EXHIBIT 99.2
DATE OF DISPATCH TO THE PARTIES: MAY 12, 2005
INTERNATIONAL CENTRE FOR SETTLEMENT
OF INVESTMENT DISPUTES
WASHINGTON, D.C.
IN THE PROCEEDING BETWEEN
CMS GAS TRANSMISSION COMPANY
(CLAIMANT)
AND
THE ARGENTINE REPUBLIC
(RESPONDENT)
CASE NO. ARB/01/8
====================
AWARD
====================
Members of the Tribunal
Professor Francisco Orrego Vicuna, President
The Honorable Marc Lalonde P.C., O.C., Q.C., Arbitrator
H.E. Judge Francisco Rezek, Arbitrator
Secretary of the Tribunal
Ms. Margrete Stevens
2
Representing the Claimant Representing the Respondent
Ms. Lucy Reed H.E. Osvaldo Cesar Guglielmino
Ms. Sylvia Noury Procurador del Tesoro de la Nacion
Freshfields Bruckhaus Deringer LLP Procuracion del Tesoro de la Nacion
New York, NY Buenos Aires
United States of America Argentina
Mr. Nigel Blackaby
Freshfields Bruckhaus Deringer
Paris
France
and
Dr. Guido Santiago Tawil
M. & M. Bomchil Abogados
Buenos Aires
Argentina
3
THE TRIBUNAL
Composed as above,
After deliberation,
Makes the following Award:
A. INTRODUCTION
1. The Claimant, CMS Gas Transmission Company, is a company established under
the laws of the State of Michigan, United States. It is represented in this
proceeding by:
Ms. Lucy Reed
Ms. Sylvia Noury
Freshfields Bruckhaus Deringer LLP
520 Madison Avenue
34th floor
New York, NY 10022
United States of America
4
Mr. Nigel Blackaby
Freshfields Bruckhaus Deringer
2-4 rue Paul Cez anne
75375 Paris Cedex 08
France
Dr. Guido Santiago Tawil
M. & M. Bomchil Abogados
Suipacha 268, piso 12
C1008AAF Buenos Aires
Argentina
2. The Respondent is the Argentine Republic, represented in this proceeding by:
H.E. Osvaldo Cesar Guglielmino
Procurador del Tesoro de la Nacion
Procuracion del Tesoro de la Nacion
Posadas 1641
CP 1112 Buenos Aires
Argentina
3. By letter of April 8, 2005 the Secretary of the Tribunal informed the parties
that the Tribunal had declared the proceeding closed in accordance with Rule
38(1) of the Arbitration Rules. This Award contains the Tribunal's Award on the
merits rendered in accordance with Arbitration Rule 47, as well as a copy of the
Tribunal's Decision on Objections to
5
Jurisdiction. In rendering its Award, the Tribunal has taken into account all
pleadings, documents and testimony in this case insofar as it considered them
relevant.
B. SUMMARY OF THE PROCEDURE
1. Procedure Leading to the Decision on Jurisdiction
4. On July 26, 2001, the International Centre for Settlement of Investment
Disputes (ICSID or the Centre) received from CMS Gas Transmission Company (CMS),
an entity incorporated in the United States of America, a Request for
Arbitration against the Argentine Republic (Argentina). The request concerned
the alleged suspension by Argentina of a tariff adjustment formula for gas
transportation applicable to an enterprise in which CMS had an investment. In
its request, the Claimant invoked the provisions of the 1991 "Treaty between the
United States of America and the Argentine Republic Concerning the Reciprocal
Encouragement and Protection of Investment." (The Argentina - U.S. Bilateral
Investment Treaty or BIT or the Treaty).(1)
5. On July 27, 2001, the Centre, in accordance with Rule 5 of the ICSID Rules of
Procedure for the Institution of Conciliation and Arbitration Proceedings
(Institution Rules), acknowledged receipt and transmitted a copy of the request
to Argentina and to the Argentine Embassy in Washington D.C.
6. On August 15, 2001, the Centre requested CMS to confirm that the dispute
referred to in the request had not been submitted by CMS for resolution in
accordance with any applicable, previously agreed, dispute-settlement procedure,
under Article VII (2)(b) of the BIT. On August 23, 2001, CMS confirmed that it
had taken no such steps.
6
7. On August 24, 2001, the Secretary-General of the Centre registered the
request, pursuant to Article 36(3) of the ICSID Convention (the Convention). On
this same date, the Secretary-General, in accordance with Institution Rule 7,
notified the parties of the registration of the request and invited them to
proceed to constitute an Arbitral Tribunal as soon as possible.
8. On August 30, 2001, the Centre reminded Argentina of the Claimant's proposal
concerning the number of arbitrators and the method of their appointment. Under
this proposal, contained in paragraph 60 of the request for arbitration, the
Arbitral Tribunal would consist of three arbitrators, one arbitrator to be
appointed by each party and the third, who would be President of the Tribunal,
to be appointed by agreement of the parties.
9. On September 13, 2001, Argentina informed the Centre of its agreement to the
proposal of CMS concerning the number of arbitrators and the method of their
appointment. On the same date the Centre informed the parties that since their
agreement on the number of arbitrators and the method of their appointment was
equivalent to the formula set forth in Article 37(2)(b) of the Convention, the
parties were invited to follow the procedure set forth in Arbitration Rule 3 for
the appointment of arbitrators.
10. On October 24, 2001 Argentina appointed H. E. Judge Francisco Rezek, a
national of Brazil, as an arbitrator. On November 9, 2001, CMS appointed The
Honorable Marc Lalonde P.C., O.C., Q.C., a national of Canada, as an arbitrator.
The parties, however, failed to agree on the appointment of the third,
presiding, arbitrator. In these circumstances, by letter of December 5, 2001,
the Claimant requested that the third, presiding, arbitrator in the proceeding
be appointed in accordance with Article 38 of the ICSID Convention.(2)
7
11. After consultation with the parties, Professor Francisco Orrego Vicuna, a
national of Chile, was duly appointed as President of the Arbitral Tribunal. On
January 11, 2002, the Secretary-General, in accordance with Rule 6(1) of the
ICSID Rules of Procedure for Arbitration Proceedings notified the parties that
all three arbitrators had accepted their appointments and that the Tribunal was
therefore deemed to have been constituted on that date. On the same date,
pursuant to ICSID Administrative and Financial Regulation 25, the parties were
informed that Mr. Alejandro Escobar, Senior Counsel, ICSID, would serve as
Secretary of the Arbitral Tribunal.
12. The first session of the Tribunal with the parties was held on February 4,
2002, at the seat of ICSID in Washington, D.C. At the session the parties
expressed their agreement that the Tribunal had been properly constituted in
accordance with the relevant provisions of the ICSID Convention and the
Arbitration Rules and that they did not have any objections in this respect.
13. During the course of the first session the parties agreed on a number of
procedural matters reflected in written minutes signed by the President and the
Secretary of the Tribunal; and the Tribunal, after ascertaining the views of the
parties on the matter, fixed the following time limits for the written phase of
the proceedings: The Claimant would file a memorial within 120 days from the
date of the first session; the Respondent would file a counter-memorial within
120 days from its receipt of the Claimant's memorial; the Claimant would file a
reply within 60 days from its receipt of the counter-memorial; and the
Respondent would file its rejoinder within 60 days from its receipt of the
reply. At the first session it was further agreed that in the event of the
Respondent raising objections to jurisdiction, the following time limits would
apply: the Respondent would file its memorial on jurisdiction within 60 days
from its receipt of the Claimant's memorial on the merits; the Claimant would
8
file its counter-memorial on jurisdiction within 60 days from its receipt of the
Respondent's memorial on jurisdiction; the Respondent would file its reply on
jurisdiction within 30 days from its receipt of the Claimant's counter-memorial
on jurisdiction; and the Claimant would file its rejoinder on jurisdiction
within 30 days from its receipt of the Respondent's reply on jurisdiction.
14. On May 24, 2002, the Claimant requested an extension till July 5, 2002 of
the time limit fixed for the filing of its memorial. On June 6, 2002, the
Tribunal granted the extension sought by the Claimant. In doing so, the Tribunal
noted that Argentina would be entitled to an equivalent extension if requested,
of the time limit fixed for its counter-memorial.
