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International Investment Law, Time, and Economics: Fixing the Length of Economic Crises as a Costs-Allocation Tool between Host States and Foreign Investors
Published online by Cambridge University Press: 15 March 2019
Abstract
The case law on non-precluded measures clauses, when they are successful, and the customary rule of necessity, when it fails, transfers significant risks to foreign investors and host States, respectively, during severe economic crises. Some risk-sharing mechanisms should be explored to achieve a more balanced result. This article presents the policy reasons in support of this approach and its normative basis: the principle of acceptable compensation, and illustrates that one way to introduce such mechanisms is through the determination by investor/State tribunals of the length of the breakdown, which is marked by the dates for its beginning and end. The article discusses economic research on when crises conclude, which could be useful to tribunals, and explores the determination on the beginning of economic collapses as a risk-sharing tool and shows how decisions of the Argentinean saga have achieved this result.
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- Research Article
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- Copyright © Alberto Alvarez-Jimenez 2019
References
1 The case law has been generated by litigation against Argentina resulting from its 2001 economic collapse and its invocation of the non-precluded measures clause included, among others, in Article XI of the US–Argentina Bilateral Investment Treaty:
This Treaty shall not preclude the application by either Party of measures necessary for the maintenance of public order, the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the Protection of its own essential security interests.
Treaty between the United States of America and the Argentine Republic Concerning the Reciprocal Encouragement and Protection of Investment, US–Argentina. Signed on 14 November 1991.
2 See Sempra Energy International v. Argentine Republic, Decision on Annulment, ICSID Case No. ARB/02/16, 29 June 2010, at para. 200 [Sempra Annulment Decision].
3 See CMS Gas Transmission Company v. Argentine Republic, Decision of Annulment, ICSID Case No. ARB/01/8, 25 September 2007, at para. 146 [CMS Annulment Decision].
4 See Continental Casualty Company v. Argentine Republic, Award, ICSID Case No. ARB/03/9, 5 September 2008, at paras. 303–304 [Continental].
5 See ibid., at paras. 236, and LG&E Energy Corp. v.. Argentine Republic, Decision on Liability, ICSID Case No. ARB/02/1, 3 October 2006, at para. 266 [LG&E].
6 It provides:
- 1.
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)
(a) is the only means for the State to safeguard an essential interest against a grave and imminent peril; and
- (b)
(b) does not seriously impair an essential interest of the State or the State towards which the obligation exists, or of the international community as a whole.
- (a)
- 2.
2. In any case, necessity may not be invoked by a State as a ground for precluding wrongfulness if:
- (a)
(a) the international obligation in question precludes the possibility of invoking necessity; or
- (b)
(b) the State has contributed to the situation of necessity.
- (a)
International Law Commission, Articles on Responsibility of States for Internationally Wrongful Acts, at 6–7. General Assembly Resolution 56/83. 20 January 2002 [ILC's Articles], www.un.org/en/ga/search/view_doc.asp?symbol=A/RES/56/83.
7 See International Law Commission, Articles on Responsibility of States for Internationally Wrongful Acts, with Commentaries 2001, at 86 [ILC Commentaries]. http://legal.un.org/ilc/texts/instruments/english/commentaries/9_6_2001.pdf.
8 See ibid. at 86.
9 See ibid. at 85.
10 International Court of Justice, Case Concerning the Gabcikovo–Nagymaros Project (Hungary/Slovakia), Judgment of 25 September 1997 IC.J. Reports 1997, p. 7.
11 See ibid., at para. 51.
12 In the following cases, Argentina's invocation of Article 25 has failed: see CMS Gas Transmission Company v. the Argentine Republic, Award, ICSID Case No. ARB/01/8, 12 May 2005, at paras. 57 and 65 [CMS]; on the matter of an UNCITRAL Arbitration, National Grid P.L.C. v. Argentine Republic, Award, 3 November 2008, at paras. 257–262 [National Grid]; Suez, Sociedad General de Aguas de Barcelona S.A., and Vivendi Universal S.A. v. the Argentine Republic; AWG Group v. the Argentine Republic, Decision on Liability, ICSID Case No. ARB/03/19, 30 July 2010, at paras. 260–265 [AWG]; Total S.A. v. the Argentine Republic, Decision on Liability, ICSID Case No. ARB/04/1, 27 December 2010, at paras. 220–224 [Total Decision on Liability]; EDF International S.A., SAUR International S.A. and Leon Participaciones Argentinas S.A. v. Argentine Republic, Award, ICSID Case No. ARB/03/23, 11 June 2012, at paras. 1171–1176 [EDF]; and Impregilo S.p.A v. Argentine Republic, Award, ICSID Case No. ARB/07/17, 21 June 2011, at paras. 344–359 [Impregilo].
