Law.com | 06-25-2009
Argentine Crisis Arbitration Awards Pile Up, but Investors Still Wait for a Payout
Luke Eric Peterson
In September 2007, executives at CMS Gas Transmission Co. had good reason to believe that the company would soon be getting a sizable check in the mail. The Michigan energy firm had been the first of dozens of foreign multinationals to file damages claims against the government of Argentina following that country’s peso devaluation in early 2002. Now, a review panel had just upheld a 2005 judgment by arbitrators at the CMS Gas Transmission Co.International Centre for Settlement of Investment Disputes that Argentina owed CMS $133.2 million for losses attributed to Argentina’s mishandling of the crisis.
But Argentina didn’t pay CMS a penny. And after several months of lobbying Argentina to cut a check, CMS transferred the award — on undisclosed terms — to a Bank of America Corp. subsidiary specializing in distressed debts. (Counsel for Bank of America declined to comment on the matter.)
While Argentina’s peso has rebounded from the lows plumbed earlier this decade, it remains to be seen if the international arbitration awards stemming from the peso collapse are themselves heading for a steep devaluation. Also up for reconsideration is the effectiveness of ICSID, the Washington, D.C.-based arbitration center that handles many investment treaty arbitrations.
Argentine financial crisis claims have been a major driver of investment treaty arbitration in recent years. During the 1990s, companies like BP plc, Suez, TOTAL SA and Enron Corp. flocked to Argentina as the government embarked on a major privatization spree. Then, in 2002, the Argentine government took a series of emergency measures to avert an economic free fall, including unyoking the peso from the U.S. dollar. When Buenos Aires refused to let foreign-owned utilities hike the price of basic services like water, gas and electricity to compensate for the peso’s sharp drop, many foreign owners cried foul. Starting in 2002, investors began to file a slew of arbitration claims, alleging breach of investment protection treaties. In recent years, Argentina has accounted for a quarter of ICSID’s case load. Several large law firms, including King & Spalding and Freshfields Bruckhaus Deringer, have handled more than a half-dozen Argentine claims apiece — often billing $5-10 million a case, according to cost filings — and seeking hundreds of millions of dollars on behalf of clients. Collectively, our 2009 Arbitration Scorecard counted more than 40 cases against Argentina, while arbitrations involving Argentina have produced some of the largest arbitral awards in recent years, including the $133.2 million CMS award and a $185 million award in favor of U.K. energy company BG Group plc.
To date, more than a half-dozen arbitration rulings have been handed down by tribunals in Argentine crisis cases. Arbitrators have tended to agree that the emergency measures taken by Argentina were in breach of treaty obligations, because they overturned prior contractual and legal commitments made to investors. But to the dismay of many observers, arbitrators have diverged sharply on the central question as to whether Argentina’s emergency measures — and the resulting treaty breaches — can be excused by the economic calamity which befell the country.
In the first ICSID ruling on this issue, in the CMS case, arbitrators flatly rejected Argentina’s arguments that it acted out of "necessity" in response to the crisis. The following year, a separate ICSID tribunal took a contrary view : Argentina’s emergency measures may have harmed the U.S. gas company LG&E Energy Corp., but they were excused on the grounds of necessity, at least during the peak months of the financial crisis. In a black eye for ICSID, separate arbitration panels hearing broadly similar claims under the same U.S.-Argentina bilateral investment treaty had reached sharply divergent conclusions.
Arbitration specialists try to put a positive spin on these developments, stressing that some inconsistency is "unavoidable" given that there is no formal doctrine of precedent in arbitration. However, José Martínez de Hoz Jr., a partner at Buenos Aires-based Pérez Alati, Grondona, Benites, Arntsen & Martínez de Hoy Jr., concedes that lack of predictability in the ICSID system is making it increasingly difficult to advise clients on their international treaty rights.
Meanwhile, lawyers for the Argentine government complain that "contradictory" rulings give conflicting signals to governments trying to regulate their economies while complying with international law. Argentina’s attorney general Osvaldo Guglielmino says that the ICSID system of one-off arbitration is "ill-conceived" when it comes to handling a tidal wave of similar claims arising out of systemic crises.
Argentina’s temper did not improve when a panel charged with reviewing the first ICSID award against Argentina ruled that the original panel of arbitrators in the CMS case had committed errors of legal reasoning ["<"Uncommon Law," The American Lawyer, December 2007]. Nevertheless, the so-called ICSID annulment committee noted that it was powerless to overturn the tribunal’s legal errors. Pouring salt in Argentina’s wounds, the committee added that if it were sitting as an appeals court, it might be minded to overturn the award. However, the grounds for annulment of ICSID awards are very stringent, owing to the desire for finality in arbitral proceedings. Argentina remained on the hook for the $133.2 million.
The CMS case was a stick in the eye for the Argentine Republic, says Jürgen Kurtz, director of Melbourne Law School’s International Investment Law Program. Kurtz says that arbitrators need to explain themselves better when handling cases involving sovereign states and international treaties. It’s not enough, he says, to focus on the outcome without offering detailed and persuasive interpretation of the underlying treaty.
