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The Arbitration Review of The Americas 2008

Section 1: International Overviews

ICSID Arbitration in the Americas

Arif Hyder Ali, Alexandre de Gramont

Crowell & Moring LLP

The Americas - and, in particular, Latin America - continue to provide headlines in the world of investor-state arbitration. About half of the 100-plus cases currently pending at the International Centre for Settlement of Investment Disputes (ICSID) involve claims against governments in North, Central, and South America. A number of the largest ICSID awards, including several rendered in the past year, have been against governments in the Americas. Substantial numbers of claims continue to be filed against governments in the Americas - including the first cases filed under the dispute resolution provisions of the Central America-Dominican Republic-US Free Trade Agreement (CAFTA-DR), which were recently invoked by investors for the first time. With populist leaders, historically unprecedented oil and mineral prices, and talk of nationalisation on the rise in several Latin American countries, it seems likely that the upward trend in the number of new investorstate disputes will continue. In the meantime, Canada appears finally on its way to completing the process under which the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention) will enter into force with respect to Canada and Canadian investors. At the other extreme, Bolivia is the first nation to have withdrawn from the ICSID Convention; Ecuador reportedly intends to reject ICSID arbitration for future oil, gas and mining disputes; and Venezuela has threatened to take a similar path.

Background

The notion that a 'visiting' investor can assert claims in international arbitration against the sovereign state which is 'hosting' the investment remains relatively new. Throughout much of the world, it had long been the case that an aggrieved investor's sole recourse was to prevail on its own government to exercise 'diplomatic protection', ie, to intervene (diplomatically or otherwise) on its behalf vis-á-vis the host state. As recently as 1970, the International Court of Justice held in the Barcelona Traction case that an aggrieved foreign investor had absolutely "no remedy in international law" that it could pursue in its own stead.1

The prevailing view in Latin America was similar, although with an important twist, known as the Calvo doctrine. Named for the 19th-century Argentine diplomat and lawyer Carlos Calvo, the Calvo doctrine emerged largely as a reaction to 'diplomatic protection' that was all too often accompanied by military threats and intervention (so-called 'gunboat diplomacy'). The Calvo doctrine posited that jurisdiction in international investment disputes lies with the country in which the investment is located, with no right of recourse by the investor to benefit from diplomatic intervention. The Calvo doctrine found its way into foreign investment contracts and even into treaties between Latin American and other States, where it became known as the Calvo clause. Though the Calvo doctrine was perhaps an understandable reaction to bullying (and worse) by the governments of many foreign investors, it is not surprising that many foreign investors were unsatisfied with the treatment they received in the host state's local courts.

In 1966, however, the ICSID Convention came into force, when it was ratified by 20 countries. Today, the ICSID Convention has been ratified by over 140 countries, including the vast majority of governments throughout the Americas. Notable exceptions include Brazil, Mexico, and Canada - although, as mentioned above, Canada appears to be on the way to completing the process whereby the ICSID Convention will be in force as to Canada and Canadian investors.2

The ICSID Convention in essence provides that a signatory state may 'consent' to arbitration claims being filed against it by an investor from another signatory state. That consent can be manifested in a number of different ways, including investment treaties, investment agreements, and the local investment laws of the host states. Today, more than 2700 investment treaties are in existence. Numerous investment agreements also provide for investor-state arbitration. Although these treaties and agreements may provide for different fora (or a choice of fora) for such arbitration, the most common forum by far is ICSID, which operates under the auspices of the World Bank, with its seat in Washington, DC.

Cases filed at ICSID against governments in the Americas

Over the past decade, the number of filings at ICSID has increased dramatically. Only 14 cases had been brought at ICSID as of 1998. Today, about 250 cases have been filed. (It is estimated that more than 100 other investor-state cases have been filed in other fora, whose confidentiality rules often make the number more difficult to track than at ICSID, where registered cases are reported on their website.)