13 The fact that NPM clauses have hardly been successful in the litigation of the Argentinean saga does not mean that the introduction of a risk-sharing mechanism is futile. Quite the contrary: the existence of the mechanism is important precisely when the clause is successful, and for the benefit of the investor. Likewise, the fact that the customary rule usually fails does not make useless the existence of a risk-sharing instrument. The very fact of the lack of success prompts the need for a risk-sharing mechanism for the benefit of the respondent host State that endured the given economic collapse.
14 See Alan O. Sykes, ‘Economic “Necessity” in International Law’, 109 American Journal of International Law (2015), 296, 299, 313, and 319.
15 See William W. Burke-White and Andreas von Staden, ‘Investment Protection in Extraordinary Times: The Interpretation and Application of Non-precluded Measures Provisions in Bilateral Investment Treaties’, 48 Virginia Journal of International Law (2008), 307, 402.
16 See infra note 47 and accompanying text.
17 ILC, Commentaries, supra note 7, at 100.
18 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, opened for signature at Washington on 18 March 1965 [ICSID Convention].
19 See International Centre for Settlement of Investment Disputes, Updated Background Paper on Annulment for the Administrative Council of ICSID, 5May 2016, at para. 93 [ICSID Paper on Annulment], https://icsid.worldbank.org/en/Documents/resources/Background%20Paper%20on%20Annulment%20April%202016%20ENG.pdf.
20 Louis Kaplow, ‘An Economic Analysis of Legal Transitions’, 99 Harvard Law Review (1986), 509, 531.
21 See ibid. at 533–536.
22 See ibid. at 527–528.
23 See ibid. at 535.
24 See ibid. at 529
25 See ibid. at 577.
26 See ibid. at 577.
27 See Clint Peinhardt and Todd Allee, ‘Political Risk Insurance as Dispute Resolution’, 7 Journal of International Dispute Settlement (2016), 205, 216.
28 See Hochtief Aktiengesellschaft v. Argentine Republic, Decision on Liability, ICSID Case No. ARB/07/31, 29 December 2014, at para. 309 [Hochtief].
29 See Kaplow, supra note 20, at 553–566.
30 See Kaplow, supra note 20, at 566.
31 Kaplow's argument based on economic efficiency does not defeat the main proposition of this article based on reasonableness and fairness. However, his argument still could have an influence on the extent to which cost-sharing mechanisms could be deployed. For instance, in hypothetical terms, tribunals embracing the efficiency logic would be less willing to put in place cost-sharing mechanisms for the benefit of foreign investors or would narrow the scope of such mechanisms, in the event of host States’ successful defences based on the applicable NPM clause.
32 See Kaplow, supra note 20, at 552
33 See El Paso Energy International Company v. the Argentine Republic, Award, ICSID Case No. ARB/03/15, 31 October 2011, at paras. 716 and 737 [El Paso].
34 LG&E, supra note 5, at para. 265. The El Paso tribunal speaks of the lack of application of the applicable IIA during the period of emergency. See El Paso, supra note 33, at para. 612.
35 Hochtief, supra note 28, at paras. 293–294.
36 For instance, assessing the requirements for the invocation of the defence, in particular, the very existence of the crisis does not necessarily imply a determination on when it ended. Tribunals have recognized the existence of the Argentinean crisis without determining when it finished.
See, among others, National Grid, supra note 12, at paras. 258–262; Impregilo, supra note 12, at paras. 348–350; EDF, supra note 12, at para. 1172; and El Paso, supra note 33, at paras. 649–655.
37 ‘Over and over I told myself that time – that infinite web of yesterday, today, the future, forever, never – is the only true enigma,’ Jorge Luis Borges, There are More Things (1975[1977]).
