“Emergency Measures” Enacted During an Economic Crisis Have Lasting Legal Ramifications

[Ed: On the cusp of what looks to be yet another long weekend on Wall Street, this cautionary tale by Chandra.]

After enacting policies to stem the economic crisis of 2000-2002, Argentina is locked in multiple arbitrations with foreign investors who were hurt by the government’s actions, which included freezing foreign assets and prices. Most of these disputes revolve around claims that Argentina’s government violated the terms of the US-Argentina Bilateral Investment Treaty, a trade agreement made in 1994. Argentina claims that under Article 11 of the treaty, it was released from the agreement when it had to enact emergency measures to “maintain public order.” Argentina also cites the “state of necessity” standard that is customary under international law.

Many of these disputes were sent, with both parties’ consent, to The International Centre for Settlement of Investment Disputes, known as the ICSID, located in Washington, D.C. The ICSID is an institution with over 140 member states that helps independent tribunals facilitate arbitrations by providing institutional and procedural frameworks and facilities. It was created by the Executive Directors of the International Bank for Reconstruction and Development (the World Bank) under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States in 1966. The main goal of the Convention was to increase flows of private investment between countries by creating an impartial forum providing facilities for international investment disputes. Currently the ICSID is the leading arbitration institution for investor-State dispute settlement.

In some disputes the ICSID tribunals found that Argentina’s actions were “necessary” to protect “essential security interests” and were therefore absolved under Article 11 of the treaty. For instance, Continental Casualty, a U.S. investor, sought $112 million (US) in damages; however they were only awarded $2.8 million because most of Argentina’s actions were found necessary.

On the other hand, some tribunals found that Argentina was not in a “state of necessity” at the time of its actions under the stringent tests imposed by customary international law. For instance, in another case the tribunal awarded a US-based energy firm $133 million (US) in compensation. In total so far, Argentina owes over three-quarters of a billion US dollars to various plaintiffs for damages incurred during the crisis, and there are still more disputes to be decided. In these unprecedented financial times, it would be prudent for countries to remember that “emergency actions” still have legal ramifications after the crisis has been abated.

The current global financial crisis has encouraged the United States government to take emergency actions such as the Federal Reserve Bank’s contentious bail-out of AIG. The terms of this deal state that the U.S. government owns 79.9% of equity interest in AIG, with the right to veto dividend payments to preferred shareholder in the deal. The seizure of Washington Mutual will lead to some shareholders’ and bond-holders’ accounts being wiped out. In England, Prime Minister Gordon Brown endorsed Lloyd’s TSB takeover of Halifax Bank of Scotland, despite anti-trust concerns. The ICSID will probably be seeing arbitrations in the future regarding these and other controversial moves that affect foreign investors. Only stringency tests and future tribunal interpretations will tell if the “state of necessity” argument will hold.

Links:

ICSID’s website: http://icsid.worldbank.org/ICSID/FrontServlet

US-Argentina BIT: http://www.bilaterals.org/article.php3?id_article=435

Article on Continental Casualty’s Dispute: http://www.investmenttreatynews.org/cms/news/archive/2008/09/10/award-continental-casualty-company-v-the-argentine-republic-argentina-emerges-largely-victorious-in-dispute-related-to-country-s-financial-crisis.aspx

Official Award given to Continental Casualty: http://www.investmenttreatynews.org/documents/p/24.aspx

Information on various Argentina arbitrations from Investment Treaty News: http://www.iisd.org/pdf/2007/itn_oct15_2007.pdf

Article on the seizure of Washington Mutual: http://www.nytimes.com/2008/09/26/business/26wamu.html?_r=1&hp&oref=slogin