CMS Gas Transmission Co. v. Republic of Argentina, ICSID Case No. ARB/01/8

(Originally published in 2011 in International Investment Law and Sustainable Development: Key cases from 2000–2010; republished on this website on October 18, 2018. Read more here.)

Decisions and award available at https://www.italaw.com/cases/288

Keywords

Fair and equitable treatment, jurisdiction, minority shareholders, multiple/parallel proceedings, necessity defence, standard for annulment, umbrella clause

Key dates

Request for Arbitration: 26 July 2001

Decision on Jurisdiction: 17 July 2003

Award: 12 May 2005

Argentine Republic’s Application for Annulment: 8 September 2005

Decision on Argentine Republic’s Request for a Continued Stay of Enforcement of the

Award: 1 September 2006

Decision on Annulment: 25 September 2007

Arbitrators

Prof. Francisco Orrego Vicuña (president, appointed under article 38 of the ICSID Convention, as parties failed to agree)

Mr. Marc Lalonde (claimant appointee)

Judge Francisco Rezek (respondent appointee)

Composition of Annulment Committee (appointed under Rule 52(2), ICSID Rules of Procedure for Arbitration Proceedings)

Judge Gilbert Guillaume (president)

Judge Nabil Elaraby

Prof. James Crawford

Forum and applicable procedural rules

International Centre for Settlement of Investment Disputes (ICSID)

ICSID Rules of Procedure for Arbitration Proceedings

Applicable treaty

United States–Argentina Bilateral Investment Treaty (BIT)

Alleged treaty violations

• Arbitrary or discriminatory treatment
• Expropriation
• Fair and equitable treatment
• Umbrella clause

Other legal issues raised

• Challenges to awards—ICSID annulment proceedings—standard for annulment
• Jurisdiction—definition of “investment”—minority shareholders
• Necessity defence

1.0 Case Summary

1.1 Factual background

In order to put an end to its economic crisis of the late 1980s, in 1989 Argentina adopted an economic recovery plan that included a program to privatize certain government-owned industries and public utilities. It also enacted various new laws, including a 1991 Currency Convertibility Law, a 1991 Decree pegging the Argentine currency to the United States dollar and a 1992 Gas Law establishing the legal framework for the privatization of the gas industry and regulation of the transport and distribution of natural gas.

Under the Gas Law, the national state-owned gas monopoly was divided into a number of companies to be privatized, one of which was Transportadora de Gas del Norte (TGN). In December 1992, TGN was granted a licence to transport gas in Argentina. By 1999, CMS Gas Argentina, a wholly owned subsidiary of claimant CMS Gas Transmission Company (CMS), a United States company, had purchased close to 30 per cent of TGN’s shares. According to CMS, under the regime established by the above laws and decrees and by the licence granted to TGN to transport gas, its tariffs were to be calculated in dollars, converted to pesos at the time of billing and adjusted every six months in accordance with the United States Producer Price Index (US–PPI).

In the late 1990s, a serious economic crisis began in Argentina. In January 2000 and again in July 2000, the representatives of the gas companies agreed, subject to certain conditions, to defer the adjustment of the gas tariffs in accordance with the US–PPI. On several occasions, the public regulatory authority of the gas industry confirmed the continuing freeze of the US–PPI adjustment and, in August 2000, an Argentine court issued an injunction for the suspension of the July 2000 agreement. In late 2001, the crisis deepened and, on 6 January 2002, a law declaring a public emergency was passed. Under the Emergency Law, the right of licensees of public utilities to adjust tariffs according to the US–PPI was terminated, as well as the calculation of tariffs in dollars. The tariffs were redenominated in pesos, at the rate of one peso to one dollar.

1.2 Summary of legal issues and decisions

CMS commenced arbitration proceedings against Argentina at ICSID under the United States–Argentina Bilateral Investment Treaty (BIT) regarding the actions taken in 2000 to defer the application of the US–PPI to gas industry tariffs, Argentina’s Emergency Law and other measures adopted during the crisis. CMS claimed violations of the BIT with respect to expropriation and fair and equitable treatment. The Tribunal rejected CMS’s claims on expropriation, but ruled that Argentina had breached its obligations on fair and equitable treatment and the umbrella clause (by violating stabilization clauses in a licence). The Tribunal also rejected Argentina’s preliminary objection to jurisdiction and did not accept Argentina’s necessity and emergency defences relating to the severe economic, social and political crisis that unfolded in Argentina in 2000.

The Tribunal awarded CMS US$133.2 million and gave Argentina the option to purchase all CMS’s shares in TGN by payment of a further US$2.148 million within one year. It held that each party should pay half of the arbitration costs and its own legal costs.

Argentina applied for an annulment of the award, claiming that the Tribunal had manifestly exceeded its powers and failed to state the reasons for its decision. The Annulment Committee upheld one of Argentina’s claims for annulment and rejected all the others. The Committee held that the Tribunal had correctly decided that it had jurisdiction to decide CMS’s claim and that the Tribunal had not manifestly exceeded its powers when considering CMS’s claim regarding breach of fair and equitable treatment. On the Tribunal’s decision regarding Argentina’s necessity defence, the Annulment Committee found two manifest errors of law but also declared that, given its limited jurisdiction, it could not annul the Tribunal’s holding on that point. The Committee annulled the Tribunal’s ruling on the umbrella clause, however, for failure to state reasons.

