International Investment Law - Essay Example

?International Investment Law Introduction International investments by corporations have become rampant. These investments however have given rise to various issues. This paper shall provide a case note on the arbitral award in the case National Grid, Plc v. Argentine Republic. Specifically, paragraphs 51-56 and 135-201 shall form the basis of this case comment. This paper shall present the relevant facts of the dispute; the findings of the tribunal in relation to each of the relevant claims; and the analysis of the arbitral award and the reasoning of the tribunal in light of the applicable international investment law. Relevant facts of the dispute This case arises from the privatization program implemented by the Argentine Republic in the early 1990s, including the guarantees they offered to investors buying assets in the electricity sector and the decisions by the respondent in reducing the impact of the Argentine economic crisis in 2001-20021. Prior to the privatization, the electricity assets of the respondent were operated by three companies which were later restructured for privatization based on Decree 634/91 and Law 26,065. Based on these laws, the electricity generation and related matters belonging to the three companies were to be divided into individual units2. The Claimant in this case argued that the impact of the Reform Law destroyed the investments in Transener and declared that the company has already incurred losses due to this law. National Grid later agreed to sell its shares to Dolphin Management in order to mitigate its losses3. Claimant National Grid notified respondent in 2002 of the investment dispute and sought for the application of Article 3 of the Treaty; they also claimed the benefit of the application of Article 7(2) of the Treaty between the US and Argentina for the protection of their investment and for international arbitration without referral to the Argentina courts. Respondent proposed the suspension of negotiations as their public service contracts were being processed. The claimant declined the proposal to suspend negotiations; the claimant however agreed to meet with authorities for negotiations4. The claimant again expressed its willingness to explore a settlement of the issue; without any response from the respondent, the claimant submitted the case for arbitration. The parties consented. The respondent agreed to the arbitration and claimed its case under the terms of the Treaty which allows the option to settle disputes which may arise with investors who may be nationals of the other State party5. The Claimant submitted to arbitration through its notice of arbitration. Based on Article 3.2 of the UNCITRAL Rules, the arbitration started on the date when the Notice of Arbitration was received by the respondent. Findings The tribunal decided that there was no direct or indirect expropriation as National Grid has not been deprived of title to its property and the methods of Argentina in handling the crisis were not equivalent to expropriation6. However, the tribunal ruled that the practice of fair and equitable treatment was violated by Argentina when it did the following: it changed the legal framework which was used as basis by National Grid in its investment; it did not negotiate with National Grid in the implementation of its measures and disposal of its investments; and when it requested for National Grid to abandon its legal remedies in relation to the renegotiation of its investment7. The tribunal also decided that economic difficulties which Argentina found itself in had to be considered. The tribunal then decided that the violation of the fair and equitable standard only happened from the time National Grid asked to renounce its rights, and not from the time the emergency measures were implemented by Argentina8. This made Argentina accountable for the losses of National Grid during the first six months of the crisis. Analysis of the Arbitral Award First of all, the jurisdiction of the Tribunal is based on the instruments of the parties submitting to arbitration, as identified and specified in the Notice of Arbitration. Based on Article 21.2 of the UNCITRAL Rules, the tribunal has the power to decide on objections on its jurisdiction9. Therefore, the tribunal itself has the power to determine whether the dispute submitted is within the terms of Article 8 of the Treaty and whether the tribunal has the power to decide on the objections forwarded by the respondent. The tribunal is also set to follow the Articles 31 and 32 of the Vienna Convention on the Law of Treaties; this convention is considered binding for Argentina and the UK because Argentina ratified the treaty in 1972 and the UK ratified it in 197110. The tribunal decided that Argentina’s prerogative in terms of its sovereign rules is superior to any other international or treaty policies. Therefore, as far as the general economic policies of Argentina are concerned, the tribunal has no jurisdiction over these. However, the tribunal has the power to assess whether the specific provisions impact on claimant’s investments and whether the investments have been carried out in violation of commitments already made to the investors in treaties11. In this case, Argentina already had a pre-existing arrangement with National Grid which it later violated. The issue of jurisdiction is therefore based on whether or not the measures applied by the respondents had a direct impact on the investment and whether such measures violated the existing arrangements between the two parties. When the contract between National Grid and Argentina was entered into, it submitted the parties into a bilateral agreement with each other. In effect, there was an existing treaty between