Investment Arbitration Reporter

By Luke Eric Peterson

A review panel at the International Centre for Settlement of Investment Disputes (ICSID) has annulled a 2007 arbitral award rendered in favour of the Enron corporation and Ponderosa Assets L.P. (hereinafter Enron”) in a dispute arising out of the Argentine financial crisis.

The July 30, 2010 ruling by a three-member ad-hoc annulment committee is the second in recent months to find serious fault with the work of a prior arbitration tribunal in a case involving the Republic of Argentina.

The developments will give further consolation to the Argentine government – which has long protested that its defence of necessity was given short shrift in a number of early ICSID arbitrations.

At the same time, the decision is likely to stir further unease amongst those foreign investors and law firms who have engaged in a protracted effort to obtain compensation from Argentina for losses arising out of that country’s response to a financial crisis earlier this decade.

In light of this latest decision, arbitrators in ongoing Argentine cases may be expected to glance nervously over their shoulders - and to devote additional attention to their analysis of Argentina’s customary international law defence of “necessity”.

The ad-hoc committee in the Enron v. Argentina case consists of Gavan Griffith (President), Judge Patrick L Robinson, and Judge Per Tresselt. Arbitrators in the original arbitration were Prof. Francisco Orrego Vicuna (President), Prof. Albert Jan van den Berg, and Pierre-Yves Tschanz.

Arbitrators failed to apply customary international law tests

It is well-established that Argentina took a series of emergency measures which impacted negatively upon foreign investors, including those in the country’s public utilities sectors.

Foreign investors turned to arbitration en masse in the aftermath of the crisis, alleging that freezes on public service rates and other restrictions served to breach contract and licensing promises, as well as the protections of various bilateral investment treaties.

In Enron’s case, the now-bankrupt US firm invested in Argentina in the 1990s, taking a stake in the newly-privatized natural gas transportation and distribution sector. Enron maintained that its investment in Transportadora de Gas del Sur (TGS) were later thrown into financial disequilibrium when Argentina forbade utility companies from raising tariff rates so as to compensate for the precipitous decline in the Argentine Peso.

For its part, Argentina has maintained that any treaty breaches found to have arisen by arbitral tribunals must be excused on the basis of the state’s having introduced its emergency measures out of economic necessity in the face of a dire financial crisis.

In some cases, Argentina has fallen back on the necessity defence available to all states under customary international law. At other times, notably in cases involving US-based investors, the government has also invoked an additional (novel) provision found in Article XI of the US-Argentina bilateral investment treaty, and which provides that the treaty will not “preclude the application by either Party of measures necessary for the maintenance of public order … or the protection of its own essential security interests.”

In a May, 2007 arbitral award*, a panel of ICSID arbitrators found that Argentina’s treatment of Enron breached several protections in the US-Argentina BIT, even as they rejected an argument that the investment was effectively expropriated by Argentina.

However, an ICSID annulment committee has now struck down this award, holding that arbitrators in the Enron v. Argentina case failed to apply the various legal elements of the test used to assess the necessity of a state’s actions under customary international law.

This failure also infected the tribunal’s further analysis of whether Argentina was entitled to a separate defence under a much-debated provision of the US-Argentina bilateral investment treaty.

In turn, these holdings meant that the tribunal had to annul the decision of the tribunal that Argentina had breached its treaty obligations to provide “fair and equitable treatment” and observe its obligations to Enron (under the so-called umbrella clause).**

Upon annulling these portions of the arbitral award, the committee also determined that it was obliged to annul the tribunal’s damages assessment as well – which served to strip the claimant of a $106 Million+ (US) pay-day.

(Of some consolation for foreign investors, if not Enron itself, the ad-hoc committee rejected a number of annulment arguments put forward by Argentina – including that the claimant should not have been able to bring an ICSID claim due its holding its Argentine investments via an indirect chain of corporate ownership and that the initial tribunal failed to state the reasons for finding that Argentina breached the so-called umbrella clause in the US-Argentina BIT.**)

Committee identifies a series of instances where tribunal failed to apply the law

As noted, the ad-hoc committee annulled the tribunal’s rulings that Argentina could not rely on a defence of necessity under customary international law and under the grounds provided under Article XI of the US-Argentina BIT.

At the crux of the committee’s assessment of the 2007 Enron v. Argentina award was a conviction that arbitrators had failed to address a number of essential legal elements of the test for necessity under customary international law.

For instance, arbitrators held that Argentina had to show that the policy measures affecting Enron needed to have been the “only way” that the state could safeguard an essential interest against a grave and imminent peril. Yet, the committee found that the arbitrators skirted across this requirement in a “cursory” manner – relying on the opinion of an economic expert who said Argentina had multiple policy options in confronting the earlier crisis – rather than engaging in a detailed analysis of the legal meaning of the phrase the “only way”.

Furthermore, the committee found that arbitrators also neglected to explore what degree of effectiveness of potential policy options would render a given option to be a viable one. Put another way, the committee found that the original tribunal had failed to explore whether states could rely on a necessity defence if a given policy response to a crisis was the “only way” that stood a very high chance of being very effective.