15. On July 5, 2002, the Claimant filed its memorial on the merits and
accompanying documentation. On August 5, 2002, Ms. Margrete Stevens, Senior
Counsel, ICSID, replaced Mr. Alejandro Escobar as Secretary of the Tribunal. On
September 4, 2002, Argentina requested an extension till October 7, 2002, of the
time limit fixed for the filing of the memorial on jurisdiction. On September
11, 2002, the Tribunal granted the extension sought by Argentina. On October 7,
2002, Argentina filed its memorial on jurisdiction.
16. On October 24, 2002, following the Respondent's filing of objections to
jurisdiction, the proceeding on the merits was suspended in accordance with
ICSID Arbitration Rule 41(3).
17. On December 17, 2002, the Claimant submitted its counter-memorial on
jurisdiction. On January 22, 2003, the parties requested an extension of 30 days
for each of the remaining two jurisdictional filings. On January 27, 2003, the
Tribunal granted the extensions, and fixed the time limit for the filing of the
Respondent's reply on jurisdiction for February 11,
9
2003; and the time limit for the filing of the Claimant's rejoinder on
jurisdiction for March 25, 2003.
18. On February 13, 2003, the Respondent filed its reply on jurisdiction, and on
March 25, 2003, the Claimant filed its rejoinder on jurisdiction.
19. On April 7-8, 2003, the hearing on jurisdiction was held at the seat of the
Centre in Washington, D.C. Ms. Lucy Reed and Messrs. Nigel Blackaby, Jonathan
Sutcliffe and Guido Tawil addressed the Tribunal on behalf of the Claimant. Mr.
Ignacio Suarez Anzorena addressed the Tribunal on behalf of Argentina. The
Tribunal posed questions to the parties, as provided in Rule 32(3) of the
Arbitration Rules.
20. On July 17, 2003, the Tribunal issued its unanimous Decision on the
Objections to Jurisdiction raised by the Argentine Republic. In its Decision,
the Tribunal rejected the Respondent's contention that the Claimant could not,
as a minority shareholder, bring a claim against Argentina and confirmed that
the dispute arose directly from an investment made by the Claimant. On this
basis, the Tribunal concluded that the Centre had jurisdiction and that the
Tribunal was competent to consider the dispute between the parties in accordance
with the provisions of the Argentina - U.S. BIT.
21. Certified copies of the Tribunal's decision were distributed to the parties
by the Secretary of the Tribunal.
10
2. Procedure Leading to the Award on the Merits
22. On July 17, 2003, the Tribunal, following its Decision on Objections to
Jurisdiction, issued, in accordance with Rules 19 and 41(4) of the Arbitration
Rules of the Centre, Procedural Order No. 1 on the continuation of the
proceeding on the merits. In that Procedural Order the Tribunal fixed the
following schedule for the further procedures: as the Claimant had already filed
its memorial on the merits of the dispute, the Respondent was directed to file a
counter-memorial on the merits within one hundred and twenty (120) days from the
date of the Order; the Claimant would file a reply on the merits within sixty
(60) days from its receipt of the Respondent's counter-memorial; and the
Respondent would file a rejoinder on the merits within sixty (60) days from its
receipt of the Claimant's reply. The Order further contemplated that the
Tribunal would propose a date for the hearing on the merits once it had received
the above-indicated memorials.
23. By letter of October 2, 2003, the Respondent filed a request for suspension
of the proceeding. By letter of October 14, 2003, the Tribunal invited the
Claimant to file, no later than October 20, 2003, its observations on the
Respondent's request for suspension; by letter of October 17, 2003 the Claimant
filed its observations on the Respondent's request of October 2, 2003.
24. By letter of October 22, 2003, the Respondent filed a request for an
extension of the time limit for the filing of its counter-memorial on the
merits.
25. By letter of October 30, 2003, the Secretary of the Tribunal informed the
parties of the Tribunal's decision to grant the Respondent's request for a
30-day extension for the filing of its counter-memorial on the merits; the new
time limit was fixed for December 17, 2003.
11
26. By letter of October 31, 2003, the Secretary of the Tribunal informed the
parties of the Tribunal's decision not to grant the Respondent's request for
suspension of the proceeding.
27. On December 22, 2003, the Respondent filed its counter-memorial on the
merits.
28. By letter of December 23, 2003, the Secretary of the Tribunal informed the
parties of the Tribunal's proposal to fix the hearing on the merits for two
weeks to begin at the end of May 2004.
29. By letter of January 7, 2004, the Respondent requested that the oral hearing
be scheduled for the end of July 2004.
30. After consultation with both sides, the Tribunal informed the parties by
letter of January 14, 2004 of its intention to fix the hearing on the merits for
August 2004.
31. By letter of January 20, 2004, the Claimant filed a request for a five-week
extension of the time limit for the filing of its reply on the merits.
32. After further consultations with both sides, the Tribunal informed the
parties by letter of February 6, 2004 that the hearing on the merits would be
held on August 9-20, 2004. Both parties confirmed their agreement that the
hearing be held in Paris, France. By that same letter, the parties were informed
that the Tribunal would grant the Claimant a four-week extension for the filing
of its reply on the merits, and would similarly grant the Respondent a four-week
extension for the filing of its rejoinder on the merits, should it so wish. The
new time limit for the filing of the Claimant's reply on the merits was fixed
for March 22, 2004.
12
33. On February 12, 2004, the Respondent filed a "Certificate Confirming the
State of Necessity in Argentina."
34. On March 22, 2004, the Claimant filed its reply on the merits.
35. On May 27, 2004, the President held a conference call with counsel for the
parties to discuss procedural arrangements for the hearing on the merits.
36. By letter of June 17, 2004, the Tribunal directed the Argentine Republic to
file all remaining witness statements and expert reports with its rejoinder on
the merits on June 25, 2004. To the extent that such statements and reports
would not be available to the Argentine Republic on June 25, 2004, these were to
be filed no later than July 9, 2004, i.e. no later than one month prior to the
commencement of the hearing on the merits in Paris. In these circumstances, the
Argentine Republic was requested to indicate on June 25, 2004, the names of any
additional witnesses and experts whose statements or reports would be filed no
later than July 9, 2004, and the subject-matter to which their testimony would
be directed.
37. On June 28, 2004, the Respondent filed its rejoinder on the merits.
38. By letter of July 12, 2004, the Claimant objected to the late presentation
of certain evidence introduced by Argentina with its rejoinder; and reserved its
right to respond with additional contemporaneous documents which it indicated
would be very limited in number.
39. By letter of July 13, 2004, the President of the Tribunal directed the
parties to exchange, on July 20, 2004, lists of the names of those witnesses
that each party wished to
13
examine, and requested that the parties inform the Secretariat of the names of
the persons that would be attending the hearing on behalf of each side.
40. The parties filed their respective lists on July 20, 2004.
41. By letter of August 4, 2004, the Tribunal gave directions on the conduct of
the hearing.
42. The hearing would commence August 9, 2004, which would be devoted to opening
statements. The Claimant would present its statement in the morning; and the
Respondent would present its statement in the afternoon.
43. The period from August 10, 2004 - August 19, 2004 would be devoted to the
presentation of evidence. The Claimant would begin with its examination of fact
witnesses, to be followed by the Respondent's examination of fact witnesses. The
same order would be followed (i.e. first the Claimant, to be followed by the
Respondent) with respect to the presentation of expert evidence. However, to the
extent possible, the parties were invited to organize such expert evidence
around subject-matter.
44. The hearing would conclude on August 20, 2004, with each party presenting
its closing statement.
