{"id":62428,"date":"2015-08-17T12:00:20","date_gmt":"2015-08-17T11:00:20","guid":{"rendered":"https:\/\/www.transcend.org\/tms\/?p=62428"},"modified":"2015-08-13T13:31:26","modified_gmt":"2015-08-13T12:31:26","slug":"crisis-emergency-measures-and-failure-of-the-investor-state-dispute-settlement-isds-system-the-case-of-argentina","status":"publish","type":"post","link":"https:\/\/www.transcend.org\/tms\/2015\/08\/crisis-emergency-measures-and-failure-of-the-investor-state-dispute-settlement-isds-system-the-case-of-argentina\/","title":{"rendered":"Crisis, Emergency Measures and Failure of the Investor-State Dispute Settlement System: The Case of Argentina"},"content":{"rendered":"

The way in which the ISDS system was used to handle a spate of claims from foreign investors against Argentina following its economic and financial crisis of 2001\/2002 has shown up flaws in the system and the need for its reform.<\/em><\/p>\n

Aug 12 2015<\/em> – The investor-state dispute\u00a0settlement (ISDS) system has come under\u00a0increasing criticism in recent years.<\/p>\n

Inconsistent decisions, poorly reasoned awards,\u00a0lack of transparency, parallel proceedings,\u00a0serious doubts about arbitrator\u2019s impartiality\u00a0and the sheer size of the compensations sought by\u00a0investors and awarded by arbitration tribunals\u00a0are just some examples of the flaws that have\u00a0been pointed out by detractors of the system.<\/p>\n

The dozens of cases that were initiated against\u00a0Argentina as a result of the outburst of one of\u00a0its worst economic and financial crises in late\u00a02001 became an often-quoted sad illustration of\u00a0many of these shortcomings of the ISDS system.<\/p>\n

Apart from the tragic consequences entailed by\u00a0the economic and political crisis which was faced\u00a0by Argentina, in particular in 2001\/2002, which\u00a0included a fall in gross domestic product (GDP)\u00a0per capita of 50 percent, an unemployment rate of\u00a0over 20 percent, a poverty rate of 50 percent,\u00a0strikes, demonstrations, violent clashes with the\u00a0police, dozens of civil casualties and a\u00a0succession of five presidents in 10 days, Argentina\u00a0received a flood of claims from foreign investors\u00a0that were filed under different ISDS mechanisms\u00a0and, in particular, before the International\u00a0Centre for Settlement of Investment Disputes (ICSID).<\/p>\n

Indeed, in the period 2003-2007, claims against\u00a0Argentina represented one-quarter of all the cases\u00a0initiated within the framework of the ICSID\u00a0Convention. These claims before international\u00a0arbitral tribunals challenged the changes to the\u00a0economic rules that Argentina had implemented to\u00a0contain the effects of perhaps the worst economic cycle of its history.<\/p>\n

After 1991, Argentina had embarked on an\u00a0economic deregulation and liberalisation programme.\u00a0Among others, this programme included the\u00a0convertibility of the Argentine peso and the\u00a0creation of a currency board to maintain parity between the peso and the U.S. dollar by\u00a0limiting the local money supply to the amount of\u00a0Argentina\u2019s foreign exchange reserves.<\/p>\n

This\u00a0economic and pro-market programme was accompanied\u00a0by a strong emphasis on the attraction of foreign\u00a0investment which, among other aspects, resulted in\u00a0the conclusion of 58 bilateral investment\u00a0treaties (BITs) \u2013 55 of which came into effect.<\/p>\n

It also included a mass privatisation process of\u00a0public companies which, at that time, represented\u00a0an important part of the domestic economy.<\/p>\n

This market-oriented model reached its limits in\u00a0the late 1990s, and in May 2003 a new president took office, whose government\u00a0reformed the regulatory framework for the economy\u00a0\u2013 particularly that for the public services privatised over the 1990s \u2013 and introduced a package of emergency laws which implied a\u00a0considerable change in the conditions under which\u00a0foreign investors and, in particular, public\u00a0services providers had to run their business in\u00a0Argentina.<\/p>\n

As a consequence, many of them decided\u00a0to resort to the investor-state dispute\u00a0settlement mechanisms embodied in the dozens of\u00a0bilateral investment treaties that Argentina had signed in the 1990s. In total, in the period 2001-2012, exactly 50\u00a0cases were filed against Argentina.<\/p>\n

