Arbitrators in Casinos Austria v. Argentina take varying approaches to the respondent’s exercise of police powers

Casinos Austria International GmbH and Casinos Austria Aktiengesellschaft v. Argentine Republic, ICSID Case No. ARB/14/32

Background and claims

The dispute arose from the 2013 revocation of an exclusive licence granted to the Argentine company Entretenimientos y Juegos de Azar S.A. (ENJASA) for operating gaming facilities and lottery activities in the Salta province of Argentina. The licence’s terms dictated that it would be extinguished or forfeited in cases of non-payment of the licence fee, non-compliance with Law No. 7020 governing the gaming and lottery sectors, or exploitation of games of chance without necessary authorizations from the regulatory authority, Ente Regulador del Juego de Azar (ENREJA). Following a public tender and changes in the ownership structure, ENJASA fell under the ownership and control of the claimants, Casinos Austria.

From 2000 to 2012, Salta authorities made several changes to the legal framework regulating games of chance, including rules on money laundering and the operation of slot machines. ENJASA was sanctioned for breaching these on no fewer than 15 occasions. In December 2012, ENREJA opened three new investigations against ENJASA for breaches of anti-money-laundering rules and the prohibition against hiring operators without authorization, after which it revoked ENJASA’s exclusive licence. Soon after, Salta authorities issued new licences transferring ENJASA’s operations and its employees to new operators. ENJASA’s recourse for reconsideration before ENREJA and applications before the Courts of Salta were dismissed. The claimants commenced ICSID arbitration in December 2014.

Majority refers to “manifestly arbitrary determinations of fact and law” by domestic regulator to find in favour of claimants on indirect expropriation

According to a majority of the tribunal, it had been cast in “a role akin to that of an administrative court which is asked by an affected private actor to review the legality of actions by the executive branch of government” (para. 306). It observed that the relevant standards to examine such actions were provided in the BIT and not Argentina’s domestic law. However, the majority noted that it was required to address questions of domestic law as incidental questions or preliminary matters. The majority further remarked that it would exercise a certain degree of deference in respect of such questions rather than conduct a de novo review.

In this context, the majority turned to the claimants’ claim for breach of Article 4 of the BIT concerning indirect expropriation. The majority noted that for a government measure to qualify as an indirect expropriation, it must fulfill two criteria. First, the measure “must show a certain severity of interference and permanence” such that “the investor has been deprived permanently and substantially of the continued use and economic benefits of his or her investment” (para. 335). The majority found that this criterion was met, as without ENJASA’s licence, the claimants could not use their investment in any meaningful way. The majority was not persuaded by the respondent’s contention that the claimants could have applied for a new licence and remarked that such a new licence could not replace an exclusive licence for the remaining 17.5 years.

Turning to the second criterion, the majority observed that the measure “must not be covered by the host State’s right to exercise its regulatory authority and police powers, taking into account … the legal framework in place in the host State when the investment was made” (para. 336). For the majority, this would depend on the compliance of the disputed measures with the host state’s domestic law and standards of international law applicable under the BIT, keeping in mind the degree of deference accorded to the host State’s authorities. Additionally, the majority stated the host State’s implementation of the existing regulatory framework under its police powers must comply with due process, the principle of good faith, and must not be arbitrary or disproportionate. Elaborating on these concepts, the majority noted that “arbitrariness requires a qualitatively significant breach, an abuse of power, that imposes harm on a foreign investor contrary to the rule of law” (para. 348). On proportionality, the majority remarked that “[p]roportionality requires that a host State’s measures i) pursues a legitimate goal (public purpose); ii) is suitable to achieve that goal; iii) is necessary to achieve that goal in the sense that less intrusive, but equally feasible and effective measures do not exist; and iv) is proportionate stricto sensu, that is, that the benefit for the public of the measure in question stands in an adequate and acceptable relationship to the negative impact of the measure on the investment” (para. 351).

The majority accordingly examined the legality of ENREJA’s exercise of regulatory powers under this criterion. Acknowledging that Salta authorities were competent to revoke ENJASA’s licence, the majority nevertheless found that the revocation was arbitrary under international law. It based its conclusions on ENREJA’s “manifestly incorrect interpretations of several legal rules,” “manifestly incorrect findings of fact,” and “combinations of both types of errors” in respect of the three investigations of 2012. The majority held that ENREJA could not have plausibly concluded that ENJASA had seriously breached rules on anti-money laundering so as to justify revocation of its licence since it had made the requisite registrations and payments under these rules, albeit with some delay. The majority further considered that ENREJA had acted based on manifestly incorrect interpretations of these rules as it disregarded the applicable statute of limitations and, in certain instances, applied the rules retroactively. Finally, the majority observed that since ENREJA had indicated its acceptance of ENJASA’s practices in hiring third-party operators over 13 years, it could not in good faith revoke ENJASA’s licence for alleged breaches arising from this practice without warning and without any opportunity to make amends. For the majority, any remaining infractions by ENJASA were minor and could not justify the revocation of a 30-year exclusive licence that was still to run for 17.5 years, indicating the disproportionate nature of ENREJA’s actions.

