In the aftermath of the Argentine financial crisis of 2001/02, more than 30 foreign investors – most with stakes in Argentina’s privatised utilities – have filed suits under investment protection treaties signed by their home countries with Argentina.

Collectively, these companies sank billions of dollars into the country during its privatisation process beginning in the early 1990s. A decade later, they are seeking billions of dollars in compensation for alleged breaches of contract and international law.


Today, the docket of the World Bank’s arbitration facility, the International Centre for Settlement of Investment Disputes (ICSID), reads like a Who’s Who of global multinationals, as companies such as BP, France Telecom, Total, Siemens, Telefonica, Enron and Suez pursue claims against Argentina.

Estimates of the amounts at stake differ but even a modest guess by the Argentine Justice Ministry puts the potential liability at more than $17bn. That figure does not include a potential claim by a sizeable minority of bondholders who, after declining a recent settlement offer by the Argentine government, are now seriously considering international arbitration.

This May, the first domino appeared to fall on Argentina, when an arbitration tribunal at the ICSID ruled in favour of US-based CMS Gas Transmission Company. The tribunal found the country guilty of violating contractual undertakings and an investment protection treaty signed with the US. It ordered Argentina to pay CMS more than $130m in compensation for losses sustained during the financial crisis.

Challenge to regime

With other tribunals expected to hand down rulings in the months to come, eyes are now focusing on Argentina as it contemplates a challenge to the international investment protection regime.

Although investment protection treaties have been negotiated for almost half a century, they have long been viewed as a last-ditch form of insurance in case of nationalisation or egregious interference. If the tanks rolled in to seize a factory or the president’s son took over an office building, the treaties provided a legal foothold for challenging such abuses and obtaining compensation. The protections found in these treaties were vague, however. Rather than offering clear guidance on who bears the brunt in the case of a currency collapse or a financial crisis, they oblige host governments to provide “fair and equitable treatment” and to “observe any obligation it may have entered into with regard to investments”, for example.


Opening the door

Interpretation is left to arbitration tribunals and, where the treaty protections are alleged to have been breached, the treaties open the door for investors to take their host governments to binding arbitration. But it was unusual for investors to do so well into the 1990s – only in the aftermath of the Argentine crisis did they begin to stride through this portal in record numbers. In 2003, the ICSID facility registered an unprecedented 30 investment treaty arbitrations, 20 of which were directed at Argentina.

To understand how the country ended up on the receiving end of this unprecedented flood of international claims, its recent economic history must be examined.

Throughout the 1980s, Argentina endured crippling bouts of hyperinflation and economic stagnation. At the end of that decade, Carlos Menem came to power with plans for major structural adjustment. His government introduced legislation designed to pave the way for future privatisations – removing obstacles to inward investment and establishing legislative frameworks to govern the privatisation process in key sectors such as gas, water and electricity.

In 1991, the government established its infamous currency board, which pegged the peso to the US dollar on a one-to-one basis to promote financial stability. Further stabilisation provisions were built into concessions and contracts concluded by Argentine authorities with long-term investors in an effort to buffer them from financial upheaval.

For a time these reforms met with some success, at least in quantitative terms. While fierce political debate continues to rage about the impact the privatisations had on service delivery for ordinary Argentines, it is undisputed that large sums of FDI flowed into Argentina for a period. Foreigners took significant stakes in various privatised utilities and other infrastructure projects.

However, by the end of the 1990s, the Argentine economy was showing signs of unravelling. In 1998, the country was dipping into recession and trouble was looming in the form of itinerant economic crises, which had spread from east Asia, to Russia, and then to neighbouring Brazil.

Crisis strikes

By late 2001, Argentina was in serious turmoil. The country turned to the International Monetary Fund for emergency assistance and introduced austerity measures to rein in public spending. Payments to public sector employees were in arrears, unemployment was on the march and popular protests were taking to the streets. In December 2001, Argentina announced that it was in default on its foreign debt, which served to quicken a run on local bank accounts and sparked public looting and public demonstrations.

Against this backdrop, in early 2002 the government introduced a series of emergency measures and decrees. Among their effects was to repeal the currency board, ending the peg between the Argentine peso and the US dollar and thereby setting the stage for successive devaluations of the Argentine currency.

The indexing of prices and tariffs to foreign inflation indices that had been used in many contracts was abolished and the government announced that such contracts would need to be renegotiated.

Quick reaction

International law firms were quick to react in the face of these measures. Freshfields Bruckhaus Deringer – which came to represent several foreign investors in Argentina – issued a briefing note in January 2002 advising prospective clients that Argentina had signed dozens of bilateral investment treaties (BITs) during the 1990s, and that the country’s emergency measures might breach those treaties.

Other international law firms also sprang into action in the months that followed.

Doak Bishop, a partner in the Houston office of law firm King & Spalding who acts on behalf of several foreign energy firms in arbitrations with Argentina, insists that the Argentine government effectively “dismantled” the special legal framework put in place to induce FDI during the 1990s.

As the newly decoupled peso slipped its US mooring, Mr Bishop says, foreign investors watched their profit projections float off towards the distant horizon. Foreign investors in the utility sector often borrowed on foreign capital markets to finance their investments, particularly in capital-intensive sectors such as gas pipelines. Financing those foreign-denominated loans became a no-win proposition when income from customers was being paid in devalued pesos.

Mr Bishop says that public contracts with foreign investors were expressly designed “to allocate any risk of currency fluctuation or currency devaluation away from the foreign investors and to the state of Argentina”. And, he says, by failing to live up to these contractual promises, Argentina violated the terms of its many investment protection treaties.

Wake-up call

The argument has found some traction in the CMS dispute at the ICSID. In the ruling handed down in May, the tribunal held that Argentina’s failure to live up to contractual stabilisation clauses – which should have buffered CMS from tariff freezes and unilateral contract changes – amounted to a violation of its international treaty obligations.

While the tribunal agreed that Argentina had not singled out foreign investors for discriminatory treatment, it did find that the government had denied such investors the stable regulatory framework advertised to foreigners throughout the 1990s, which they say induced them to invest into the country. This failure to ensure stability and predictability amounted to a breach of the treaty requirement to give foreign investors “fair and equitable treatment”.

Argentina sought to convince the tribunal that any breaches of the treaty had been a necessary response to a chaotic economic and social situation. However, the tribunal rejected this argument, noting that the country failed to meet the stringent international law test for “necessity” and taking the view that “government policies and their shortcomings significantly contributed to the crisis and the emergency”. This further undermined Argentina’s defence.

Lucy Reed of law firm Freshfields, who acted as co-counsel for CMS in the arbitration with Argentina, says it was “gratifying to see the tribunal having given such a careful analysis of Argentina’s legal defence and applying the international law carefully, in a way that supports the legal expectations of investors”.

While counsel for Argentina are not talking about the CMS decision in any detail (to avoid revealing their future legal strategy), they do say that tribunals may be too inclined to interpret treaty protections in a manner that privileges foreign investors. A lawyer at the attorney general’s office, who spoke on the condition of anonymity, stresses that Argentina seeks to treat foreign companies equitably, but without putting them above others.

“This crisis affected everybody – foreign investors, local investors. Poverty and unemployment grew at an incredible pace,” the lawyer says. “We believe that in those kinds of situations a government has the right under international law to take the necessary measures to assure its survival, the survival of the state, and of the society. As long as [those] measures do not discriminate and as long they affect everybody in an equal way, we believe that nobody can say [to a government] that ‘you are not entitled to do that’.” The lawyer adds that investment treaties are being interpreted to provide foreign investors with a softer landing than that experienced by the rest of the Argentine economy.