2.0 Select Legal Issues

The CMS Annulment Committee’s decision is important in a number of respects. First, it confirmed that, where a treaty’s definition of “investment” includes equity, stock or shares in a company, a minority shareholder has a direct right of action against the host state that can be asserted independently from the rights of the company itself. Second, it held that an umbrella clause that requires a host state to observe “any obligations it may have entered into with regard to investments” is concerned with consensual obligations not entered into erga omnes, but with regard to particular persons. It held that the effect of an umbrella clause is not to transform the relied-upon obligation into something else; the content of the obligation is unaffected and likewise the parties to the obligation (i.e., the persons bound by it and entitled to rely upon it) are not changed. Third, it held that a host state is not required to satisfy the requirements of the customary law defence of necessity, codified in article 25 of the Articles on State Responsibility, in order to rely on a defence of necessity contained in the treaty (if there is one). Fourth, the CMS decision has produced one of the most extensive interpretations of the fair and equitable treatment obligation, extending host states’ obligations under the clause well beyond the level of customary international law. Finally, it confirmed that the powers of annulment in an ICSID arbitration are limited to those set out in Article 52 of the ICSID Convention. In particular, an annulment committee is not an appeal mechanism and it has no power to correct manifest errors of law, even where it recognizes these.

2.1 Allowing minority shareholders to bring claims

Argentina objected to jurisdiction on the ground that Article 25(1) of the ICSID Convention covers “any legal dispute arising directly out of an investment” and that CMS was claiming not for direct damages but for indirect damages resulting from its minority shareholding in TGN after TGN suffered damage regarding its licence. Argentina argued that because TGN was the licensee, only TGN could claim directly for any damage suffered regarding its licence. The Tribunal rejected Argentina’s objection.

The Annulment Committee held that the Tribunal had correctly decided that it had jurisdiction to decide CMS’s claim. It held that the BIT defined “investment” broadly to include “every type of investment in the territory of one Party owned or controlled directly or indirectly by nationals or companies of the other Party,” and included “a company or shares of stocks or other interests in a company.” The Annulment Committee observed that this definition did not require the shareholder to own a majority of the stock or control the company. It affirmed the Tribunal’s finding that CMS was an investor within the meaning of the BIT and held that the Tribunal had not manifestly exceeded its powers by assuming jurisdiction over CMS’s claims (paras. 68–76, Annulment Decision).

Pursuant to the approach taken in this case, a minority shareholder has a direct right of action against the host state that can be asserted independently from the rights of the company itself, provided that the relevant treaty’s definition of “investment” includes equity, stock or shares in a company. This interpretation can have the practical impact of permitting numerous different shareholders to bring claims against a single host state based on the same allegedly wrongful treatment of a single company.

2.2 Fair and equitable treatment: A stable legal and business environment as an essential element

CMS alleged that Argentina had breached the fair and equitable treatment standard and had not ensured full protection and security to the investment, particularly insofar as Argentina had profoundly altered the stability and predictability of the investment environment, the certainty of which was key to CMS’s decision to invest (paras. 266–269, Award).

The Tribunal noted that the BIT, like most bilateral investment treaties, did not define the standard of fair and equitable treatment. It reasoned, however, that because a principal objective of the BIT’s preamble was “to maintain a stable framework for investments and maximum effective use of economic resources,” there could be no doubt that a stable legal and business environment was an essential element of fair and equitable treatment. The Tribunal accepted that the  guarantees  given in  the  legal framework regarding the tariff regime were crucial for the investment decision and that the measures complained of did, in fact, entirely transform the legal and business environment under which the decision to invest and the investment were made. The Tribunal concluded that the measures adopted by Argentina were a breach of its obligation to accord the investor fair and equitable treatment under Article II(2)(a) of the BIT (paras. 273–281, Award). The Annulment Committee upheld the Tribunal’s finding.

2.3 The umbrella clause: The Annulment Committee rejects the Tribunal’s broad interpretation

The Tribunal also held that Argentina had breached the umbrella clause in Article II(2)(c) of the BIT, which required Argentina to observe “any obligations it may have entered into with regard to investments.” It held that there were two stabilization clauses contained in the licence, namely provisions not to freeze the tariff regime or subject it to price controls and not to alter the basic rules governing the licence without TGN’s written consent. The Tribunal concluded that by failing to observe these clauses, Argentina was in breach of the BIT’s umbrella clause (paras. 299–303, Award).