45. The hearing on the merits was held, as scheduled, from August 9-20, 2004, at
the World Bank's office at 66, avenue d'Iena, Paris. Present at the hearing
were:
14
Members of the Tribunal
Professor Francisco Orrego Vicuna, President
The Hon. Marc Lalonde, P.C, O.C., Q.C., Arbitrator
Judge Francisco Rezek, Arbitrator
ICSID Secretariat
Ms. Margrete Stevens, Secretary of the Tribunal
On behalf of the Claimant:
Ms. Sharon McIlnay (CMS Gas Transmission Company)
Mr. Julio Mazzoli (CMS Gas Transmission Company)
Mr. Nigel Blackaby (Freshfields Bruckhaus Deringer)
Ms. Lucy Reed (Freshfields Bruckhaus Deringer)
Dr. Lluis Paradel (Freshfields Bruckhaus Deringer)
Mr. Noah Rubins (Freshfields Bruckhaus Deringer)
Ms. Sylvia Noury (Freshfields Bruckhaus Deringer)
Ms. Blanca Montejo (Freshfields Bruckhaus Deringer)
Dr. Guido Santiago Tawil (M. & M. Bomchil Abogados, Buenos Aires)
Dr. Hector Huici (M. & M. Bomchil Abogados, Buenos Aires)
Dr. Ignacio Minorini Lima (M. & M. Bomchil Abogados, Buenos Aires)
15
On behalf of the Respondent:
H.E. Dr. Horacio Daniel Rosatti (Minister of Justice of the Republic of
Argentina, formerly the Procurador del Tesoro de la Nacion, Buenos Aires,)
Dr. Andrea Gualde (Procuracion del Tesoro de la Nacion, Buenos Aires)
Dr. Ana R. Badillos (Procuracion del Tesoro de la Nacion, Buenos Aires)
Dr. Jorge R. Barraguirre (Procuracion del Tesoro de la Nacion, Buenos
Aires)
Dr. Ignacio Perez Cortes (Procuracion del Tesoro de la Nacion, Buenos
Aires)
Dr. Bettina Cunado (Procuracion del Tesoro de la Nacion, Buenos Aires)
46. Prior to the hearing the Claimant filed with the Tribunal, on August 5,
2004, two new volumes of exhibits and authorities that the Claimant said were
responsive to issues that had been raised for the first time in the rejoinder
and accompanying statements; and that updated the underlying facts of the
dispute since the time of the Claimant's submission of its reply.
47. By letter of August 6, 2004, the Respondent opposed the introduction into
the proceeding of the new documents.
48. By letter of September 14, 2004, the Tribunal informed the parties of its
decision to allow a limited number of the Claimant's documents into the
proceeding insofar as these concerned the process of renegotiation with
Argentina of concession agreements in the area of gas production and
distribution, and were relevant to the factual and legal issues pending before
the Tribunal.
49. On September 20, 2004 the parties filed their post-hearing briefs.
16
50. By letter of September 24, 2004, the Tribunal informed the parties of its
decision to retain independent expert advice so as to better understand the
underlying assumptions and methodology relied upon in the valuation reports
offered by the parties' experts.
51. By letter of December 16, 2004, the Secretariat transmitted the report on
the findings of the independent experts to the parties. By that same letter the
Tribunal invited the parties to file their observations on the report no later
than January 5, 2005. Such observations were filed in accordance with the
Tribunal's directions.
52. Throughout the proceedings, the parties' numerous procedural applications
were promptly and unanimously decided by the Tribunal.
C. CONSIDERATIONS
3. The Privatization Program as the Background to the Dispute
53. As had been observed by the Tribunal in its Decision on Jurisdiction,(3) the
Argentine Republic embarked in 1989 on economic reforms, which included the
privatization of important industries and public utilities as well as the
participation of foreign investment. Gas transportation was one of the
significant sectors to be included under this reform program. The basic
instruments governing these economic reforms were Law No. 23.696 on the Reform
of the State of 1989,(4) Law No. 23.928 on Currency Convertibility of 1991(5)
and Decree No. 2128/91 fixing the Argentine peso at par with the United States
dollar.
54. Within this broad framework specific instruments were enacted to govern the
privatization of the main industries. As far as the Gas sector was concerned,
Law No. 24.076
17
of 1992, or Gas Law,(6) established the basic rules for the transportation and
distribution of natural gas. This instrument was implemented the same year by
Decree No. 1738/92 or Gas Decree.(7)
55. As a consequence of the new legislation, Gas del Estado, a State-owned
entity, was divided into two transportation companies and eight distribution
companies. Transportadora de Gas del Norte (TGN) was one of the companies
created for gas transportation.(8) The privatization of the new company was
opened to investors by means of a public tender offer(9) and a related
Information Memorandum was prepared by consultant and investment firms in 1992
at the request of the Government.(10)
56. A Model License approved by Decree No. 2255/92(11) established the basic
terms and conditions for the licenses that each new company would be granted by
the Argentine Government. TGN's license was granted by Decree No. 2457/92(12)
for a period of thirty-five years, subject to extension for another ten years on
the fulfillment of certain conditions.
57. In the Claimant's view, the legislation and regulations enacted, as well as
the license, resulted in a legal regime under which tariffs were to be
calculated in dollars, conversion to pesos was to be effected at the time of
billing and tariffs would be adjusted every six months in accordance with the
United States Producer Price Index (US PPI). As will be examined further below,
the Respondent has a different understanding of the nature and legal effects of
these various instruments.
58. CMS's participation in TGN began in 1995 under a 1995 Offering
Memorandum(13) leading to the purchase of the shares still held by the
government. CMS's acquisition represented 25% of the company, later supplemented
by the purchase of an additional 4.42%,
18
thus totaling 29.42% of TGN's shares. This new Offering Memorandum was modeled
on the 1992 Information Memorandum and the license.
4. Argentina's Measures in the Period 1999-2002 and the Emergence of
the Dispute
59. Towards the end of the 1990's a serious economic crisis began to unfold in
Argentina, which eventually had profound political and social ramifications. The
nature and extent of this crisis will be discussed below.
60. Against this background, the Argentine Government called in late 1999 for a
meeting with representatives of the gas companies in order to discuss a
temporary suspension of the US PPI adjustment of the gas tariffs. The companies
agreed to a temporary suspension deferring the adjustment due for a period of
six months (January 1 - June 30, 2000). The agreement provided that costs of the
deferral would be recouped in the period July 1, 2000 - April 30, 2001, that
resulting income losses would be indemnified and it was understood that this
arrangement would not set a precedent or amend the legal framework governing the
licenses. This agreement was approved by ENARGAS, the public regulatory agency
of the gas industry, by Resolution No. 1471 on January 10, 2000.(14)
61. Soon thereafter it became apparent that the agreement would not be
implemented and requests by TGN for an adjustment of tariffs in accordance with
the License were not acted upon; in fact ENARGAS directed the company to refrain
from introducing any such adjustment. On July 17, 2000, a further meeting was
held with representatives of the gas companies, at which the companies were
asked to agree on a new deferral of the tariff adjustment. Another agreement to
this effect was entered into on that date, freezing US PPI
19
adjustments of tariffs for a two year period while allowing for some increases
relating to the earlier deferral and lost income. Income lost as a result of the
new deferral was to be gradually recovered and US PPI adjustments were to be
reintroduced as from June 30, 2002. Decree No. 669/2000 embodied the new
arrangements while recognizing that the US PPI adjustment constituted "a
legitimately acquired right" and was a basic premise and condition of the tender
and the offers.(15)
62. In a proceeding commenced by the Argentine "Defensor del Pueblo de la
Nacion," a federal judge issued on August 18, 2000 an injunction for the
suspension of both the agreement and Decree No. 669/2000 pending a decision on
the challenged legality of the US PPI adjustment. Meanwhile, administrative
appeals made by TGN did not change the situation and TGN's applications for
tariff adjustments continued to be rejected. In due course, the companies, the
Government and ENARGAS appealed the above decision of the federal judge,
however, the appeal was rejected. A final appeal of the companies to the
Argentine Supreme Court is still pending.
63. Based on these developments, ENARGAS repeatedly confirmed the continuing
freeze of the US PPI adjustment of tariffs, resulting in no adjustments being
made in accordance with this mechanism as from January 1, 2000, that is since
the first deferral. The parties disagree on the nature and extent of the
decisions adopted by ENARGAS, as will be discussed below. Against these
developments, CMS notified its consent to arbitration under ICSID on July 12,
2001, following the required notification of the dispute to the Argentine
Government. The dispute at this stage concerned only the issue of the
application of the US PPI adjustment.
20
64. In late 2001 the crisis deepened as the corrective measures that Minister
Domingo Cavallo had set in train did not succeed. Significant capital flight
from Argentina followed. In the wake of these further developments, the
Government introduced the "corralito" by Decree No. 1570/2001,(16) drastically
limiting the right to withdraw deposits from bank accounts. Default was declared
and several Presidents succeeded one another in office within a matter of days.
Emergency Law No. 25.561 was enacted on January 6, 2002,(17) declaring a public
emergency until December 10, 2003 and introducing a reform of the foreign
exchange system. Extensions of this period were later introduced, as will be
discussed below.