Of course, a more careful and deliberative approach to treaty interpretation may conflict with the desire of foreign investors for swifter resolution of cases. Investors already complain that ICSID arbitrations can grind on for years. One in-house lawyer with a Houston-based energy company locked in arbitration with Argentina says that foreign investors are "incredibly disappointed" with the whole process. This lawyer, who was not authorized by his company to speak publicly, finds it discouraging that seven years have passed since the Argentine crisis but many cases remain unresolved.
When CMS asked Argentina to pay its $133.2 million ICSID award, Buenos Aires replied that CMS should bring the award to an Argentine court for recognition and enforcement. But CMS refused to be drawn into the Argentine courts, fearing years of litigation.
Martínez de Hoz, the Buenos Aires lawyer who acts for foreign investors in several other disputes with Argentina, says that he advises ICSID award-holders to steer clear of the Argentine courts. "I would not recommend to any company to enforce an (ICSID) judgment in Argentina," he warns, "I would not hesitate on this." Oscar Garibaldi, a Covington & Burling partner who handles Argentina disputes for corporate clients, agrees that the Argentine courts could be a "black hole."
Claimants’ lawyers point with particular concern to comments made in 2005 by then-Argentine attorney general Horacio Rosatti, to the effect that Argentina would challenge the enforcement of arbitral awards under its domestic constitution. Even if the Argentine government took a hands-off approach, Martinez de Hoz says, nongovernmental organizations, or even certain judges, might push for protracted review by the Argentine courts.
Because no foreign investor has been willing to venture into the Argentine courts, officials in the Argentine attorney general’s office insist that Argentina is living up to all of its international obligations. Argentina points to a clause in the ICSID Convention that obliges award-creditors to present their awards to a local body for enforcement and recognition. Foreign investors counter that the ICSID Convention also says that ICSID awards are final and binding, and that Argentina should be paying those awards quickly to demonstrate its good faith.
In recent months, several ICSID annulment committees charged with reviewing more recent arbitral awards against Argentina have weighed in on the debate. In response to investor fears about Argentine compliance, these panels are imposing heightened requirements — including written guarantees or the posting of bonds — for the continued stay of enforcement of ICSID awards while they are undergoing review.
Some lawyers want more drastic measures. Nigel Blackaby of Freshfields, who represents CMS and claimants in other Argentine cases, says that arbitral processes may need to give way to political solutions. He notes that Argentina, in its case with CMS, was found to have breached provisions of the U.S.-Argentina bilateral investment treaty. It’s time for the U.S. Department of State to pressure Argentina to comply with these treaty obligations, Blackaby suggests.
Such demands highlight the limits of the supposed de-politicization of investor-state arbitration. ICSID was conceived in the 1960s as a neutral forum in which the investor’s home country would stay out of the fray — politically or militarily — while disputes were being arbitrated between the investor and another state. Still, under the ICSID system, an investor’s home government may become involved politically if a state refuses to comply with a final ICSID award.
Carlos Alfaro, an Argentine lawyer who is chairman of the Argentine-American Chamber of Commerce, says that Argentina’s dwindling balance sheet could force it to seek financing next year from the International Monetary Fund or other international agencies. In such a case, he suspects that pressure might be brought to bear upon Argentina to settle the outstanding claims of foreign investors.
It’s also possible that, in a global economic crisis, wealthier governments in North America and Europe may take a fresh, more sympathetic look at some aspects of the ICSID arbitration system that have long vexed Argentina and other developing countries — for instance, the lack of an appeals process to correct legal errors and ensure consistent rulings. The ICSID system is famously resistant to change : To amend the decades-old ICSID Convention would require the unanimity of the 143 current member-states. However, if the United States were sued by overseas investors for failing to save Lehman Brothers Holdings, Inc., or if Belgium were sued by unhappy Chinese shareholders of the failing bank Fortis SA/NV, political sentiment could shift sharply, and those governments might quickly develop an appetite for reforming the system.
Joseph Stiglitz, the Nobel Prize-winning former chief economist of The World Bank Group, delivered a highly critical take on the role of arbitration in economic crises in his 2007 Grotius Lecture to The American Society of International Law. While recognizing the need for international mechanisms to govern cross-border disputes, Stiglitz questioned whether the current system of international arbitration was too blunt an instrument to resolve disputes arising out of the Argentine financial crisis.
"It is not clear whether the arbitrators have the ability to judge the full societal consequences of what would have happened had, say, all utility contracts been honored [in Argentina]," Stiglitz said in his speech. He added : "In the case of Argentina, it is clear that maintaining prices in dollars — when the rest of the economy was undergoing pesofication — would have ... represented a vast redistribution of wealth from the rest of the economy to the utilities, clearly an unfair and inequitable outcome."
Currently, Stiglitz is chairing a United Nations commission exploring changes to the global financial system in the face of the current global economic crisis. It would be no surprise if that commission casts a critical eye upon the investment arbitration system — particularly if arbitration claims seem to threaten the crisis management of more powerful states. In the future, arbitrators may come under pressure to show greater sensitivity to the difficult political choices made by governments to buffer citizens from the full brunt of economic storms.
"Western governments liked to treat crises in Argentina, or earlier crises in Southeast Asia, as local phenomena, and somehow the fault of the countries concerned," says Melbourne Law’s Kurtz. "However, if the United States, the United Kingdom, and Germany start to be hit by these types of claims, then all bets will be off."