the host state and the investor12. The treaty on its own cannot secure the jurisdiction of the tribunal; however, the treaty may include and contain the offer of the host state. Such an offer was then taken up by the other party. This was the incident in this case where there was an agreement between National Grid and Argentina, and the former made an investment on the latter. This bilateral agreement also placed both parties within the possible legislative processes required for proper adjudication of any disputes13. Since one of the parties requested for the jurisdiction of the tribunal, citing the Vienna Convention, (where both parties are signatories), the jurisdiction of the tribunal over the other party was also implied. Moreover, most of the ICSID clauses in relation to bilateral agreements expressed that the ICSID is one of the possible options in the settlement of issue14. The alternatives may include the domestic courts of the host state, as well as procedure by the parties in dispute. However, National Grid already submitted the issue to the tribunal for arbitration and the Argentine government agreed to such submission. Some of the settlement clauses needed agreement among parties to consider any of the procedures15. No such express agreement was made by the parties; however, the submission of National Grid to the tribunal has constituted acquiescence from the investor in terms of jurisdiction. The ruling under Switzerland-Ghana BIT of 1991 declares support for the decision above as the case declared that, where parties cannot amicably settle their dispute within six months, the dispute shall be submitted to international arbitration16. Where the dispute is submitted for international arbitration, the affected party may file the dispute to the International Centre for the Settlement of Investment Disputes for an international arbitrator; and the parties shall have to consent to the submission of the dispute for arbitration17. The choice in most cases lies with the investor-claimant; in this case – National Grid. National Grid found itself in a position where the bilateral agreement with Argentina was unilaterally changed, and based on such changes, they sought the appropriate jurisdiction and adjudication of the tribunal. The umbrella clause also applies in this case. The umbrella clause is also known as the mirror of the parallel effect clause; it is a treaty found in various bilateral treaties which calls for states to observe investment agreements it has entered into in relation with investors from another state18. The main concept behind this clause is to bring independent investment agreements between states and private investors from other states under the BITs (bilateral investment treaty) so-called umbrella of protection19. When applied to this paper, the umbrella clause therefore protects the right of the investor – National Grid – in its state agreement with Argentina, bringing it under the BITs protection. It therefore makes Argentina liable for investment agreements which National Grid would enforce when the BIT allows for a direct right of recourse in relation to arbitration20. The umbrella clause emphasizes that it makes possible for breaches of investment contracts to be placed under the jurisdiction of an international arbitration forum21. This clause applies to obligations involving state-investor contracts ensuring international recourse for parties if possible breaches are seen. Aside from the jurisdictional issue, the respondent also argues that the dispute is not a legal issue because it is not related to violations of legal rights; instead, the issue pertains only to a conflict of interest22. There is a legal dispute between the parties because legal disputes simply refer to an issue directly related to the investment. This dispute also includes rights and obligations which when breached are subject to legal actions. In this case, there was a legal arrangement between National Grid and the Argentine government and the Argentine government sought to cease its duties in relation to the arrangement23. These measures violated the terms of the investment, thereby creating a legal dispute between the parties. Treaties and contracts are usually not ‘clean’ and fool proof agreements24. Between various groups and contracting parties, issues may always arise in relation to these treaties and agreements. Agreements between parties involve a deliberate attempt by private investors and parties to benefit from consensual arbitration. In these cases, investors often have a standing right to choose to agree in writing to the submission of the dispute for arbitration25. The consent of parties provides the parties with the tools for settlement and it gives the parties recourse under international legal mandates. In relation to the letters of understanding, the respondents highlight the tribunal letters of understanding signed with Transener and Transba; and that these are forms of renegotiations of the contracts26. The claimant argues that the letters are irrelevant in the tribunal’s jurisdiction over the dispute. The tribunal decided that the respondents’ arguments ignored direct claims by investors founded on legal obligations arising from the treaty. As previously established, Argentina has various legal obligations as far as the agreement with National Grid is concerned27. In effect, the transactions made by Transener and Transba did not strip Argentina of its legal capacity to negotiate. The issue of bankruptcy had no bearing on the jurisdiction of the tribunal over the dispute. The application of the Most Favoured Nation Treatment cannot be seen in this case because it violates the effect of the treaty. Any third party cannot have any impact on the relations of the investor