65. The Emergency Law introduced the second type of measures that underlie the
dispute in the present case. Thus, the currency board which had pegged the peso
to the dollar under the 1991 Convertibility Law was abolished, the peso was
devalued and different exchange rates were introduced for different
transactions. The right of licensees of public utilities to adjust tariffs
according to the US PPI was terminated, as was the calculation of tariffs in
dollars. The respective tariffs were redenominated in pesos at the rate of one
peso to the dollar. The same rate was applied to all private contracts
denominated in dollars or other foreign currencies. It was later clarified by
Decrees No. 689/2002 and 704/2002, dated May 2, 2002, that the Emergency Law did
not apply to gas exports or the tariffs for its transportation, which
consequently were exempt from the conversion to pesos.
66. The Emergency Law envisaged a process of renegotiation of licenses to be
conducted by a Renegotiation Commission. The pertinent procedures were defined
by Decree No. 293/2002.(18) The renegotiation process began on March 1, 2002 and
was later reorganized under other arrangements. Various efforts at initiating an
extraordinary review of tariffs or granting small adjustments were blocked by
court injunctions. A new Renegotiation Unit was created in 2003 and a new law
governing the renegotiation process -- Law No. 25.790 --
21
was enacted on October 31, 2003. Renegotiations were to be completed by December
31, 2004. Renegotiation was completed by this date in respect of some public
utilities and related companies, but this was not the case in the gas
transportation and distribution sector. A witness introduced by the Respondent
explained that this was attributable to the inherent difficulty in renegotiating
64 public utility contracts and numerous subcontracts.(19)
67. On February 13, 2002 CMS notified an ancillary dispute concerning the
measures enacted under the Emergency Law and related decisions. In its Decision
on Jurisdiction, the Tribunal considered that the disputes arising from the one
as well as the other types of measures were sufficiently closely related and
thus proceeded to the merits phase in respect of both.
5. CMS's Claim for Business and Financial Losses
68. The Claimant explains that it decided to undertake important investments in
the gas transportation sector in reliance on the Argentine Government's promises
and guarantees, particularly those that offered a real return in dollar terms
and the adjustment of tariffs according to the US PPI. The Claimant asserts that
it invested almost US$ 175 million in the purchase of shares in TGN and that TGN
invested more than US$ 1 billion in the renovation and expansion of the gas
pipeline network.
69. The Claimant further argues that the measures undertaken by the Government
in the period 1999 - 2002 and in the aftermath have had devastating
consequences. The effects relate in part to the loss of income and in part to
the fact that the Claimant's ability to pay its debt has been reduced by a
factor of more than three because the debt is denominated in US dollars and
there has been an intervening devaluation of the peso. The Claimant also asserts
22
that the value of its shares in TGN has dropped by 92%, falling from US$ 261.1
million to US$ 21.2 million, this last figure having later been revised to US$
23.7 million and later yet to US$ 17.5 million.(20)
70. Because no adjustment of tariffs has taken place since January 1, 2000 and
because tariffs may no longer be calculated in US dollars, the Claimant explains
that TGN's domestic tariff revenue has decreased by nearly 75%. Only export
revenues have been kept in US dollars. In the Claimant's view the situation has
been aggravated by the assertion by some Provincial governments of the right to
pay gas and other invoices in bonds.
71. It is further explained that the devaluation has also had an adverse impact
on TGN's costs: taking into account an exchange rate of 3.6 pesos to the dollar,
the rate used by the Claimant in its Memorial, it now takes 3.6 times as much
revenue as before to pay existing debt. As a result, it is claimed, TGN has
defaulted on certain dollar-denominated obligations and on its foreign and
domestic debt, thus having been excluded from international capital markets.
Dollar-denominated operating costs, it is asserted, have also been affected.
72. In addition to the losses that CMS has suffered as a result of the specific
measures referred to above, the Claimant argues that the broader economic
implications of the Emergency Law have led to an artificial depression of
consumer gas prices in Argentina, particularly as a result of the tariff freeze.
Because Argentine gas prices are among the lowest in the world, an effective
subsidy benefiting the rest of the Argentine economy has had a negative impact
on the regulated gas sector, amounting to several billion dollars for the energy
sector as a whole.
23
73. The end result of these measures, in the Claimant's view, has led to the
suspension of investments in new expansion projects and the collapse of the
pipeline network. This, in turn, it is argued, has brought about serious gas
shortages both in the domestic market and in the supply of neighboring
countries, such as Brazil, Chile and Uruguay. A fiduciary fund was established
in 2004 to channel investment, in conjunction with private participation, in gas
transportation infrastructure, particularly with a view to importing gas from
Bolivia to compensate for the domestic shortages. While the Respondent argues
that this is evidence of the normal operation of companies and TGN in the gas
market, the Claimant is of the view that TGN's participation in this arrangement
has not been voluntary.(21)
6. The Respondent's Arguments in Respect of Business and Financial
Losses
74. The Government of Argentina argues that the losses incurred by the Claimant
are not attributable to the Respondent and that any such losses arise from
business decisions of TGN. The effects of the measures on TGN's costs are in the
Respondent's view very different from what CMS claims.
75. The Government of Argentina asserts first that it is not true that TGN's
domestic tariff revenues have decreased by 75%, as argued by the Claimant -- a
50% decrease has also been indicated(22) -- in view of the fact that 25% -- a
figure of 31% has also been mentioned(23) -- of the revenues of TGN are related
to export contracts. In this area of operation the pertinent tariffs have been
kept in dollars and have increased by 11% -- 12% has also been mentioned (24) --
as a result of the periodic adjustment of such export tariffs in accordance with
the US PPI.
24
76. Moreover, the exchange rate used in the Claimant's calculations--3.6 pesos
to the dollar--is in the Respondent's view 20% higher than the actual exchange
rate at the time of the Answer (December 2003), or 3 pesos to the dollar. It is
further argued that the obligation to accept Provincial bonds in payment has
also not caused any harm to TGN as these bonds are used for the payment of taxes
and in any event most such bonds have now been recalled.
77. The Respondent argues next that TGN's operating costs in dollars amount to
only 26.69% of the revenues denominated in that currency. This, it says, is
because part of that revenue is export-related and, moreover, it is to be
expected that as a result of the devaluation, the share of dollar denominated
operating costs would decrease as a consequence of import substitution. The
dollar denominated revenue, it is also asserted, amply compensates for the
increase in domestic operating costs in pesos arising from inflation.
78. A third line of argument of the Argentine Government relates to the choices
available to TGN as sources of financing. These ranged from the use of its own
capital, debt in pesos -- which would not have been affected by a devaluation --
, dollar debt in Argentina -- which would have been "pesified" -- , and finally
to foreign currency debt incurred abroad. It is argued in this respect that TGN
chose the last option, which held the highest risks. The Respondent holds that
the Claimant cannot now attempt to transfer the consequences of this decision to
the Government or the consumer.
79. In the Respondent's view, the Gas Law provides for a structure of tariffs
that covers only operating costs and excludes financial costs altogether.
Tariffs were fixed on the basis of the cost of capital in Argentina and
therefore at a level higher than what would have been justified in more stable
countries. (25)
25
80. It is furthermore explained that ENARGAS warned TGN about the potential
difficulties that could arise from its debt profile(26). In fact, the investment
prospectus prepared by the Board of TGN in 1995 had specifically warned about
the potential adverse effects of a devaluation on revenues, debt payment in
foreign currencies and dividends to shareholders.(27) The latter document stated
that
"In case of a big devaluation of the peso in respect of the dollar,
the patrimonial situation and the operational results of the Company
could be adversely affected, as would also be the case of the capacity
to make payments in foreign currency (including the repayment of debt
expressed in foreign currency) and the distribution of dividends in
dollars at acceptable levels."(28)
81. The Respondent also argues that the License did not guarantee the
profitability of the business because, as stated in Article 2.4 of the Basic
Rules of the License, "the Licensor does not guarantee or ensure the
profitability of exploitation."(29) Nor, it is argued, can credit rating
deterioration be attributed to the Government. It is further asserted that TGN
is free to renegotiate its debt in the international financial market at
discounts ranging from 55% to 90%, just as other businesses have done.
