In Suez and others v Argentina (ICSID Case No ARB/03/19) and AWG Group v Argentina (UNCITRAL), and Suez and others v Argentina (ICSID Case No ARB/03/17), two parallel tribunals considered whether Argentina could rely on the defence of necessity in connection with its treatment of investors during and in the aftermath of its financial crisis.
Two ICSID tribunals have rejected Argentina's defence of necessity, pleaded in response to claims by French, Spanish and UK investors in connection with steps taken during and after the Argentinean financial crisis. The tribunals found that Argentina had breached the fair and equitable treatment standard, and rejected the defence of necessity.
The decisions, as well as the separate dissenting opinion, contain a useful analysis of treatment standards, in particular the fair and equitable treatment standard. They illustrate the difficulties of reconciling the host state's regulatory powers in exceptional circumstances of financial and social crises with the rationale of an investor-friendly legislative and regulatory framework adopted before the crises arose. However, in recent decisions (in the Sempra and Enron cases, which were also concerned with the financial and economic crisis in Argentina), ad hoc committees have annulled two awards on Argentina's applications on the basis of failure to recognise the defence of necessity. In the light of those decisions, it will be interesting to see whether the Suez awards are similarly open to challenge.
Suez, Societad General de Aguas de Barcelona SA and Vivendi Universal SA v Argentina (ICSID Case No ARB/03/19) and AWG Group v Argentina (UNCITRAL) (30 July 2010)
Suez, Societad General de Aguas de Barcelona SA and InterAgua Servicios Integrales del Agua SA v Argentina (ICSID Case No ARB/03/17) (30 July 2010)Close speedread
The relevant provisions concerning treatment standards provide:
In the Argentina-France bilateral investment treaty (www.practicallaw.com/4-502-2491) (BIT):
"Each Contracting Party shall undertake to accord ... just and equitable treatment, in accordance with the principles of international law" (Article 3).
"Investments made by investors of one Contracting Party shall be fully and completely protected and safeguarded ... in accordance with the principle of just and equitable treatment mentioned in Article 3" (Article 5).
In the Argentina-Spain BIT:
"Each Party shall guarantee ... fair and equitable treatment of investments" (Article IV).
In the Argentina-UK BIT:
"Investments of investors of each Contracting Party shall at all times be accorded fair and equitable treatment" (Article 2).
Article 25 of the International Law Commission (ILC) Articles on Responsibility of States for Internationally Wrongful Acts (2001) on the defence of necessity provides as follows:
"1. Necessity may not be invoked by a State as a ground for precluding the wrongfulness of an act not in conformity with an international obligation of that State unless the act:(a) Is the only way for the State to safeguard an essential interest against a grave and imminent peril; and(b) Does not seriously impair an essential interest of the State or States towards which the obligation exists, or of the international community as a whole.
2. In any case, necessity may not be invoked by a State as a ground for precluding wrongfulness if:(a) The international obligation in question excludes the possibility of invoking necessity; or(b) The State has contributed to the situation of necessity."
The underlying disputes arose under Argentina-France, Argentina-UK and Argentina-Spain BITs.
The claimants were incorporated variously in France, Spain or the UK. They were shareholders in Aguas Provinciales de Santa Fe SA Aguas Argentina SA and Aguas Provinciales de Santa Fe SA (Subsidiaries). The Subsidiaries were Argentinean companies, organised and managed by the claimants, and they held 30-year concessions for water distribution and wastewater treatment in Buenos Aires (awarded in 1993) and in the Province of Santa Fe (awarded in 1995) respectively (Concessions). The Concessions were granted in a privatisation process.
The privatisation of water and wastewater services in Argentina was connected with other reforms aimed at remedying severe problems with its economy and public services. The tribunals concluded that the legal framework introduced as a result of these reforms was aimed at:
Attracting foreign private capital and know-how.
Securing reasonable profit for investors and providing for adjustment mechanisms safeguarding the profitability in case of changing circumstances.
Assuring efficient provision of water and wastewater.
During the Argentinean economic crisis (2001-2003), Argentina changed this legal framework in a way that negatively impacted on the financial architecture of the claimants' Concessions. After unsuccessful attempts by the claimants to renegotiate the Concessions and to withdraw from them, Argentina terminated both Concessions in 2006.