and the beneficiary country28. Moreover, the opinion cannot be supported under the Vienna Convention on the Law of Treaties which considers rights above treaties for third states. This article declared that benefits granted to third states can only come from a clear intention established by the parties involved. In this case, there was no intention of the parties to the treaty to consider the letters as significant determinants to the validity of their agreement29. In effect, the effect may be indirect, but such indirect effect was not intended and accepted by the parties. In other words, agreements or actions involving third parties who are isolated from the main agreement, cannot create a binding effect on the parties involved – the investor and the granting state30. Finally, in relation to the exclusive jurisdiction of the federal courts of Buenos Aires, the respondent argues that Article 38 of the contract declares the jurisdiction of the federal courts over the case31. The Claimant on the other hand cites other cases which point out that in international case law, claims which include actions under BIT are not within the jurisdiction of the lower courts. The tribunal declared that the National Grid is not a party to the Concession Contract where the parties agreed to the exclusive jurisdiction of the federal courts32. The respondents also cannot base its jurisdiction objections on preserving the personality of the concessionaires and later claim that National Grid is bound to the commitment it has not made. The matter of the claimant seeking claims under the treaty is also under the claimant’s choice. The court also cites SGS Pakistan in terms of giving the chance to the claimant to have the alleged breaches be reviewed on the merits33. International investment agreements can remove legal disputes with host states from the jurisdiction of the domestic courts and bring them to the jurisdiction of international arbiters34. In this case, the tribunal was within its right to rule over the case and to remove it from the jurisdiction of the local courts. At times, this process can be an advantage for foreign investors who are faced with corruption or other issues in the host state35. The overall coverage of the arbitration provisions have helped to ensure that foreign investors can avoid local legal processes and downplay the role of domestic courts in deciding over important business disputes. In actual practice however, various elements, such as the nature of the dispute and the goals of the investor would likely determine whether an investor would decide to have the dispute be settled by the international tribunal36. In the end, it is the investor, not the state who shall decide whether it would resort to international arbitration. Ultimately, treaties are meant to establish legal protection for investors without imposing specific obligations for these investors. Various corporations have chosen international arbitration after the Argentina crisis in order to seek resort for Argentina’s breach of public utilities contracts and international investment treaties37. Argentina has been consistent in its claims that disputes must be resolved in Argentina courts; however investors have also been firm in arguing that they would get a more fair trial under international arbitration. Most multinational firms have chosen international treaties in the resolution of their disputes with the Argentine government38. Even as the treaties also provide opportunities for trying treaty breaches in local courts, most corporations have trusted the international arbitration process more. Where treaties provide for options in international arbitration, local courts have limited access to the legal issues39. Local courts can issue injunctions to delay the arbitration process, however the international tribunals can easily ignore these orders, arguing that the parties have already consented to the international arbitration and the consent cannot be withdrawn after arbitration processes have been commenced40. Otherwise, local courts have limited options for intervention; they may do so if they are asked by any of the parties to implement the final ruling of the tribunal. Rules are often different with various jurisdictions, and local courts are constrained by domestic arbitration laws in implementing minimal review. These domestic arbitration laws are often established in order to acknowledge arbitration decisions on the ground that said decisions are mutually agreed upon by the parties41. Moreover, even if governments have a stake in these cases, or where public interest considerations are crucial, local courts are allowed to intervene if there is proof of corruption among the arbitrators or a failure of jurisdiction on the arbitrators’ part42. Evidence suggests that parties are often not successful in reversing the decisions of the tribunals by resorting to the local courts. This was seen in several instances where parties have resorted to Canadian courts after arbitrations under the terms of the NAFTA; however only in one instance did the court reverse any part of an arbitration decision, and this reversal did not even have a financial impact on the country involved43. Even in instances when local courts are provided opportunities to assess arbitration awards, such a process may not entirely be transparent. The laws differ based on different states, however some countries like the UK and Switzerland may allow hearings to be carried out in private or they may deny the release of the arbitral award to the public even if it is already part of the court records44. These instances have been conceptualized in order to protect investors who seek privacy and final adjudication of disputes; however it may not be clear if this type