INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES WASHINGTON D C IN THE PROCEEDINGS BETWEEN LG E ENERGY CORP LG E CAPITAL CORP LG E INTERNATIONAL INC Claimants AND ARGENTINE REPUBLIC Respondent ICSID Case No ARB 02 1 Decision on Liability Members of the Tribunal Dr Tatiana B de Maekelt President Judge Francisco Rezek Arbitrator Professor Albert Jan van den Berg Arbitrator Secretary of the Tribunal Claudia Frutos-Peterson Date 3 October 2006 203 9 LG E Liability ENG 3-5-07 indd 203 3 5 07 2 50 52 PM 204 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL Representing the Claimants Mr Eugene D Gulland Mr Oscar M Garibaldi Mr Eric D Brown Ms Karin L Kizer Mr Miguel López Forastier Covington Burling Washington D C United States of America Representing the Respondent H E Osvaldo César Guglielmino Procurador del Tesoro de la Nación Procuración del Tesoro de la Nación Buenos Aires Argentina Ms Dorothy O’Brien LG E Energy LLC and Dr Horacio J Ruiz Moreno Dr Gustavo Cedrone Dr Leonardo Orlanski Hope Duggan Silva Buenos Aires Argentina 9 LG E Liability ENG 3-5-07 indd 204 3 5 07 2 50 53 PM CASES 205 TABLE OF CONTENTS I The Parties 1 II The Arbitral Tribunal 1 III Procedural Background 2 IV Factual Background 8 A Late 1980s and 1990s 8 B Economic Crisis and the Emergence of the Dispute – 1999–2001 12 C The Emergency Law – 6 January 2002 14 D Renegotiation of the Public Service Contracts 15 E Request for Relief 16 V Preliminary Matters 18 A Jus Standi 18 B Law Applicable 19 1 Parties’ Positions 19 2 Tribunal’s Analysis 19 3 Tribunal’s Conclusion 24 VI Liability 24 A Article II 2 a Fair and Equitable Treatment 24 1 Parties’ Positions 24 2 Tribunal’s Conclusion Concerning Argentina’s Guarantees to Investors 28 3 Tribunal’s Analysis 30 4 Tribunal’s Conclusion 33 B Article II 2 b Discriminatory and Arbitrary Treatment 35 1 Discriminatory Treatment 35 i Parties’ Positions 35 ii Tribunal’s Analysis 37 iii Tribunal’s Conclusion 37 The page numbering in this table of contents refers to the page numbering in the original decision 9 LG E Liability ENG 3-5-07 indd 205 3 5 07 2 50 53 PM 206 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL 2 Arbitrary Treatment 38 i Parties’ Positions 38 ii Tribunal’s Analysis 39 iii Tribunal’s Conclusion 41 C Article II 2 c The Umbrella Clause 41 1 Parties’ Positions 41 2 Tribunal’s Analysis 42 3 Tribunal’s Conclusion 44 D Considerations on Indirect Expropriation 44 1 Parties’ Positions 44 2 Tribunal’s Analysis 46 3 Tribunal’s Conclusion 50 E State of Necessity 50 1 Parties’ Positions 50 2 General Comments on Article XI 51 i Preliminary Considerations 51 ii The Question of Whether Article XI is Self-Judging 52 iii Necessary Nature of the Measures Adopted 53 a Parties’ Positions 53 b Tribunal’s Analysis 56 iv Consequences of the State of Necessity 65 v Conclusions of the Tribunal 66 VII Decision of the Tribunal on Liability 67 9 LG E Liability ENG 3-5-07 indd 206 3 5 07 2 50 53 PM CASES 207 I THE PARTIES 1 Claimants LG E Energy Corp and LG E Capital Corp are corporations created and existing under the laws of the Commonwealth of Kentucky in the United States of America with domestic and foreign operations 1 LG E International Inc is a corporation organized and existing under the laws of the State of Delaware United States of America Claimants hereinafter will be referred to collectively as “LG E” or “Claimants ” 2 LG E has a shareholding interest in three local gas distributing companies in Argentina created and existing under the laws of Argentina by commandment of the Argentine Government Distribuidora de Gas del Centro “Centro” Distribuidora de Gas Cuyana S A “Cuyana” and Gas Natural BAN S A “GasBan” hereinafter collectively referred to as “the licensees” LG E owns a controlling equity interest in Centro and minority equity interests in GasBan and Cuyana 3 Respondent is the Argentine Republic which along with the United States of America is a party to the Convention on the Settlement of Investment Disputes between States and Nationals of other States “ICSID Convention” or “Convention” ratified by the Argentine Republic in 1994 and by the United States of America in 1966 The Bilateral Investment Treaty between the United States of America and the Argentine Republic Concerning the Reciprocal Encouragement and Protection of Investments was signed on 14 November 1991 “BIT” “the Bilateral Treaty” or the “Treaty” and entered into force on 20 October 1994 II THE ARBITRAL TRIBUNAL 4 On 31 January 2002 the Centre’s Secretary-General registered Claimants’ Request for Arbitration in accordance with Article 36 3 of the ICSID Convention In accordance with Rule 7 of the Rules of Procedure for the Institution of Conciliation and Arbitration Proceedings “the Institution Rules” the Secretary-General gave notice to the parties of the registration of 1 Until 1 December 2005 Claimants were LG E Energy Corp LG E Capital Corp and LG E International Inc However on 26 January 2006 Claimants informed the Tribunal that the name of two of the companies had been modified LG E Energy Corp is now E ON US LLC and LG E Capital Corp is now E ON US Capital Corp LG E International Inc kept its name Upon request by the Tribunal LG E submitted documents that in the Tribunal’s opinion only prove the change of name but not its effects Respondent remained silent on this issue 9 LG E Liability ENG 3-5-07 indd 207 3 5 07 2 50 53 PM 208 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL Claimants’ Request and invited them to constitute an Arbitral Tribunal as soon as possible 5 Forthwith the parties agreed that the Arbitral Tribunal should be formed by three arbitrators one appointed by the Claimants another by the Argentine Republic and the third one called to preside over the Tribunal would be appointed by the Centre’s Secretary-General in accordance with the method agreed upon by the parties 6 On 20 June 2002 the Claimants appointed Professor Albert Jan van den Berg a national of the Netherlands as an arbitrator for this case Said appointment was ratified by the Claimants by letters to the Centre dated 15 and 28 August 2002 The Argentine Republic by letter dated 26 August 2002 appointed Judge Francisco Rezek a Brazilian citizen as an arbitrator On 7 November 2002 the Centre’s Secretary-General with the parties’ agreement appointed Dr Tatiana B de Maekelt a citizen of Venezuela as the Arbitral Tribunal’s President 7 On 13 November 2002 the ICSID’s Secretariat in accordance with Rule 6 1 of the Rules of Procedure for Arbitration Proceedings “Arbitration Rules” notified the parties that all the arbitrators had accepted their appointments and that the Tribunal was deemed to be constituted and the proceeding deemed to begun as from that date On this same day in accordance with Rule 25 of the ICSID Administrative and Financial Regulations the parties were informed that Dr Claudia Frutos-Peterson would act as the Tribunal’s Secretary III PROCEDURAL BACKGROUND 8 On 28 December 2001 ICSID received from LG E a request for arbitration dated 21 December 2001 against the Argentine Republic 9 By letter dated 24 January 2002 the Claimants filed with ICSID a supplement to their request for arbitration Claimants asserted that Respondent had committed further violations of the BIT as a result of the enactment by the Government of the Public Emergency and Currency Exchange Law “Emergency Law” which allegedly adversely affected Claimants’ investment in Argentina 10 In accordance with Arbitration Rule 13 the Tribunal held its first session with the parties at the seat of the Centre in Washington D C on 19 December 2002 The parties agreed to set the following schedule for the written proceedure Claimants were to file a Memorial on 31 March 2003 Upon receipt of Claimants’ Memorial Respondent could choose to file an answer within either 60 or 90 days In its answer Respondent was entitled to file exceptions on 9 LG E Liability ENG 3-5-07 indd 208 3 5 07 2 50 54 PM CASES 209 jurisdiction and to the extent it deemed necessary could respond to Claimants’ arguments on the merits In the event that the Respondent filed a Memorial on Jurisdiction the Claimants were to file their Counter-Memorial on Jurisdiction within 30 days from their receipt of the Respondent’s Memorial on Jurisdiction followed by Respondent’s Reply on Jurisdiction within 20 days following receipt of Claimants’ Counter-Memorial on Jurisdiction and Claimants’ Rejoinder on Jurisdiction to be filed 20 days from receipt of the Respondent’s Reply on Jurisdiction 11 With respect to oral proceedure it was also agreed during the first session to set the following schedule based on the written submissions In the event that Respondent filed its answer within 60 days and if the Tribunal decided so there was to be a hearing on jurisdiction between 22 and 23 September 2003 In the event that Respondent filed its answer within 90 days the hearing on jurisdiction if the Tribunal were in agreement was to be held on 20 and 21 October 2003 The hearing on the merits was scheduled for 8 through 12 March 2004 12 The Claimants filed their Memorial on 31 March 2003 13 Subsequently under covenant the parties decided to amend the schedule of proceedings concerning the objections to jurisdiction Respondent and Claimants informed the ICSID Secretariat of this amendment on 1 and 2 July 2003 respectively Under the new schedule Respondent’s Memorial on Jurisdiction was to be filed on 21 July 2003 Claimants’ Counter-Memorial on Jurisdiction on 29 August 2003 Respondent’s Reply on Jurisdiction on 22 September 2003 and Claimants’ Rejoinder on Jurisdiction on 13 October 2003 It was also agreed that the hearing on jurisdiction was to be held on 20 and 21 October 2003 but subsequently the Tribunal in joint agreement with the parties decided that the hearing on jurisdiction should be held between 20 and 21 November 2003 at The Hague Netherlands 14 In accordance with the terms set on 21 July 2003 Respondent formally filed objections to ICSID’s jurisdiction In its Memorial on Jurisdiction Respondent presented the grounds upon which it based said objections and attached documents in support of its arguments On 29 August 2003 Claimants filed their Counter-Memorial on Jurisdiction On 22 September 2003 the Argentine Republic filed its Reply on Jurisdiction and on 14 October 2003 Claimants filed their Rejoinder on Jurisdiction 15 On 30 October 2003 Respondent filed a motion to suspend the proceedings and requested as an alternative measure a stay of the hearing on jurisdiction On 31 October 2003 the President of the Tribunal asked Claimants to submit their comments on said motion by 3 November 2003 9 LG E Liability ENG 3-5-07 indd 209 3 5 07 2 50 54 PM 210 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL On 3 November 2003 the Claimants filed an objection to the stay motion On 5 November 2003 the members of the Arbitral Tribunal deliberated on the Argentine Republic’s motion and denied Respondent’s motions to suspend these proceedings and stay the hearing on jurisdiction scheduled for 20 and 21 November 2003 16 The hearing on jurisdiction was held on the date set at the seat of the Permanent Court of Arbitration in The Hague the Netherlands Messrs Eugene D Gulland and Oscar M Garibaldi of the law firm of Covington Burling from Washington D C acted as counsel for the Claimants Also present at the hearing were Ms Dorothy O’Brien Deputy General Counsel for LG E Energy Corp and Mr S Bradford Rives Chief Financial Officer of LG E Energy Corp 17 Messrs Carlos Ignacio Suárez Anzorena and Ignacio Pérez Cortés on behalf of Dr Horacio Daniel Rosatti the then-Procurador del Tesoro de la Nación Argentina atended the hearing on behalf of the Respondent 18 During the hearing the parties presented their arguments on the jurisdictional issues The Tribunal posed questions to the parties in accordance with Rule 32 3 of the Arbitration Rules 19 On 30 April 2004 the Tribunal issued its Decision on Objections to Jurisdiction holding that the present dispute is within the jurisdiction of the Centre and the competence of the Tribunal In so holding the Tribunal considered the following criteria a That the dispute should be between a Contracting State and a national of another Contracting State and that Claimants should have jus standi to act in these proceedings b That the issue should be a dispute of a legal nature arising directly from an investment c That the parties should have given their consent in writing to submit to arbitration and specifically to the ICSID arbitration and d That all the other requirements of both the ICSID Convention and the Bilateral Treaty should be met in order to submit a dispute to arbitration 20 With respect to criteria a regarding jus standi the Tribunal was of the opinion that for purposes of the ICSID Convention and the Bilateral Treaty Claimants should be considered foreign investors even though they did not directly operate the investment in the Argentine Republic but acted through companies constituted for that purpose in its territory Decision on Jurisdiction ¶ 63 9 LG E Liability ENG 3-5-07 indd 210 3 5 07 2 50 54 PM CASES 211 21 With respect to criteria b which requires that the issues before the Tribunal be a dispute of a legal nature arising directly from an investment the Tribunal concluded that at the jurisdictional phase it was to be presumed that Claimants’ claims were based on alleged breaches of the Bilateral Treaty affecting Claimants’ investments within the meaning of the ICSID Convention and the Bilateral Treaty Decision on Jurisdiction ¶ 66 22 With respect to criteria c requiring the consent of the parties to submit the dispute to ICSID arbitration the Tribunal was of the opinion that the Argentine Republic’s consent was given through Article VII 4 of the Bilateral Treaty In turn when Claimants resorted to ICSID they decided to submit their investment disputes to the Centre’s jurisdiction It is noteworthy in this case that Claimants did not submit the dispute to the Argentine courts or to any other dispute settlement mechanism mentioned in Article VII of the Bilateral Treaty For this reason no question regarding the “fork in the road” provision arises in the present case Decision on Jurisdiction ¶ 69 et seq 23 Finally with respect to criteria d concerning verification of the other requirements of the ICSID Convention and the Bilateral Treaty the Tribunal concluded that the claims are not time barred and that the claims asserted in the additional request filed by Claimants are sufficiently sequential to the originally stated claims as to permit their review by this Tribunal for the sake of efficiency The fact that the license holders may have begun negotiations with Respondent is outside this arbitral proceeding inasmuch as the license holders which are different legal entities are pursuing that process from their own corporate perspective Thus in view of the fact that more than six months elapsed from the date on which the dispute arose i e 24 January 2002 there is no bar in initiating the arbitral proceedings Decision on Jurisdiction ¶ 80 et seq 24 Based on these considerations the Tribunal a Held that the present dispute is within the jurisdiction of the Centre and the competence of the Tribunal b Dismissed all of the Respondent’s objections as to the admissibility of the dispute and all of the Respondent’s objections to the jurisdiction of ICSID and the competence of this Tribunal c Ordered pursuant to Rule 41 4 of the Arbitration Rules the continuation of the proceeding d Reserved all questions concerning the costs and expenses of the Tribunal and the parties for future determination 9 LG E Liability ENG 3-5-07 indd 211 3 5 07 2 50 55 PM 212 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL 25 In accordance with Procedural Order No 1 dated 4 May 2004 Respondent filed its Counter-Memorial on the merits on 18 June 2004 seeking dismissal of LG E’s claims On 6 August 2004 Claimants filed their Reply 26 Respondent filed its Rejoinder on the merits on 27 September 2004 in which it asked the Tribunal among other legal and factual arguments to exclude Claimants’ witness Mr Patricio Perkins from the hearing on the merits on grounds of an alleged conflict of interest Claimants objected to Respondent’s motion to exclude the witness on 1 November 2004 27 By means of Procedural Order No 3 dated 23 November 2004 the Arbitral Tribunal decided i to admit the witness depositions offered by Respondent ii to grant Claimants the opportunity to offer additional evidence regarding the witness depositions produced by Respondent in its Rejoinder at the latest on 20 December 2004 and to cross-examine said witnesses during the hearing on the merits iii to admit the testimony of Mr Patricio Perkins subject to cross-examination by Respondent 28 In accordance with Procedural Orders Nos 4 and 5 dated 13 and 18 January 2005 respectively the hearing on the merits was held between 23 and 29 January 2005 at the seat of the Centre in Washington D C The following persons were present at that hearing Arbitral Tribunal Tatiana B de Maekelt President Francisco Rezek Arbitrator Albert Jan van den Berg Arbitrator Secretary of the Tribunal Claudia Frutos-Peterson Counsel for Claimants Oscar M Garibaldi Covington Burling Washington D C Eugene D Gulland Covington Burling Washington D C Eric D Brown Covington Burling Washington D C Miguel López Forastier Covington Burling Washington D C Karin Kizer Covington Burling Washington D C Warda Henning Covington Burling Washington D C Harris Bor Covington Burling Washington D C Matthew Chester Covington Burling Washington D C Jadranka Poljak Covington Burling Washington D C Alma Ramírez Covington Burling Washington D C Karin Lui Covington Burling Washington D C Horacio Ruiz Moreno Rosso Alba Francia Ruiz Moreno Abogados Buenos Aires Argentina Leonardo Orlanski Rosso Alba Francia Ruiz Moreno Abogados Buenos Aires Argentina 9 LG E Liability ENG 3-5-07 indd 212 3 5 07 2 50 55 PM CASES 213 Also present on behalf of Claimants Dorothy O’Brien LG E Energy LLC Chris Hermann Leonardo Massimino Donaldo Sloog Gabriel Wilkinson Counsel for Respondent Osvaldo Guglielmino Procurador del Tesoro de la Nación Argentina Buenos Aires Argentina Gustavo Adolfo Scrinzi Subprocurador del Tesoro de la Nación Argentina Buenos Aires Argentina Ana Badillos Procuración del Tesoro de la Nación Argentina Buenos Aires Argentina Luz Moglia Procuración del Tesoro de la Nación Argentina Buenos Aires Argentina Gabriel Bottini Procuración del Tesoro de la Nación Argentina Buenos Aires Argentina Ignacio Pérez Cortés Procuración del Tesoro de la Nación Argentina Buenos Aires Argentina Gastón Rosenberg Procuración del Tesoro de la Nación Argentina Buenos Aires Argentina Also present on behalf of Respondent Carlos Garber Ministerio de Relaciones Exteriores Comercio Internacional y Culto Buenos Aires Argentina Alicia Federico Ente Nacional Regulador del Gas ENARGAS Buenos Aires Argentina Charles Joseph Masano Secretaría de Energía Buenos Aires Argentina Marcelo Masonni Embassy of the Argentine Republic Washington D C Court Reporters David A Kasdan Dante Rinaldi 29 The hearing commenced as scheduled on Sunday 23 January 2005 at 8 45 a m After a brief introduction by the Tribunal’s President Claimants’ counsel Messrs Eugene Gulland and Oscar Garibaldi made their oral presentation to the Tribunal referring to the arguments indicated in their briefs They also presented their witnesses for oral examination Messrs S Bradford Rives Eduardo A Hurtado Patricio Carlos Perkins Rudolf Dolzer Eduardo Schwartz Carlos Lapuerta Antoni Peris Mingot and Jose E Álvarez 30 Thereafter Messrs Osvaldo César Guglielmino Ignacio Pérez Cortés and Gabriel Bottini made their submissions on behalf of the Argentine Republic The following witnesses testified on behalf of Respondent Ms Anne-Marie Slaughter and Messrs Eduardo A Ratti Jorge G Simeonoff Cristian Folgar Nouriel Roubini and Fabián Bello 31 On 28 February 2005 the parties submitted Post-Hearing Briefs 32 By letter dated 18 May 2005 the Tribunal informed the parties of its decision to appoint an independent expert to assist the Tribunal in evaluating the expert financial evidence By letter of 14 September 2005 the ICSID Secretariat transmitted the report on the findings of the independent expert to 9 LG E Liability ENG 3-5-07 indd 213 3 5 07 2 50 55 PM 214 