The vast majority of these cases are based on investment treaties, usually bilateral investment treaties (BITs), but also multilateral trade and investment protection treaties, such as the tripartite North American Free Trade Agreement (NAFTA), to which Canada, Mexico, and the US are parties, or the CAFTA-DR, which has been signed by the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, the US, and Costa Rica. (In October 2007, voters in Costa Rica - the only signatory that had not ratified the treaty - narrowly voted to approve CAFTA-DR in a national referendum.) Because Mexico has not signed the ICSID Convention, and because the Convention is not yet in force with respect to Canada, NAFTA claims may be heard at ICSID's Additional Facility, which has its own procedural rules that differ from the ICSID Arbitration Rules. NAFTA claims may also be brought on an ad hoc basis or at a different arbitral institution under the rules of the UN Commission on International Trade Law (UNCITRAL). About a dozen NAFTA cases have been filed under the ICSID Additional Facility Rules.

Approximately 40 per cent of all of the cases registered so far at ICSID have been against governments in the Americas. A very high number of those cases have been brought against Argentina. (There are currently over 30 cases pending against Argentina at ICSID, in addition to a dozen or so cases previously filed against Argentina that have since been resolved.) Most of the Argentine cases arose out of Argentina's economic crisis in 2001-2002, its resulting currency devaluation and the policies adopted by the government in response to the crisis. But even if one discounted the Argentine cases entirely, a quarter of the cases at ICSID would still be against governments in the Americas.

After falling slightly from 2005 to 2006, the number of cases registered at ICSID is up substantially in 2007. Through early October, there have already been more than 30 cases filed at ICSID. If the trend continues through the end of 2007, ICSID could have as many as 40 cases registered this year (about twice as many as in 2006). A third of the cases registered so far in 2007 are against governments in the Americas, specifically, Argentina, Costa Rica, Guatemala, Nicaragua, Paraguay, Peru, and Venezuela.

The newly registered cases involve a variety of subject matters, including debt instruments (Giovanni A Beccara et al v Argentina); a fish flour production enterprise (Tza Yap Shum v Peru); capital contributions to an enterprise (Alasdair Ross Anderson et al v Costa Rica); and a water services concession (Impregilo SpA v Argentina). They also include Railroad Development Corp v Guatemala, the first case at ICSID brought under CAFTA-DR. (A second case under CAFTA-DR against the Dominican Republic was apparently filed earlier this year under the UNCITRAL Rules at the ICC.) They also include the first mass claimant arbitration filed at ICSID. Giovanni A Beccara is reportedly brought on behalf of 195,000 claimants, who allege US$4.4 billion in damages arising from Argentina's alleged default on payment of sovereign bonds. In the meantime, the Tza Yap Shum case is apparently the first arbitration filed at ICSID by a Chinese investor. Submitted under the China-Peru BIT, the case is another indication of the rapidly growing level of Chinese investment in Latin America.

Cases decided at ICSID involving governments in the Americas

The increasing number of ICSID cases, and of published decisions arising from such cases, have produced a growing and evolving body of ICSID jurisprudence. Although decisions by one arbitral tribunal are not binding on another, they are considered persuasive authority, and tribunals in investor-state cases have recognised "a duty to contribute to the harmonious development of investment law and thereby to meet the legitimate expectations of the community of States and investors toward the certainty of the rule of law."3

Jurisdiction issues

ICSID proceedings are often bifurcated into separate phases addressing jurisdiction and the merits. As the growing numbers of cases filed over the past decade have made their way through the process of arbitration, a first 'wave' of ICSID decisions arising from the Americas involved mostly issues of jurisdiction. For example, of all of the ICSID cases filed against Argentina, only seven have been concluded on the merits, while 20 have had decisions issued on jurisdiction.

