Foreign investors looking to enforce ill-gotten contracts through international arbitration may want to think twice in light of a recent ruling at the Washington, DC-based International Centre for Settlement of Investment Disputes (ICSID). The ICSID is a popular venue for arbitrating investor-state disputes, and a particular ruling issued by an ICSID tribunal last autumn has generated considerable discussion in the legal community.
A trio of ICSID arbitrators found that they had no jurisdiction to hear an international arbitration brought by a Spanish firm, Inceysa Vallisoletana, against the government of El Salvador. The Spanish investor bid successfully to run a series of vehicle inspection facilities throughout the Central American country. However, when tensions arose between the Spanish firm and local authorities, Inceysa turned to international arbitration, charging El Salvador with breaching its contract and an investment protection treaty between Spain and El Salvador.
However, the tribunal presiding over the case heard evidence that the investors had secured their contract thanks to various misrepresentations during the bidding process. The tribunal ruled that financial statements were fudged and the company’s credentials wildly embellished. El Salvador argued that its offer to arbitrate foreign investment disputes did not extend to investments that had been obtained illegally.
Ultimately, the tribunal was inclined to agree, informing the Spanish firm that it lacked jurisdiction to arbitrate in its dispute with El Salvador. In addition to losing its case, the Spanish firm was ordered to shoulder the costs of the ICSID process, including the fees for the three international arbitrators.
Tongues are wagging and heads are shaking as international lawyers try to reconcile a pair of arbitration rulings handed down in separate lawsuits by US-based foreign investors against Argentina. In the aftermath of Argentina’s financial meltdown, several dozen foreign investors filed suits against the government, alleging that its treatment of foreign investors breached individual contracts, as well as a number of investment protection treaties signed by Argentina.
As reported here previously, US natural gas company CMS was the first to have its case resolved. In 2005, an arbitration tribunal found that Argentina’s treatment of CMS, in the period during and after its financial crisis, had breached the terms of the US-Argentina investment protection treaty. CMS was awarded about $130m in damages – although its pay-day was postponed when Argentina moved to annul the arbitration ruling, a process that can take up to two years.
More recently, another US gas company, LG&E won a similar ruling against Argentina. However, legal observers are puzzled by major differences in the two arbitration rulings.
Remarkably, two different groups of international arbitrators came to contradictory conclusions about whether Argentina suffered a genuine state of economic emergency under international law, and whether it could be absolved of paying compensation to US investors for losses incurred during that emergency situation. In the CMS case, the arbitrators said that Argentina could not invoke the defence of necessity to avoid paying compensation to foreign investors affected by Argentina’s actions. Yet, in the LG&E case, the presiding tribunal ruled that Argentina was entitled to a defence of necessity, at least during the finite time-window from December 1, 2001 until April 23, 2003, when the crisis was deemed to be a fully fledged national emergency.
The upshot of the two cases is that CMS will be compensated for losses – including lower natural gas tariff earnings – dating to 2001, whereas LG&E is not entitled to compensation for its losses during part of that same time-frame.
Stephan Schill, a Hauser Global Scholar at New York University School of Law, says that these diverging arbitration rulings pose a real “problem for the predictability and stability of international investment relations”. Foreign investors and their lawyers are puzzling over the contradictory arbitration rulings and wondering how future tribunals will handle the same issues. Mr Schill observes that foreign investment legal disputes are handled differently to international trade disputes, with the former subjected to one-off arbitration that can yield diverging or conflicting legal rulings from case to case.
The best solution for resolving foreign investment disputes, according to Mr Schill, would be a single international court, similar to the dispute settlement apparatus of the World Trade Organization. However, he concedes that the political will to build such a system seems to be lacking at the present time.
In the meantime, both foreign investors and host governments may have to endure continuing uncertainty over how international investment protection treaties will be interpreted from one instance to the next.
Luke Peterson is a journalist and research consultant based in Ottawa, Ontario. He produces an investigative news bulletin on international investment treaties for a Canadian think tank.