of deference is appropriate in instances where the rights of host governments are at issue45. In this case of National Grid versus the Argentine government, the arbitration courts have the jurisdiction over the case, primarily because the investor National Grid sought arbitration for the case. Their preference therefore takes precedence in this case. There is also better transparency if the case were to be evaluated by the international tribunal, not by the local courts. The decision in this case is interesting because it provides an interpretation of the legal obligation to protect and secure investments as indicated under Article 2(2) of the Investment Treaty46. The tribunal supported the arguments of National Grid in relation to their interpretation of their legal responsibilities. The tribunal also supported the interpretation of National Grid in terms of establishing that their duty also included the protection of an investor’s physical property. It also found that Argentina violated its responsibility in relation to National Grid’s investment from the time it violated its agreement to manage the investment fairly. The tribunal also established that even if the duty had been considered in relation to the protection of tangible assets, this limitation was not included in Article 2(2) of the Treaty; moreover, the close link with the standards of fairness also implied that such a duty would go beyond the realm of physical assets47. The decision by the tribunal is important because it surpasses the interpretation of the duty as decided by other cases which have often ruled that the duty is bound by the need to preserve the physical security of investors and their monetary interests. Specifically, in the 2007 decision of the BG Group Plc v. The Republic of Argentina, the tribunal decided was not comfortable with expanding its duty beyond physical protection to include the obligation to establish a standard for investment48. In the BG Group case, the tribunal declared that in linking the standard of protection and constant security as well as fair and equitable treatment, the tribunals have established that the host state has the responsibility of providing secure investment environments49. However, the tribunal also found it difficult to depart from the established standards of protection and constant security. The tribunal also established that Argentina’s decisions were not meant to be discriminatory actions to their citizens or to the investors. The tribunal did not also assess the argument that Argentina violated the umbrella clause under the treaty. This clause emphasizes the protection of obligations agreed upon in relation to the investors and their investments since this was not established in the Statement of Claim50. Even with the Tribunal not holding Argentina liable for the losses of National Grid during the first six months of the crisis, it also did not consider Argentina’s argument that the methods they applied were made during a state of necessity and they were therefore not responsible for the losses suffered by the investor National Grid51. The necessity defence, available herein, was not included in the treaty, however was used by the tribunal in relation to the necessity defence as protected under customary international law. Article 25 of the Draft Articles on State Responsibility also forms the basis for the necessity defence. In this case however, the tribunal decided that Argentina did not pass the first cumulative threshold necessary to justify use of the defence52. This threshold requires parties invoking its application not to have had a hand in giving rise to the state of necessity. The tribunal considered elements established by the respondents as being contributory to the crisis and saw that these were internal and also external. Moreover, the methods applied by Argentina during the crisis exacerbated the problem. The Respondent failed the necessary elements for the application of necessity defence and could not therefore use the state of necessity to justify its actions in the current case. Conclusion This case discussed the case of National Grid Plc v. Argentina, a case which considers a series of claims made by foreign companies in relation to investments in Argentina which were affected by the economic crisis that plagued the country from 1999 to 2001. National Grid made its investments in the Argentine electrical power industry after this industry was privatized. The British company later forwarded its claims against the decisions of Argentina in 2002 which resulted to breach of Argentina’s agreement with National Grid. The company’s investment was expropriated, and the standards of fair treatment were violated. The tribunal ruled that there was no expropriation; however Argentina violated the standards of fair treatment. Its jurisdiction over the case was also justified. References A. Beattie, ‘International Investment Rules: Concern grows over global trade regulation,’ (2008) The Financial Times, issue 3, p. 12. D. Bishop & L. 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Shore, ‘Independence, Impartiality, and Immunity of Arbitrators – US and English Perspectives’, (2003) 52 ICLQ 935, p. 935. G. Smith, ‘Chinese Bilateral Investment Treaties: Restrictions on International Arbitration,’ (2010) 76 Arbitration 1, p. 58 J. Wong, ‘Umbrella clauses in bilateral investment treaties: of breaches of contract, treaty violations, and the divide between developing and developed countries in foreign investment disputes,’ (2006) 14 Geo. Mason L. Rev. 1, 145. J. Yackee, ‘Conceptual difficulties in the empirical study of bilateral investment treaties,’ (2007), http://works.bepress.com/cgi/viewcontent.cgi?article=1000&context=jason_yackee [Accessed 28 April 2012]. Read More