38 CMS, supra note 12, at para. 250.
39 See LG&E, supra note 5, at para. 230.
40 See Continental, supra note 4, at para. 157.
41 See Total Decision on Liability, supra note 12, at para. 171.
42 See AWG, supra note 12, at para. 257.
43 See Hochtief, supra note 28, at para. 295.
44 See ibid.
45 See supra note 38 and accompanying text.
46 See CMS, supra note 12, at paras. 315–331 and 353–378. An Ad Hoc Annulment Committee was very critical of the CMS tribunal's legal interpretation of the NPM clause and the customary rule. See CMS Annulment Decision, supra note 3, at paras. 129–136. However, this criticism had no impact on the decision of the tribunal regarding the length of the crisis and on the measure of the compensation.
47 CMS, supra note 12, at para. 248.
48 Ibid., at para. 406.
49 Ibid., at para. 446.
50 It is important to say that the CMS tribunal is not the only one that has taken the crisis into account at the time of measuring the compensation. The Hochtief tribunal also did so. See Hochtief, supra note 28, at paras. 317–318.
51 The requirement of lack of contribution is explicitly provided for by the customary rule of necessity. However, some tribunals dealing with NPM clauses have also included the requirement within such clauses. See Continental, supra note 4, at para. 234; and El Paso, supra note 33, at paras. 617–624.
52 The Total tribunal stated that it had some discretion to award ‘damages in a reasonable amount’, Total S.A. v. the Argentine Republic, Award, ICSID Case No. ARB04/1, 27 November 2013, at para. 32.
53 This proposal does not suggest that tribunals should always shorten the length of crises. It could be a tool to be used when tribunals declare the success of the invocation of the NPM clause and, in light of the particular facts of the case, are of the view that some cost-sharing mechanisms between the given claimant investor and the host State must be introduced for the purpose of achieving a reasonable compensation.
54 See LG&E, supra note 5, at para. 260.
55 See ibid., at para. 226.
56 See CMS, supra note 12, at para. 250.
This is, however, not to say that only tribunals that found the invocation of the NPM clause or the customary rule successful are the ones that fixed this date, April 2003. The AWG tribunal agreed on the LG&E tribunal's date of the end of the crisis as was said, but concluded that Argentina had not met the requirements of the customary rule. See AWG, supra note 12, at paras. 263–265.
57 See supra note 34 and accompanying text.
58 See Continental, supra note 4, at paras. 159 and 220.
59 See ibid., at paras. 160–219.
60 See ibid., at paras. 220–22.
61 See ibid., at para. 320(B).
62 Carmen M. Reinhart and Kenneth S. Rogoff, ‘Recovery from Financial Crises: Evidence from 100 Episodes’, NBER Working Paper No. 19823, January 2014, at 4, www.nber.org/papers/w19823.pdf.
63 Kannan, Scott, and Terrones define the recovery and its length ‘as Number of quarters after trough and before recovery to the level of previous peak’. Prakash Kannan, Alasdair Scott, and Marco E. Terrones, ‘From Recession to Recovery: How Soon and How Strong’, IMF World Economic Outlook, April 2009, at 6 n. 3, www.imf.org/external/np/seminars/eng/2012/fincrises/pdf/ch8.pdf.
64 See Antonio Fatás and Ilian Mihov, ‘Recoveries’, Paper presented at the annual conference of the Boston Federal Reserve, 12–13 April 2013, at 17, https://faculty.insead.edu/fatas/Recoveries%20Fatas%20Mihov.pdf.
65 See Continental, supra note 4, at paras. 159 and 221, n. 336.
66 Relying on the theory of business cycles, Rebelo illustrates the phenomena of comovement of different sectors of the US economy regarding several criteria, such as gross output, value added, and materials and energy use. See Sergio Rebelo, ‘Real Business Cycle Models: Past, Present, and Future’, NBER Working Paper No. 11401, June 2005, 19–21. Comovement could also be at play during recoveries.
67 See CMS, supra note 12, at para. 249; Continental, supra note 4, at para. 152; and Hochtief, supra note 28, at para. 294.
68 See Reinhart and Rogoff, supra note 62, at 4.
69 See ibid.
70 See supra note 64 and accompanying text.
71 See LG&E, supra note 5, at paras. 226–229.
72 See Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, Award, ICSID Case No ARB/07/26, 8 December 2016, at paras. 250–256 and 263 [Bizkaia].
73 See LG&E, supra note 5, at para. 229.
74 The words of the main character, an investment banker, in Jorge Volpi's novel Memorial del Enga ño (Memoir of a Fraud) come to mind:
Y le dije qué teníamos que hacer … debíamos sacar partido de ese mínimo paréntesis, de esa oportunidad de oro, el preludio del desorden, apostar aquí y allá [So I suggested what to do … we should take advantage of this brief parenthesis, of this golden opportunity, the prelude of the mess, making bets here and there].
