a breach of the fair and equitable treatment standard."

Dang. What creeps.

Then, the panel just got silly. Argentina reasonably argued that the economic crisis should excuse some of the alleged infractions (the so-called "necessity" defense in Article XI of the BIT). After the panel ran through a bunch of editorial comments from Domingo Cavallo and other architects of Argentina's failed neoliberal strategy that blamed Argentina for causing the crisis (which they characterize as "evidence"), Bernardini and Caflisch write:

"While accepting that 'in economic matters, the analysis of causation … does not lend itself to the same scientific analysis as in the domain of the so-called exact sciences and of natural phenomenon,' the evidence presented by the Claimant regarding the actions and omissions by Argentina until the end of 2001, and Argentina’s own admission of its 'inability to maintain a fiscal discipline,' support the conclusion of a majority of the Tribunal that Argentina contributed to the crisis to a substantial extent, so that Article XI cannot come to its rescue."

Yeah, social science is hard. But if you're looking for causation in this case, why not give it a name? How about Domingo Cavallo, the "expert" now cited as an objective observer of the Argentine scene?

Thankfully (but of little practical consequence), Stern took an opposing view:

"666. Arbitrator Stern, while she agrees, as a matter of principle, with the theoretical analysis of the role played by the contribution by a State to a situation of necessity as expressed in paragraphs
613-626, does not consider that, on the concrete level, the contribution of a State to an economic crisis should be lightly assumed – should the US be held responsible of the worldwide sub-prime crisis as it contributed to it, because the SEC did not monitor the banks closely enough? Moreover, she is of the view that, considering the facts of this case, the substantial contribution of the Argentine authorities to the crisis has not been sufficiently proven by strong and uncontroverted evidence presented by the Claimant.

667. Arbitrator Stern disagrees with the far-reaching conclusion by the majority, which is not based, in her view, on an in-depth understanding of the intricacies of economic development. It should not lightly be assumed that a State is responsible for an economic collapse in a liberal market economy, where the invisible hand of the market is more powerful than the hand of the State. The majority, after having presented the experts’ evidence on both sides and concluded that the latter diverged on the analysis for the responsibilities of the economic crisis, the Claimant expert considering, not surprisingly, that the crisis was primarly self-induced and the Respondent’s expert holding, unsurprisingly too, that the essential factors of the crisis were external shocks. The experts have presented contradictory analyses. The IMF itself recognised that it made mistakes in monitoring Argentina’s problems, as can be seen in the citation of one of its reports in paragraph 657 of this Award, where it is recognised that “the IMF on its part erred in the precrisis period.”

668. Economics is a complicated science or, better, a complicated art; the mere reading of the analyses of the experts of both Parties show that there is little certainty. In Arbitrator Stern’s view, the conclusion reached by the majority is based essentially on a comparative analysis of the expert reports, the Edwards’ Report being described as “comprehensive, very detailed and well documented,” while the Frenkel/Damil report is said to be “rather polemical and only in part based on data from external sources.” In her view, the situation of the Argentine economy was extremely serious and out of control by any definition. Many publicly well known events support this conclusion, and there is no reason to doubt the statement, made by Argentina, that it was “the worst economic crisis (which later became a political and institutional crisis) ever experienced by the Argentine Republic as from its onset in 1810.” A serious clue to the gravity of the crisis was the decrease of Argentina’s contribution to the United Nations: “In May 2002, the critical situation caused the United Nations Organization General Assembly to reduce Argentina’s contribution to such organization. It was the first time in history that the organization decreased the contribution to be made by a member state and the decision was taken unanimously by its members.”

669. Moreover, according to Arbitrator Stern, the measures adopted were necessary to prevent the crisis from resulting in anarchy and social disintegration and they constituted a suitable means to overcome the chaos. It should also be recorded that the policies followed by Argentina before the crisis were generally supported by the World Bank and that the measures taken to address the crisis had the support and encouragement of the IMF. This has been stressed, for example, in Continental: “In its Second Review of January 2001, the IMF staff noted that “the external environment worsened in the subsequent months, with external financing to emerging markets nearly drying up. This was compounded by domestic political uncertainties, which raised doubts about the political governability of the country. (…) The authorities have responded to these adverse developments by strengthening the growth orientation of their economic program, through measures aimed at promoting a recovery of investment, and an accelerated implementation of structural reforms…. “In view of the staff, this strategy is appropriate, and deserves the increased financial support of the international community … A recovery of confidence hinges, in turn, not only on a relatively benign international environment, but perhaps more importantly, on a demonstrated, unwavering commitment by the authorities to a rapid and full implementation of their announced policies.”

670. In other words, Argentina adopted mainstream policies, following the Washington consensus, and earned praise for its conduct from the international financial community. Therefore, Arbitrator Stern is inclined to adopt the same conclusion as in Continental, i.e. that the evidence is insufficient to conclude that the policies adopted by the GOA before the crisis were mainly responsible for the crisis."

Will there be any basis for a national court overturning this ruling? I wouldn't hold your breath.

[Update 1/19: Just to be clear on this last point, the El Paso case was brought under the World Bank's ICSID rather than the UNCITRAL rules (which were operative in the BG Group case). There is a limited basis within ICSID for annulment of a tribunal ruling. So a national court would be unlikely to overturn the El Paso ruling for two reasons: because of the differing ICSID rules, and because the U.S.-Argentina BIT (unlike the UK-Argentina BIT) doesn't have an 18-month exhaustion requirement. HT to an alert reader for catching the fuzziness of my statement here.]

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