The majority also rejected Argentina’s arguments that ENREJA had revoked the licence upon consideration of the “infringer’s record of relapses,” as authorized under Law No. 7020. It noted that the ENJASA’s recidivism, if any, did not justify a sanction as severe as a revocation of its licence, especially since ENREJA had failed to consider whether a temporary suspension of the licence would have been equally effective in securing the licensee’s compliance. The majority relied on the practices of Argentine provinces and other jurisdictions, noting that these would not have revoked an exclusive operating licence in similar circumstances.

Dissenting arbitrator criticizes majority for acting without deference to domestic actions taken by competent authorities

The dissenting arbitrator noted that the decision to revoke ENJASA’s licence had become final in the respondent’s legal system. Thus, for the dissenting arbitrator, the majority had incorrectly assumed the functions of an appellate court. The dissenting arbitrator noted that the revocation of ENJASA’s licence was a measure adopted by the competent authority in exercise of sanctioning powers expressly provided under domestic law and as a consequence of ENJASA’s serious and repeated violations of its legal obligations. Accordingly, the dissenting arbitrator remarked, this revocation could not be deemed “such gross a measure that it displaces the application of the customary rule invoked by Respondent concerning the regular exercise by the competent body of the Province of Salta of the sanctioning role thereof” (para. 68 of dissent).

In arriving at this conclusion, the dissenting arbitrator criticized the majority’s approach regarding inter alia (i) its failure to respect the deference element of the police powers doctrine in favour of an “extreme expression of the sole effects doctrine” (para. 365 of dissent); (ii) the “import[ation]” of a limitation on the respondent’s sanctioning powers from other cases involving different measures and applicable laws (para. 368 of dissent); (iii) the disregard for the nature and purpose of the disputed measure which is “not a mere administrative measure” but a “sanction” (para. 386 of dissent); (iv) its failure to apply a high threshold of seriousness in respect of arbitrariness of lack of proportionality (para. 391 of dissent); and (v) its substitution of its own interpretation of Argentine law for the interpretation adopted by national authorities (para. 404).

Decision and costs

The tribunal majority concluded that the revocation of the claimants’ licence was an unlawful indirect expropriation rather than a legitimate exercise of the state’s police powers. Based on this finding, the majority declined to address the claimants’ allegations of direct expropriation and breach of the fair and equitable treatment standard.

On compensation, the majority held that the claimants were entitled to full reparation in the form of compensation as restitution to status quo ante was neither requested nor possible. For the majority, this would include “consequential damages that were caused as a result of the unlawful expropriation,” provided that there was “a proximate link between the violation of international law and the injury caused to Claimants” (para. 442). The dissenting arbitrator observed that the majority had erred in awarding compensation for an allegedly wrongful act despite the claimants’ failure to adduce evidence establishing the injury resulting from this breach. The dissenting arbitrator further criticized the majority for their failure to consider the claimant’s contributory fault, noting that the claimants’ various violations of the host State’s domestic law had occasioned the revocation of their licence.

On costs, the majority observed that the respondent’s costs were lower but did not find the claimants’ costs to be excessive, noting that the latter “could not rely on the administrative structure that Respondent has built up over the course of a large number of investment cases, but had to retain specialized outside counsel to conduct the proceedings” (para. 606). Recalling the principle of full reparation, the majority directed the respondent to pay the entire costs of the arbitration as well as reasonable costs that claimants had incurred in respect of the proceeding. The majority also awarded interest on arbitration costs, which the dissenting arbitrator criticized as contrary to international law.

The author of this piece has chosen to contribute anonymously.

Note: The tribunal was composed of Hans van Houtte (president, appointed by the parties, Belgian national), Stephan W. Schill (claimant’s nominee, German national), and Santiago Torres Bernárdez (respondent’s nominee, Spanish national). The award is available at https://www.italaw.com/sites/default/files/case-documents/italaw16357.pdf and the dissenting opinion of the respondent’s nominee is available at https://com/sites/default/files/case-documents/italaw16359.pdf.