The recent annulments of two ICSID arbitral awards in Sempra
Energy International v. Argentine Republic and Enron Corp.
Ponderosa Asset, L.P. v. Argentine Republic have created new
uncertainty regarding the scope of review in annulment proceedings
under the ICSID Convention. They have also contributed to the
continuing uncertainty regarding the proper application of the
"necessity" clause—a standard provision in
bilateral investment treaties that exempts state actions in
extraordinary circumstances from the protection of the treaties.
These decisions, which annul two more-than-$100 million awards
against Argentina, lend further support to a state's defense of
necessity in times of economic and political turmoil, and suggest
that the scope of annulment committee review may be more expansive
than previously thought.
In the early 1990s, Argentina privatized several of its major
government-run industries, including natural gas. Among the many
international corporations that invested in these assets were the
now-defunct Enron Corporation and Sempra Energy International, a
San Diego-based energy services company. Enron invested in
government-issued licenses to transport natural gas, while Sempra
invested in licenses to distribute it.
In response to an economic crisis, the government of Argentina made
changes to its currency regime in 2002 that altered the terms of
those licenses, dramatically diminishing the value of Enron and
Sempra's investments. The companies alleged that these changes
violated Argentina's contractual obligations as well as
guarantees provided under the Argentina-U.S. bilateral investment
treaty (the "BIT") and both filed requests for
arbitration under the ICSID Convention.1 The two
arbitrations proceeded in close parallel, as they shared almost
identical factual circumstances, the same counsel, and the same
tribunal president.
Argentina argued in both arbitrations that its actions were
necessitated by a collapsing economy that had produced nationwide
rioting and five different presidents in the span of a month. It
argued that its actions were accordingly exempted from liability by
both Article XI of the BIT as well as customary international
law.
Article XI of the BIT provides that the treaty does not preclude
the government from enacting "measures necessary for the
maintenance of public order, the fulfillment of its obligations
with respect to the maintenance or restoration of international
peace or security, or the [p]rotection of its own essential
security interests." Customary international
law—which Argentina and both claimants agreed is
reflected in Article 25 of the International Law Commission's
Articles on State Responsibility—provides that the
necessity defense cannot be invoked unless the act was the
"only way for the State to safeguard an essential interest
against a grave and imminent peril" and the state did not
"contribute[] to the situation of
necessity."2
At least one leading observer, who also served as an expert for
Argentina in both arbitrations, argued that customary international
law provides a "far more rigorous standard" than
Argentina negotiated for in its BIT.3 Yet both tribunals
reasoned that because the BIT does not define necessity and the
conditions for its operation, they must rely on customary
international law for the elements of Article XI.4
Applying these elements, both tribunals held—in several
pages of nearly verbatim discussion—that Argentina could
not invoke the necessity defense. According to the tribunals, the
crisis did not qualify as one involving an essential state
interest, the state's response was not the only one available,
and the state substantially contributed to the situation it
faced.5 In addition, the tribunals both held that
Argentina breached the fair and equitable treatment provision and
the umbrella clause in the BIT. Enron received a damages award of
over $106 million, and Sempra was awarded over $128 million.
Argentina sought the annulment of both awards, and those requests
were granted on June 29, 2010 in Sempra and on July 30,
2010 in Enron. It is here that the Sempra and
Enron stories diverge.
Under the express terms of the ICSID Convention, an annulment
proceeding is not an appeal.6 An annulment
committee's scope of review is limited to annulling an award in
whole or in part on five enumerated bases, including "that the
Tribunal has manifestly exceeded its powers" and "that
the award has failed to state the reasons on which it is
based."7
According to the annulment committee in Sempra, the tribunal's
mistake was equating customary international law with Article XI.
The two may share similar language, but the committee found that
customary international law is not a guide to Article XI's
interpretation, much less a proxy for its express terms. Sempra
argued that an "error of law is not a ground for
annulment."8 The committee characterized the
tribunal's mistake differently, however—not as a mere
error of law but as a complete "fail[ure] to apply the
applicable law."9 Thus, the committee concluded
that the tribunal had manifestly exceeded its powers.
The annulment committee in Enron felt the tribunal was
permitted to find customary international law and Article XI
interchangeable.10 But it concluded that the tribunal
manifestly exceeded its powers by failing to fully apply the
elements of either doctrine. The committee added that at the very
least the tribunal failed to explain its reasoning, an independent
basis for annulment.11
For example, since there is always more than one way to respond to
a crisis, the committee asked if the necessity defense truly
requires that the state's response be the "only way"
for it to safeguard an essential interest.12 And how
free from fault must a state be in the instigation of a situation
of necessity, which inevitably has countless causes?13
The committee concluded that the tribunal did not address such
questions when it rejected Argentina's necessity defense.
Instead, it relied on the conclusions of an expert economist, who
claimed that the government's policies were partially at fault
and that there were other responses available once the crisis
arose.14 The tribunal's failure to make legal
findings on these issues "amount[ed] in the Committee's
view to a failure to apply the applicable law," an annullable
error.15
A few years ago, a third annulment committee addressed this same
set of tribunal findings regarding Argentina's necessity
defense and came up with yet a third approach. In that case,
CMS Gas Transmission Company v. Argentine Republic, the
tribunal had also applied customary international law and concluded
that Argentina's conduct was not excused by the necessity
defense, just as in Sempra and
Enron.16 Although the committee disagreed with
the tribunal's reasoning, it declined to annul the award.