There have been several discernible trends in rulings on jurisdiction. For example, a number of jurisdiction cases arising from the Americas involved investment agreements between the investor and host state that at least arguably provided for the exclusive jurisdiction of the domestic courts. With some claimants arguing that those provisions amounted to efforts to resurrect the Calvo clause and circumvent the investment treaties, tribunals have consistently rejected the use of such provisions as a bar to jurisdiction.4 (However, at least one tribunal has suggested in dictum that an unambiguous waiver of treaty rights in an investment agreement would serve to waive jurisdiction.)5

Tribunals deciding jurisdictional issues in cases arising from the Americas have generally followed the larger trend of construing treaty definitions literally and, some would argue, broadly. Depending on the language of the treaty, the potential range of 'investors' who can bring claims against a host state is large. The ICSID Convention allows contracting states to treat an entity that is incorporated in the host state - but 'controlled' by an entity in the other state - to be treated as a 'national' of the other state. Thus, for example, in Aguas del Tunari, SA v Bolivia, the tribunal concluded that it had jurisdiction over claims by a Bolivian company against Bolivia under the Bolivia-Netherlands BIT, when the Bolivian company was "controlled" by Netherlands entities in its upstream ownership.6 Conversely, tribunals have concluded that, under some treaties, they have jurisdiction to hear claims by non-controlling and indirect shareholders. Thus, in CMS Gas Transmission Co v Argentine Republic, the tribunal found it had jurisdiction to hear indirect claims by a minority shareholder, where the US-Argentina BIT at issue defined "investment" as including "every kind of investment in the territory of one Party owned or controlled, directly or indirectly by nationals or companies of the other Party."7

The language of many treaties has proven sufficiently broad to allow investors to structure their investments through holding companies in particular countries, in order to be able to invoke the protections of a BIT that might not be available if the investor held the investment directly in the host state. The importance to an investor of carefully considering the treaties available for a particular investment is underscored by two cases brought against Ecuador involving the same value-added tax. One company brought its claim under the US-Ecuador BIT and recovered an award of US$71.5 million.8 The other company brought its claim under the Canada- Ecuador BIT; however, the tribunal concluded that a provision in that BIT excluded tax cases from the tribunal's jurisdiction. The claimant in that case, therefore, recovered nothing.9

Although structuring investments through holding companies to invoke a particular BIT has been criticised as 'treaty shopping', the reality is that companies investing in the Americas (and elsewhere) are engaging in that practice. There are some steps that host states can take in an effort to limit the effects of 'treaty shopping', such as including waiver-of-jurisdiction clauses in their investment contracts (though it remains to be seen whether tribunals will follow the dictum of Aguas del Tunari and enforce such clauses) and the inclusion of denial of benefits provisions in their BITs. A denial of benefits clause, if properly drafted and invoked, may preclude a claimant from asserting jurisdiction based on a holding company in a country that has little or no connection to the dispute at issue.

Merits issues

Most investment treaties provide the investor with a variety of substantive protections, including, typically, guarantees that the state:

  • will not expropriate property - directly or indirectly (eg, through regulation) - without compensation;
  • will provide the investor with 'fair and equitable' treatment;
  • will treat the investor no less favourably than its own nationals and no less favourably than required by international law;
  • will not discriminate against the investor;
  • will afford the investor 'full protection and security'; and
  • will honour its contractual and other legal obligations owed to the investor (the so-called 'umbrella' clause).

In many of the recent merits decisions arising out of the Americas (as elsewhere), tribunals continue to struggle with regulations that adversely impact international investors - especially when those regulations serve compelling public interest or policy purposes. Although there are perhaps too few cases to announce a trend, it is interesting to note that several recent cases rejected expropriation claims based on such regulations, only to find that the regulations violated the guarantee of 'fair and equitable' treatment. For example, in LG&E Energy Corp v Argentine Republic, the tribunal rejected the claim for expropriation when Argentina had changed the legal and regulatory framework that had induced the claimants to invest in Argentina. According to the tribunal in LG&E: "The abrogation of these specific guarantees [contained in the original regulations] violates the stability and predictability underlying the standard of fair and equitable treatment."10 Similarly, in Azurix v Argentine Republic, the tribunal concluded that the impact of various adverse regulatory actions against a water concession "was not to the extent required to find that, in the aggregate, these actions amount to an expropriation . . ."; however, the actions of the government, when considered together, "reflect[ed] a pervasive conduct of the [government] in breach of the standard of fair and equitable treatment."11