75 See Total Decision on Liability, supra note 12, at para. 305.
76 See ibid., at para. 297.
77 See ibid., at paras. 322–323
78 See ibid., at para. 322.
79 See ibid., at para. 324.
80 The measures set prices that did not allow the investor to recover its costs and make a reasonable profit, as mandated by the Argentinean legal system. See ibid., at para. 333.
81 See ibid., at paras. 222–224.
82 The Impregilo tribunal was dealing with a dispute regarding the alleged violation of the Agreement between Italy and the Argentine Republic for the Promotion and Protection of Investments (Argentina–Italy BIT). See Impregilo, supra note 12, at para. 5.
83 See ibid., at paras. 1, 14, and 237. Impregilo owned 42,58% of AGBA's stock and made a USD 21.3 million equity investment in the latter company (see ibid., at para. 238). Measures adopted by Argentina to cope with its collapse affected the contract and the investor. The contract was terminated by Argentina in July 2006 (see ibid., at paras. 45 and 48).
84 See ibid., at para. 251.
85 See ibid., at para. 254.
86 See ibid., at para. 373.
87 See ibid., at paras. 330–331.
88 See ibid., at para. 379.
89 See ibid., at para. 373.
90 See ibid., at para. 374.
91 At this time, Argentina's economy was already in a recession as a result of the adverse consequences caused by the Asian crisis of 1997 and the Brazilian crisis of 1999, as the International Monetary Fund admitted at the time (see International Monetary Fund PIN No. 00/84, IMF Concludes Article IV Consultation with Argentina, 3 October 2000), www.imf.org/en/News/Articles/2015/09/28/04/53/pn0084.
92 See Article 39 of the ILC's Articles on State Responsibility. See ILC's Articles, supra note 6, at 9.
93 See Bizkaia, supra note 72, at para. 34.
94 The claimants in Bizkaia were also shareholders of AGBA, and the value of their shares was US45 million (see ibid., at para. 383). The applicable IIA was the ‘Agreement on the Reciprocal Promotion and Protection of Investments between the Argentine Republic and the Kingdom of Spain’ signed on 3 October 1991. See Bizkaia, supra note 72, at para. 1.
95 See ibid., at para. 634.
96 See ibid., at para. 638.
97 See ibid., at para. 630.
98 See ibid., at paras. 250–256 and 263.
99 See ibid., at paras. 368–370.
100 See ibid., at para. 408.
101 See ibid., at paras. 434–435.
102 See ibid., at paras. 843–845.
103 See ibid., at paras. 846–847 and 1234.4.
104 See ibid., at paras. 638 and 678.
105 See ibid., at para. 512.
106 Bizkaia also illustrates what was mentioned at the beginning: that allocation of risks and costs is a not an effect that should always exist. Despite this, Bizkaia is quite useful to the deepening of the Total approach on cost sharing, as will be seen below.
107 See Continental, supra note 4, at para. 180.
108 See ibid., at paras. 157–159.
109 To be fair to the Continental tribunal, it did mention some factors that had not evolved positively (see Continental, supra note 4, at para. 152). However, the factors did not make up part of the assessment that the tribunal carried out to determine when the economic collapse had ceased.
110 It is expected that over time investor/State tribunals will arrive at a certain consensus on the number of quarters of recovery that could be deemed as enough to mark the end of a particular economic crisis for the purpose of deciding an investor's claim or host State's defence. Once this consensus is achieved, governments dealing with another ongoing crisis might at least have a reference point to make ex ante assessments regarding when future tribunals will regard that the economic breakdown ended. Even though economic collapses are different in their causes and effects, this consensus would then mitigate to some extent the uncertainty that governments face when crafting decisions aimed at curbing severe ongoing economic turmoil.
In effect, there is a certain consensus among tribunals that dealt with the Argentinean collapse. In general, the consensus on recovery is for the third or fourth quarters. The bottom of the crisis took place in the second or third quarter of 2002 (see Continental, supra note 4, at para. 152); and the breakdown ceased in the second quarter of 2003 (see supra notes 38 to 43 and accompanying texts).
Whether or not three or four quarters of recovery might be applied by investor/State tribunals to another crisis remains to be seen. But the point of reference is there for future governments to use as a gauge.