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL the parties and invited them to comment on the report by 5 October 2005 The parties filed their observations with the Tribunal on that date IV FACTUAL BACKGROUND 33 Before considering the merits of the dispute the Tribunal deems it necessary to set forth the facts that it considered relevant for its decision A Late 1980s and 1990s 34 The present claims are to be viewed against the historic background and especially the economic upheaval in Argentina and the Government’s reaction to the several economic crises suffered by the country in the late 1980s and 1990s 35 In the late 1980s Argentina underwent an economic crisis characterized by deep recession and hyperinflation As part of its economic recovery plan the Government began an ambitious privatization program with the enactment of the State Reform Law in August 1989 Within this framework large Government-owned businesses and entities were privatized or granted on concession Respondent’s Counter-Memorial ¶121 36 One March 27 1991 Argentina enacted Law No 23 928 referred to as the Convertibility Law which ordered the implementation of a fixed exchange rate pegging the austral the then-Argentine currency to the United States dollar 2 The Convertibility Law also banned price or value indexation 37 One of the primary goals of the Government’s plan was the privatization of Gas del Estado S E the national natural-gas transport and distribution monopoly Pursuant to the Government’s privatization plan investors could purchase shares in newly-formed licensed private corporations that would offer gas transport and distribution services Such shares were available to domestic and foreign investors 38 To implement its plan the Government enacted in June 1992 the Ley del Gas “Gas Law” which established a comprehensive regulatory structure for the provision of natural-gas transport and distribution services and created a public agency called Ente Nacional Regulador del Gas ENARGAS to oversee the industry 2 The austral later was replaced by the peso at the rate of 1 000 australs to 1 peso 9 LG E Liability ENG 3-5-07 indd 214 3 5 07 2 50 56 PM CASES 215 39 The Gas Law adopted a tariff structure under which ENARGAS would collect tariffs on the price of gas paid by consumers Under the provisions of the Gas Law ENARGAS was required to set the transport and distribution tariffs at fair and reasonable levels that would allow licensed utility providers to recoup a “reasonable rate of return ” after accounting for costs defined as a rate similar to that applied to activities of similar risk and adequately related to the level of efficiency and satisfactory performance of the transport or distribution service Profitability was to be measured against other activities of comparable risk 40 ENARGAS was to set maximum tariffs for a period of five years At the end of the five-year period the tariffs were to be reviewed and adjusted based on international market indicators that reflected changes in the value of the goods and services representative of the activities of service providers 41 The Gas Law was implemented by regulations adopted on 28 September 1992 by Decree No 1738 92 Pursuant to these regulations transport and distribution tariffs were to be calculated in U S dollars and then expressed in Argentine pesos and the Government could not rescind or modify the licenses without the consent of the licensees 42 On 7 December 1992 the Government adopted Decree No 2255 92 called Reglas Básicas de la Licencia Basic Rules of the License which supplemented the Gas Law and the above-mentioned regulation and approved prototype licenses for natural-gas transport and distribution The prototype licenses included a schedule of the maximum tariffs for the first five-year period 1993–1997 of service The Basic Rules of the License obligated the Government to compensate the licensees fully for any losses resulting from changes to the guaranteed tariff system The Basic Rules of the License also implemented the semi-annual tariff review based on the U S Producer Price Index “PPI” to be conducted in January and June of each year “PPI adjustment” 43 Under this framework comprised of the Gas Law its regulations and Basic Rules of the License the five-year review was to be a comprehensive review of the method used to calculate tariffs 44 By Decree No 1189 92 published on 17 July 1992 Argentina approved the procedure for the privatization of Gas del Estado S E It was restructured into two distinct transport business units and eight separate distribution business units each responsible for a geographic region of the country Each of the ten business units were transferred to the newly-created companies which were to operate with a license under the legal framework in force 9 LG E Liability ENG 3-5-07 indd 215 3 5 07 2 50 56 PM 216 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL 45 An international bidding process was set in place by Resolution No 874 92 issued by the Ministry of Public Works and Services and conducted pursuant to the Pliego de Bases y Condiciones para la Licitación “Bidding Rules” Under these Bidding Rules both foreign and domestic investors were free to bid on the shares The purpose of the Bidding Process was the purchase and sale of the majority interest in each of the licensed companies created by Decree No 1189 92 Three of those majority interests were sold during that bidding process 60% of Cuyana’s shares 70% of GasBan’s shares and 90% of Centro’s shares 46 In December 1992 the Argentine Government awarded the contracts for the purchase of the majority of shares in the ten newly-formed licensees into which Gas del Estado S E had been restructured The licenses relevant to this dispute were approved by Decrees Nos 2454 92 for Centro 2460 92 for GasBan and 2453 92 for Cuyana and became effective on 22 December 1992 47 The blocks of shares of Centro GasBan and Cuyana that were subject to privatization were awarded to private investors 90% of the shares of Centro were awarded to a consortium formed by Società Italiana Per Il Gas S p A “Italgas” an Italian company and Sideco Americana S A an Argentine company “Sideco” 70% of the shares of GasBan were awarded to a consortium formed by Gas Natural SdG S A a Spanish company Compañía General de Combustibles S A and Manra S A both Argentine companies and 60% of the shares of Cuyana were awarded to a consortium formed by Italgas and Sideco 48 Three Argentine investment companies were created as vehicles for the acquisitions i Inversora de Gas del Centro S A to acquire the privatized shares of Centro ii Invergas S A to acquire the privatized shares of GasBan and iii Inversora de Gas Cuyana S A to acquire the privatized shares of Cuyana The successful bidders or their affiliates became shareholders of the respective investment companies which then entered into Transfer Agreements with the Respondent concerning the shares subject to this arbitration 49 The privatization scheme created by Respondent targeted foreign investors because foreign capital was deemed essential for the successful operation of the Government’s economic recovery plan Foreign investors were encouraged to purchase shares with guarantees such as tariffs calculated in U S dollars automatic and periodic adjustments to the tariffs based on the PPI a clear legal framework that could not be unilaterally modified and the granting of “licenses” instead of “concessions” with a view to offering the highest degree of protection to prospective investors 9 LG E Liability ENG 3-5-07 indd 216 3 5 07 2 50 56 PM CASES 217 50 As part of its marketing efforts Argentina distributed an Information Memorandum in foreign markets including the United States and Europe The Information Memorandum summarized the legal framework governing the privatization the terms and conditions for the bidding the bidding process and the legal and the regulatory framework that would apply to the new industry after privatization The information in the memorandum concerning the privatization prepared and distributed by investment banks contained descriptive information and included disclaimers to discourage investors from relying solely on the information therein 51 During this period Argentina undertook to provide enhanced legal protection to investors so as to attract foreign investment in support of its privatization scheme The Respondent ratified several treaties relating to international investment obligations such as the ICSID Convention and a great number of bilateral investment treaties including the Argentina-U S Bilateral Investment Treaty at issue in this dispute As mentioned above the Convertibility Law which pegged the peso to the U S dollar was also enacted at this time 52 In reliance on the legal guarantees offered by the Argentine Government for the privatized energy industry and based on its positive prior experience investing in the privatized Argentine gas market in 1992 Claimants chose to purchase shares of three licensed companies in the gas-distribution market In February 1997 LG E purchased a 45 9% interest in Centro and a 14 4% interest in Cuyana In March 1999 LG E purchased a 19 6% interest in GasBan 53 From 1993 until the end of 1999 Claimants agree that the gasdistribution licensees and Respondent abided by their respective obligations under the licenses and law governing the privatization scheme According to Claimants the licensees invested heavily in Argentina’s natural-gas-distribution infrastructure GasBan invested about US$372 million in a new plant and equipment even though originally required to invest US$90 9 million Centro invested US$92 million although originally required to invest US$10 million and Cuyana invested more than US$120 million although originally required to invest US$10 million In return Argentina honored the provisions of the licenses and other legal obligations including the semi-annual tariff adjustment under the PPI indicator and calculation of the tariffs in U S dollars B Economic Crisis and the Emergence of the Dispute—1999–2001 54 A new economic crisis developed in Argentina in the late 1990s In the third quarter of 1998 the Argentine economy plunged into a period of recession 9 LG E Liability ENG 3-5-07 indd 217 3 5 07 2 50 57 PM 218 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL that was to last four years and triggered in Respondent’s opinion the worst economic crisis since Argentina’s inception in 1810 Respondent’s CounterMemorial ¶ 782 55 In 1999 Argentina’s Gross Domestic Product “GDP” decreased causing a dramatic fall in domestic prices Private consumption and investments began falling in August 1998 and Argentina entered a deflationary period The period was marked by widespread decline in the value of assets located in Argentina By the end of the 1990s many economists considered the peso as overvalued and predicted that the currency board would have to be abandoned which would inevitably devalue the peso Argentina’s country risk premium increased gradually excluding the country from the international credit market These economic indicators were accompanied by social problems—unemployment poverty and indigence levels began to increase On 10 December 1999 Mr Fernando de la Rúa took office as the President of Argentina His administration tried to maintain the peg of the Argentine peso to the U S dollar as mandated by the Convertibility Law 56 Against this background public services rates as specified in the contracts were due to be adjusted in January 2000 based on the PPI At the time the United States was experiencing a high inflationary period while Argentina was experiencing a significant deflationary period As established in the Gas Law the tariffs were to be adjusted to reflect changes in the cost structure of utility providers Gas Law Article 41 Argentina considered that the pending tariff adjustments based on the U S rate were unreasonable because they would result in a significant increase in utility rates within a recessionary and deflationary context 57 Argentina met with the gas-distribution licensees to discuss a temporary suspension of the semi-annual tariff adjustments Two agreements that the Government and the licensees entered in 2000 formed part of Claimaints’ original claim submitted to this arbitration 58 On 6 January 2000 the Government and the licensees entered an agreement Acta Acuerdo whereby the licensees agreed to a one-time six-month postponement of the tariff adjustment due in January 2000 Pursuant to the agreement the tariffs would be recovered with interest from 1 July 2000 to 30 April 2001 Therefore through resolutions published on 10 January 2000 ENARGAS approved the tariff effective as from 1 January 2000 without the PPI adjustment The ENARGAS resolutions provided that the legal regime governing the tariffs would remain intact 59 During the first six months of 2000 the situation in the Argentine economy continued to deteriorate The semi-annual PPI adjustment would have forced a 9 LG E Liability ENG 3-5-07 indd 218 3 5 07 2 50 57 PM CASES 219 second tariff increase in a continued deflationary period Although the licensees had agreed to only one-time tariff adjustment postponement the Government urged the gas-distribution licensees to accept a second postponement of the tariff adjustments including the previously postponed adjustments that were scheduled to be recovered beginning on 1 July 2000 in accordance with the Acta Acuerdo of 6 January 2000 60 On 17 July 2000 by Decree No 669 00 effective 4 August 2000 the licensees and the Government agreed to a second postponement of the tariff adjustments until 30 June 2002 Pursuant to the agreement a stabilization fund would be created to recover the postponed amounts subject to certain ceilings and floors with interest As with the previous agreement this agreement reaffirmed the Government’s commitments and guarantees provided to the licensees and their investors under the legal structure created for the privatization of the gas industry specifically recognizing the enforcement of Argentina’s bilateral investment treaties and the semi-annual PPI adjustments as an integral component of the tariff system 61 On 3 August 2000 the Argentine National Ombudsman filed a lawsuit in an Argentine Federal Court seeking an injunction against the operation of Decree No 669 00 On 18 August 2000 the Court issued an order provisionally enjoining the application of Decree No 669 00 and of the agreement of 17 July 2000 On 5 October 2001 the Court of Appeal ratified the order and the case is presently pending before the Supreme Court Respondent’s CounterMemorial ¶ 255 62 ENARGAS declared in November 2001 that no further adjustments to the tariffs would be approved until final judgment in the lawsuit No further adjustments to the tariffs have occurred to date C The Emergency Law—6 January 2002 63 Argentina’s crisis deepened at the end of 2001 The Government experienced increased difficulties in repaying its foreign debt As poverty and unemployment soared Argentines feared that the Government would default on its debt and immobilize bank deposits Therefore savings were massively withdrawn from the banks In response the Government issued Decree No 1570 01 known as “Corralito ” on 1 December 2001 restricting bank withdrawals and prohibiting any transfer of currency abroad Amid widespread discontent and public demonstrations including violence that claimed tens of lives President De la Rúa and his Cabinet resigned on 20 December 2001 A succession of presidents took office and quickly resigned 9 LG E Liability ENG 3-5-07 indd 219 3 5 07 2 50 58 PM 220 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL 64 Finally President Eduardo Duhalde took office and implemented a new economic plan which contained measures that form the additional claim submitted by Claimants On 6 January 2002 Congress enacted Law No 25 561 the Public Emergency and Foreign Exchange System Reform Law known as “the Emergency Law” The Emergency Law abrogated the Convertibility Law so that the one-to-one peg of the Argentine peso to the United States dollar no longer existed The Emergency Law provided for the switch into Argentine pesos of debts owed to the banking system debts arising from management contracts governed by public law and debts under private agreements The law further provided for the renegotiation of private and public agreements to adapt them to the new exchange system 65 The Emergency Law adopted measures modifying public-service contracts such as establishing that tariffs and prices for public services were to be calculated in pesos instead of U S dollars abolishing all clauses calling for tariff adjustments in U S dollars or other foreign currencies eliminating all indexing mechanisms and directing the Executive Branch to renegotiate all public-service contracts 66 By Presidential Decree No 214 of 3 February 2002 the Government adopted a currency conversion scheme under which all obligations payable in dollars existing on the date of enactment of the Emergency Law would be converted into pesos at the fixed one-to-one exchange rate 67 The switch into Argentine pesos also called “pesification ” which affected the entire Argentine economy was characterized by Respondent as a necessary process to return the country to the path of economic stability D Renegotiation of the Public Service Contracts 68 On 12 February 2002 Argentina announced the renegotiation of all public service contracts By Decree No 293 02 licenses for transport and distribution of natural gas were subject to mandatory renegotiation by a Renegotiation Committee within the Ministry of Economy Under the Decree the Government could either sign a renegotiated agreement or rescind the contract By Resolution No 38 02 issued on 9 March 2002 ENARGAS was ordered to discontinue all tariff reviews and to refrain from adjusting tariffs or prices in any way 69 After enactment of the Emergency Law the licensees and the Argentine Executive launched three initiatives to implement an emergency increase in the natural gas and electricity tariffs Each of these initiatives was successfully 9 LG E Liability ENG 3-5-07 indd 220 3 5 07 2 50 58 PM CASES 221 challenged by consumer organizations and ombudspersons in the Argentine judiciary and consequently did not become effective The Argentine Government attempted twice more in 2003 to obtain tariff increases through Presidential Decrees but both these efforts were also quashed by the judiciary 70 On 25 May 2003 a new Argentine President Dr Néstor Kirchner took office after a popular election was held on 26 April 2003 replacing the transition authorities that had been appointed by the Argentine Congress Respondent states that with the new administration a period of institutional stabilization at the federal level began Respondent’s Counter-Memorial 317 71 By Presidential Decree No 311 03 published on 4 July 2003 and Law No 25 790 passed on 22 October 2003 the Argentine Government extended the renegotiation process Centro Cuyana and GasBan have been involved in the renegotiation process under threat of rescission of contract During the renegotiation process the Government has not offered to restore the legal guarantees that were eliminated by the Emergency Law or compensate Claimants for any losses incurred E Request for Relief 72 Bearing in mind the background already described Claimants request the following relief Request for Arbitration ¶ 111 as revised in Claimants’ Memorial at ¶ 208 i Declaring that the Respondent has breached its obligations under Article II 2 c of the Bilateral Treaty by failing to observe obligations that it entered into with regard to the Claimants’ investment ii Declaring that the Respondent has breached its obligations under Article II 2 a of the Bilateral Treaty by failing to accord to the Claimants’ investment fair and equitable treatment and by according treatment less than that required by international law iii Declaring that the Respondent has breached its obligations under Article II 2 b of the Bilateral Treaty by taking arbitrary and discriminatory measures that impair the use and enjoyment of the Claimants’ investment iv Declaring that the Respondent has breached Article IV 1 of the Bilateral Treaty by indirectly expropriating the Claimants’ investment without complying with the requirements of the Bilateral