The LG&E case is also significant for its recognition and application of the 'necessity' defence. Under the necessity defence, a state may be excused from its treaty obligations when the actions at issue were taken to safeguard an essential interest against a grave and imminent peril.12 In LG&E, the tribunal concluded that the regulatory actions taken by Argentina were - at least for a limited period of time - justified by the severity of Argentina's financial crisis. The tribunal concluded that Argentina was not liable for damages during that period of time.13 In this respect, the LG&E decision reached the opposite conclusion from the tribunal in a case decided the previous year. In CMS Gas Transmission Co v Argentine Republic, the tribunal concluded that Argentina's financial crisis did not satisfy the conditions of the necessity defence.14 In LG&E, the tribunal held a separate damages phase and, in July 2007, announced its award in favour of the claimant in the amount of US$57,400,000.15 Still, the case is more likely to be remembered for its recognition of the necessity defence than for its substantial award in favour of the claimant.

The LG&E and CMS decisions are reminders that, as ICSID's jurisprudence continues to evolve, there will be an increasing number of conflicting decisions. Another area where the decisions appear to be inconsistent involves the so-called 'umbrella' clause, in which the host states agree in the treaty to comply with any obligation they have undertaken with respect to investors and/or investments of the other state. Some claimants have argued that an umbrella clause can elevate a claim for breach of an investment agreement into a claim under an investment treaty. The first case to address that argument was SGS v Pakistan, which rejected the notion that a contract claim could be transformed into a treaty claim by virtue of an umbrella clause.16 But several cases arising out of the Americas have taken the opposite view. In LG&E, the tribunal stated that the umbrella clause "creates a requirement for the host state to meeting its obligations toward foreign investors, including those that derive from a contract. Hence, such obligations receive extra protection by virtue of their consideration under the bilateral treaty."17 But the tribunal in LG&E appeared to go even further by holding that Argentina's abrogation of guarantees to foreign investors contained within a statutory framework could breach the umbrella clause.18 In Enron v Argentine Republic, the tribunal reached the same conclusion. In awarding the claimant US$106 million, the tribunal determined that Argentina's failure to comply with the obligations it had assumed under its agreement with the investor and in its domestic regulations constituted a violation of the treaty's 'umbrella' clause, as well as its 'fair and equitable treatment' provision.19 However, in the recent decision of the annulment committee in CMS v Argentine Republic, the committee annulled the tribunal's earlier finding that the umbrella clause could be applied to erga omnes obligations (such as unilateral commitments set forth in the state's regulatory framework), on the basis that the tribunal had not adequately stated the reasons for its finding. But in so ruling, the committee expressed scepticism that the umbrella clause could be applied to such obligations.20

Despite a number of awards against host states, it should be recognized that host states have also prevailed in their disputes with investors. For example, in several recent cases, Vieira v Chile,21 Bayview Irrigation District et al v Mexico,22 and MCI Power Group LC v Ecuador,23 the tribunals sustained the respondents' objections based on jurisdiction. In Fireman's Fund Ins Co v Mexico 24 and United Parcel Service v Canada,25 both NAFTA cases, the tribunal ruled in favour of the respondents on the merits.

Other developments

Few events in Latin America attracted more attention in the world of investor-state arbitration than Bolivia's withdrawal from the ICSID Convention. As a practical matter, the withdrawal does not mean that investor-state arbitration can no longer be brought against Bolivia at ICSID. Bolivia still has fully ratified BITs with ICSID clauses with countries such as Belgium and Luxembourg, France, Germany, the Netherlands, the UK and the US. Even after Bolivia's withdrawal from the ICSID Convention becomes effective (3 November 2007),26 cases can still be brought against Bolivia at the ICSID Additional Facility, as well as other arbitral fora speci- fied in the BITs. Only a country like Brazil - which has neither signed the ICSID Convention nor ratified any of the 14 BITs it has signed - will avoid arbitration at ICSID.27

But Bolivia's withdrawal is emblematic of a tide of populism and nationalisation that has been spreading throughout much of Latin America over the past several years. Large-scale nationalisations are underway in Venezuela, Ecuador and elsewhere. After expelling its World Bank representative in April, it was reported in early October that Ecuador would no longer accept ICSID jurisdiction over disputes related to oil, gas and mining. (As this article goes to print, it is unclear how and to what extent Ecuador intends to accomplish that goal.) Similarly, President Hugo Chávez announced that Venezuela would be withdrawing from the World Bank and IMF, and has suggested that Venezuela might also withdraw from the ICSID Convention. In addition, Argentina is reportedly planning to ask the US government formally to recognise Argentina's right to declare its financial crisis in 2001-2002 as an emergency that excused Argentina from its obligations under the US-Argentina BIT.