82. The Government of Argentina also asserts that in spite of the Claimant's
argument to the effect that TGN invested over US$ 1 billion in infrastructure,
the actual situation is that TGN did not comply with the mandatory investment
requirement under the License of US$ 40 million and that TGN has repeatedly been
fined because of this failure; instead heavy voluntary investments were made in
the expansion of the transportation network for exports. A witness for the
Respondent stated that TGN has participated actively in the creation and
financing of the fiduciary fund for gas transportation mentioned above.(30)
26
83. It will be shown below that the Claimant opposes all such arguments. For now
the Tribunal wishes to observe that the Argentine Government has not provided in
its memorials an alternative valuation of the eventual losses affecting CMS,
saying that it is for the Claimant to properly prove its claims. In this regard
the Argentine Minister of Justice explained, at the hearing on the merits, that
Argentina was "not obliged to propose another valuation."(31) And although the
Tribunal requested a clarification on this matter from Argentina's experts, none
was provided.(32)
7. CMS's Legal Justification of its Claims
84. The Claimant is of the view that the measures adopted by the Argentine
Government are in violation of the commitments that the Government made to
foreign investors in the offering memoranda, relevant laws and regulations and
the License itself.
85. Such commitments, it is asserted, included the calculation of tariffs in US
dollars, the semi-annual adjustment in accordance with the US PPI and general
adjustment of tariffs every five years, all with the purpose of maintaining the
real dollar value of the tariffs.(33)
86. The Claimant argues that Argentina further agreed expressly not to freeze
the tariff structure or subject it to further regulation or price controls; and
that in the event that price controls were introduced, TGN would be entitled to
compensation for the difference between the tariff it was entitled to and the
tariff actually charged.(34) Moreover, the basic rules governing the License
could not be altered without TGN's consent.(35)
87. The Claimant is of the view that these guarantees constituted essential
conditions for CMS's investment (36) and that it has an acquired right to the
application of the agreed tariff
27
regime. The Claimant says that the Government of Argentina itself confirmed this
in Decree No. 669/2000 by explaining the adjustment mechanism of the licenses as
a "legitimately acquired right."(37)
88. It is further argued that the measures adopted are all attributable to the
Argentine Government and result in the violation of all the major investment
protections owed to CMS under the Treaty. It is claimed in particular that
Argentina has wrongfully expropriated CMS's investment without compensation in
violation of Article IV of the Treaty; that Argentina has failed to treat CMS's
investment in accordance with the standard of fair and equitable treatment of
Article II(2)(a) of the Treaty; that the passing of arbitrary and discriminatory
measures violates Article II(2)(b); and that it has also failed to observe the
many obligations entered into with regard to the investment in violation of the
standard of Article II(2)(c) of that Treaty. Unlawful restrictions to the free
transfer of funds in violation of Article V of the Treaty were also invoked in
the Claimant's memorial, a claim that was later withdrawn.(38)
89. On the basis of its understanding of the measures adopted, their economic
impact on the company and the legal violations invoked the Claimant requests
compensation in the amount of US$ 261.1 million for Treaty breaches plus
interest and costs.
90. The specific arguments invoked by the Claimant in support of its legal
contentions will be examined by the Tribunal separately when discussing each of
the claims made.
28
8. The Respondent's Legal Defense
91. In the view of the Argentine Government, the License, and the legal and
regulatory framework governing it, provide only for the right of the licensee to
a fair and reasonable tariff, encompassing costs of operation, taxes,
amortizations, and a reasonable return on investments, but excluding altogether
financial costs.(39) It is further asserted that no guarantees were offered in
respect of convertibility and currency devaluation and the risk inherent to the
investment in these respects was expressly brought to the attention of the
company.
92. The Respondent is of the view that any consequences arising from CMS's
decision to rely on the report of private consultants for its investment
strategies cannot be assigned to the Government. That report was not made by the
Government and all responsibility for its contents was the subject of an express
disclaimer.(40)
93. The Respondent argues in addition that, under the Gas Law, transportation
and distribution of gas is a national public service which must take into
account particular needs of social importance. To this end, the Government is
under an obligation to ensure the efficient operation of the service and must
control the implementation of the contract, including the alternative of
amendment or unilateral termination.(41) Thus, the regulation of tariffs is a
discretionary power of the Government insofar as it must take social and other
public considerations into account.
94. In the Respondent's view, it follows that no commitments could have been
made by the Government to maintain a certain economic or exchange rate policy
and that the State is free to change such policies, a right which cannot be
subject to claims by individuals or
29
corporations. In this respect, the argument follows, CMS could not have ignored
the public law of Argentina and the risks involved in investing in that country.
95 In this context, it is further asserted, tariffs must ensure to consumers
the minimum cost compatible with the certainty of supply,(42) as long as the
provision of the service is efficient. Because Argentina was characterized by an
unstable economy, the tariffs took into account the added risk of investing in
that country and were therefore higher than would normally have been the case.
As a result profits were also higher.
96. The Respondent is of the view that the licenses did not contemplate the
possibility of convertibility being abandoned and that the contractual regime
was therefore incomplete.(43) This, the Respondent filled in by means of the
pesification in the domestic market and dollarization in the external market,
thereby allowing consumers to continue to pay for gas and avoiding the collapse
of demand.(44) The Respondent also argues that tariffs did take into account the
risk of devaluation, a point that will be discussed further below.
97. As a result of the above considerations, the Respondent argues that there
has been no violation of the commitments made, explaining that the loss of value
of CMS's shares is the result of recession and deflation, of a major social and
economic crisis and the currency devaluation that followed. This devaluation, it
is asserted, had already occurred in other important international financial
markets.(45) All the measures adopted by the Government, it is further argued,
were needed for the normalization of the country and the continuous operation of
public services. Had tariffs been adjusted by 300% as CMS would have wanted,
public services would have been paralyzed, the income of licensees would have
dramatically decreased and public reaction would have been beyond control.(46)
30
98. The Respondent further explains that, in this legal and regulatory context,
there could be no violation of the Treaty and objects, in that regard,
particularly to the legal claims of CMS. In the Respondent's view, none of the
requirements under international law of indirect expropriation are met. The
guarantees invoked by CMS are not the property of the company protected under
the Treaty and TGN continues to operate normally. Nor was there a violation of
the standard of fair and equitable treatment, or a case of arbitrariness or
discrimination. The umbrella clause of the Treaty, the argument follows, cannot
be invoked as no obligations were undertaken by Argentina in respect of CMS,
only in respect of TGN, and the latter has not made any claim for contractual
violation under the License.
99. In the alternative, the Republic of Argentina has invoked national
emergency, brought about by the above-mentioned economic and social crisis, as
grounds for exemption of liability under international law and the Treaty.
100. As with the Claimant's arguments, all the views expressed by the Respondent
will be discussed in greater detail in connection with each claim.
101. Before proceeding any further, however, the Tribunal wishes to address one
particular issue raised by the Respondent. The matter concerns the fact that
certain loans were granted to TGN by the International Finance Corporation, an
affiliate of the World Bank, and the suggestion that this might constitute some
form of conflict of interest for an ICSID Tribunal operating under World Bank
Group auspices.(47)
102. The Tribunal wishes to state clearly that no connection to this effect has
ever interfered with its independent judgment of the case, and it would not
permit this to happen. Neither has the Tribunal at any point been approached by
World Bank officials on behalf of
31
the IFC or any other Bank affiliate, nor would the Tribunal permit any
representation of this kind. The Tribunal learnt about TGN's financing
arrangements through the pleadings of the parties alone.
9. Are the Measures Adopted Temporary or Permanent?
103. One particular aspect of this dispute is whether the measures adopted are
temporary or permanent in nature, a matter that has importance in the context of
the applicable law that will be discussed further below.
104. The Claimant rejects that the measures adopted are temporary insofar as
they continue to be in force after several years. Moreover, all draft
legislation introduced by the Government in Congress has tended to reinforce the
effect of such measures. The Claimant invokes as clear evidence of this being
the case the draft Public Utilities National Regulatory Act introduced in 2004,
in which the measures in force were turned into permanent features of the tariff
regime.(48)
105. The Respondent argues the opposite. In its view, the measures complained
of are all of a temporary nature arising from the emergency and subject to
renegotiation.(49) The Government, it is argued, has made specific proposals to
TGN in its efforts to achieve a successful renegotiation, including a proposal
made on July 2, 2004, envisaging a 7% increase in tariffs in 2005 and completing
their regularization in 2007.(50) This has been described as a basic or first
proposal.(51) It is further stated that the Claimant has not been minded to
present any counter-proposal.