Treaty including observance of due process of law and payment of prompt adequate and effective compensation 9 LG E Liability ENG 3-5-07 indd 221 3 5 07 2 50 59 PM 222 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL v Ordering the Respondent to pay the Claimants full compensation in the amounts set forth in the Memorial plus pre- and post-award compound interest vi Ordering the Respondent to pay all costs and expenses of this arbitration proceeding including the fees and expenses of the Tribunal and the cost of the Claimants’ legal representation plus interest thereon in accordance with the Bilateral Treaty and vii Such other or additional relief as may be appropriate under the Bilateral Treaty or may otherwise be just and proper 73 According to Claimants’ Reply ¶ 287 the relief they seek is stated as follows 1 2 3 Finding the Argentine Republic to be in breach of its obligations under the Treaty Ordering the Argentine Republic to pay LG E i compensation in the amounts specified in Part VI of the Reply ii all costs and fees of the arbitration including reasonable attorneys’ fees and iii compound interest on the monetary award from the date of the award until the date of actual payment and Ordering such additional relief as may be appropriate under the applicable law or otherwise just and proper 74 The monetary relief sought by Claimants is US$ 248 million or if the Tribunal concludes that there was expropriation US$ 268 million plus compound pre-award and post-award interest and costs 75 Respondent denies that it has violated the Treaty and seeks an order from this Tribunal dismissing LG E’s claims and holding LG E liable for costs In asserting its defense Respondent contends in the alternative that the circumstances warrant application of the state of necessity defense thus exempting it from liability for any Treaty violations V PRELIMINARY MATTERS 76 In the analysis below the Tribunal has not only considered the positions of the parties as summarized in the various sections above but also their numerous detailed arguments in support of those positions as well as the arguments made at the hearing To the extent that these arguments are not referred to expressly they must be deemed to be subsumed in the analysis below 9 LG E Liability ENG 3-5-07 indd 222 3 5 07 2 50 59 PM CASES 223 A Jus Standi 77 With respect to jus standi the Tribunal re-affirms its conclusions adopted in the Decision on Objections to Jurisdiction of 30 April 2004 As determined in the Decision on Jurisdiction the Centre has jurisdiction over LG E’s claims and this Tribunal is competent to decide on Claimants’ claims 78 Argentina continues to argue that this Tribunal shall only have jurisdiction if Argentina’s non-compliance with an international obligation is verified Respondent’s Rejoinder ¶ 521 a Pursuant to the Tribunal’s Decision on Jurisdiction issued on 30 April 2004 the Tribunal deems that all the obligations in discussion are international because they relate to the Treaty Thus LG E’s minority-shareholder status has no bearing on its standing to bring these claims or on the Tribunal’s competence to rule upon them 79 It should be pointed out that as this Tribunal stated in the Decision on Jurisdiction the subject matter of this arbitration focuses on the investments made by LG E in the Argentine licensees Accordingly the Tribunal has insisted on the independent treatment of LG E regarding the licensees both from the point of view of the legal personality of each entity and from the actions of each This does not mean however that certain actions of the licensees by the fact that they are the investment’s beneficiaries may have in some cases effects on the investment itself For such reasons on occasion the Tribunal shall be bound to refer to the licensees and their actions without implying a reference to LG E One should bear in mind that the recognition of the independence among these entities was the basis on which the jurisdiction of the Centre and the competence of the Tribunal were supported B Law Applicable 1 Parties’ Positions 80 The Claimants argue that their claims asserted arise under the Treaty The law that applies to the dispute is therefore the Treaty and general international law Claimants contend that this approach comports with the first part of Article 42 1 of the ICSID Convention In Claimants’ view Argentine law merely establishes a factual predicate for the claims under the Treaty and general international law Claimants’ Memorial ¶¶ 155–56 81 Respondent does not deny the application of the Bilateral Treaty to this dispute but argues that in the absence of an agreement on the applicable law the relationship between LG E and the Argentine Government should be 9 LG E Liability ENG 3-5-07 indd 223 3 5 07 2 50 59 PM 224 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL subject to the second part of Article 42 1 of the ICSD Convention which establishes the precedence of sources of law therefore the Argentine law should be applied first Respondent asserts that “where an investor makes an investment in a State it is subject—as are local investors– to the laws of the country where the investment is made” Respondent’s Counter-Memorial ¶ 25 Argentina stresses the insufficiency of the Treaty to govern the dispute at issue particularly in light of the substantive framework regarding the foreign investment’s treatment under Argentine law 2 Tribunal’s Analysis 82 In accordance with Article 42 1 of the ICSID Convention 1 The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties In the absence of such agreement the Tribunal shall apply the law of the Contracting State party to the dispute including its rules on the conflict of laws and such rules of International Law as may be applicable 83 This rule grants the parties’ autonomy in choosing the law applicable to the substance of the dispute in an arbitration administered by ICSID If no applicable law is chosen the Tribunal must resort to the second sentence of Article 42 1 84 It is evident that the parties hereto had not agreed on the applicable law in this dispute This is usually found in the investment agreement though this does not hold in this case Nor is there any express reference to the applicable law in other documents related to the investment by LG E a fact that would result in the application of the second part of Article 42 1 85 It is to be noted that the Argentine Republic is a signatory party to the Bilateral Investment Treaty which may be regarded as a tacit submission to its provisions in the event of a dispute related to foreign investments In turn LG E grounds its claim on the provisions of the Treaty thus presumably choosing the Treaty and the general international law as the applicable law for this dispute Nevertheless these elements do not suffice to say that there is an implicit agreement by the Parties as to the applicable law a decision requiring more decisive actions Consequently the dispute shall be settled in accordance with the second part of Article 42 1 3 3 Schreuer Christoph The ICSID Convention A Commentary Cambridge University Press 2001 p 573 9 LG E Liability ENG 3-5-07 indd 224 3 5 07 2 51 00 PM CASES 225 86 In addition to the indication of the applicable law there are two other concepts embedded in the second part of Article 42 1 which deserve comment— the references to private international law and to the rules of international law “as may be applicable” 87 As to the reference to the private international law the Tribunal has not found in the ICSID records any case in which the Arbitral Tribunal has resorted to the rules of conflict of law of the State party to the dispute It has been so observed in the Amco v Indonesia case in which the Arbitral Tribunal presided by Berthold Goldman affirmed that it did not deem it necessary to enter into a discussion on the rules of conflict inasmuch as the parties make constant references to the law of the State party in the dispute and moreover in “the dispute before the Tribunal relating to an investment in Indonesia there is no doubt that the substantive municipal rules of law to be applied by the Tribunal are to drawn from Indonesian Law ”4 The Tribunal in this case shares the same criterion 88 With reference to the rules of international law and particularly to the language “as may be applicable ” found in Article 42 1 of the ICSID Convention the Tribunal holds the view that it should not be understood as if it were in some way conditioning application of international law Rather it should be understood as making reference within international law to the competent rules to govern the dispute at issue 5 This interpretation could find support in the ICSID Convention’s French version that refers to the rules of international law “en la matière ”6 89 Likewise applying the rules of international law is to be understood as comprising the general international law including customary international law to be used as an instrument for the interpretation of the Treaty For example where a term is ambiguous or where further interpretation of a Treaty provision is required the Tribunal will turn to its obligations under Articles 31and 32 of the Vienna Convention on the Law of Treaties signed in 1969 90 Having made this part clear the Tribunal proceeds to analyze the extension of the remission to the domestic law contained in the second part 4 Amco Asia Corporation and others v Republic of Indonesia Award of 20 November 1984 1 ICSID Rep 413 1993 5 “It simply means that the relevant rules of international law are to be applied ” Schreuer Cristoph The ICSID Convention…op cit p 622 6 Convention CIRDI Art 42 1 Le Tribunal statue sur le différend conformément aux règles de droit adoptées par les parties Faute d’accord entre les parties le Tribunal applique le droit de l’Etat contractant partie au différend—y compris les règles relatives aux conflits de lois—ainsi que les principes de droit international en la matière emphasis added In http www worldbank org icsid basicdoc-fra partA-chap04 htm#s03 9 LG E Liability ENG 3-5-07 indd 225 3 5 07 2 51 00 PM 226 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL of Article 42 1 whereby the Tribunal shall apply “the law of the Contracting State Party to the dispute…” The Argentine doctrine contributes to gaining insight into the remission’s scope “the situation is much clearer by virtue of the incorporation of the international law to the Argentine law and the hierarchical relation conferred by the 1994 constitutional reform to international treaties in Article 75 paragraph 22 7 of the National Constitution ”8 91 The Tribunal notes that as part of the Argentine legal system the Bilateral Treaty prevails over domestic law “especially inasmuch as in most of the Bilateral Treaty’s assumptions there is an express mention of international law be it when referring to the treatment to be given to investments or to the compensation in the event of expropriation or any other like measure etc ”9 92 This interpretation has been accepted in Argentina “as long as the litigation is linked to the violation of the BIT bilateral investment treaty and of international law and not to the mere pretensions of infringement of a local contract and as the parties should have not provided expressly the law applicable to the first of said disputes the decision shall be governed by the ICSID Convention by the BIT and applicable international law Thus the BIT becomes the lex specialis regarding disputes appearing in matters of investment between the foreign investor and the Host State ”10 93 It is this Tribunal’s opinion that obviating application of international law specifically of the ICSID Convention and the Bilateral Treaty would entail ignoring the fact that “international treaties move away from the principle according to which foreign investment is subject to the law and jurisdiction of the host state and seek international solution of conflicts ”11 This thesis held by part of the Argentine doctrine indicates that when submitting the settlement of a dispute to an Arbitral Tribunal acting within the framework of an international agreement like ICSID the dispute falls under public international law thus its rules are to be applied 12 However the problem is more complex as has been admitted by several scholars who are of the opinion that it is necessary to “balance the weight that domestic law and international law should have upon 7 “… the treaties and concordats are hierarchically superior than laws …” Tawil Guido Santiago Los conflictos en materia de inversión la jurisdicción del CIADI y el Derecho aplicable a propósito de las recientes decisiones en los casos “Vivendi” “Wena” y “Maffezini” in RAP October 2002 Year XXV Nº 239 pp 241 et seq especially pp 256–257 9 Idem p 256 The author bases his opinion on the Vivendi case 10 Ibidem 11 See Investment for foreigners in Argentina www enplenitud com 12 Grigera Naón Horacio Choice of Law Problems in International Commercial Arbitration J C B Mohr Paul Siebeck Tübingen Germany 1992 p 115 8 9 LG E Liability ENG 3-5-07 indd 226 3 5 07 2 51 00 PM CASES 227 the settlement of the dispute”13 this is to establish an order of precedence of the sources 94 International law overrides domestic law when there is a contradiction since a State cannot justify non-compliance of its international obligations by asserting the provisions of its domestic law 95 If this contradiction does not exist it is not an easy task to establish the relationship between international law and domestic law In the original draft of the ICSID Convention the conjunction “and” was not present in the rule but rather the conjunction “or” was in its place so that it read “The Arbitral Tribunal shall decide the dispute submitted to it in accordance with such rules of law whether national or international as it shall determine to be applicable ”14 The intention in the language of the original draft was not to establish an order of preference but rather to establish the possibility of alternatives Initially scholarly authorities and some ICSID Tribunals admitted that the conjunction “and” meant that “and in case of lacunae or should the law of the Contracting State be inconsistent with international law ”15 However any limitation to the role of international law under these terms would imply accepting that international law may be subordinate to domestic law and would obviate the fact that there are a growing number of arbitrations initiated on the basis of bilateral or multilateral investment treaties 96 It is this Tribunal’s opinion that “and” means “and ” so that the rules of international law especially those included in the ICSID Convention and in the Bilateral Treaty as well as those of domestic law are to be applied In the Wena Hotels Limited v Arab Republic of Egypt case the Tribunal affirmed that “and means and” but accepted the supremacy of international law 16 97 The Tribunal concludes as the tribunal concluded in the Asian Agricultural Products Ltd AAPL v Democratic Socialist Republic of Sri Lanka Award of June 27 1990 that the Treaty “is not a self-contained closed legal system limited to provide for substantive material rules of direct applicability but it has to be envisaged within a wider juridical context in which rules from other sources 13 Vives Chillida Julio El Centro Internacional de Arreglos de Diferencias Relativas a Inversiones CIADI Madrid McGraw Hill 1998 p 195 14 Schreuer Christoph The ICSID Convention… op cit p 623 15 Gaillard Emmanuel and Banifetami Yas The Meaning of “and” in Article 42 1 second sentence of the Washington Convention The Role of International Law in the ICSID choice of the law process ICSID Review Foreign Investment Law Journal 2003 Vol 12 No 2 pp 375 et seq especially pp 381–382 See also Schreuer Christoph op cit p 263 16 Wena Hotels Limited v Arab Republic of Egypt ICSID Case Nº ARB 98 4 Decision on Application for Annulment Feb 5 2002 41 ILM 933 2002 9 LG E Liability ENG 3-5-07 indd 227 3 5 07 2 51 01 PM 228 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL are integrated through implied incorporation methods or by direct reference to certain supplementary rules whether of international law character or of domestic law nature ”17 98 In short one must also recall that between Argentina and LG E there is no binding contractual agreement The existence of such relationship would have allowed the parties to agree on stabilization clauses in the event of changes in certain circumstances But in the absence of such agreement one is bound to resort to a legal system regulating those events The fact that there is no contract between the Argentine Republic and LG E favors in the first place the application of international law inasmuch as we are dealing with a genuine dispute in matters of investment which is especially subject to the provisions of the Bilateral Treaty complemented by the domestic law 3 Tribunal’s Conclusion 99 In order to settle this controversy the present Tribunal shall apply first the Bilateral Treaty second and in the absence of explicit provisions therein general international law and third the Argentine domestic law particularly the Gas Law that governs the natural gas sector The latter is applicable in view of its relevance for determining the Argentine Republic’s liability and the defenses to which it may resort vis-à-vis the allegations made by Claimants VI LIABILITY A Article II 2 a Fair and Equitable Treatment 1 Parties’ Positions 100 Based on the circumstances of this case as described in Section IV above LG E claims that the Argentine Republic breached Article II 2 a of the Bilateral Treaty which guarantees that LG E’s investment in Argentina will at all times be accorded fair and equitable treatment 101 In Claimants’ view by committing itself to the Treaty Argentina made promises to the United States as to how it would treat the investments of U S nationals in Argentina In Article II Argentina agreed to maintain an investment environment that is even-handed towards all investors foreign and domestic 17 Asian Agricultural Products Ltd AAPL v Democratic Socialist Republic of Sri Lanka ICSID Case No ARB 87 3 Final Award June 27 1990 6 ICSID Review 533 1991 9 LG E Liability ENG 3-5-07 indd 228 3 5 07 2 51 01 PM CASES 229 alike free of arbitrary and discriminatory laws and regulations and ultimately fair and equitable offering full protection and security to the investments of U S nationals 102 Claimants explain that fair and equitable treatment in the context of this Treaty requires a stable and predictable legal framework for the investment Claimants support their interpretation of the standard on the basis of the Preamble of the Treaty which sets forth the object and purpose of the Treaty and specifically the provision on fair and equitable treatment as well as three recent opinions of arbitral tribunals considering the question in a similar context 18 Claimants contend that under this standard a State cannot grant treatment that affects the basic expectations that were taken into account by the foreign investor to make the investment Considering that the Treaty’s objective was to promote foreign investment Claimants argue that the stability and predictability of the legal framework that laid the foundations for their investment and granted protection to its value are particularly important 103 With respect to Respondent’s reliance on the Genin case Claimants argue that as the Genin19 case is merely a standard for evaluating the fairness and equity of State procedures such a standard should be evaluated in light of more recent cases 104 Claimants also contend that the extent to which the fair and equitable standard relates to the minimum standard of treatment under customary international law makes no difference in this case because that standard has evolved since the Mondev20 case to include the reasonable expectations of the investor 105 Under this articulation of the standard Claimants state that Argentina treated LG E’s investment in an unfair and inequitable manner First Argentina repudiated the guarantees that it had offered to the foreign investors at the time it induced them to invest in Argentina Second Argentina singled out the gasdistribution industry and other public utility industries for treatment that was less favorable than the treatment granted to all other sectors