A striking\u00a0characteristic of the Argentinian experience is\u00a0the amount of requests for compensations made by\u00a0the companies that sued Argentina. According to estimates made when the peak of\u00a0cases following the crisis was reached, if all\u00a0investors that\u00a0sued Argentina had obtained 100\u00a0percent of their claims, the total amount that\u00a0the country should have had to bear would have\u00a0been at around 80 billion dollars.<\/p>\n

This sum would\u00a0have been practically impossible to pay, even if\u00a0Argentina had not been undergoing a period of\u00a0acute economic crisis, because it represented\u00a0approximately 13 percent of Argentina\u2019s GDP for 2013.<\/p>\n

Although Argentina\u2019s response to this flood of\u00a0cases was varied and it is still early to offer definite figures, it is already possible to\u00a0conclude that, in general, arbitration tribunals\u00a0were prone to render awards in favour of investors.<\/p>\n

Almost 45 percent of the cases have received a\u00a0condemnatory award, although most of these cases\u00a0could still be reversed by annulment proceedings,\u00a0whereas only 15 percent of the arbitration\u00a0proceedings ended up with a final decision\u00a0completely in favour of Argentina. The remaining\u00a030 percent are mostly cases which resulted in an\u00a0agreement between the parties or which were altogether suspended.<\/p>\n

All in all, of the 80 billion dollars of the\u00a0possible amount of compensations calculated when\u00a0the peak of cases against Argentina was reached\u00a0following the crisis, Argentina has so far\u00a0received final rulings involving the payment of 900 million dollars.<\/p>\n

The first salient conclusion is that the ISDS\u00a0system has a very low capacity to adapt to\u00a0totally exceptional circumstances for which it\u00a0does not seem to have been designed. Despite the\u00a0efforts of Argentinian attorneys to show that\u00a0the measures implemented in the post-crisis period\u00a0were adopted in an emergency context, being so\u00a0exceptional as to justify any breach of the\u00a0substantial clauses of the BITs, few tribunals\u00a0were prepared to sustain this defence.<\/p>\n

This notwithstanding, and with most of these\u00a0cases having already been dealt with, the upcoming\u00a0scenario for Argentina seems much less drastic\u00a0than that forecast when the peak of cases was reached.<\/p>\n

While they represent a heavy burden for a\u00a0developing country like Argentina, so far the\u00a0compensations actually paid amount to a small\u00a0portion of the sum initially estimated.<\/p>\n

The Argentinian case also represents a worrisome\u00a0example of the failure of the ISDS system to\u00a0ensure coherence and soundness in its decisions.<\/p>\n

Although the dozens of cases submitted against\u00a0Argentina addressed exactly the same package of\u00a0measures (the post-crisis emergency laws) and\u00a0 had to assess very similar arguments of the\u00a0different claimants and a practically identical\u00a0series of defences put forward by the Argentinian\u00a0government, the conclusions at which they arrived\u00a0have shown striking differences.<\/p>\n

Additionally, some of the decisions have been\u00a0subject to strong criticism and\/or declared null\u00a0and void by annulment committees.<\/p>\n

Finally, the experience of Argentina shows the\u00a0difficulties that arbitration tribunals might\u00a0encounter when trying to scrutinise the economic\u00a0policy choices made by governments. On top of the\u00a0sensitiveness of examining sovereign decisions of\u00a0States, arbitrators might find themselves in the\u00a0awkward situation of deciding on highly technical\u00a0matters which they are clearly ill-equipped to assess.<\/p>\n

The case of Argentina thus represents a sad\u00a0example of the urgent need to reconsider and\u00a0reform the ISDS system. Yet, the lessons to be\u00a0drawn from this experience do not seem to lead to\u00a0clear conclusions about which direction to take.<\/p>\n

On the one hand, the system has proved to be\u00a0extremely inflexible, which prevented it from\u00a0addressing the exceptional peculiarities of the\u00a0Argentinian case. On the other hand, however, the\u00a0wide margin of discretion available for the\u00a0arbitral tribunals resulted in the adoption of inherently poor decisions, and with high levels of incoherence among them.<\/p>\n

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