Many of these events arise from social, political, and economic trends that have little to do with ICSID, and in many ways trace their roots to the historic revulsion in many Latin American countries against any perceived relinquishment of national sovereignty (the same revulsion that gave rise, more than 100 years ago, to the Calvo doctrine). But the first wave of jurisdictional decisions against Latin American governments - which were decided mostly in favor of claimants - may also have contributed to the perception that ICSID arbitration was systemically unfair to countries from the developing world. As Latin American countries become increasingly sophisticated - and increasingly successful - in defending ICSID cases, one can only hope that that perception is changing.

But in many countries in Latin America, hostility toward so-called 'neoliberal' policies and institutions appears unlikely to decline any time soon. It is almost inevitable that such hostility - and the policies that are born of it - will lead to an increasing number of ICSID arbitrations being filed in the coming years.

In the meantime, the number of arbitrations filed under NAFTA and other treaties against governments in the northern part of the hemisphere are increasing as well. That trend appears equally likely to continue.

Notes
  1. Case Concerning the Barcelona Traction, Light and Power Co Ltd, (Belgium v Spain), 1970 ICJ Reports, 3 paragraph 78.
  2. Although Canada ratified the ICSID Convention in December 2006, it has not yet complied with articles 68 and 69, which require parties to the Convention to implement its provisions within their territories, in compliance with their respective constitutional procedures. Under Canada's constitution, its provincial governments are responsible for the regulation of property and civil rights and courts administration. The provinces of Alberta and Quebec have not yet taken the necessary steps to implement the ICSID Convention, and as Canada has not yet elected to exclude these provincial territories from the Convention's application upon written notice, as permitted under article 70, the Convention arguably does not yet apply to Canada or Canadian investors.
  3. Saipem, SpA v Bangladesh, Decision on Jurisdiction and Recommendation on Provisional Measures, 21 March 2007, ICSID Case No. ARB/05/07, paragraph 67.
  4. See, eg, Aguas del Tunari SA v Bolivia, Decision on Respondent's Objections to Jurisdiction, 21 October 2005, ICSID Case No. ARB/02/03 (AdT Decision); Azurix Corp v Argentina, Decision on Jurisdiction, 8 December 2003, ICSID Case No. ARB/01/12; Compa￱ia de Aguas del Aconquija SA & Vivendi Universal v Argentina, Award, 21 November 2000, ICSID Case No. ARB/97/3. In the interests of full disclosure, Crowell & Moring LLP was counsel for the respondent in the Aguas del Tunari case.
  5. AdT Decision, paragraph 118.
  6. AdT Decision, paragraph 323.
  7. Decision of the Tribunal on Objections to Jurisdiction, 17 July 2003, ICSID Case No. ARB/01/8.
  8. Occidental Exploration and Prod Co v Ecuador, Final Award, 1 July 2004, LCIA Case No. UN3467 (UNCITRAL). An appeal by Ecuador in the UK was rejected by the Queen's Bench in a decision that was affirmed by the Court of Appeal in London on 4 July 2007.
  9. EnCana Corp v Ecuador, Final Award, 3 February 2006, LCIA Case No. UN3481 (UNCITRAL).
  10. LG&E Energy Corp v Argentine Republic, Decision on Liability, 3 October 2006, ICSID Case No. ARB/02/1 (LG&E), at paragraph 133.
  11. Azurix v Argentine Republic, Award, 14 July 2006, ICSID Case No. ARB/01/12, paragraph 332. By contrast, several earlier decisions agreed with the claimants that the state's regulatory actions amounted to expropriation - although these cases involved the denial or revocation of permits and licenses, without which the businesses could not operated. See, eg, Metalclad v United Mexican States, Award, 30 August 2000, ICSID Case No. ARB(AF)/97/1; Tecmed v United Mexican States, Award, 29 May 2003, ICSID Case No. ARB/(AF)/00/2.
  12. The necessity defence is articulated in article 25(1) of the International Law Commission's Draft Articles on State Responsibility as follows: "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) is the only means for the State to safeguard an essential interest against a grave and imminent peril; and (b) does not seriously impair an essential interest of the State or States towards which the obligation exists, or of the international community as a whole."
  13. LG&E, paragraph 267(e).
  14. Award, 12 May 2005, ICSID Case No. ARB/01/8.
  15. LG&E Energy Corp. v Argentine Republic, Award, 25 July 2007, ICSID Case No. ARB/02/1.
  16. Decision on Jurisdiction, 6 August 2003, ICSID Case No. ARB/01/13.
  17. LG&E, paragraph 170.
  18. Id, paragraph 175.
  19. Award, 22 May 2007, ICSID Case No. ARB/01/3, at paragraph 251-277.
  20. CMS Gas Transmission Co v. Argentine Republic, Decision of the ad hoc committee on the Application for Annulment of the Argentine Republic, 25 September 2007, ICSID Case No. ARB/01/8, paragraphs 86-100. Although the committee annulled this portion of the tribunal's earlier decision, it affirmed the overall award.
  21. Decision on Jurisdiction, 21 August 2007, ICSID Case No. ARB/04/7.
  22. Decision on Jurisdiction, 19 June 2007, ICSID Case No. ARB(AF)/05/1 (NAFTA).
  23. Award, 31 July 2007, ICSID Case No. ARB/03/6 at paragraph 351-353.
  24. Award, 17 July 2007, ICSID Case No. ARB(AF)/02/1 (NAFTA).
  25. Award, 11 June 2007, UNCITRAL (NAFTA).
  26. Article 71 of the ICSID Convention provides that "[a]ny Contracting State may denounce this Convention by written notice to the depositary of this Convention [i.e., the World Bank]. The denunciation shall take effect six months after receipt of such notice." The World Bank received Bolivia's notice on 2 May 2007.
  27. Bolivia has also indicated that it may withdraw or revise its BITs. It should be noted, however, that most BITs contain termination provisions providing that any investment made before the date of termination will be protected for a number of years. For example, the U.S.-Bolivia BIT provides that any investment made before the date of termination will be protected for 10 years thereafter.