of the economy Third Argentina publicized unfounded charges against the foreign investors and 18 Técnicas Medioambientales Tecmed S A v The United Mexican States ICSID Case No ARB AF 00 02 Award ¶ 154 29 May 2003 MTD Equity Sdn Bhd and MTD Chile S A v Republic of Chile ICSID Case No ARB 01 7 Award ¶ 113 25 May 2004 Occidental Exploration and Production Company v The Republic of Ecuador LCIA Case No UN 3467 Final Award 1 July 2004 19 Alex Genin Eastern Credit Limited Inc and A S Baltoil v The Republic of Estonia ICSID Case No ARB 99 2 Award ¶ 367 25 June 2001 20 Mondev International Ltd v United States of America ICSID Case No ARB AF 99 2 Award ¶ 116 October 11 2002 9 LG E Liability ENG 3-5-07 indd 229 3 5 07 2 51 02 PM 230 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL coerced the gas-distribution companies to waive their rights under the licenses and renegotiate the licenses Fourth Argentina held the licensees responsible for strict compliance with the terms of the licenses while the Government froze the gasdistribution tariffs Finally Claimants allege that Argentina foreclosed the licensees from pursuing judicial or arbitral remedies Claimants’ Memorial ¶ 171 106 Argentina had attracted Claimants with the guarantees derived from the Treaty and the legal framework for privatization under which its laws and regulations guaranteed how Argentina would treat LG E’s investment In making their decision to invest in Argentina Claimants relied on Argentine laws that granted protection against currency fluctuation and inflation while providing for adjustment of utility rates thus ensuring reasonable rates of return and that the Argentine Government would not freeze utility rates but rather maintain a dynamic tariff system regulated by an expert agency 107 Claimants did not expect their investment to be free of risk or that Article II of the Bilateral Treaty should protect them from all risks associated with their investment But they insist that the gas regulatory framework that Argentina put in place made their investment free from risk of regulatory alterations or changes in the rules in which they had invested LG E understood that it would bear what it calls “commercial risks ” such as industry demand recession and substitution of natural gas by alternative fuels Hearing on the Merits Perkins 24 January 2005 Spanish Transcript p 369 Claimants’ Post-Hearing Brief ¶ 8 108 Claimants allege that during the economic crisis Argentina abandoned the guarantees that it made to investors in the gas-distribution sector In January 2002 the Emergency Law swept away the protection against inflation Argentina forced licensees to enter into two agreements postponing the PPI adjustments after which an Argentine court issued an order that ENARGAS interpreted as an injunction against the PPI adjustment The Emergency Law permanently abolished the PPI adjustment 109 The Emergency Law also abandoned the protection against currency fluctuations The Gas Law had guaranteed that the tariffs would be calculated in dollars and converted into pesos In reliance on this protection against any sharp devaluation of the peso Claimants decided to invest in the licensees 110 In light of these prior measures Claimants argue that Argentina repudiated its guarantee that generally prohibited the freezing or control of tariffs Claimants’ Post-Hearing Brief ¶¶ 15–31 111 While Claimants acknowledge that the material used by Respondent in order to make the offer was not binding the laws and promises referenced therein 9 LG E Liability ENG 3-5-07 indd 230 3 5 07 2 51 02 PM CASES 231 were Claimants’ Post-Hearing Brief ¶ 9 Claimants add that if establishing the tariffs had been left to the State investors would have never invested 112 Respondent objects to the definition given to fair and equitable treatment In Respondent’s view the standard should be defined by impartial and objective rather than personal and arbitrary criteria They conclude that Claimants’ interpretation of the standard is so vague as to ignore the parties’ obligations and rights Respondent’s Counter-Memorial ¶ 603–604 113 Citing Alex Genin Eastern Credit Limited Inc and A S Baltoil v The Republic of Estonia21 and Robert Azinian Kenning Davitian Ellen Baca v The United Mexican States22 Respondent concludes that the fair and equitable treatment principle refers to the international minimum standard of treatment owed to an investor and as such constitutes a minimum pattern for substantive justice Respondent’s Counter-Memorial ¶ 620 Respondent also contends citing S D Myers Inc v The Government of Canada23 that a violation of the fair and equitable standard “occurs only when it is shown that an investor has been treated in such an unjust or arbitrary manner that the treatment rises to the level that is unacceptable from the international perspective” Respondent’s Counter-Memorial ¶¶ 621–622 114 Regarding the list of guarantees cited by Claimants Respondent contends that the Gas Law does not provide for what Claimants call “exchange protection” Respondent’s Post-Hearing Brief ¶ 74a Respondent points out that in fact when Claimants’ witnesses were examined they were not able to identify where any such “protection” had been established Respondent also asserts that the tariff calculation in U S dollars was linked to the existing fixed rate of exchange between the peso and the U S dollar as established by the Convertibility Law None of Claimants’ witnesses was able to prove the opposite Respondent adds that maintaining tariffs linked to the U S dollar after the convertibility system was abandoned lacks any economic logic Respondent points out that none of the Government’s guarantees address the abandonment of convertibility 115 With respect to the tariff guarantee Respondent argues that it is possible that the Argentine authorities had considered guaranteeing the calculation of the tariffs in U S dollars regardless of the Convertibility Law but such plan was rejected due to the fact that the Government concluded that the Convertibility 21 See Genin footnote No 19 supra Robert Azinian and others v United Mexican States ICSID Case No ARB AF 97 2 Award ¶¶ 83 and 87 1 November 1999 23 S D Myers Inc v Government of Canada NAFTA Arbitration under UNCITRAL Rules Partial Award ¶ 263 13 November 2000 22 9 LG E Liability ENG 3-5-07 indd 231 3 5 07 2 51 03 PM 232 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL Law provided sufficient protection to the investment Respondent’s PostHearing Brief ¶ 26 116 With respect to the PPI adjustments Respondent argues that from mid1998 application of the PPI as the rate adjustment index became unreasonable and failed to fulfill the goal it was conceived for—namely reflecting the changes in the value of the goods and services involved in the activity of service providers Respondent’s Post-Hearing Brief ¶ 44 Additionally Respondent states that the measure did not cause loss to the licensees Citing the opinions of Schwartz and Lapuerta Respondent contends that suspension of the PPI adjustment would have affected tariffs only by approximately 2% between August 2000 and October 2002 Respondent’s Post-Hearing Brief ¶ 46 117 Respondent agrees that the tariffs must be fair and sufficient yet not abusive something that would occur if the Claimants’ position were sustained Respondent’s Post-Hearing Brief ¶ 74c 118 Regarding the claim that the Claimants were “induced” to invest in the Argentine Republic Respondent argues that there is no proof of such inducement Respondent’s Counter-Memorial ¶ 647 Respondent points out that the Claimants rely on non-binding documents such as reports and minutes without any legal relevance According to Respondent these documents were irrelevant to the laws that should have been considered in deciding whether or not to invest in the Argentine gas-distribution market Respondent’s PostHearing Brief ¶ 17 2 Tribunal’s Conclusion Concerning Argentina’s Guarantees to Investors 119 The Tribunal concludes that the Gas Law and its implementing regulations made four guarantees to investors in the gas transport and distribution centers 1 24 Article 41 1 of Decree No 1738 92 24 and Section 9 2 of the Basic Rules of the License25 mandated that the tariffs would be calculated in U S dollars before conversion into pesos Article 41 1 provides Transportation and Distribution rates shall be calculated in United States dollars The resulting Rate Schedule shall be stated in Argentine pesos and shall be convertible as stated in Law No 23 928 using for the retranslation into Argentine pesos the parity set forth in Article 3 of Argentine Presidential Decree No 2 128 91 25 Section 9 2 provides “The tariff has been calculated in U S dollars The adjustments referred to in point 9 3 will be calculated in U S dollars ” 9 LG E Liability ENG 3-5-07 indd 232 3 5 07 2 51 03 PM CASES 233 2 Section 9 4 1 1 of the Basic Rules of the License guaranteed that the tariffs would be subject to semi-annual adjustments according to the PPI 26 3 Article 38 of Law No 24 076 provided that tariffs were to provide an income sufficient to cover all costs and a reasonable rate of return 27 4 Section 9 8 of the Basic Rules of the License guaranteed that the tariff system would not be subject to freezing or price controls without compensation 28 120 The Tribunal also finds that as a matter of fact the Emergency Law passed on 6 January 2002 declared that the tariffs would no longer be calculated in U S dollars but directly in pesos Article 8 and that there would be no further semiannual tariff adjustments according to the PPI Article 8 The Tribunal notes that since July 1999 there have not been any PPI adjustments in the tariffs relating to the licensees and the five-year review due in 2002 was not conducted—both affecting the level of the tariffs in the gas-distribution sector and as a consequence Claimants’ rate of return on their investment Argentina took these steps without compensating Claimants and forcing Claimants to renegotiate a process in which an Argentine official recommended that investors waive their claims against the Government relating to the licenses or face rescission of the licenses Decree No 293 02 Article 2 and Claimants’ Memorial ¶¶ 120 et seq 3 Tribunal’s Analysis 121 The question before the Tribunal is whether the measures implemented by Argentina violated Argentina’s obligation under Article II 2 a of the Treaty to give fair and equitable treatment to LG E’s investment 26 Section 9 4 1 1 provides “Distribution tariffs will be adjusted semiannually according to the variation operated in the PPI ” 27 Article 38 provides The services rendered by distributors will be offered at tariffs in line with the following principles a To provide distributors who operate economically and prudently the opportunity to obtain sufficient income to meet all reasonable operating costs applicable to the service taxes amortization and a reasonable rate of return as determined in the following article 28 Section 9 8 provides Licensee’s tariff system will not be subject to freezing administration and or price control If in spite of this stipulation Licensee is forced to adapt to a price control system establishing a lower level than that arising from the Tariff Licensee will have the right to be compensated by the Government in an equivalent amount 9 LG E Liability ENG 3-5-07 indd 233 3 5 07 2 51 03 PM 234 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL 122 The Treaty does not define what is meant by fair and equitable treatment In these circumstances the Tribunal must interpret this provision in good faith in accordance with the ordinary meaning to be given to the terms in their context and in light of its object and purpose as required by Article 31 1 of the Vienna Convention 123 The Treaty following the general trend with investment treaties provides for treatment applicable to investors in the host State through the establishment of a series of internationally recognized standards 29 Due to the fact that such international standards have a generic nature and that their interpretation varies with the course of time and with the circumstances of each case it becomes difficult to establish an unequivocal and static concept of these notions 124 In considering the context within which Argentina and the United States included the fair and equitable treatment standard and its object and purpose the Tribunal observes in the Preamble of the Treaty that the two countries agreed that “fair and equitable treatment of investment is desirable in order to maintain a stable framework for investment and maximum effective use of economic resources ” In entering the Bilateral Treaty as a whole the parties desired to “promote greater economic cooperation” and “stimulate the flow of private capital and the economic development of the parties” In light of these stated objectives this Tribunal must conclude that stability of the legal and business framework is an essential element of fair and equitable treatment in this case provided that they do not pose any danger for the existence of the host State itself 125 Several tribunals in recent years have interpreted the fair and equitable treatment standard in various investment treaties in light of the same or similar language as the Preamble of the Argentina—U S BIT 30 These tribunals have 29 The notion of a standard appeared for the first time in a 1948 treaty the Havana Charter for an International Trade Organization and it was considered a protection against state actions violating internationally-accepted rules In the 1960s it was related to the protection given to foreign properties In international case law the standard existed pursuant to the interpretation provided in the 1920s in the emblematic Neer case which required that State conduct be deemed outrageous wrongful open injustice an atrocity bad faith or voluntary negligence of duty for a violation to be found That interpretation is not the same that is given today What was considered an “atrocity” in 1926 might not be so today and what may be considered “violent” now may not have been at that time See “Fair and Equitable Treatment Standard in International Investment Law” OECD Working Paper on International Investment November 2003 4 30 See e g CMS Gas Transmission Company v The Argentine Republic ICSID Case No ARB 01 8 Award 12 May 2005 Argentina-U S BIT Occidental Exploration and Production Company v The Republic of Ecuador LCIA Case No UN 3467 Final Award 1 July 2004 U S -Ecuador BIT – almost identical language MTD Equity Sdn Bhd and MTD Chile S A v Republic of Chile ICSID Case No ARB 01 7 Award ¶ 113 25 May 2004 Malaysia-Chile BIT Metalclad Corporation v United Mexican States ICSID Case No ARB AF 97 1 Award ¶ 75 30 August 2000 An underlying objective of Article 102 1 of NAFTA is “to promote and increase cross-border investment opportunities and ensure the succesful implementation of investment initiatives” 9 LG E Liability ENG 3-5-07 indd 234 3 5 07 2 51 04 PM CASES 235 repeatedly concluded based on the specific language concerning fair and equitable treatment and in the context of the stated objectives of the various treaties that the stability of the legal and business framework in the State party is an essential element in the standard of what is fair and equitable treatment 31 As such the Tribunal considers this interpretation to be an emerging standard of fair and equitable treatment in international law 126 Although the Chile—Malaysia BIT does not include express reference in its Preamble with respect to fair and equitable treatment the tribunal in MTD Equity Sdn Bhd and MTD Chile S A v Republic of Chile referred to the objectives of the Treaty set forth in the Preamble and concluded that in light of these objectives fair and equitable treatment meant treatment in an “even-handed and just manner conducive to fostering the promotion of foreign investment ”32 127 In addition to the State’s obligation to provide a stable legal and business environment the fair and equitable treatment analysis involves consideration of the investor’s expectations when making its investment in reliance on the protections to be granted by the host State Indeed this view is reflected in the Tecmed decision that has been adopted by a succession of tribunals The Arbitral Tribunal considers that this provision of the BIT in light of the good faith principle established by international law requires the Contracting Parties to provide to international investments treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment The foreign investor expects the host State to act in a consistent manner free from ambiguity and totally transparently in its relations with the foreign investor so that it may know beforehand any and all rules and regulations that will govern its investments as well as the goals of the relevant policies and administrative practices or directives to be able to plan its investment and comply with such regulations 33 128 Similarly the tribunal in Waste Management Inc v The United Mexican States interpreting the fair and equitable treatment standard under NAFTA Article 1105 1 concluded that in applying the fair and equitable treatment standard “it is relevant that the treatment is in breach of representations made 31 CMS ¶ 274 Occidental ¶183 See also Metalclad ¶ 99 “Mexico failed to ensure a transparent and predictable framework for Metalclad’s business planning and investment” 32 MTD ¶ 113 33 Técnicas Medioambientales Tecmed S A v The United Mexican States ICSID Case No ARB AF 00 02 Award ¶ 154 29 May 2003 cited in e g MTD ¶ 114 Occidental ¶ 185 CMS ¶ 279 9 LG E Liability ENG 3-5-07 indd 235 3 5 07 2 51 04 PM 236 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL by the host State which were reasonably relied on by the claimant ”34 This means that violations of the fair and equitable treatment standard may arise from a State’s failure to act with transparency —that is all relevant legal requirements for the purpose of initiating completing and successfully operating investments made or intended to be made under an investment treaty should be capable of being readily known to all affected investors 35 129 The Tribunal is not convinced that bad faith or something comparable would ever be necessary to find a violation of fair and equitable treatment The tribunal in Alex Genin Eastern Credit Limited Inc and A S Baltoil v The Republic of Estonia 36 did not reach this conclusion either The tribunal merely stated “Acts that would violate this minimum standard would include acts showing a willful neglect of duty or even subjective bad faith” emphasis added 37 The tribunal concluded that bad faith was not a requirement for a finding of a violation of fair and equitable treatment 38 130 It can be said that the investor’s fair expectations have the following characteristics they are based on the conditions offered by the host State at the time of the investment they may not be established unilaterally by one of the parties they must exist and be enforceable by law in the event of infringement by the host State a duty to compensate the investor for damages arises except for those caused in the event of state of necessity however the investor’s fair expectations cannot fail to consider parameters such as business risk or industry’s regular patterns 131 Thus this Tribunal having considered as previously stated the sources of international law understands that the fair and equitable standard consists of the host State’s consistent and transparent behavior free of ambiguity that involves the obligation to grant and maintain a stable and predictable legal framework necessary to fulfill the justified expectations of the foreign investor 34 Waste Management Inc v The United Mexican States ICSID Case No ARB AF 00 3 Award ¶ 98 30 April 2004 35 See e g Tecmed ¶ 154 CMS ¶¶ 278–79 and Occidental ¶ 185 citing the Tecmed and Metalclad passages referring to transparency 36 Genin ¶ 367 37 Ibidem 38 See e g Mondev ¶ 116 October 11 2002 “To the modern eye what is unfair or inequitable need not equate with the outrageous or the egregious In particular a State may treat foreign investment unfairly and inequitably without necessarily acting in bad faith ” see also Occidental ¶ 63 “this is an objective requirement that does not depend on whether the Respondent has proceeded in good faith or