Jurisprudence of the International Arbitration of Failed Projects

1
Jurisprudence of the International Arbitration of
Failed Projects

• Thomas Heller and
• Aaron Nathan

2
Case Study CMS v. Argentina

• In 1992, TGN, a Privatized Argentine Gas
  Corporation Enters License Agreement with
  Government of Argentina
• Incorporates Privatization Gas Law
• Tariffs set by US PPI with Periodic Readjustment
• Tariffs calculated in Dollars, Converted to Pesos
• In 1995, CMS, a U.S. corporation, Purchases
  Shares in TGN, Pursuant to Gas Law, License and
  Memoranda.
• 175 Million
• 29.42 of TGN Shares

3
Case Study CMS v. Argentina

• Argentine Financial Crisis (Late 1990s)
• Suspension of Tariff Adjustments (2000)
• Emergency Law (2002)
• Currency Peg is Removed and Peso is Devalued
• No More Tariff Adjustments to US PPI
• No More Calculations in US Dollars
• CMS Investment in TGN is Devalued

4
The History of Investor Rights

• Diplomatic protection was the only recourse
• Barcelona Traction (1970, ICJ) No standing to
  protect indirect investors (shareholders)
• Even under ICSID rights were limited
• Vacuum Salt (1994, ICSID) Foreign shareholders
  in domestic corporation have no international
  legal recourse without controlling interest

5
The History of Investor Rights

• Investor risks raised
• Need for home state representation of investor
  (political decision)
• Shareholder from a third state has minimal
  representation
• Alternative remedies in national courts (domestic
  corporation as plaintiff) or national rules about
  arbitrability and choice of law
• ICSID provides direct right of arbitration to
  investors
• The rights asserted are treaty rights
• Well advised investors can structure their
  investment to assure treaty rights

6
How Can Investors Assure Treaty Rights?

• Bilateral Investment Treaty or Other Agreement,
  such as NAFTA, Defining Treaty Rights and Dispute
  Resolution Authority
• Jurisdiction, e.g. under ICSID Convention
• Dispute Concerning an Investment
• Agreement Between Host State and Foreign
  Investor

7
Agreements between Foreign Investor and Host State

• Agreement between investor and host state
  broadly defined
• Often a contract between the host state and the
  domestic corporation
• Tender offer (road show)
• Gas Law, License, Memoranda
• If there is evidence that a host state has
  induced the foreign investment, it will prevent
  the host state from subsequently evading
  liability
• Justifiable reliance best defined by
  international law
• Necessity as a limitation on reliance?

8
Can Sovereigns be Bound?

• Defense of Necessity
• Not Self-Judging (not determined by country
  invoking necessity)
• Must be the only available means to avoid harm
• Must not impair essential interests of other
  contracting states
• Must not be precluded by specific obligation
• Must not be fault of the state invoking necessity
• Must be temporally limited
• Does Not Eliminate the Legal Obligation to
  Compensate

9
Surmountable Barriers to Jurisdiction

• Standing
• Indirect Claim
• Foreign Control
• Minority Shareholder
• Hypothetical Dispute
• Fork-in-the-Road
• Exhaustion Requirement

10
Substantive Investor Rights

• CMS, under U.S.-Argentina BIT, Claims Violation
  of License Constitutes
• Expropriation (No)
• Arbitrary and Discriminatory Measures (No)
• Breach of Standard of Fair and Equitable
  Treatment (Yes)
• Minimum Standard of Customary International Law
• Violation of Umbrella Clause (Yes)
• Pacta Sunt Servanda (contracts must be honored)

11
Other Cases

• Metalclad (NAFTA, ICSID, 2000)
• Fair and Equitable Treatment (Yes)
• Expropriation (Yes)
• Methanex (NAFTA, 2005)
• National Treatment (No)
• Fair and Equitable Treatment (No)
• Expropriation (No)

12
SummaryAssurances of Jurisdiction

• Existence of Treaty Protection
• Specific Agreement Between the Local Corporation
  and the State
• Appears to be consideration for
  investment/inducement to invest
• Bargaining History Between the State and the
  Investor
• Violation of Specific Terms of the Agreement
  Causing Specific Harm to Investors Interest

13
How Have Things Changed?

• Investor Claims vs. Host State Now Direct
• Jurisdictional Barriers to Investor Claims
  Reduced
• Substantive Rights defined by International Law
• Possible Recognition as Customary International
  Law of Standard Treaty Provisions
• CMS Decision on Jurisdiction
• Need for Multilateral Treaty Obviated?

14
Unresolved Issues

• Uncertain Level of Protection
• Damages
• Time Cost
• Political Risk Insurance
• Hypotheses Future
• Endgame
• Renegotiation