The Annulment Committee took a different view, holding that there were a number of difficulties with the Tribunal’s broad interpretation of the umbrella clause in Article II(2)(c) of the BIT. The Committee noted that CMS had conceded that the obligations of Argentina under the licence were obligations to TGN but had then claimed that, while it was not entitled as a minority shareholder to invoke those obligations under the licence, the effect of Article II(2)(c) was to give it standing to invoke them under the BIT. The Committee noted that it seemed that the Tribunal may have accepted CMS’s reasoning, but the award did not address this expressly (paras. 90–94, Annulment Decision). In contrast, the Committee held that an umbrella clause that requires a host state to observe “any obligations it may have entered into with regard to investments” is concerned with consensual obligations with regard to particular persons, not obligations erga omnes. It held that the effect of such a clause is not to transform the obligation relied upon into something else; the content of the obligation is unaffected, as is its proper law, and likewise the parties to the obligation (i.e., the persons bound by it and entitled to rely on it) are not changed by reason of the umbrella clause (para. 95, Annulment Decision). The Committee concluded that it was quite unclear how the Tribunal arrived at its conclusion that CMS could enforce the obligations of Argentina to TGN and that the Tribunal’s finding on Article II(2)(c) must be annulled for failure to state reasons (paras. 96–97, Annulment Decision).

2.4 Defence of necessity: The Annulment Committee upholds the Tribunal’s rejection of the defence

The Tribunal did not accept Argentina’s defences based on either the customary international law defence of necessity or the necessity defence in Article XI of the BIT. The Tribunal held that Article 25 of the International Law Commission’s Draft Articles on State Responsibility reflected customary international law on necessity.[1] In respect of whether Argentina had met the requirements of the defence of necessity under customary law, the Tribunal held that, while the crisis may have placed an essential interest of the state at grave and imminent peril, it was not clear that, as would be required to be covered by the customary international law defence, the measures adopted were the only means available (paras. 315–324, Award). Moreover, to qualify for the customary law defence, the state should not have contributed to the situation of necessity, although such contribution must be “suffciently substantial and not merely incidental or peripheral.” The Tribunal held that while external factors fuelled additional diffculties, the crisis had its roots in Argentina’s earlier crisis in the 1980s and shortcomings of its government policies in the 1990s (paras. 328–329, Award). Noting that all the conditions of the customary law defence had to be “cumulatively” satisfied, the Tribunal held that these had not been fully met so as to preclude the wrongfulness of the acts (paras. 330–331, Award).

Regarding the defence of necessity contained in Article XI of the BIT,[2] the Tribunal stated that while the text of Article XI did not refer to economic crises, there was nothing in customary international law or the object and purpose of the BIT that on its own excluded major economic crises from its scope (para. 359, Award). The Tribunal held, however, that a BIT is clearly designed to protect investments at times of economic difficulties or other circumstances leading to adverse measures by the government and that, in the absence of such profoundly serious conditions as total collapse, the BIT would prevail over any plea of necessity. The Tribunal concluded that the Argentine crisis was severe but did not result in total economic and social collapse and that such crises in other countries had not seen those countries derogate from their international obligations. The Tribunal then stated that although not excusing liability or precluding wrongfulness, the crisis ought to be considered when determining compensation (paras. 353–356, Award).

The Annulment Committee noted that the Tribunal had considered that Article 25 of the International Law Commission’s Articles on State Responsibility reflected the defence of necessity under customary international law and that it had examined and taken a decision on each of the conditions in Article 25, clearly stating its reasons. The Committee held that it had no jurisdiction to consider whether, in doing so, the Tribunal made any error of fact or law (para. 121, Annulment Decision). With respect to the defence based on Article XI of the BIT, the Committee held that the Tribunal should have been more explicit that it considered Article XI be interpreted in light of customary international law on necessity and that, if the conditions fixed under that law were not met, Argentina’s defence under Article XI was likewise to be rejected. The Committee noted, however, that both parties had understood the award in that sense and, although the award could have been clearer, a careful reader could follow its implicit reasoning. It held that annulment could therefore not be upheld on this point (paras. 122–127, Annulment Decision).

The Annulment Committee found that the Tribunal had made two manifest errors of law when considering whether Argentina qualified for the defence of necessity under Article XI of the BIT. First, the Tribunal had incorrectly held that the requirements of the defence of necessity under Article XI were the same as those under customary international law. Second, the Tribunal did not examine whether the conditions laid down by Article XI were fulfilled (paras. 130–132, Annulment Decision). The Committee held that these two errors made by the Tribunal could have had a decisive impact on the operative part of the award and that if the Annulment Committee were a court of appeal, it would have to reconsider the award on this ground. The Committee noted, however, that its limited jurisdiction under Article 52 of the ICSID Convention meant that it could not simply substitute its own view of the law and facts for those of the Tribunal. Notwithstanding the identified errors, the Tribunal had applied Article XI of the BIT, albeit cryptically and defectively. The Committee held there was thus no manifest excess of powers permitting annulment of that aspect of the award (paras. 135–136, Annulment Decision).

Notes

[1] Article 25 provides:

1. 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 way 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;

2. In any case, necessity may not be invoked by a State as a ground for precluding wrongfulness if:

(a) the international obligation in question excludes the possibility of invoking necessity; or

(b) the State has contributed to the situation of necessity.

[2] Article XI of the BIT provides: “This Treaty shall not preclude the application by either Party of 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 protection of its own essential security interests.”