not ” see also Tecmed ¶ 153 relying on Mondev Waste Management ¶ 93 rejecting the standard set forth in the Neer case involving willful neglect of duty and bad faith 9 LG E Liability ENG 3-5-07 indd 236 3 5 07 2 51 05 PM CASES 237 4 Tribunal’s Conclusion 132 In light of the foregoing the Tribunal concludes that Argentina violated the fair and equitable treatment provision in the Bilateral Treaty for the following reasons 133 Emerging from the economic crisis of the late 1980s Argentina created an economic recovery plan mainly dependent upon foreign capital Argentina prepared with the investment banks an attractive framework of laws and regulations that addressed the specific concerns of foreign investors with respect to the country risks involved in Argentina In light of these risks Claimants relied upon certain key guarantees in the Gas Law and implementing regulations such as calculation of the tariffs in U S dollars before their conversion into pesos the semi-annual PPI adjustments tariffs set to provide sufficient revenues to cover all the costs and a reasonable rate of return and compensation in the event that the Government altered the tariff scheme Having created specific expectations among investors Argentina was bound by its obligations concerning the investment guarantees vis-à-vis public utility licensees and in particular the gas-distribution licensees The abrogation of these specific guarantees violates the stability and predictability underlying the standard of fair and equitable treatment 134 Specifically it was unfair and inequitable to pass a law discarding the guarantee in Decree No 1738 92 that the tariffs would be calculated in U S dollars and then converted into pesos As pointed out by Claimants this was not merely an economic and monetary policy of the Argentine Government which materialized through the Convertibility Law Rather it was a guarantee laid down in the tariff system This guarantee was very important to investors to protect their investment which was made in dollars from a subsequent devaluation of the peso 135 Argentina also acted unfairly and inequitably in the manner in which it abrogated the guarantees of the Gas Law and its implementing regulations adversely affecting the gas-distribution sector but not affecting other sectors of the economy For example certain contracts such as those in the export industry were excluded from the forced conversion to pesos regulation or the conversion was performed at a more favorable rate to the individual or company 136 Argentina acted unfairly and inequitably when it prematurely abandoned the PPI tariff adjustments and essentially froze tariffs prior to the onset of the public disorder and threats to its essential security in December 2001 and 9 LG E Liability ENG 3-5-07 indd 237 3 5 07 2 51 05 PM 238 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL when it refused to resume adjustments when conditions had normalized in April 2003 forcing instead the licensees to renegotiate 39 History has shown that the PPI adjustments that initially were supposed to be postponed have been abandoned completely and are now being “negotiated” away 137 Argentina also has acted unfairly and inequitably in forcing the licensees to renegotiate public service contracts and waive the right to pursue claims against the Government or risk rescission of the contracts Even though the Gas Law provided for the renegotiation of public service contracts in practice there was no real renegotiation but rather the imposition of a process 138 Likewise the Government’s Resolution No 38 02 issued on 9 March 2002 which ordered ENARGAS to discontinue all tariff reviews and to refrain from adjusting tariffs or prices in any way also breaches the fair and equitable treatment standard 139 The Tribunal nevertheless recognizes the economic hardships that occurred during this period and certain political and social realities that at the time may have influenced the Government’s response to the growing economic difficulties Certainly LG E was aware of the risks inherent in investing in a foreign State But here the Tribunal is of the opinion that Argentina went too far by completely dismantling the very legal framework constructed to attract investors B Article II 2 b Discriminatory and Arbitrary Treatment 1 Discriminatory Treatment i Parties’ Positions 140 Claimants contend that the Argentine Government adopted measures that discriminated against the downstream gas sector transport and distribution compared to upstream businesses production large industrial customers and other sectors not dominated by foreign investors such as alternative energy and the public In their view such discrimination violates Article II 2 b of the Bilateral Treaty which provides that “ n either Party shall in any way impair by 39 As described more fully below Argentina is excused from liability for the measures taken during the extreme circumstances of December 2001 until April 2003 in order to maintain public order and protect its essential interests It was fair that during this period of time Argentina suspended the guarantees of the Gas Law and postponed the PPI tariff adjustments until such time as the Government could manage to resume its obligations 9 LG E Liability ENG 3-5-07 indd 238 3 5 07 2 51 06 PM CASES 239 arbitrary or discriminatory measures the management operation maintenance use enjoyment acquisition expansion or disposal of investments ” 141 Claimants state that from the time of the first PPI adjustment until the enactment of the Emergency Law of 6 January 2002 the gas industry received treatment different from that accorded to similarly situated public utilities including electricity and water distribution companies These other public utilities continued to enjoy the PPI adjustment until the enactment of the Emergency Law 142 Claimants also support their contention by pointing out that following enactment of the Emergency Law on 6 January 2002 the Government subjected most of the privatized public-utility sector including the gas-distribution industry to the least favorable of several regimes devised for the conversion of dollar obligation into pesos Within the public-utility sector Claimants also allege that the Government discriminated against the gas-distribution industry by excluding other public-service companies from the conversion of tariffs into pesos The Government imposed upon the privatized gas-distribution companies what was considered the worst exchange and tariff system during the Argentine crisis 143 Claimants stress that if one compares the measures that affected sectors such as gas production alternative energy sources or even those of the public sector with those affecting gas transportation or distribution the Tribunal can only conclude that the Argentine Government discriminated against the gas distribution and transportation sectors The alleged discrimination is particularly obvious in Claimants’ view by the fact that most of the investors in the gas-distribution sector are foreigners 144 Respondent argues that the measures it adopted were not discriminatory because they were general measures without any unreasonable distinction Respondent questions whether Argentina’s measures can be considered discriminatory if one acknowledges as Claimants have that other industries related to public services were affected by the measures adopted regarding the PPI Respondent’s Counter-Memorial ¶ 700 145 Respondent explains that each public service is regulated by its own set of tariff rules and for that reason the effect may not have been exactly the same for all sectors including the field of public services Respondent alleges that “ i t is irrational and illegitimate to compare one utility to a different one subject to different rules different agreements and different characteristics and then hold that it is discriminatory to treat differently the different utilities at stake” Respondent’s Counter-Memorial ¶ 703 emphasis omitted 9 LG E Liability ENG 3-5-07 indd 239 3 5 07 2 51 06 PM 240 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL ii Tribunal’s Analysis 146 In the context of investment treaties and the obligation thereunder not to discriminate against foreign investors a measure is considered discriminatory if the intent of the measure is to discriminate or if the measure has a discriminatory effect 40 As stated in the ELSI Elettronica Sicula SpA case United States of America v Italy ICJ Report 1989 RLA 56 at 61–62 20 July 1989 in order to establish when a measure is discriminatory there must be i an intentional treatment ii in favor of a national iii against a foreign investor and iv that is not taken under similar circumstances against another national iii Tribunal’s Conclusion 147 While the Tribunal concludes that based on the evidence presented Respondent treated the gas-distribution companies in a discriminatory manner imposing stricter measures on the gas-distribution companies than other publicutility sectors Claimants have however not proven that these measures targeted Claimants’ investments specifically as foreign investments 148 Certainly all the gas-distribution companies were affected by the economic crisis and by the Government’s measures like all other companies within the public-utility sector However Argentina suspended PPI adjustments for the gas industry two years before enacting the Emergency Law It did not take the same action with respect to the public-utility companies such as the electricity and water distribution companies in which case it continued to adjust their tariffs until enactment of the Emergency Law Instead the gas-distribution companies were subjected to unfavorable regimes devised for the conversion of dollar obligations and tariffs into pesos Even though it was not proved that these measures had been adopted with the purpose of causing Claimants’ foreign investments damage discrimination against gas distribution companies vis-à-vis other companies such as water supply and electricity companies is evident 2 Arbitrary Treatment i Parties’ Positions 149 Claimants characterize Argentine Government’s course of conduct towards the gas-distribution licensees as arbitrary in violation of Article II 2 b 40 See Vandevelde Kenneth J United States Investment Treaties Policy and Practice Kluwer Law and Taxation 1992 p 77 9 LG E Liability ENG 3-5-07 indd 240 3 5 07 2 51 07 PM CASES 241 of the Bilateral Treaty Claimants articulate the standard for what constitutes an “arbitrary” act as “disregard for the rule of law” Claimants’ Memorial ¶ 176 150 Claimants argue that in taking measures against the gas-distribution licensees and other public utilities the Argentine Government acted in disregard for the rule of law According to Claimants the Government acted under the trappings of laws decrees resolution regulations and court decisions but by willfully repudiating the commitments it made to the gas-distribution licensees and their shareholders the Government followed “the rule of power not the rule of law” Claimants’ Post-Hearing Brief ¶ 44 In Claimants’ view the Government’s wholesale repudiation of the tariff system was unnecessary to achieve the stated aims of the PPI suspension or those of the Emergency Law since the the tariff system was sufficiently flexible to allow Respondent to reduce tariffs unilaterally for any reason as long as it paid compensation to the licensees Instead the Government chose to dismantle the whole tariff system without granting due compensation Claimants’ Memorial ¶ 176 151 Claimants argue that when Respondent’s Bilateral Treaty obligations and the promises made to the foreign investors became politically and economically inconvenient Respondent ignored its obligations and repudiated the Gas Law’s key provisions These measures they assert not only surprise but also contradict any sense of Respondent’s ownership of its legal obligations and accordingly they are arbitrary in nature Claimants refute as without evidence any assertion by Respondent that if the guarantees had not been abolished tariffs would have tripled or quadrupled in price Claimants’ Post-Hearing Brief ¶ 44 152 In its defense Respondent contends that the measures were not arbitrary on the contrary they were reasonable and proportionate to the end pursued In Argentina’s view the tariff system was not dismantled Rather it was modified by the measures that the Government was forced to put in place during the economic crisis Respondent suggests that under the circumstances the deferment of the PPI adjustment in the year 2000 was a reasonable measure This position as Respondent views it is supported by both a decision of a court of first instance and by the Federal Court of Appeal Cámara Federal de Apelaciones which concluded that the adjustment at issue was unreasonable within the recessive economic context endured by the Argentine Republic The stability that Claimants argue should characterize the legal system does not mean that the system will exist in perpetuity immutability or immobility Any requirement of “freezing the law” without considering the social and economic circumstances under which the laws were enacted is transforming the Argentine legal system into a “frivolous rite” Respondent’s Counter-Memorial ¶¶ 638–639 9 LG E Liability ENG 3-5-07 indd 241 3 5 07 2 51 07 PM 242 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL 153 Respondent contends that linking the tariff adjustments to the peso pesificación is not arbitrary or discriminatory Had there been no link to the peso many customers could not have had access to the gas service which would have resulted in the collapse of the distribution industries themselves and tariffs would have been no longer fair but abusive 154 In Respondent’s view none of the measures adopted by the Argentine Government may be qualified as arbitrary or discriminatory On the contrary they were proportionate and reasonable under the circumstances and accordingly not a violation of Article II 2 b of the Bilateral Treaty Respondent’s PostHearing Brief ¶ 112 ii Tribunal’s Analysis 155 Article II 2 b of the Bilateral Treaty provides that “ n either Party shall in any way impair by arbitrary or discriminatory measures the management operation maintenance use enjoyment acquisition expansion or disposal of investments ” 156 The term “arbitrary” is left undefined by the Bilateral Treaty Thus the Tribunal looks to its plain meaning for international law to determine whether the measures adopted by Argentina could be classified as arbitrary 157 According to international law arbitrariness has been described as “a willful disregard of due process of law an act which shocks or at least surprises a sense of juridical propriety ”41 The tribunal in Ronald S Lauder v The Czech Republic referring to the Black’s Law Dictionary defined the term as “depending on individual discretion … founded on prejudice or preference rather than on reason or fact ”42 158 It is apparent from the Bilateral Treaty that Argentina and the United States wanted to prohibit themselves from implementing measures that affect the investments of nationals of the other Party without engaging in a rational decision-making process Such process would include a consideration of the effect of a measure on foreign investments and a balance of the interests of the State with any burden imposed on such investments Certainly a State that fails 41 Elettronica Sicula S p A ELSI United States of America v Italy 1989 I C J 15 76 Judgment of 20 July 42 Ronald S Lauder v The Czech Republic Final Award ¶ 221 3 September 2001 citing Black’s Law Dictionary 100 7th ed 1999 9 LG E Liability ENG 3-5-07 indd 242 3 5 07 2 51 07 PM CASES 243 to base its actions on reasoned judgment and uses abusive arguments instead would not “stimulate the flow of private capital ”43 159 The Genin case quoted by Respondent provides a good example of a State measure upholding a guarantee similar to the prohibition in the Estonia—U S BIT against arbitrary treatment There the tribunal concluded that the Bank of Estonia’s annulment of a license occurred in the course of exercising its statutory obligations to regulate the Estonian banking sector and therefore was not arbitrary 44 In so concluding the tribunal accepted Estonia’s explanation that the circumstances of political and economic transition prevailing in Estonia at the time justified heightened scrutiny of the banking sector and that such regulation by a State reflects “a clear and legitimate public purpose ”45 160 In contrast the Lauder tribunal determined that the acts of the Czech Republic’s Media Council were arbitrary Such acts consisted in forcing a private investor in the newly-privatized company that held the state television license to exchange a direct participation in the company for a contractual relationship 46 The tribunal reasoned that the act was motivated by fear of the political implications of having a foreigner influencing Czech television broadcasts 47 iii Tribunal’s Conclusion 161 This case lands between the two cases mentioned above but ultimately the Tribunal concludes that the acts of Argentina were not arbitrary and therefore did not violate Article II 2 b for the following reasons 162 While Claimants have alleged Argentina’s political motivation to use foreign investors in the public utility sector as an excuse to justify the economic mistakes committed in the country Argentina has explained that the Government’s motivation was its desire to avoid its full economic collapse To this end it entered into agreements with the licensees in 2001 in addition to other actions taken Bearing in mind the Tribunal’s analysis characterizing the measures as not arbitrary does not mean that such measures are characterized as fair and equitable or regarded as not having affected the stability of the legal framework under which gas transportation companies in Argentina operated On the contrary this means that Argentina faced severe economic and social 43 Preamble Argentina—U S BIT 1994 Genin ¶ 370 45 Ibidem 46 Lauder ¶ 222–32 47 Lauder ¶¶ 229 232 44 9 LG E Liability ENG 3-5-07 indd 243 3 5 07 2 51 08 PM 244 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL hardships from 2001 onwards and had to react to the circumstances prevailing at the time Even though the measures adopted by Argentina may not have been the best they were not taken lightly without due consideration This is particularly reflected in the PPI adjustments which before deciding on their postponement Argentina negotiated with the investors The Tribunal concludes that the charges imposed by Argentina to Claimants’ investment though unfair and inequitable were the result of reasoned judgment rather than simple disregard of the rule of law 163 Likewise it was not arbitrary though unfair and inequitable not to restore the Gas Law or the other guarantees related to the gas distribution sector and to implement the contract renegotiation policy C Article II 2 c The Umbrella Clause 1 Parties’ Positions 164 LG E claims that Argentina violated Article II 2 c of the BIT when it assumed certain fundamental obligations with regard to investments in its gasdistribution sector and the foreign investors and then repudiated each of these legal commitments without compensating Claimants for their loss 165 As LG E explains it Argentina used foreign capital investment as the cornerstone of its economic recovery plan in the early 1990s Respondent designed the privatization of Gas del Estado S E as an international bidding process in which the conditions for bidding on local enterprises could be met only by a consortium involving foreign investors Argentina wooed foreign investors with promises of return on investment that would always be reasonable protections against currency exchange and inflation adjustment of rates pursuant to international indexes no unilateral changes and no price controls without indemnification Argentina bound itself to these promises in the form of legal obligations 166 According to Claimants these are the promises that the umbrella clause is meant to address The Tribunal need not decide that every commitment regarding investments embodied in general legislation or regulations gives rise to obligations that must be observed under that clause Rather liability derives from this article of the Treaty when in the particular