Crowell & Moring LLP

1001 Pennsylvania Avenue N.W.
Washington, D.C.
Phone: 202.624.2500
Fax: 202.628.5116
Website: www.crowell.com

Contacts

Arif Hyder Ali

Tel: +1.202.624.2888
aali@crowell.com

Alexandre de Gramont

Tel: +1.202.624.2517
adegramont@crowell.com

Crowell & Moring LLP is a full-service international law firm with nearly 400 lawyers practicing in litigation, international dispute resolution, antitrust, environmental, government contracts, corporate, intellectual property and more than 20 other practice areas. More than two-thirds of the firm's lawyers regularly litigate or arbitrate disputes on behalf of domestic and international corporations, sovereign states, and private individuals. Lawyers in the firm's International Dispute Resolution (IDR) Group have appeared in virtually every major arbitral forum in the world, including the International Centre for Settlement of Investment Disputes (ICSID), the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA), the Stockholm Chamber of Commerce (SCC), and the International Centre for Dispute Resolution (ICDR) of the American Arbitration Association (AAA). The firm's IDR attorneys have extensive experience in international commercial and investor-state arbitration. They are currently handling five major investor-state arbitrations (including three NAFTA cases) at ICSID and the ICSID Additional Facility involving cases arising from the Americas. In other areas, Crowell & Moring's work ranges from advising on one of the world's largest telecommunications mergers to representing investment banks and major corporations in litigation, corporate, and financial services matters. Based in Washington, D.C., the firm also has offices in New York, London, Brussels, and California.

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