The committee also noted that the tribunal failed to elucidate who gets to decide whether a state had other relevant policy options, and on what basis such a determination is to be made.

While the committee professed agnosticism as to the answer to such questions it noted that it was the tribunal’s responsibility to grapple with them in the first instance.

The committee also took issue with other aspects of the tribunal’s award, including what it deemed to be an “entirely obscure” reference to a UK judicial decision – in the Occidental v. Ecuador matter – and the tribunal’s consequent failure to explain why a serious impairment of an essential interest of a foreign investor should be equated with the serious impairment of an essential interest of a (home) state.

Additionally, the committee found fault with the tribunal’s holding that Argentina had “contributed” to the situation of necessity. Again, arbitrators were deemed to have relied merely on the opinion of economic experts as to whether Argentina contributed to its economic crisis, without having applied customary international law.

Ultimately, as noted above, the tribunal’s failure to apply the applicable law (customary international law in this instance) also gave rise to a knock-on problem for its reading of Article XI of the US-Argentina bilateral investment treaty. Because the tribunal had held that the effect of this clause was similar to the customary international law defence of necessity, the tribunal had leaned upon its analysis of the latter for purposes of applying Article XI of the BIT. In turn, this led the annulment committee to find fault with the tribunal’s application of Article XI as well.

(Of particular note, the annulment committee took pains to stress that it did not find any grounds to annul the tribunal’s more basic finding that Article XI had a similar meaning to the necessity defence under customary international law. In stark contrast with the views of an earlier ICSID annulment committee in the CMS v. Argentina case – which excoriated arbitrators for essentially conflating the two concepts - the committee in the Enron case felt that it was wholly for the initial arbitral tribunal to pass judgment on the content of Article XI and its relationship to the customary international law standard. The committee noted that it could, of course, pass judgment on whether the tribunal manifestly exceeded its powers or failed to state its reasons for reaching the conclusions that it did.)

Putting the decision in context

At first glance, the annulment of the Enron award marks the latest in a string of upheavals which have lent some uncertainty to the resolution of disputes between Argentina and foreign investors.

The June 29, 2010 annulment ruling*** in the Sempra v. Argentina case came as a particular shock to many observers, not least as the ICSID’s review process is touted as a limited one which does not subject awards to a full appeal or provide for mere errors of law to be overturned.

However, viewed in context, the annulment of the Sempra award, as well as the sharp criticism (but non-annulment) of an earlier award in the CMS v. Argentina case, both pertained to a legal approach spearheaded by a single tribunal chairman: Prof. Francisco Orrego Vicuna. What’s more, annulment committees took issue (to different degrees) with a failure of Prof. Orrego Vicuna and his co-arbitrators to take seriously Article XI of the US-Argentina BIT as a stand-alone defence separate from the necessity defence under customary international law.

In this sense, criticism of the Sempra and CMS awards seemed of less relevance to the myriad of other claims against Argentina, a number of which arise out of differently-drafted investment treaties.

While it might be tempting to view the annulment of the Enron v. Argentina award, as yet another instance where an annulment committee has simply found problems with Prof. Orrego Vicuna’s approach to the US-Argentina BIT, it should be stressed that the recent Enron annulment decision hinges on the interpretation and application of the customary international law defence of necessity – a defence which is relevant to the full cross-section of Argentine crisis arbitrations.

For this reason, the committee’s reasoning will likely give pause to arbitrators presiding in the fuller range of financial crisis arbitrations against Argentina – under both US and European treaties with Argentina. While hardly assuring Argentina of victory in future cases, the Enron decision could ensure that the Argentine government receives a more detailed accounting of the various facets of the customary international law necessity defence.****

As for Enron, the claimant – or more accurately, the Enron Creditors Recovery Corporation, which succeeded to Enron’s ICSID claim last year - could initiate a new arbitration and try its luck before a new tribunal.

It will be of particular interest to see whether Enron (and Sempra) take such a course, or whether they give up on the ICSID after their respective set-backs.

* The May 2007 award can be found here: http://ita.law.uvic.ca/documents/Enron-Award.pdf ** So-called umbrella clauses oblige treaty-parties to observe other (non-treaty) obligations they may have entered into elsewhere. In one earlier Argentine case at ICSID, an ad-hoc annulment committee annulled a portion of an arbitral award in the CMS v. Argentina case because the original tribunal had failed to clarify in its award how CMS, a US national, could claim for breach of obligations which were owed to a separate Argentina company (in which CMS had invested). *** See our recent report on the Sempra decision here: http://www.iareporter.com/articles/20100630 **** Indeed, proponents of arbitral minimalism should be advised that the committee made clear its view that arbitrators may need to address certain interpretive issues that were not briefed by the parties to the dispute.

Investment Arbitration Reporter is a specialized news publication tracking developments in the area of international investment law and policy.

The publication does not offer legal or financial advice or recommendations of any kind.
 
To offer news-tips or comments, email the Editor, Luke Eric Peterson, at: editor@iareporter.com