circumstances of this case Respondent failed to observe its obligations 167 The problem with LG E’s claim according to Respondent is that it assumes that general legislation relating to the natural gas distribution and 9 LG E Liability ENG 3-5-07 indd 244 3 5 07 2 51 08 PM CASES 245 transportation industry falls within Article II 2 c ’s parameter Respondent suggests that such promises do not qualify as specific representations that make the umbrella clause effective 168 Respondent also asserts that LG E’s claims are nothing more than claims of contractual breaches which are to be considered under the specific jurisdictional clauses of the contract and not adjudicated in an international forum under application of the umbrella clause 2 Tribunal’s Analysis 169 Article II 2 c of the Treaty provides that “ e ach party shall observe any obligation it may have entered into with regard to investments ” 170 Such clause referred to as an “umbrella clause ” is a general provision included in a fairly large number of bilateral treaties that creates a requirement for the host State to meet its obligations towards foreign investors including those that derive from a contract Hence such obligations receive extra protection by virtue of their consideration under the bilateral treaty 171 In many cases it has been considered that the umbrella clause is activated not by obligations set forth in municipal law but in contracts between the State and the investor 48 Several of those tribunals have concluded that the breach of a contractual obligation in a contract between the State and the investor gives rise to a claim under the umbrella clause 49 172 The issue for the Tribunal’s consideration is whether the provisions of the Gas Law and its implementing regulations constitute i “obligations” ii “with regard to” LG E’s capacity as a foreign investor iii with respect to its “investment ” such that abrogation of the guarantees set forth in the Gas Law and its implementing regulations give rise to a violation of the Treaty 173 In this case it will be necessary to establish whether LG E’s claims fall under the umbrella clause’s protection 174 In order to determine the applicability of the umbrella clause the Tribunal should establish if by virtue of the provisions of the Gas Law and its regulations the Argentine State has assumed international obligations with respect to LG E and its investment To this end it is necessary to remember that the provisions 48 See e g CMS ¶300 citing cases CMS ¶ 303 SGS v Republic of the Philippines Decision on Jurisdiction ICSID Case No ARB 02 6 29 January 2004 ¶¶ 127–28 49 9 LG E Liability ENG 3-5-07 indd 245 3 5 07 2 51 08 PM 246 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL of the Gas Law and its regulation fixed and regulated the tariff scheme ensuring the value of Claimants’ investment that the purpose of Claimants’ investment was to increase the value of its shares in the Licensees through a fragile balanced management of profits and costs represented by the tariffs fixed by Argentina in light of the already mentioned Gas Law and its regulation In view of the statements above the Tribunal concludes that these provisions were not legal obligations of a general nature 50 On the contrary they were very specific in relation to LG E’s investment in Argentina so that their abrogation would be a violation of the umbrella clause 3 Tribunal’s Conclusion 175 As such Argentina’s abrogation of the guarantees under the statutory framework—calculation of the tariffs in dollars before conversion to pesos semi-annual tariff adjustments by the PPI and no price controls without indemnification—violated its obligations to Claimants’ investments Argentina made these specific obligations to foreign investors such as LG E by enacting the Gas Law and other regulations and then advertising these guarantees in the Offering Memorandum to induce the entry of foreign capital to fund the privatization program in its public service sector These laws and regulations became obligations within the meaning of Article II 2 c by virtue of targeting foreign investors and applying specifically to their investments that gave rise to liability under the umbrella clause D Considerations on Indirect Expropriation 1 Parties’ Positions 176 LG E seeks a declaration from this Tribunal that Argentina expropriated LG E’s investment in the Argentine gas-distribution sector without compensation in violation of Article IV of the Treaty which provides in part 1 Investments shall not be expropriated or nationalized either directly or indirectly through measures tantamount to expropriation or nationalization “expropriation” except for a public purpose in a non-discriminatory manner upon payment of prompt adequate and effective compensation and in accordance with due process of 50 SGS v Philippines ¶ 121 “For the umbrella clause to be applicable the host State must have assumed a legal obligation and it must have been assumed vis-à-vis the specific investment—not as a matter of the application of some legal obligation of a general character ” 9 LG E Liability ENG 3-5-07 indd 246 3 5 07 2 51 09 PM CASES 247 law and the general principles of treatment provided for in Article II 2 177 LG E articulates its expropriation claim as one of indirect expropriation In other words LG E argues that the Argentine Government’s treatment of Claimants’ investment in the Licensees constitutes an indirect expropriation of the investments because the value of LG E’s holdings in the Licenses has been reduced by more than 90% as a result of Respondent’s abrogation of the principal guarantees of the tariff system Claimants’ Memorial ¶ 180 178 LG E contends that pursuant to Article IV of the Bilateral Treaty it is entitled to compensation equivalent to the fair market value of the expropriated investment immediately before the expropriation was committed Claimants pinpoint the date of expropriation in this case as the date on which Respondent’s course of conduct finally resulted in the virtual destruction of the value of the investment—not later than August 2000 when the Argentine court enjoined implementation of the 17 July 2000 agreement and any further PPI adjustments Claimants’ Memorial ¶ 181 179 Under Claimants’ theory indirect expropriation occurs when government action substantially impairs the value of an investment Claimants’ Post-Hearing Brief ¶ 53 citing Dolzer Reb ¶ 56 In this case the Claimants consider that the Argentine Government’s actions had a substantial effect on LG E’s shares in the Licensees which are an investment protected under Article I 1 a of the Treaty The value of LG E’s investment was based on a tariff system and depended on the Respondent respecting the system The value of LG E’s shares in the Licensees now fluctuates according to general speculation around the future tariff relief that Argentina may or may not grant Claimants’ PostHearing Brief ¶ 53 180 Claimants add that when it comes to establishing whether there was effectively an indirect expropriation there is no relevance to the fact that the Licensees continue to operate or control their gas-distribution business or as to whether Claimants hold title to the shares In the case of indirect expropriation it does not matter whether title to the licenses has been transferred to the State It is enough to show that their investment has been impaired as a result of government action which they claim is the case here as there allegedly has been a substantial appropriation of value by the State and transfer of wealth from the gas industry to gas consumers especially large industrial consumers Claimants’ Post-Hearing Brief ¶¶ 53–54 181 The Respondent denies that any expropriation under Article IV of the Bilateral Treaty has occurred Respondent contends that in order for 9 LG E Liability ENG 3-5-07 indd 247 3 5 07 2 51 09 PM 248 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL the Argentine Government to have either directly or indirectly expropriated Claimants’ investment the measures at issue would have had to have been designed to transfer title to the investment to the State The sole difference between direct and indirect expropriation in this case according to Respondent is that with indirect expropriation no formal transfer of title is required since its purpose is that of “masking disguising the expropriating event and of eluding the resulting liability” Respondent’s Post-Hearing Brief ¶ 103 182 Respondent argues that Claimants have not proven that the PPI’s suspension constitutes an expropriating event Respondent contends that the suspension of the PPI adjustments would have affected tariffs by approximately 2% and states that under no circumstance could a tribunal conclude that such a small loss qualifies as an expropriation subject to compensation 183 Argentina argues that in any event there could not have been any expropriation during the economic crisis The fact that the licensees may have been affected by the crisis along with everyone else does not lead to the conclusion that their investment was expropriated Respondent denies any causal link between the measures adopted by the Argentine State during this time and the fluctuations in the value of LG E’s shares in the licensees In its opinion the fluctuation in the value of LG E’s investment is attributable to the “macroeconomic conditions affecting the Argentine Republic” rather than the measures adopted by the Argentine State Respondent’s Post-Hearing Brief ¶ 109 Argentina points out that between 1997 and 2000 LG E earned higher income than expected through its investments in the licensees 184 Finally after objecting the expropriation claim because the company remains de facto and by law the owner of the investment Respondent alleges that in fact the share prices of Claimants’ investment have increased in value from the period immediately preceding the suspension of the PPI adjustments As such Respondent argues that where property is worth more today than it was prior to the measures’ adoption the property may not be deemed expropriated Respondent’s Post-Hearing Brief ¶¶ 110–111 2 Tribunal’s Analysis 185 In order to establish the sustainability of an indirect expropriation the Tribunal must define the concept Generally bilateral treaties do not define what constitutes an expropriation—they just make an express reference to “expropriation” and add the language “any other action that has equivalent effects ” Likewise Article IV of the Bilateral Treaty does not define the term “expropriation” and does not establish which measures actions or conduct 9 LG E Liability ENG 3-5-07 indd 248 3 5 07 2 51 10 PM CASES 249 would constitute acts “tantamount to expropriation ” Therefore the Tribunal shall look to international law in determining the relevant criteria for evaluating this claim 186 A State may at its discretion under Article IV of the Bilateral Treaty and in accordance with general principles of international law make use of its sovereign power to expropriate private property with the purpose of satisfying a public interest However expropriation in any of its modalities requires due process and compensation under international law 187 Although in scholarly authority two kinds of expropriation are known we will obviously skip the direct one understood as the forcible appropriation by the State of the tangible or intangible property of individuals by means of administrative or legislative action The parties admit that the claim at issue does not involve a direct expropriation In the case of the Argentine Republic one could not say that it appropriated Claimants’ investment which is the indispensable requirement if one is to talk of direct expropriation Instead we shall limit ourselves to the assumption of the indirect expropriation one qualified by the Bilateral Treaty itself as “measures tantamount to expropriation ” 188 Generally the expression “equivalent to expropriation” or “tantamount to expropriation” found in most bilateral treaties may refer both to the so-called “creeping expropriation” and to the de facto expropriation Their common point rests in the fact that the host State’s actions or conduct do not involve “overt taking” but the taking occurs when governmental measures have “effectively neutralize d the benefit of property of the foreign owner ”51 Ownership or enjoyment can be said to be “neutralized” where a party no longer is in control of the investment or where it cannot direct the day-to-day operations of the investment 52 As to the differences it is usual to say that indirect expropriation may show itself in a gradual or growing form—creeping expropriation—or through a sole and unique action or through actions being quite close in time or simultaneous—de facto expropriation 189 In order to establish whether State measures constitute expropriation under Article IV 1 of the Bilateral Treaty the Tribunal must balance two competing interests the degree of the measure’s interference with the right of ownership and the power of the State to adopt its policies 190 In evaluating the degree of the measure’s interference with the investor’s right of ownership one must analyze the measure’s economic impact—its 51 52 CME Czech Republic v Czech Republic Partial Award ¶ 604 13 September 2001 Pope Talbot Inc v Canada Interim Award ¶ 100 26 June 2000 9 LG E Liability ENG 3-5-07 indd 249 3 5 07 2 51 10 PM 250 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL interference with the investor’s reasonable expectations—and the measure’s duration 191 In considering the severity of the economic impact the analysis focuses on whether the economic impact unleashed by the measure adopted by the host State was sufficiently severe as to generate the need for compensation due to expropriation In many arbitral decisions the compensation has been denied when it has not affected all or almost all the investment’s economic value Interference with the investment’s ability to carry on its business is not satisfied where the investment continues to operate even if profits are diminished 53 The impact must be substantial in order that compensation may be claimed for the expropriation 192 The tribunal in Tecmed required a finding that Claimant had been “radically deprived of the economical use and enjoyment of its investments as if the rights related thereto—such as the income or benefits related to the investment… —had ceased to exist ”54 In other words if due to the actions of the Respondent the assets involved have lost their value or economic use for the Claimants and the extent of the loss 55 193 Similarly one must consider the duration of the measure as it relates to the degree of interference with the investor’s ownership rights Generally the expropriation must be permanent that is to say it cannot have a temporary nature unless the investment’s successful development depends on the realization of certain activities at specific moments that may not endure variations 194 There is no doubt that the facts relating to the severity of the changes on the legal status and the practical impact endured by the investors in this case as well as the possibility of enjoying the right of ownership and use of the investment are decisive in establishing whether an indirect expropriation is said to have occurred The question remains as to whether one should only take into account the effects produced by the measure or if one should consider also the context within which a measure was adopted and the host State’s purpose It is this Tribunal’s opinion that there must be a balance in the analysis both of the causes and the effects of a measure in order that one may qualify a measure as being of an expropriatory nature It is important not to confound the State’s right to adopt policies with its power to take an expropriatory measure “This determination is important because it is one of the main elements to distinguish 53 Pope Talbot ¶¶ 101–02 Tecmed ¶ 115 55 Ibidem 54 9 LG E Liability ENG 3-5-07 indd 250 3 5 07 2 51 11 PM CASES 251 from the perspective of an international tribunal between a regulatory measure which is an ordinary expression of the exercise of the state’s police power that entails a decrease in assets or rights and a de facto expropriation that deprives those assets and rights of any real substance ”56 195 With respect to the power of the State to adopt its policies it can generally be said that the State has the right to adopt measures having a social or general welfare purpose In such a case the measure must be accepted without any imposition of liability except in cases where the State’s action is obviously disproportionate to the need being addressed The proportionality to be used when making use of this right was recognized in Tecmed which observed that “whether such actions or measures are proportional to the public interest presumably protected thereby and the protection legally granted to investments taking into account that the significance of such impact has a key role upon deciding the proportionality ”57 196 As is observed by The American Law Institute’s Restatement Third of the Foreign Relations Law of the United States “a state is not responsible for loss of property or for other economic disadvantage resulting from bona fide general taxation regulation forfeiture for crime or other action of the kind that is commonly accepted as within the police power of the states if it is not discriminatory…”58 This criterion was used by the Tribunal of Iran-United States of America claims in the Too v Greater Modesto Insurance Associates 59 197 As was stated in the Oscar Chinn affair of 1934 adopted by the Permanent Court of International Justice No enterprise… can escape from the chances and hazards resulting from general economic conditions Some industries may be able to make large profits during a period of general prosperity or else by taking advantages of a treaty of commerce or of an alteration in customs duties but they are also exposed to the danger of ruin or extinction if circumstances change Where this is the case no vested rights are violated by the State 60 56 Ibidem Tecmed ¶122 58 Restatement Third of the Foreign Relations Law of the United States American Law Institute Volume 1 1987 Section 712 Comment g 59 Too v Greater Modesto Insurance Associates 23 Iran-United States Cl Trib Rep 378 Award of 29 December 1989 60 Oscar Chinn affair P C I J 1934 Ser A B Case No 63 57 9 LG E Liability ENG 3-5-07 indd 251 3 5 07 2 51 11 PM 252 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL 3 Tribunal’s Conclusion 198 In the circumstances of this case although the State adopted severe measures that had a certain impact on Claimants’ investment especially regarding the earnings that the Claimants expected such measures did not deprive the investors of the right to enjoy their investment As in Pope Talbot the true interests at stake here are the investment’s asset base the value of which has rebounded since the economic crisis of December 2001 and 2002 199 Further it cannot be said that Claimants lost control over their shares in the licensees even though the value of the shares may have fluctuated during the economic crisis or that they were unable to direct the day-to-day operations of the licensees in a manner different than before the measures were implemented 200 Thus the effect of the Argentine State’s actions has not been permanent on the value of the Claimants’ shares’ and Claimants’ investment has not ceased to exist Without a permanent severe deprivation of LG E’s rights with regard to its investment or almost complete deprivation of the value of LG E’s investment the Tribunal concludes that these circumstances do not constitute expropriation E State of Necessity 1 Parties’ Positions 201 Respondent contends in the alternative that if Argentina would have breached its Treaty obligations the state of political economic and social crisis that befell Argentina allowed it to take action contrary to the obligations it had assumed with respect to the gas-distribution licensees Thus even if the measures adopted by the State in order to overcome the economic crisis suffered during the years 1998 through 2003 resulted in a violation of the rights guaranteed under the Treaty to foreign investments such measures were implemented under a state of necessity and therefore Argentina is excused from liability