The claimants claimed that Argentina had:
By taking certain general regulatory measures to cope with the financial crisis, failing to revise tariffs under Concessions and by taking certain measures at the time of termination of the Concessions:
expropriated the claimants' investments directly and indirectly; and
breached the fair and equitable treatment (FET) standard.
Denied the claimants full protection and security by withdrawing from certain guarantees made under the legal framework and thus removed the legal protection and security against its own actions previously granted to the investments.
Argentina opposed these claims and raised certain defences, including the defence of necessity under international law, to excuse any alleged breach of the BITs.
The tribunals held that the measures taken by Argentina:
Did not constitute (direct or indirect) expropriation of the claimants' investments.
Did not breach the obligation to provide investors with full protection and security.
Did breach its obligation to accord to investors FET.
The tribunals rejected Argentina's defence of necessity.
The tribunals found that:
The claimants had investments eligible for protection against expropriation, which consisted of shareholdings in the Subsidiaries (which were the holders of Concessions). The Concessions gave rights to a stream of revenues (but were not connected with ownership of any physical assets).
Neither the general measures adopted by Argentina nor its failure to revise the tariffs constituted permanent and substantial deprivation of the claimants' investments and therefore did not amount to expropriation. Similarly, termination of Concessions did not constitute expropriation, since it was an exercise of Argentina's contractual rights (acta iure gestionis) and not its sovereign powers (acta iure imperii).
Because no expropriation was found, the doctrine of police powers, invoked by Argentina in ICSID Case No ARB/03/17, did not apply and its application to other treaty violations was inappropriate.
Analysed the historical development of the standard of full protection and security and followed a traditional interpretation of the term "full protection and security", obliging the host state to exercise due diligence to protect investors and investments from physical harm.
Found that the concept of full protection and security was included within the concept of FET, but the former was narrower than the latter. The FET standard related to the stability of the business environment and legal security. The standard of full protection and security related to the protection of investment from physical harm and did not extend to an obligation to maintain a stable and secure legal and commercial environment, and, consequently, to the claimants' allegations of withdrawal of legal protections.
The tribunals found that:
The phrases "fair and equitable" (Argentina-Spain and Argentina-UK BITs) and "just and equitable" (Argentina-France BIT) meant the same thing. The reference to "the principles of international law" in the Argentina-France BIT did not impose obligations different from those found in the Argentina-Spain and Argentina-UK BITs (where that wording was not used); and the FET standard in all three BITs was not limited to the international minimum standard.
Investors' reasonable and legitimate expectations were an "operational method for determining the existence or non-existence of [FET]". Legitimate expectations, concerning the nature of treatment the investor can anticipate from the state, were created by the host state's laws, regulations, declared policies and statements. The claimants' legitimate expectations were created by Argentina's legal framework, and they invested in Argentina in reliance on this framework.
The claimants had "legitimate, reasonable and justified" expectations that the tariffs would be revised in accordance with the legal framework and the procedures provided for in the Concessions.
The host state's reasonable right to regulate, which had to be balanced with investors' legitimate expectations, had to be exercised within the legal framework. This was not the case here and therefore Argentina's refusal to revise the tariffs frustrated the claimants' legitimate expectations.
The state breached its obligation to treat the claimants fairly and equitably by forcing the Subsidiaries to renegotiate the Concessions during the financial crisis and outside the legal framework. The renegotiation of the Concessions during the crisis differed from previous renegotiations, which created expectations as to how renegotiation should proceed.
There was insufficient evidence to conclude that the state breached its obligation to accord FET to investors by terminating the Concessions.
In separate opinions, one arbitrator agreed that Argentina breached its FET obligation, however, only after its recovery from economic and social crises. In his opinion:
The FET standard was a neutral expression of the international minimum standard and would, as a rule, refer to the standard at the time a given BIT was signed.
Identification of the FET standard with the protection of legitimate expectations went beyond the normal meaning of the BITs' terms. The FET standard represented the degree of due diligence that the state parties to the BIT were obliged to observe in respect of foreign investments and not "a declaration of rights of investors". The FET standard was to be measured by the canons of good governance of a reasonably well-organised state, not by investors' expectations.
