ICSID Tribunal Rules Against Argentina

Dispute Resolution Journal, Aug-Oct 2005

On May 12, 2005, the ICSID tribunal in CMS Gas Transmission Co. v. Argentine Republic (ILCSID No. ARB/01/8), issued a $133.2 million award in favor of CMS after finding that Argentina failed to accord CMS "fair and equitable treatment" in violation of the bilateral investment treaty (BIT) between the United States and Argentina. However, the tribunal dismissed CMS's claim for "expropriation." The decision is available on the CMS Web site (under SEC Filings, 8K on May 17).

The case arose out of CMS's purchase of 30% of the stock of TGN, an energy company wholly owned by Argentina. After CMS made its investment, Argentina suffered a severe economic crisis. During this crisis, Argentina temporarily suspended certain practices that were favorable to investors in the energy sector (e.g., it no longer allowed tariffs to be calculated in dollars and then converted into pesos at the prevailing exchange rate, and it ceased to adjust tariffs every six months to reflect changes in inflation. Then, in 2001, Argentina issued Decree No. 1570/2001, which limited the right to withdraw deposits from bank accounts. Then, on Jan. 6, 2002, Argentina reformed the foreign exchange system by issuing Emergency Law 25.561. CMS claimed that these measures decreased the value of its investment in Argentina and were actionable under the BIT and the ICSID Convention.

Argentina argued that its privatization framework never guaranteed that a devaluation would not occur. Moreover, the prospectus warned that there were no assurances that changes in government policy would not affect investors. It also argued that the high tariffs calculated before the economic downturn factored into the risk of devaluation.

Unfortunately for Argentina, the tribunal found these arguments essentially constituted an admission that the risk of devaluation was foreseeable and foreseen, which undermined any force majeure defense.

Argentina also made a "necessity" defense, arguing that the measures it adopted were the only ways to safeguard its economic interests. However, the tribunal did not accept this argument. Moreover, it found that Argentina's contribution to the economic crisis had to be taken into consideration under the International Law Commission Articles on State Responsibility. As for the Emergency Clause in the BIT, which Argentina cited to support its actions, the tribunal ruled that Argentina could not unilaterally decide that its actions were legitimate under this clause because the treaty did not expressly confer that right. Even if the Emergency Clause were applicable, the tribunals said, Argentina would have to comply with its other treaty obligations after the emergency circumstances had ended.

In upholding CMS's claim for violations of fair and equitable treatment, the tribunal stated that fair and equitable treatment were inseparable from stability and predictability. Accordingly, all that had to be shown was that the legitimate expectations that the host State act in a consistent manner were not met. Bad faith did not have to be shown.

Argentina succeeded in having CMS's expropriation claim dismissed, arguing that the company was not deprived of the enjoyment of its property.

The tribunal in this case was composed of Francisco Orrego Vicuña (president), the Hon. Mark Lalonde and Judge Francisco Rezek.