during this period 202 Respondent pleads its defense as a “state of necessity” defense available under Argentine law Treaty in Articles XI and IV 3 as well as customary international law 203 Claimants reject Respondent’s contentions regarding the alleged state of necessity defense Claimants contend that Article XI is not applicable in 9 LG E Liability ENG 3-5-07 indd 252 3 5 07 2 51 12 PM CASES 253 the case of an economic crisis because the public order and essential security interests elements are intentionally narrow in scope limited to security threats of a physical nature 2 General Comments on Article XI i Preliminary Considerations 204 Article XI of the Bilateral Treaty 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 205 The Tribunal’s analysis to determine the applicability of Article XI of the Bilateral Treaty is twofold First the Tribunal must decide whether the conditions that existed in Argentina during the relevant period were such that the State was entitled to invoke the protections included in Article XI of the Treaty Second the Tribunal must determine whether the measures implemented by Argentina were necessary to maintain public order or to protect its essential security interests albeit in violation of the Treaty 61 206 The Tribunal reiterates that to carry out the two-fold analysis already mentioned it shall apply first the Treaty second the general international law to the extent that is necessary and third the Argentine domestic law The Tribunal underscores that the claims and defenses mentioned derive from the Treaty and that to the extent required for the interpretation and application of its provisions the general international law shall be applied See section V B supra ii The Question of Whether Article XI is Self-Judging 207 Before turning to its substantive analysis of Article XI the Tribunal must determine whether Article XI is self-judging 208 Respondent has argued that because Article XI is a self-judging provision it is for the State to make a good faith determination as to what measures are 61 Respondent has not relied upon the third element of Article XI “the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security ” 9 LG E Liability ENG 3-5-07 indd 253 3 5 07 2 51 12 PM 254 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL necessary for the maintenance of public order or the protection of its essential security interests According to Respondent under this self-judging exception the Tribunal must decide only whether Argentina acted in good faith or not 209 Respondent considers Article XI is ambiguous and characterizes such ambiguity as a “strategic ambiguity” on the part of the United States since it does not clearly define who should determine if the measures to maintain public order or protect essential security interests are necessary Respondent recognizes that the United States’ 1987 Model BIT upon which the Argentina– U S BIT was based does not clarify the United States’ position nor does any of the documentation related to the negotiation or ratification of the ArgentinaU S BIT However Respondent contends that subsequent to the conclusion of the Argentina-U S BIT the United States shifted its position permanently with regard to essential security clauses stating in 1992 that the United States considered such clauses to be self-judging presently and retroactively Slaughter Witness Statement ¶¶ 12–31 210 Claimants disagree that Article XI is self-judging and argue instead that its application requires that the Tribunal conduct its own analysis of whether the conditions necessitated measures to maintain public order or protect Argentina’s essential security interests within the meaning of Article XI 211 Claimants contend that neither the plain meaning of Article XI nor the context or purpose of the Treaty suggest that Article XI is self-judging and that the position of the United States at the time the parties signed the Treaty was that such clauses were not self-judging Hearing on the Merits 28 January 2005 Alvarez Spanish Transcript p 925 et seq Claimants argue that Respondent has not proven that the parties to the Treaty intended Article XI to be selfjudging which they characterize as “an exceptional thing ” Hearing on the Merits 28 January 2005 Alvarez Spanish Transcript p 932 et seq Claimants contend that the United States did not consider essential security clauses as selfjudging until the Russia-U S BIT of 1992 and the 1992 U S Model BIT both of which post-date the Argentina-U S BIT and both of which noted explicitly the change in the United States’ policy that these provisions were to be selfjudging 212 Certainly the language of the BIT does not specify who should decide what constitutes essential security measures—either Argentina itself subject to a review under a good faith standard or the Tribunal Based on the evidence before the Tribunal regarding the understanding of the Parties in 1991 at the time the Treaty was signed the Tribunal decides and concludes that the provision is not self-judging 9 LG E Liability ENG 3-5-07 indd 254 3 5 07 2 51 12 PM CASES 255 213 The provisions included in the international treaty are to be interpreted in conformity with the interpretation given and agreed upon by both parties at the time of its signature unless both parties agreed to its modification In that case the date to be considered is November 1991 It is not until 1992 with the ratification of the Russia—US BIT that the United States begins to consider that the application of the essential security measures are self judging both instruments post-date the bilateral treaty between the United States and the Argentine Republic and in both cases this change was explicitly clarified 214 Were the Tribunal to conclude that the provision is self-judging Argentina’s determination would be subject to a good faith review anyway which does not significantly differ from the substantive analysis presented here iii Necessary Nature of the Measures Adopted a Parties’ Positions 215 Argentina defends the measures it implemented as necessary to maintain public order and protect its essential security interests It contends that under any interpretation the financial crisis riots and chaos of the years 2000 through 2002 in Argentina constitute a national emergency sufficient to invoke the protections of Article XI Slaughter Witness Statement ¶ 45 216 Concerning “public order” Respondent reinforces its arguments on the necessary nature of the measures it had implemented by pointing to numerous reports of waves of sudden economic catastrophe massive strikes involving millions of workers fatal shootings the shut down of schools businesses transportation energy banking and health services demonstrations across the country and a plummeting stock market culminating in a “final massive social explosion” in which five presidential administrations resigned within a month Slaughter Witness Statement ¶¶ 46–49 Under these circumstances Argentina argues that price controls by the Argentine Government would have been fully justifiable under the public order provisions of Article XI Additionally Respondent argues that actions to freeze price increases in the gas-distribution sector were justifiable to maintain the country’s basic infrastructure which was dependent on natural gas energy 217 Argentina also defends its measures as necessary to protect its essential security interests Argentina asserts that Article XI’s “essential security interests” element encompasses economic and political interests as well as national military defense interests Respondent cites several United States’ officials 9 LG E Liability ENG 3-5-07 indd 255 3 5 07 2 51 13 PM 256 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL who have propounded a broad interpretation of “essential security interests” Slaughter Witness Statement ¶ 38 218 Respondent attacks Claimants’ basis for asserting that the clause is narrow reserved only for military actions Furthermore in all of the cases cited by Claimants the point was whether the use of military force was justifiable under international law—a narrow reading of essential security clauses in these cases would be expected 219 Because economic stability in Respondent’s view falls within a State’s essential security interests Respondent defends the measures it took as necessary to protect its economic interests Respondent argues that during the crisis period the health safety and security of the Argentine State and its people were threatened and that the economic melt-down had the potential to cause catastrophic state failure Thus the public emergency that Argentina declared and the Emergency Law the Government passed altering its financial arrangements were necessary to protect the State’s essential security interests 220 Claimants identify the four measures at issue here—suspension and abolishment of the PPI adjustment freezing the gas-distribution tariffs and abandonment of the calculation of the tariffs in dollars all taken unilaterally– and contend that Respondent must prove that each measure was necessary in order to maintain public order and protect Argentina’s essential security interests Reply ¶ 209 By the term “necessary ” Claimants contend that these measures must have been the only option available to Argentina in order to invoke protection under Article XI 221 Claimants define public order measures as “actions taken pursuant to a state’s police powers particularly in respect of public health and safety” Based on this definition Claimants state that the measures in dispute in this case were not aimed at bringing calmness to the collapse that was threatening the country Consequently such measures cannot be deemed necessary to maintain public order 222 With respect to “essential security interests ” Claimants reiterate that such interests do not include economic interests—only defense or military concerns They compare a State’s interest in essential security to a national security threat while a “national emergency ” the alleged circumstance in which Respondent invokes the protection has an entirely different meaning In Claimants’ view economic crises should not be elevated to an essential security interest and that doing so would disregard the object and purpose of the Treaty They argue that an economic crisis is precisely when investors need the protections offered by a BIT 9 LG E Liability ENG 3-5-07 indd 256 3 5 07 2 51 13 PM CASES 257 223 Claimants argue that in any event Article XI does not relieve Argentina of its obligations to compensate Claimants for damages suffered as a result of breaches of the Treaty 224 Claimants also reject the possibility of applying the rule provided by Article IV 3 of the Treaty They are of the opinion that this provision does not apply to economic crises and it does not authorize the host State to revoke or suspend the protections given to foreign investors Reply ¶ 229 225 Claimants invoke Article 27 of the International Law Commission’s Draft Articles on State Responsibility Claimants contend that even if the state of necessity defense is available to Argentina under the circumstances of this case Article 27 of the Draft Articles makes clear that Argentina’s obligations to Claimants are not extinguished and Argentina must compensate Claimants for losses incurred as a result of the Government’s actions Article 27 provides that “invocation of a circumstance precluding wrongfulness in accordance with this chapter is without prejudice to a compliance with the obligation in question… b the question of compensation for any material loss caused by the act in question” Reply ¶¶ 226–228 b Tribunal’s Analysis 226 In the judgment of the Tribunal from 1 December 2001 until 26 April 2003 Argentina was in a period of crisis during which it was necessary to enact measures to maintain public order and protect its essential security interests 227 The Tribunal does not consider that the initial date for the state of necessity is the effective date of the Emergency Law 6 January 2002 because in the first place the emergency had already started when the law was enacted Second should the Tribunal take as the initial date the day when the Emergency Law became effective it might be reasonable to take as its closing date the day when the state of emergency is lifted by the Argentine State a fact that has not yet taken place since the law has been extended several times 228 It is to be pointed out that there is a factual emergency that began on 1 December 2001 and ended on 26 April 2003 on account of the reasons detailed below as well as a legislative emergency that begins and ends with the enactment and abrogation of the Emergency Law respectively It should be borne in mind that Argentina declared its state of necessity and has extended such state until the present Indeed the country has issued a record number of decrees since 1901 accounting for the fact that the emergency periods in Argentina have been longer than the non-emergency periods Emergency 9 LG E Liability ENG 3-5-07 indd 257 3 5 07 2 51 14 PM 258 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL periods should be only strictly exceptional and should be applied exclusively when faced with extraordinary circumstances Hence in order to allege state of necessity as a State defense it will be necessary to prove the existence of serious public disorders Based on the evidence available the Tribunal has determined that the situation ended at the time President Kirchner was elected 229 Thus Argentina is excused under Article XI from liability for any breaches of the Treaty between 1 December 2001 and 26 April 2003 The reasons are the following 230 These dates coincide on the one hand with the Government’s announcement of the measure freezing funds which prohibited bank account owners from withdrawing more than one thousand pesos monthly and on the other hand with the election of President Kirchner The Tribunal marks these dates as the beginning and end of the period of extreme crisis in view of the notorious events that occurred during this period 231 Evidence has been put before the Tribunal that the conditions as of December 2001 constituted the highest degree of public disorder and threatened Argentina’s essential security interests This was not merely a period of “economic problems” or “business cycle fluctuation” as Claimants described Claimants’ Post-Hearing Brief ¶ 14 Extremely severe crises in the economic political and social sectors reached their apex and converged in December 2001 threatening total collapse of the Government and the Argentine State 232 All of the major economic indicators reached catastrophic proportions in December 2001 An accelerated deterioration of Argentina’s Gross Domestic Product GDP began in December 2001 falling 10 to 15 percent faster than the previous year Private consumption dramatically dropped in the fourth quarter of 2001 accompanied by a severe drop in domestic prices Argentina experienced at this time widespread decline in the prices and in the value of assets located in Argentina The Merval Index which measures the share value of the main companies of Argentina listed on the Buenos Aires Stock Exchange experienced a dramatic decline of 60% by the end of December 2001 By mid2001 Argentina’s country risk premium was the highest premium worldwide rendering Argentina unable to borrow on the international markets and reflecting the severity of the economic crisis 233 At this time capital outflow was a critical problem for the Government In the fourth quarter of 2001 the Central Bank of Argentina lost US$ 11 billion in liquid reserves amounting to 40% The banking system lost 25% of its total deposits 9 LG E Liability ENG 3-5-07 indd 258 3 5 07 2 51 14 PM CASES 259 234 While unemployment poverty and indigency rates gradually increased from the beginning of 1998 they reached intolerable levels by December 2001 Unemployment reached almost 25% and almost half of the Argentine population was living below poverty The entire healthcare system teetered on the brink of collapse Prices of pharmaceuticals soared as the country plunged deeper into the deflationary period becoming unavailable for low-income people Hospitals suffered a severe shortage of basic supplies Investments in infrastructure and equipment for public hospitals declined as never before These conditions prompted the Government to declare the nationwide health emergency to ensure the population’s access to basic health care goods and services At the time one quarter of the population could not afford the minimum amount of food required to ensure their subsistence Given the level of poverty and lack of access to healthcare and proper nutrition disease followed Facing increased pressure to provide social services and security to the masses of indigent and poor people the Government was forced to decrease its per capita spending on social services by 74% 235 By December 2001 there was widespread fear among the population that the Government would default on its debt and seize bank deposits to prevent the bankruptcy of the banking system Faced with a possible run on banks the Government issued on 1 December 2001 Decree of Necessity and Emergency No 1570 01 The law triggered widespread social discontent Widespread violent demonstrations and protests brought the economy to a halt including effectively shutting down transportation systems Looting and rioting followed in which tens of people were killed as the conditions in the country approached anarchy A curfew was imposed to curb lootings 236 By 20 December 2001 President De la Rúa resigned His presidency was followed by a succession of presidents over the next days until Mr Eduardo Duhalde took office on 1 January 2002 charged with the mandate to bring the country back to normal conditions 237 All of these devastating conditions—economic political social– in the aggregate triggered the protections afforded under Article XI of the Treaty to maintain order and control the civil unrest 238 The Tribunal rejects the notion that Article XI is only applicable in circumstances amounting to military action and war Certainly the conditions in Argentina in December 2001 called for immediate decisive action to restore civil order and stop the economic decline To conclude that such a severe economic crisis could not constitute an essential security interest is to 9 LG E Liability ENG 3-5-07 indd 259 3 5 07 2 51 14 PM 260 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL diminish the havoc that the economy can wreak on the lives of an entire population and the ability of the Government to lead When a State’s economic foundation is under siege the severity of the problem can equal that of any military invasion 239 Claimants contend that the necessity defense should not be applied here because the measures implemented by Argentina were not the only means available to respond to the crisis The Tribunal rejects this assertion Article XI refers to situations in which a State has no choice but to act A State may have several responses at its disposal to maintain public order or protect its essential security interests In this sense it is recognized that Argentina’s suspension of the calculation of tariffs in U S dollars and the PPI adjustment of tariffs was a legitimate way of protecting its social and economic system 240 The Tribunal has determined that Argentina’s enactment of the Emergency Law was a necessary and legitimate measure on the part of the Argentine Government Under the conditions the Government faced in December 2001 time was of the essence in crafting a response Drafted in just six days the Emergency Law took the swift unilateral action against the economic crisis that was necessary at the time Hearing on the Merits 25 January 2005 Ratti Spanish Transcript pp 415–419 241 In drafting the Emergency Law the Government considered the interests of the foreign investors and concluded that it “could not leave sectors of the economy operating with the brutally dollarized economy— the system was in crisis so we had to cut off that process and we had to establish a new set of rules for everybody ” Hearing on the Merits 25 January 2005 Ratti Spanish Transcript p 417 Argentina’s strategy to deal with the thousands of public utility contracts that could not be individually assessed during the period of crisis was to implement “across-the-board