32
106. The Claimant explains on this point that the proposal is insufficient to
meet the adjustments necessary to achieve a just and reasonable tariff and to
compensate for the losses the company has experienced.(52) This is particularly
so in light of TGN's own January 22, 2003 proposal. Under this proposal, TGN had
requested four 17.8% increases to take effect between March and September
2003.(53) Such increases would have represented close to a 90% adjustment.
107. The Tribunal can only note in this respect that more than five years have
lapsed since the adoption of the first measures in 2000. Delays can be explained
with reference the above-mentioned crisis. However, if delays exceed a
reasonable period of time the assumption that they might become permanent
features of the governing regime gains in likelihood.
10. Applicable Law: The Parties' Views
108. The parties in this case have not chosen a particular law applicable to
the resolution of the dispute nor has the Treaty. In the absence of such choice,
Article 42(1) of the Convention becomes the rule governing the determination of
the law to be applied by the Tribunal:
"[I]n the absence of such agreement, the Tribunal shall apply the
law of the Contracting State party to the dispute (including its
rules on conflict of laws) and such rules of international law as
may be applicable."
109. Yet again the parties have expressed radically different views. The
Claimant has argued, first at the jurisdictional stage and again in the merits
phase of the proceedings, that only the Treaty and international law are
applicable to the dispute while the law of the host State "plays only a marginal
role, relevant only as a matter of fact."(54) The Claimant argues
33
that ICSID's jurisprudence is uniform in respect of the application of the
Treaty as lex specialis, complemented by customary international law where
necessary.(55)
110. On this basis, the Claimant asserts that Argentine law is relevant only in
the context of factual matters, such as with regard to the nature of the
assurances made to CMS. The Claimant relies in this respect on the decision
rendered in the case of Tecmed v. Mexico to show that the act of a State must be
characterized as internationally wrongful if in breach of an international
obligation, "even if the act does not contravene the State's internal
law..."(56)
111. The Claimant further explains that, in any event, treaties have a
significant place in the Argentine constitutional order and must be observed,
and that various courts in Argentina have ruled that some of the measures
adopted are themselves unconstitutional.
112. The Respondent has put forth the view that, in the absence of an
agreement, the Tribunal must examine and apply the domestic legislation of
Argentina, particularly since the investor, like any national investor, is
subject to domestic law and the License is specifically governed by Argentine
law.
113. The Respondent invokes first the need to apply the Argentine Constitution.
It is explained, in this context, that the protection of the right of property
enshrined in the Constitution has been interpreted by the Courts as not having
an absolute character and that State intervention in the regulation of
individual rights is justified, provided such intervention is both legal and
reasonable when factoring in social needs. Moreover, the Respondent asserts that
a differentiated treatment in certain circumstances does not affect the
requirement of uniformity in the application of the law.
34
114. In respect of the legal regime of treaties in Argentina, the Respondent
argues that while treaties override the law they are not above the Constitution
and must accord with constitutional public law.(57) Only some basic treaties on
human rights have been recognized by a 1994 constitutional amendment as having
constitutional standing(58) and, therefore, in the Respondent's view, stand
above ordinary treaties such as investment treaties. It is further argued that,
as the economic and social crisis that affected the country compromised basic
human rights, no investment treaty could prevail as it would be in violation of
such constitutionally recognized rights.
11. Applicable Law: The Tribunal's Findings
115. Much discussion has surrounded the meaning of Article 42(1) of the
Convention and the interpretations have ranged from a restricted application of
international law in a complementary or corrective role, to be relied upon only
in case of domestic lacunae or where the law of the Contracting State is
inconsistent with international law,(59) to a role that calls for the
application of international law only to safeguard principles of jus cogens.(60)
116. More recently, however, a more pragmatic and less doctrinaire approach has
emerged, allowing for the application of both domestic law and international law
if the specific facts of the dispute so justifies. It is no longer the case of
one prevailing over the other and excluding it altogether. Rather, both sources
have a role to play. The Annulment Committee in Wena v. Egypt held in this
respect:
"Some of these views have in common the fact that they are aimed at
restricting the role of international law and highlighting that of
the law of the host State. Conversely, the view that calls for a
broad application of international law aims at restricting the role
of the law of the host State. There
35
seems not to be a single answer as to which of these approaches is
the correct one. The circumstances of each case may justify one or
another solution... What is clear is that the sense and meaning of
the negotiations leading to the second sentence of Article 42(1)
allowed for both legal orders to have a role. The law of the host
State can indeed be applied in conjunction with international law if
this is justified. So too international law can be applied by itself
if the appropriate rule is found in this other ambit."(61)
117. This is the approach this Tribunal considers justified when taking the
facts of the case and the arguments of the parties into account. Indeed, there
is here a close interaction between the legislation and the regulations
governing the gas privatization, the License and international law, as embodied
both in the Treaty and in customary international law. All of these rules are
inseparable and will, to the extent justified, be applied by the Tribunal.
118. It is also necessary to note that the parties themselves, in spite of
their doctrinal differences, have in fact invoked the role of both legal orders.
The Republic of Argentina relies for its arguments heavily on provisions of
domestic law, but also resorts to international law, for example in respect of
treaty clauses on national security and customary law on state of necessity and
other matters. Similarly, the Claimant invokes provisions of domestic law,
regulations and the License to explain the rights TGN has under these
instruments and the measures affecting them. But also the Claimant invokes
Treaty guarantees and customary law on various issues.
119. The Respondent has suggested this arbitration might infringe upon or be in
conflict with the Constitution of the Republic of Argentina.(62) The Tribunal,
however, does not believe this to be the case considering the prominent role of
treaties under the Constitution and the
36
fact that the arbitration proceeds under both the ICSID Convention and the
Treaty. In fact, under Article 27 of the Argentine Constitution
"The federal Government is under the obligation to consolidate its
relations of peace and commerce with foreign powers by means of
treaties in conformity with the principles of public law provided
for under this Constitution."
120. So too, Article 31 of the Constitution mandates that the Constitution, the
laws enacted under it and treaties are "the supreme law of the Nation." Indeed,
the Argentine courts have a long-standing record of respect for treaties and
have duly recognized their hierarchical standing above the law.(63) While
treaties in theory could collide with the Constitution, in practice this is not
very likely as treaties will be scrutinized in detail by both the Government and
Congress.
121. In this case, the Tribunal does not find any such collision. First because
the Constitution carefully protects the right to property, just as the treaties
on human rights do, and secondly because there is no question of affecting
fundamental human rights when considering the issues disputed by the parties.
122. The specific domestic legislation of Argentina and rules of international
law applied by the Tribunal will be discussed in connection with the issues
contended. In addition to the Constitution and the Argentine Civil Code, the gas
legislation and regulations will be analyzed, together with the measures adopted
under the Emergency Law and other pertinent matters. The Treaty and customary
international law will also be applied in reaching the pertinent conclusions.
37
123. Before doing so, however, the Tribunal wishes to address a particular
contention made by the Respondent, namely that the Tribunal would be exceeding
its powers if it were to decide the dispute on the basis of the provisions of
the License, and that such decision would be subject to annulment. The Tribunal
must apply the relevant domestic and international law, including the License,
as a validly made contract under Argentine law and subject to specific stability
clauses, since it has a duty to decide the dispute under Article 42(1) of the
Convention.
12. The Limits of the Tribunal's Jurisdiction
124. The Tribunal is mindful that, in its Decision on Jurisdiction, the
distinction was made between measures of a general economic nature, such as
those concerning the economic and financial emergency, and measures specifically
directed to the investment's operation.(64) It then reached the following
conclusion:
"...the Tribunal concludes on this point that it does not have
jurisdiction over measures of general economic policy adopted by the
Republic of Argentina and cannot pass judgment on whether they are
right or wrong. The Tribunal also concludes, however, that it has
jurisdiction to examine whether specific measures affecting the
Claimant's investment or measures of general economic policy having
a direct bearing on such investment have been adopted in violation
of legally binding commitments made to the investor in treaties,
legislation or contracts."(65)
125. In discussing the rights of the parties and the measures adopted the
Tribunal will keep this distinction in mind.
38
126. It must also be noted that in connection with the merits the Respondent
has again raised certain jurisdictional issues that were addressed in the
jurisdictional phase of the case, such as the jus standi of the Claimant. These
issues were decided upon at that stage and will not be reopened in this Award.