The interpretation giving the FET standard the effect of a legal stability provision had no basis in the relevant BITs in question. The obligation of legal stability would limit the host state's essential regulatory powers and therefore such declaration had to be specific, explicit and unequivocal, which was not the case here.
The alteration of the legal framework did not constitute a breach of the FET standard. Temporary freezing of tariffs during the crisis was reasonable. Argentina had the right, not contradicted by the BITs or the general international law, to take exceptional measures in a crisis situation, which were unpredictable at the time the BITs had been signed. These exceptional measures could not be "unreasonable, disproportionate, discriminatory, or in any way arbitrary" and had to conform to the "canons of a modern and well-organised State".
Argentina invoked the defence of necessity under customary international law (as reflected in Article 25 of the ILC Articles on Responsibility of States for Internationally Wrongful Acts (2001)) to exempt itself from liability for BIT violations. The tribunals found that Argentina did not satisfy the conditions expressed in Article 25.1(a) and 25.2(b) of the ILC Articles:
The measures which violated the BITs in question were not the only way to safeguard Argentina's essential interests, as more flexible means existed to assure continued provision of water and wastewater services and, at the same time, respect Argentina's FET obligation. (Article 25.1(a)).
Argentina itself contributed to the situation of emergency by "excessive public spending, inefficient tax collection, delays in responding to the early signs of the crisis, insufficient efforts at developing export market, and internal political dissension and problems inhibiting effective policy making". (Article 25.2(b)).
The high threshold for the necessity defence to succeed was not lowered by the fact that the disputes concerned provision of water to large communities. The tribunals rejected the argument that, because the case involved Argentina's obligation to safeguard the human right to water, this gave it a broader margin of discretion than in relation to other commodities. The tribunals stated that Argentina was bound by both the treaty (BIT) and human rights obligations, and had to respect them equally. These two types of obligations were not "inconsistent, contradictory, or mutually exclusive" and Argentina could have respected both of them at the same time.
These are two out of three disputes regarding water concessions in Argentina. The third ICSID case (filed by Aguas Cordobesas SA, Suez and Societad General de Aguas de Barcelona SA (ICSID Case No ARB/03/18)) was discontinued in 2007 following a settlement. All three disputes were heard by tribunals consisting of the same panel of arbitrators. Certain non-governmental organisations and individuals were allowed to participate as amici curiae. These disputes are part of a series of investor-state disputes arising out of the Argentinean financial crisis of the early 2000s.
The awards, as well as the separate dissenting opinion, contain a useful analysis of the treatment standards, in particular the FET standard. They illustrate the difficulties of reconciling the host state's regulatory powers in exceptional circumstances of financial and social crises with the rationale of an investor-friendly legislative and regulatory framework adopted before the crises and which did not provide expressly for any solutions in case of such an emergency.
The awards are to be contrasted with the decision of the committee in Sempra Energy International v Argentina (ICSID Case No ARB/021/16) (Annulment proceeding) (Legal update, Sempra v Argentina: award annulled for manifest excess of powers in failure to apply BIT defence of necessity (www.practicallaw.com/6-502-7299)). In that case, the tribunal's failure to recognise the defence of necessity was held to amount to manifest excess of power, and the award was annulled. A similar decision has recently been reached in the challenge to the award in Enron Corp, Ponderosa Assets LP v Argentina (ICSID Case No ARB/01/3) (see Legal update, Enron v Argentina: ICSID tribunal rejects defence of necessity (www.practicallaw.com/2-366-1973)). It will be interesting to see whether similar challenges are mounted to the awards in the Suez cases.
Suez, Societad General de Aguas de Barcelona SA, and Vivendi Universal SA v Argentina (ICSID Case No ARB/03/19) (www.practicallaw.com/5-503-0240) and dissenting opinion (www.practicallaw.com/1-503-0242)
Suez, Societad General de Aguas de Barcelona SA, and Inter Agua Servicios Integrales del Agua SA v Argentina (ICSID Case No ARB/03/17) (www.practicallaw.com/3-503-0236) and dissenting opinion (www.practicallaw.com/7-503-0239)