Herbert Smith Freehills LLP
Argentina settles five outstanding investment treaty arbitration claims in historic break with its anti-enforcement stance
By Paula Hodges, Christian Leathley and Louise Barber
14 October 2013
Argentina has agreed to settle five separate investment treaty arbitration claims at a cost of around USD 500 million, in an historic departure from the Latin American state’s refusal to comply with awards made by international investment treaty arbitration bodies.
It was reported in an Argentine newspaper last Thursday, and confirmed by the counsel involved, that the settlements relate to the French media conglomerate Vivendi SA, British electricity and gas utility National Grid PLC, Continental Casualty Company (a subsidiary of the American financial and insurance products provider CNA Financial Corp), the American water company Azurix, and Blue Ridge Investments, the wholly owned subsidiary of Bank of America Corp. These companies were each successful in bringing claims against Argentina through the International Centre for the Settlement of Investment Disputes (ICSID) over the past 12 years, with the exception of National Grid which brought its claim under the Rules of the United Nations Commission on International Trade Law (UNCITRAL Rules) and Blue Ridge Investments, which acquired the ICSID award from the original claimant, CMG Gas Transmission.
While the details of the settlement are not yet clear, local newspapers in Argentina report that the settlement agreement involves a reduction of 15% of the original amount of the awards (USD 677 million) and 45% of the interest accrued, leading to an overall nominal discount of 25% on the amount originally claimed. The settlement is to take the form of sovereign bonds, which is a controversial choice given that Argentina has also been subject to ICSID claims regarding the state’s default on sovereign bonds, several of which are still outstanding. The settlement agreement is also reported to commit the parties benefiting from it to reinvest 10% of the amount (USD 67 million) in the purchase of additional sovereign bonds (BAADE).
While each of the arbitration awards was based on a different set of facts, the claims all arose in the context of Argentina’s financial crisis in the late 1990s and 2000s and the privatisation of many industry sectors.
In Vivendi Universal SA v Argentina, the claimant’s water and sewage concession was subject to forced tariff reductions and termination of the concession contract by the provincial authorities of Tucuman.
The Azurix award also concerned a water concession which was prevented by local authorities from applying the tariffs to which it was entitled.
In the award due to Blue Ridge Investments LLC, the original claimant (CMS Gas Transmission) purchased a 25% stake in the Argentine gas transportation utility, the terms of which provided for a periodic tariff increase in line with inflation. The award concerned the unilateral removal by the Argentine government of this right to adjust the tariffs.
In National Grid PLC v Argentina, the claimant purchased a significant stake in the local electricity transmission sector, only to have its investment vastly devalued by emergency measures taken during the financial crisis.
The award made to Continental Casualty Company concerned the forcible conversion of the claimants’ investments from US dollars into pesos at a time the Argentine peso was dramatically losing value, combined with a prohibition on transferring assets out of the state.
The claims were brought under bilateral investment treaties between Argentina and each of the respective countries of origin of the claimant entities. The 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) contains an unambiguous statement of a contracting state’s obligation to enforce awards rendered under the auspices of ICSID as though they were a final judgment of that state’s national courts. Notwithstanding this obligation, Argentina’s position has always been that it is bound by its domestic law to submit any enforcement proceedings to its federal courts and that this is provided for in the ICSID Convention. It has been reported in Argentinean newspapers that this position remains unchanged by the settlement and that beneficiaries of the settlement will still be required to enforce the settlement agreement through the courts, although it would be expected that in this case the process may be expedited.
Argentina’s refusal to allow automatic enforcement of awards against its domestic assets has been a notable derogation from the generally positive record of states in the investor-state arbitration sphere. As an organ of the World Bank, ICSID has typically wielded sufficient influence to ensure enforcement of the arbitral awards it issues. However, Argentina’s consistent and public refusal to automatically comply with ICSID awards has caused some commentators to question the systemic efficacy of the ICSID mechanism.
This consistent non-compliance with investment treaty arbitration awards has had an impact on investor confidence around Argentina. The series of high profile ICSID awards which were issued and remained outstanding against Argentina have contributed to a strong reluctance in international capital markets to make credit available to the state. Attempts have been made since 2005 to restructure the debt burdening the state, but the International Monetary Fund (IMF) has thus far been limited in its ability to facilitate this due to Argentina’s stance on the ICSID awards. It is thought that the current settlement may have been induced by the prospect of unlocking up to USD 1.8 billion in funds from the IMF and the World Bank to assist Argentina in resolving its ongoing financial crisis.
There is also speculation that an additional motivation for the settlement could be an attempt to bolster arguments in the ongoing NML Capital litigation in US courts between Argentina and several bondholders who refused to participate in debt restructurings that occurred following Argentina’s sovereign default in 2002.
In addition, Argentina was suspended from the United States’ Generalized System of Preferences program in mid-2012, a system which allows some import duties to be waived for certain states, as a direct result of its refusal to comply with the awards in favour of Azurix and Blue Ridge Investments. As a major export market for Argentine goods, this move by the United States was of great financial significance to Argentina. It remains to be seen whether Argentina’s eligibility for the program will be restored as a result of the settlement.
It is understood that the bonds which are part of the settlement agreement, Boden 2015 and Bonar 2017, are different from those issued to the claimants in the Abaclat and NML Capital cases which are the subject of other pending legal claims. Nevertheless, there is expected to be some unease around the value of the settlement bonds on the secondary bond market given the uncertainty about Argentina’s financial position and the possibility of future default.
It has also been reported that three of the awards which are the subject of the settlement may have been purchased from the original claimants by US hedge fund Gramercy. The price of these purchases is not known, but given the anticipated difficulty of enforcement it could well have been a significant discount from the face value of the awards.
The ongoing financial crisis faced by Argentina and the decreasing levels of foreign direct investment mean that we can expect to see further changes in the way Argentina interacts with the international legal sphere in the coming years. It will be of interest to observe the position that Argentina takes in relation to those ICSID awards which remain outstanding, as well as any future ICSID awards going forward.