Investment Arbitration Reporter

By Luke Eric Peterson

The Republic of Argentina has been found liable for denying fair and equitable treatment to a number of foreign shareholders in the country’s privatized water and sewage sector.

The developments come in three separate arbitration claims brought by foreign shareholders in water & sewage concessions - one in the province of Santa Fe and the other in Buenos Aires – which were privatized in the mid-1990s and opened to foreign investment. Claimants in the cases included the French companies Suez and Vivendi Universal, UK firm Anglian Water Group (AWG), and Spanish firms Agbar and Interagua.
 
In Decisions rendered on July 30, 2010*, arbitrators have found Argentina liable for breaching the fair and equitable treatment obligations of investment protection treaties with the UK, France and Spain.

The claimants complained of mistreatment by provincial and national authorities stretching across multiple years, including during the peak of the Argentine financial crisis at the turn of the last decade. In their recent Decisions, arbitrators ruled that Argentina could not rely on a defence of “necessity” under customary international law in an effort to justify the treaty breaches that occurred as a result of Argentina’s “emergency” response to the financial crisis.

However, in an unwelcome coincidence for the claimants, the Decisions – and the tribunal’s analysis of the necessity issue – were issued on the very same day that an ICSID annulment committee struck down a 2007 arbitral award, in the Enron v. Argentina case, which tackled similar necessity issues. (See item 8 below)

Of course, the (perhaps inevitable) review of the recent Decisions in the Suez water cases may be some distance off. First, arbitrators must convene a separate damage phase where a tribunal-appointed damages expert will help determine the compensation owed by Argentina for the treaty breaches. (The claimants in the Buenos Aires case seek upwards of 1.2 Billion Dollars in compensation, while the Santa Fe investors have pointed to losses of more than a quarter of a Billion Dollars.)

After the damages phase, Argentina might be expected to seek annulment – as it has in virtually all other cases at ICSID.

The three arbitration claims were heard by the same three individuals: US law professor Jeswald Salacuse (President), Swiss law Professor Gabrielle Kaufman-Kohler (claimants’ nominee), and Judge Pedro Nikken (Argentina’s nominee).** The law firm Freshfields represented the claimants; Argentina relied on its in-house legal team.

Judge Nikken wrote Separate Opinions in each case where he diverged with the majority on several points, including in relation to the majority’s reading of the meaning of fair and equitable treatment and with respect to the time-period during which Argentina could be held to have breached this treaty obligation. (See our separate article on his separate Opinion).

Background to disputes

At the crux of the tribunal’s findings in both cases was a conviction that Argentine authorities long neglected to adjust tariffs which could be charged by the increasingly financially-beleaguered water companies.

Despite protests by Argentina that the privately-run concessions were poorly operated, arbitrators found that the concessions, at least in their early years, led to improvements in water and sewage services delivery.

However, the Argentine financial crisis which began at the end of the 1990s upended the companies’ financial situation, particularly after concessionaires were forbidden from raising prices in order to compensate for the precipitous decline in the value of the Argentine Peso. With a great deal of debt denominated in US Dollars, and a belief that the state was contractually committed to assume the risk of any devaluation, the concession shareholders complained that the government’s decision to hold the line on utility price-hikes was driving the companies into bankruptcy.
 
(For its part, Argentina maintained that it was motivated by concerns to cushion the impact of the financial crisis on its citizens and to maintain the essential security and stability of the country as it weathered the unprecedented financial crisis. Foreign investors have long complained, however, that Argentina’s “emergency” measures – whatever their necessity – remained in place long after the crisis had subsided, much to the economic detriment of investors in the country’s utility sector.)

As the foreign shareholders struggled increasingly with debt obligations and the solvency of their concessions, they turned to arbitration against Argentina in 2003 – not under the concession contracts, but under the terms of overarching investment protection treaties between Argentina and the home countries of the foreign investors. In these claims, the investors alleged that the state was liable for the actions (and inactions) of provincial and federal authorities, and had committed various treaty breaches.

No expropriation found

The July 30, 2010 arbitral awards turn upon the tribunal’s reading of treaty requirements to accord fair and equitable treatment to foreign investments. Equally, the Separate Opinion by Judge Nikken centers on this treaty obligation.

Accordingly, we analyze the views of the arbitrators on the fair and equitable treatment portion of the case in a separate pair of analysis articles. (For the majority's opinion, click here. For Judge Nikken's separate opinion, click here.)

On the question of expropriation, the tribunal noted that the non-ownership of the water and sewage assets did not preclude a claim by claimants for expropriation of their contractual right to a revenue stream. However, the tribunal found no evidence that the claimants had suffered a “substantial, permanent deprivation of their investments” or the enjoyment of those investments’ economic benefits. Indeed, a diminuation in the value of the investments was not akin to an expropriation of them.

As for the “failure” of authorities to raise tariffs, the tribunal side-stepped determining whether a form of “inaction” by a state could be deemed to be a “measure” (capable of giving rise to an expropriation). Rather, the provinces were deemed to have actively refused to raise tariffs, which the tribunal viewed as a “measure” – albeit one that did not give rise on the facts to an expropriation.

As for the ultimate termination of the concessions, the arbitrators ruled that the state acted in its commercial capacity as a party to contracts – rather than in a sovereign capacity – and it was not for a BIT arbitration tribunal to pass judgment on the legality of such terminations.

While the lack of any substantial deprivations meant that there was no need for Argentina to fall back on its “police powers” defence, the Decisions did stress the view that such a defence is only relevant to expropriation claims. (As previously reported by IAReporter, in one recent ICSID award, arbitrators have gone further and seemed to assume that the defence is relevant to other treaty protections as well.***)

Full Protection & Security does not extend to security and legal rights

The tribunal takes a more traditional view of the interpretation of the full protection and security standard, finding that it covers the physical protection and security of an investment – but, in contrast with the view of a few arbitral tribunals, it does not extend (unless made explicit in the treaty language) to providing protection for legal rights or for the security of the broader commercial environment.

In this vein, the tribunal notes that one case oft-cited as a “precedent”, CME v. Czech Republic, was not a unanimous award, and was actually contradicted by the holdings of a separate tribunal hearing essentially the same dispute under another treaty (i.e. the Lauder v. Czech Republic case). Equally, it notes that the CME award and the similarly-reasoned Azurix v. Argentina rulings do not give any clear explanation as to why the arbitrators depart “from the historical interpretation traditionally employed by courts and tribunals and expanding that concept to cover non-physical actions and injuries.”

The tribunal also rejects the approach taken by some arbitrators to essentially collapse the full protection and security and fair and equitable treatment protections into one another. Instead, they deem the latter to be broader, and add that a breach of the former would give rise automatically to a breach of the latter.

Presumably, Judge Nikken dissents from this part of the Decision where the tribunal opines that it is the fair and equitable treatment clause (and not the full protection and security clause) which tends to provide for stability of the business environment and legal security (Click here for our detailed analysis of his separate Opinion).

* The various Decisions and Separate Opinions are available at http://ita.law.uvic.ca ** Prof. Kaufmann-Kohler’s broader arbitration practice was discussed in this report. Prof. Salacuse is a Professor at Tufts University in the United States, he is known to have sat in at least one other treaty-based investment arbitration: the Anderson and others v. Costa Rica case Prof. Nikken is a former Judge on the Inter-American Court of Human Rights. He also sits in the (currently-suspended) Gas Natural v. Argentina case. He also sat on the Duke v. Peru contract arbitration at ICSID – a process which is now at the annulment phase. *** See our reporting (click here) on the EDF v. Romania tribunal’s unique take on the police powers exception.

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