13. Did the Claimant have a Right to a Tariff Calculated in US Dollars?
127. The first issue the Tribunal must address in connection with the
Claimant's contentions is whether it had a right to a tariff calculated in US
dollars and converted into pesos at the time of billing.
128. The Claimant asserts this right under the public tender offer, the Gas
Decree, the Information Memorandum issued in 1992 in conjunction with the
initial public tender offer, and Clause 9.2 of the License. The Claimant recalls
in particular Article 41 of the Gas Decree stipulating that "tariffs for
transportation and distribution shall be calculated in dollars."
129. The Respondent, however, believes differently. As already noted, in the
Respondent's view the Gas Law only ensures licensees the right to a fair and
reasonable tariff. The Gas Decree and TGN's License do provide for the
calculation of tariffs in US dollars and their conversion to pesos but, the
Respondent argues, only in conjunction with Convertibility Law No. 23.928. It is
further explained that once the convertibility and the dollar/peso parity were
abandoned, calculation of tariffs in dollars would become redundant and the
right to such calculation would lapse, particularly if a devaluation were to
reach 300%. In this regard the Respondent recalls that the Gas Decree refers to
the parity established in the Convertibility Law and not to the exchange rate in
force at the time of
39
calculation and conversion.(66) According to the Respondent, the Government made
no promise or guarantee that tariffs would be kept in dollars if the fixed
exchange rate regime were abandoned.(67)
130. This relationship between the tariff calculated in US dollars and the
Convertibility Law is also discussed by the Respondent in the context of the
privatization of the telephone company. In that situation tariffs were
originally calculated in local currency and adjusted in accordance with
Argentina's consumer price index. The tariffs were later converted into dollars
and subjected to dollar adjustment but only as a result of the Convertibility
Law, presumably for as long as this law was in force. It has been explained by
the Claimant, however, that this was a different situation and that, in its
view, it further confirms that tariffs were to be calculated in dollars.(68)
131. The Respondent has also elaborated on the question of the applicable law
in the context of this issue, arguing in particular that the Claimant could not
have made its investment exclusively on the basis of the public tender offer or
the Information Memorandum of 1992, as both were subject to the express
provisions of Argentine law and the specific terms of the arrangements for the
transfer of TGN's shares. It is also emphasized, as noted, that the information
provided by consultant firms was expressly subject to a disclaimer, that no
assurance was offered on the part of the Government and that no liability could
ensue from the information contained therein.
132. Any such decision to invest, the argument follows, could only have been
made on the basis of the applicable rules in force. As the Gas Law only ensured
the right to a fair and reasonable tariff, none of the instruments which were
subordinate to it, in particular the License, could validly provide for
additional rights. This would breach the principle of
40
legality and the very right of the State to fix the tariffs for its public
services and modify contracts in consideration of public interest. Moreover, the
Respondent again raises an argument to the effect that the Claimant in any event
cannot rely on TGN's License as this was issued to a different company; this, as
noted, is an issue that has been resolved by the Tribunal in its jurisdictional
decision.
133. While it is true that the Claimant at first relied heavily for its
arguments on the Information Memorandum and related consultant reports, the
entire legal structure was gradually brought into the pleadings by both parties.
This included the Gas Law which contains provisions of a general nature, such as
the right to a fair and reasonable tariff, as well as the Gas Decree and the
License which specifically provide for the calculation of tariffs in dollars and
their conversion into pesos at the time of billing. This guarantee is sufficient
to legally give rise to a right of the Claimant to this effect. It is not
contrary to the law. Neither is it contrary to the right of the State to amend
tariffs, for which purpose specific mechanisms were established in the License
itself and other relevant instruments.
134. In addition, in the context of the privatization it was abundantly clear
that one of the key elements in attracting foreign investment and in overcoming
the economic and financial crisis of the late 1980's was to provide the
necessary stability. Declarations by public officials repeatedly confirmed this
understanding and the Memorandum, while not legally binding, accurately reflects
the views and intentions of the Government. This very same understanding, as the
Claimant has emphasized, was expressly confirmed by the Privatization Committee,
a step that must be considered as having some legal implications.
135. This Committee in fact recorded in the minutes of its session of October
2, 1992, that "Section 9.2 leaves it sufficiently clear that the tariffs are in
dollars and expressed in
41
convertible pesos, for which reason, when faced with an eventual modification of
the Convertibility Law, they should be automatically re-expressed at the
modified rate."(69)
136. The Tribunal is not convinced of the merits of the argument the Respondent
has made about the right to a tariff calculation in dollars linked to the
Convertibility law. Had the right been conditioned on the existing parity the
pertinent provisions could have said so quite clearly. This was not the case and
the Privatization Committee understood the guarantee differently, that is, as
providing for a tariff in a stable currency. In fact, the provisions in question
allow for a reading which is quite different from that argued by the Respondent.
If the tariffs were in dollars and had parity changed at the time of billing,
the conversion was to be made at the rate of exchange at that moment so as to,
precisely, guarantee the fairness and reasonableness of the return. This,
however, is an argument linked more to the question of devaluation and it will
be examined further below.
137. The Tribunal also notes that it was precisely because the right to tariff
calculations in dollars was guaranteed that the privatization program was as
successful as it was. The program attracted hundreds of companies to the country
with investments that ran into over 10 billion dollars. Numerous bilateral
investment treaties were also entered into at the time to provide additional
guarantees under international law. It is not credible that so many companies
and governments and their phalanxes of lawyers could have misunderstood the
meaning of the guarantees offered in a manner that allowed for their reversal
within a few years.
138. The Tribunal concludes on this question that the Claimant has convincingly
established that it has a right to a tariff calculated in dollars and converted
into pesos at the time of billing. The specific implications of this finding
will be discussed below.
42
14. Did the Claimant have a Right to Adjustment of Tariffs in Accordance
with the US PPI?
139. The second element that was determinative for the Claimant in deciding to
invest in TGN was the assurance of adjustments of the tariff in accordance with
the US PPI in January and July of each year. This right, in the Claimant's view,
was created by the Gas Law and every other instrument governing the
privatization of the gas transportation and distribution industry.
140. The Respondent makes in this connection the same arguments as those
advanced above in respect of the calculation of the tariff in dollars. In the
Respondent's view, such mechanism was justified only in conjunction with the
Convertibility Law and the exchange rate parity, thus avoiding indexation in
accordance with Argentine indexation mechanisms and taking advantage of the fact
that inflation in the United States was historically lower than that reflected
in Argentine indexes.
141. The Respondent further asserts that such adjustment mechanism was
justified at the time of privatization in 1992, but that at the end of the
decade it had lost all relevance because the Argentine economy went into
recession and deflation and domestic prices fell significantly. It is also
argued that the United States' inflation at the time was higher than what it had
been historically and that the adjustment would therefore no longer reflect
TGN's costs but would result in a significant increase of tariffs during the
recession. The Respondent held that such increase could be as high as 6.18%
resulting from the US PPI adjustment plus some adjustments due to debt
repayment.
43
142. According to the Respondent's argument this was the situation underlying
the voluntary postponement of adjustments agreed to in January and July 2000.
These were also the reasons invoked by the Federal judge issuing the injunction
on adjustments referred to above.
143. Moreover, the Respondent believes that the freezing of tariffs at this
point was the measure affecting the licensees the least as resorting to an
extraordinary adjustment of tariffs would have led to yet lower tariffs.
144. The same considerations the Tribunal made above in respect of the meaning
of the governing legal framework, including the question of the dependence on
the Convertibility Law, apply to the issue of adjustment of tariffs in
accordance with the US PPI; that is, it was a right established under the legal
rules, the License and the context in which the privatization was undertaken.
The Claimant has adequately proven its rights concerning this other issue. The
question of costs and whether the mechanism was justified at a later point will
be discussed separately.
15. Did the Claimant have a Right to Stabilization Mechanisms under the
License?
145. A third issue the Tribunal must examine is whether the Claimant had a
right under the governing legal framework to additional stabilization clauses.