The CMS committee held that by substituting customary
international law for the language in the BIT, the tribunal failed
to "examine whether the conditions laid down by Article XI
were fulfilled . . . ."17 It concluded, however,
that although this was a defective application of Article XI, it
was an application of the BIT provision nonetheless. Accordingly,
there had been "no manifest excess of powers" and no
basis for annulment.18
The Sempra and Enron committees' decision to
go farther and annul the tribunal awards illustrates two divergent
views of the scope of an annulment committee's review under the
ICSID Convention. The committee's decision in CMS
indicated that an error of law, no matter how egregious, cannot be
the basis for annulment. The committees' decisions in
Sempra and Enron, on the other hand, leaves the
door open to this possibility, particularly where the error can be
characterized as a complete failure to apply applicable law.
The Sempra and Enron annulment decisions also
prolong the uncertainty surrounding the proper interpretation of a
standard necessity defense provision. In addition to the arbitral
tribunals and annulment committees in Enron,
Sempra, and CMS, one other ICSID tribunal has
addressed this provision in the BIT. In LG&E Energy Corp.
v. Argentine Republic, the tribunal found that Article XI
provides a necessity defense that is distinct from customary
international law and excused Argentina from
liability.19 Though none of these decisions are binding
on future arbitrations,20 investors seeking to arbitrate
a dispute before an ICSID tribunal no longer benefit from the
weight of authority tipping in their favor.
Under the ICSID Convention, Sempra and the Enron Creditors Recovery
Corporation are now permitted to submit the dispute to a new ICSID
tribunal, which would be bound only to those findings that were not
annulled by the committees.21
Footnotes
1. Sempra Energy Int'l v. Argentine
Republic, ICSID (W. Bank) Case No. ARB/02/16, Award (Sept. 28,
2007) (the "Sempra Award") ¶¶ 4, 94; Enron
Corp. Ponderosa Asset, L.P. v. Argentine Republic, ICSID (W.
Bank) Case No. ARB/01/3, Award (May 22, 2007) (the "Enron
Award") ¶ 87.
2. Int'l Law Comm'n, Draft Articles on the
Responsibility of States for Internationally Wrongful Acts with
Commentaries, art. 25, U.N. Doc. A/56/10 (2001).
3. William W. Burke-White, The Argentine Financial Crisis:
State Liability under BITS and the Legitimacy of the ICSID
System, 3 Asian J. WTO & Int'l Health L. &
Pol'y 199, 213 (2008).
4. Enron Award ¶¶ 333–334; Sempra Award
¶¶ 376, 378.
5. Enron Award ¶¶ 305–313; Sempra Award
¶¶ 347–355.
6. ICSID Convention, art. 53(1).
7. Id., art. 52(1)(b), (e).
8. Sempra Energy Int'l v. Argentine
Republic, ICSID (W. Bank) Case No. ARB/02/16, Decision on
Argentine Republic's Request for Annulment of the Award (June
29, 2010) (the "Sempra Annulment Decision") ¶
144.
9. Id ¶¶ 164–165.
10. Enron Corp. Ponderosa Asset, L.P. v. Argentine
Republic, ICSID (W. Bank) Case No. ARB/01/3, Decision on the
Application for Annulment of the Argentine Republic (July 30, 2010)
(the "Enron Annulment Decision") ¶ 403, 405.
11. ICSID Convention, art. 52(1)(e).
12. ILC Draft Articles, art. 25(1)(a); Enron Annulment Decision
¶¶ 369–372.
13. ILC Draft Articles, art. 25(2)(b); Enron Annulment Decision
¶¶ 387–389.
14. Enron Annulment Decision ¶¶ 384, 393.
15. Id. ¶ 393.
16. CMS Gas Transmission Co. v. Argentine
Republic, ICSID (W. Bank) Case No. ARB/01/8, Award (May
12, 2005) ¶¶ 353–358. Professor Francisco
Orrego Vicuña, president of the tribunals in Sempra
and Enron, also served as president in
CMS.
17. CMS Gas Transmission Co. v. Argentine Republic,
ICSID (W. Bank) Case No. ARB/01/8, Decision of the Ad Hoc
Annulment Committee on the Application for Annulment of the
Argentine Republic (Sept. 25, 2007) ¶ 135.
18. Id. ¶ 136.
19. LG&E Energy Corp. v. Argentine Republic, ICSID (W.
Bank) Case No. ARB/02/1, Decision on Liability (Oct. 3, 2006)
¶ 245.
20. Although the ICSID Convention provides in Article 53(1) that
"an award shall be binding on the parties..." without
ruling out the possibility of a binding effect on other
arbitrations, the lack of stare decisis is generally
presumed. Christoph H. Schreuer, The ICSID Convention: A
Commentary (Cambridge University Press, 2001), 1082.
21. ICSID Convention, art. 52(6); Schreuer, The ICSID
Convention, 1066–73.
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