solutions” and then renegotiate the contracts Hearing on the Merits 26 January 2005 Roubini Spanish Transcript p 635 The Tribunal accepts the necessity of approaching enactment of a stop-gap measure in this manner and therefore rejects Claimants’ objection that Argentina’s unilateral response was not necessary 242 The Tribunal accepts that the provisions of the Emergency Law that abrogated calculation of the tariffs in U S dollars and PPI adjustments as well as freezing tariffs were necessary measures to deal with the extremely serious economic crisis Indeed it would be unreasonable to conclude that during this period the Government should have implemented a tariff increase 9 LG E Liability ENG 3-5-07 indd 260 3 5 07 2 51 15 PM CASES 261 pursuant to an index pegged to an economy experiencing a high inflationary period the United States The severe devaluation of the peso against the dollar renders the Government’s decision to abandon the calculation of tariffs in dollars reasonable Similarly the Government deemed that freezing gas tariffs altogether during the crisis period was necessary and Claimants have not provided any reason as to why such measure would not provide immediate relief from the crisis 243 The Tribunal will now turn to Article IV 3 of the Treaty which provides Nationals or companies of either Party whose investments suffer losses in the territory of the other Party owing to war or other armed conflict revolution state of national emergency insurrection civil disturbance or other similar events shall be accorded treatment by such other Party no less favorable than that accorded to its own nationals or companies or to nationals or companies of any third country whichever is the more favorable treatment as regards any measures it adopts in relation to such losses Emphasis added 244 Article IV 3 of the Treaty confirms that the States Party to the Bilateral Treaty contemplated the state of national emergency as a separate category of exceptional circumstances That is in line with the Tribunal’s interpretation of Article XI of the Treaty Furthermore the Tribunal has determined as a factual matter that the grave crisis in Argentina lasted from 1 December 2001 until 26 April 2003 It has not been shown convincingly to the Tribunal that during that period the provisions of Article IV 3 of the Treaty have been violated by Argentina On the contrary during that period the measures taken by Argentina were “across the board ” 245 In the previous analysis the Tribunal has determined that the conditions in Argentina from 1 December 2001 until 26 April 2003 were such that Argentina is excused from liability for the alleged violation of its Treaty obligations due to the responsive measures it enacted The concept of excusing a State for the responsibility for violation of its international obligations during what is called a “state of necessity” or “state of emergency” also exists in international law While the Tribunal considers that the protections afforded by Article XI have been triggered in this case and are sufficient to excuse Argentina’s liability the Tribunal recognizes that satisfaction of the state of necessity standard as it exists in international law reflected in Article 9 LG E Liability ENG 3-5-07 indd 261 3 5 07 2 51 15 PM 262 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL 25 of the ILC’s Draft Articles on State Responsibility supports the Tribunal’s conclusion 62 246 In international law a state of necessity is marked by certain characteristics that must be present in order for a State to invoke this defense As articulated by Roberto Ago one of the mentors of the Draft Articles on State Responsibility a state of necessity is identified by those conditions in which a State is threatened by a serious danger to its existence to its political or economic survival to the possibility of maintaining its essential services in operation to the preservation of its internal peace or to the survival of part of its territory 63 In other words the State must be dealing with interests that are essential or particularly important 64 247 The United Nations Organization has understood that the invocation of a state of necessity depends on the concurrent existence of three circumstances 62 Article 25 of the Draft Articles on Responsibility of States for Internationally Wrongful Acts 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 The ILC’s Draft Articles after some debate regarding the original prepared under the auspices of the Society of Nations in 1930 was abandoned and then resumed by the General Assembly in 1963 Its definitive version due mainly to the works of Mssrs Roberto Ago Willem Riphagen and Gaetano Arangio-Ruiz was approved in 1981 and subject to a revision in 1998 which was approved in 2001 during the 85th plenary session of the United Nations’ General Assembly Session dated 12 December 2001 during the fifty-sixth session Agenda item 162 of the Program A RES 56 83 63 United Nations Report A CN 4 318 ADD 5 p 3 64 Strupp K Les règles générales du Droit de la paix Recueil des Cours 1934 I T 47 pp 259–595 especially p 568 Similarly the ILC has defined the state of necessity as that situation where the only means of safeguarding an essential interest of the State against a grave and imminent peril is an act that is not in conformity with an international obligation binding that State with another State In shaping the concept of state of necessity one must make a compulsory reference to the Russian seal furs case There the Russian government banned the hunting of seals near the Russian shorelines including international waters and founded such decision on the absolute need to adopt immediate provisional measures In a communication addressed on the occasion of this incident by the Russian foreign Minister Chickline to the British Ambassador Morier the main elements of the state of necessity were established the absolutely exceptional nature of the alleged situation the imminent character of the threat against an important State interest the impossibility of avoiding the risk with other means and the necessarily temporary nature of this justification linked to the due danger’s persistence See United Nations Report of the International Law Commission on the work performed during its 32nd session p 87 9 LG E Liability ENG 3-5-07 indd 262 3 5 07 2 51 16 PM CASES 263 namely a danger to the survival of the State and not for its interests is necessary that danger must not have been created by the acting State finally the danger should be serious and imminent so that there are no other means of avoiding it 248 The concept of state of necessity and the requirements for its admissibility lead to the idea of prevention the State covers itself against the risk of suffering certain damages Hence the possibility of alleging the state of necessity is closely bound by the requirement that there should be a serious and imminent threat and no means to avoid it Such circumstances in principle have been left to the State’s subjective appreciation a conclusion accepted by the International Law Commission Nevertheless the Commission was well aware of the fact that this exception requiring admissibility has been frequently abused by States thus opening up a very easy opportunity to violate the international law with impunity The Commission has set in its Draft Articles on State Responsibility very restrictive conditions to account for its admissibility reducing such subjectivity 65 249 James Crawford who was rapporteur of the Draft Articles approved in 2001 noted that when a State invokes the state of necessity it has full knowledge of the fact that it deliberately chooses a procedure that does not abide an international obligation 66 This deliberate action on the part of the State is therefore subject to the requirements of Article 25 of the Draft Articles which must concur jointly and without which it is not possible to exclude under international law the wrongfulness of a State’s act that violates an international obligation 250 Taking each element in turn Article 25 requires first that the act must be the only means available to the State in order to protect an interest According to S P Jagota a member of the Commission such requirement implies that it has not been possible for the State to “avoid by any other means even a much more onerous one that could have been adopted and maintained the respect of international obligations The State must have exhausted all possible legal means before being forced to act as it does ”67 Any act that goes beyond the limits of what is strictly necessary “may not be considered as no longer being as such a wrongful act even if justification of the necessity may have been admitted ”68 65 United Nations Report A CN 4 315 p 78 Crawford James Second Report on State Responsibility UN General Assembly International Law Commission 51st Session Geneva 23 July 1999 A CN 4 498 Add 2 p 27–28 67 United Nations Report A CN 4 SER A 1980 pp 155 and 175 68 Ibidem 66 9 LG E Liability ENG 3-5-07 indd 263 3 5 07 2 51 16 PM 264 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL 251 The interest subject to protection also must be essential for the State What qualifies as an “essential” interest is not limited to those interests referring to the State’s existence As evidence demonstrates economic financial or those interests related to the protection of the State against any danger seriously compromising its internal or external situation are also considered essential interests Roberto Ago has stated that essential interests include those related to “different matters such as the economy ecology or other ”69 Julio Barboza affirmed that the threat to an essential interest would be identified by considering among other things “a serious threat against the existence of the State against its political or economic survival against the maintenance of its essential services and operational possibilities or against the conservation of internal peace or its territory’s ecology ”70 252 James Crawford has stated that no opinion may be offered a priori of “essential interest ” but one should understand that it is not the case of the State’s “existence” since the “purpose of the positive law of self-defense is to safeguard that existence ”71 Thus an interest’s greater or lesser essential must be determined as a function of the set of conditions in which the State finds itself under specific situations The requirement is to appreciate the conditions of each specific case where an interest is in play since what is essential cannot be predetermined in the abstract 72 253 The interest must be threatened by a serious and imminent danger The threat according to Roberto Ago “must be ‘extremely grave’ and ‘imminent ’”73 In this respect James Crawford has opined that the danger must be established objectively and not only deemed possible 74 It must be imminent in the sense that it will soon occur 254 The action taken by the State may not seriously impair another State’s interest In this respect the Commission has observed that the interest sacrificed for the sake of necessity must be evidently less important than the interest sought to be preserved through the action 75 The idea is to prevent against the possibility of invoking the state of necessity only for the safeguard of a non-essential interest 69 United Nations Report A CN 4 SER A 1980 p 174 Ibidem 71 Crawford James Second Report on State Responsibility op cit p 30 72 Ibidem 73 United Nations Report A CN 4 318 ADD 5–7 p 20 74 Crawford James Second Report on State Responsibility op cit p 31 In fact this is so reflected in Principle 15 of the Rio Declaration on Environment and Development adopted by the United Nations’ Conference on Environment and Development in 1992 75 United Nations Report A CN 4 318 ADD 5–7 p 20 70 9 LG E Liability ENG 3-5-07 indd 264 3 5 07 2 51 16 PM CASES 265 255 The international obligation at issue must allow invocation of the state of necessity The inclusion of an article authorizing the state of necessity in a Bilateral Investment Treaty constitutes the acceptance in the relations between States of the possibility that one of them may invoke the state of necessity 256 The State must not have contributed to the production of the state of necessity It seems logical that if the State has contributed to cause the emergency it should be prevented from invoking the state of necessity If there is fault by the State the exception disappears since in such case the causal relationship between the State’s act and the damage caused is produced The Tribunal considers that in the first place Claimants have not proved that Argentina has contributed to cause the severe crisis faced by the country secondly the attitude adopted by the Argentine Government has shown a desire to slow down by all the means available the severity of the crisis 257 The essential interests of the Argentine State were threatened in December 2001 It faced an extremely serious threat to its existence its political and economic survival to the possibility of maintaining its essential services in operation and to the preservation of its internal peace There is no serious evidence in the record that Argentina contributed to the crisis resulting in the state of necessity In this circumstances an economic recovery package was the only means to respond to the crisis Although there may have been a number of ways to draft the economic recovery plan the evidence before the Tribunal demonstrates that an across-the-board response was necessary and the tariffs on public utilities had to be addressed It cannot be said that any other State’s rights were seriously impaired by the measures taken by Argentina during the crisis Finally as addressed above Article XI of the Treaty exempts Argentina of responsibility for measures enacted during the state of necessity 258 While this analysis concerning Article 25 of the Draft Articles on State Responsibility alone does not establish Argentina’s defense it supports the Tribunal’s analysis with regard to the meaning of Article XI’s requirement that the measures implemented by Argentina had to have been necessary either for the maintenance of public order or the protection of its own essential security interests 259 Having found that the requirements for invoking the state of necessity were satisfied the Tribunal considers that it is the factor excluding the State from its liability vis-à-vis the damage caused as a result of the measures adopted by Argentina in response to the severe crisis suffered by the country 9 LG E Liability ENG 3-5-07 indd 265 3 5 07 2 51 17 PM 266 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL 260 With regard to Article 27 of the United Nations’ Draft Articles alleged by Claimants the Tribunal opines that the article at issue does not specifically refer to the compensation for one or all the losses incurred by an investor as a result of the measures adopted by a State during a state of necessity The commentary introduced by the Special Rapporteur establishes that Article 27 “does not attempt to specify in what circumstances compensation would be payable” 76 The rule does not specify if compensation is payable during the state of necessity or whether the State should reassume its obligations In this case this Tribunal’s interpretation of Article XI of the Treaty provides the answer 261 Following this interpretation the Tribunal considers that Article XI establishes the state of necessity as a ground for exclusion from wrongfulness of an act of the State and therefore the State is exempted from liability This exception is appropriate only in emergency situations and once the situation has been overcome i e certain degree of stability has been recovered the State is no longer exempted from responsibility for any violation of its obligations under the international law and shall reassume them immediately iv Consequences of the State of Necessity 262 Three relevant issues arise with respect to the Tribunal’s finding Argentina is entitled to invoke the state of necessity as contemplated by Article XI and general international law 263 The first issue deals with the determination of the period during which the state of necessity occurred As previously indicated in the view of the Tribunal the state of necessity in this case began on 1 December 2001 and ended on 26 April 2003 when President Kirchner was elected see the Tribunal’s Analysis All measures adopted by Argentina in breach of the Treaty before77 and after the period during which the state of necessity prevailed shall have all their effects and shall be taken into account by the Tribunal to estimate the damages 264 The second issue related to the effects of the state of necessity is to determine the subject upon which the consequences of the measures adopted by the host State during the state of necessity shall fall As established in the 76 Crawford James The International Law Commission’s Articles on State Responsibility Cambridge University Press 2002 p 178 et seq 77 The period before the state of necessity initiates with the injunction issued by the Argentine Court on 18 August 2000 9 LG E Liability ENG 3-5-07 indd 266 3 5 07 2 51 17 PM CASES 267 Tribunal’s Analysis Article 27 of ILC’s Draft Articles as well as Article XI of the Treaty does not specify if any compensation is payable to the party affected by losses during the state of necessity Nevertheless and in accordance with that expressed under paragraphs 260 and 261 supra this Tribunal has decided that the damages suffered during the state of necessity should be borne by the investor 265 The third issue is related to what Argentina should have done once the state of necessity was over on 26 April 2003 The very following day 27 April Argentina’s obligations were once again effective Therefore Respondent should have reestablished the tariff scheme offered to LG E or at least it should have compensated Claimants for the losses incurred on account of the measures adopted before and after the state of necessity v Conclusions of the Tribunal 266 Based on the analysis of the state of necessity the Tribunal concludes that first said state started on 1 December 2001 and ended on 26 April 2003 second during that period Argentina is exempt of responsibility and accordingly the Claimants should bear the consequences of the measures taken by the host State and finally the Respondent should have restored the tariff regime on 27 April 2003 or should have compensated the Claimants which did not occur As a result Argentina is liable as from that date to Claimants for damages VII DECISION OF THE TRIBUNAL ON LIABILITY 267 For the foregoing reasons the Tribunal renders its decision partially granting LG E’s claims as follows a The claim for expropriation of the investment is hereby dismissed b Argentina breached the standard of fair and equitable treatment no less favorable treatment than that to be accorded under the international law and adopted discriminatory measures causing damage to LG E Argentina’s abrogation of the guarantees under the statutory framework as indicated under paragraph 175 supra violated its obligations to Claimants’ investments giving rise to liability under the umbrella clause c The standard prohibiting the adoption of arbitrary measures is not deemed to have been violated 9 LG E Liability ENG 3-5-07 indd 267 3 5 07 2 51 18 PM 268 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL d Between 1 December 2001 and 26 April 2003 Argentina was in a state of necessity for which reason it shall be exempted from the payment of compensation for damages incurred during that period e The Argentine Republic is liable for damages to Claimants for the aforementioned violations except during the period of the state of necessity which damages including interest as well as specification of the periods during which Respondent has incurred in violation of its international obligations shall be determined in a next phase of the arbitration and in respect of which the Tribunal retains jurisdiction f Any decision on the costs of the arbitration is reserved Made in Washington D C in English and Spanish both versions equally authentic PROFESSOR ALBERT JAN VAN DEN BERG JUDGE FRANCISCO REZEK Arbitrator Arbitrator DR TATIANA B DE MAEKELT President 9 LG E Liability ENG 3-5-07 indd 268 3 5 07 2 51 18 PM