The Claimant invokes in particular two such clauses of the License. The first
concerns the Respondent's commitment in clause 9.8 of the License to the effect
that the tariff structure would not be frozen or subject to further regulation
or price control, and that in the event that a price control
44
mechanism compelled the licensee to adjust to a lower level of tariff "...the
Licensee shall be entitled to an equivalent amount in compensation to be paid by
the Grantor."(70)
146. The Claimant next invokes Clause 18.2 of the License which provided that
the basic rules governing the License would not be amended, totally or
partially, without the Licensee's written consent. The Claimant further asserts
that when such consent was given in January and July 2000 for the postponement
and rescheduling of adjustments, albeit non-voluntarily in the Claimant's view,
the Argentine Government undertook additional obligations to reestablish the
operation of the altered adjustment mechanisms.
147. The Claimant argues that all the commitments under the License as well as
the 2000 postponement arrangements were simply not observed by the Argentine
Government. Moreover, in the Claimant's view, ENARGAS further aggravated the
situation by adopting decisions that went beyond the extent of the judicial
injunction. It is argued in particular that the injunction affected only the
July agreement and the corresponding Decree No. 669/00,(71) but not the January
agreement under which a 6% adjustment would be made in July 2000.
148. In the Respondent's view, there is yet again a jurisdictional question in
that any stabilization clause would benefit TGN as the licensee but not the
Claimant, a matter on which, as explained, the Tribunal has already ruled. It is
further believed on the merits of the question that the Government powers could
not be subject to a freeze as this would be equivalent to a renunciation
prohibited under the law and the constitutional concept of public service.
149. In respect of the argument about aggravating measures adopted in 2000, the
Respondent asserts that ENARGAS was only following a judicial determination and
it was
45
on this basis that it rejected an administrative appeal by TGN purporting to
have the January adjustment enforced. Yet later it rejected the tariff
application by TGN seeking to retroactively obtain the adjustments corresponding
to the year 2000 and to follow on as from 2001.
150. On this last question, the Tribunal considers the argument made by the
Argentine Government as pertinent because, even though technically a restrictive
interpretation of the injunction might have been correct, it was quite evident
that such injunction was aimed at paralyzing the operation of the adjustments as
a whole and not just that corresponding to the July agreement.
151. The important question, however, is that concerning the right to benefit
from stabilization clauses. This discussion is well known in international law
and to the extent this dispute concerns the simultaneous operation of the
License and protection under the Treaty, the stabilization ensured a right that
the Claimant can properly invoke.(72)
16. Was the Economic Balance of the License Altered in Light of Changing
Realities?
152. While the legal meaning of the governing legal framework and the License
is quite straightforward and granted rights that are now invoked by the
Claimant, the reality of the Argentine economy is more difficult to assess. It
may be recalled that the privatization program was conceived to overcome the
crisis of the late 1980's. This crisis was characterized by hyper inflation, the
inefficient operation of many publicly-owned companies, including those
responsible for public utilities, and a dramatic shortage of
46
investments. The privatization program was very successful but the late 1990's
witnessed the emergence of another major crisis.
153. This crisis will be discussed further below, but it should be mentioned at
this point that it stemmed basically from economic conditions that made it
impossible to maintain the fixed exchange rate and which gradually led to the
greatest default on foreign debt in history and the collapse of the Argentine
financial markets. Some tend to fault foreign investors and put the blame on
excessive privatization and globalization, while others see in it the result of
not having carried out the liberalization program in its entirety and having
allowed major governmental interferences in the functioning of the economy.
154. Justice, however, is not as blind as it is often thought and this Tribunal
acknowledges that changing realities had an impact on the operation of the
industry and the governing legal and contractual arrangements.
155. The first major impact arose from the devaluation of the peso. The measures
adopted in 2000 in order to postpone US PPI adjustments and to freeze the
tariffs were in fact anticipating a major upheaval in the economy and in the
economic policies followed by the Argentine Government. The Emergency Law and
related measures came to confirm this situation and transformed the freeze into
a permanent feature of that policy coupled with the elimination of the
Convertibility Board and the exchange rate parity.
156. The Respondent has argued in this respect, first, that the privatization
framework never guaranteed that a devaluation would not occur and, next, that
the Board of TGN expressly warned in the Investment Prospectus that there were
no assurances that changes in government policy would not affect the company.
Particular reference was made to inflation,
47
monetary fluctuations, interest rates, social instability and political
events.(73) Along the same lines, the Respondent argues that witnesses
introduced by the Claimant have recognized that there was no assurance against
devaluation.(74)
157. In the Respondent's view, the Claimant cannot pretend that it had a right
never to see the returns of the company diminish for reasons other than business
risks. The Respondent observes that this would transform the License into the
kind of insurance policy which this Tribunal and other tribunals have held are
not provided by bilateral investment treaties. Moreover, the Respondent asserts,
the Claimant cannot pretend to be insulated from any internal or external
condition affecting the operation of the company.
158. The Claimant explains that it does not complain about the economic
conditions of Argentina or the right of the Government to devalue the currency,
but only about the breach of the specific guarantees offered to investors and
the related protection ensured under the Treaty. One of the most significant
guarantees in this respect, in the Claimant's view, was that of keeping the
tariffs in dollars so as to eliminate monetary and devaluation risks.
159. The Tribunal has noted above that it is not its task to pass judgment on
the economic policies adopted by Argentina and hence it is not for it to
determine whether the devaluation was the right or the wrong measure to take in
the circumstances. However, it is its duty to establish whether such measure had
specific adverse consequences for the Claimant in light of the legal commitments
made by Argentina both under the applicable domestic and international legal
framework.
160. Here again the discussion about the connection between the calculation of
tariffs and their periodic adjustment in dollars and the Convertibility Law
becomes crucial to determine
48
the issue. As noted above, two different views have been expressed on this
point. For the Respondent, that guarantee only stands as long as the
Convertibility Law and the exchange rate parity was in force. For the Claimant,
the guarantee works precisely in the context of an alteration of the exchange
rate, as the tariffs would still be calculated in dollars and converted into
pesos at the newly established exchange rate.
161. For the reasons mentioned above, the Tribunal is of the view that the
meaning of the legal framework and the License, particularly in the context of
the privatization, was to guarantee the stability of the tariff structure and
the role the calculation in dollars and the US PPI adjustment played therein.
Devaluation could of course happen at some point, but then the tariff structure
would remain intact within the framework of stability envisaged as it would
adjust automatically to the new level of the exchange rate.
162. The fact that tariffs were converted from dollars to pesos at a fixed
exchange rate of 1 to 1 and that, at the same time, the devaluation was
undertaken, meant that the stabilization envisaged in the License was in
practice eliminated.
163. The discussions held in this respect in the Privatization Committee,
referred to above, are helpful to clarify the real meaning of the guarantees
provided. It is reasonable to understand this discussion as having concluded
that there was no need to repeat in the License a guarantee that was already
provided under the law, as opposed to an agreement to abandon a fundamental
guarantee of this kind. The latter option would be entirely contradictory to the
intent of the contemporaneous privatization program and the interest in
attracting foreign investment.
49
164. Again, on this issue, the law is clear, but economic realities are indeed
more complex to assess. For one thing, it is quite true that, as argued by the
Respondent, the peso had already been much devalued in international markets and
hence it was entirely artificial to keep it at a parity that was no longer
sustainable.(75) For another, capital flight had reached critical proportions as
a consequence of a drop in exchange rates and general lack of trust in the
economic conditions. In this regard, the change of policy became inevitable.
165. The question for the Tribunal is then how does one weigh the significance
of a legal guarantee in the context of a collapsing economic situation. It is
certainly not an option to ignore the guarantee, as the Respondent has advocated
and done, but neither is it an option to disregard the economic reality which
underpinned the operation of the industry.
166. The answer to this conundrum lies in the examination of the effect of the
economic situation on the costs of the company, including the question of cost
structure, the significance of the export market and the adjustment mechanisms
provided for under the License.
17. A Fair and Reasonable Tariff
167. One of the few points on which the parties seem to be in agreement is that
tariffs should be fair and reasonable as envisaged under the governing legal
regime. Yet, what is fair and reasonable is the subject of substantial
disagreement.
168. The Respondent has made the argument that tariffs that were kept and
adjusted in dollars could not be fair and reasonable in the context of the
recession and deflation that affected Argentina. This was particularly so, in
the Respondent's view, because internal
50
prices kept falling in the wake of the currency devaluation and hence the costs
of the company were greatly diminished, a consequence to which a dollar standard
could not adjust. Hence the decisions to abandon the dollar denomination and to
freeze the tariffs.
169. The Claimant has explained in this respect that its operating costs did in
fact decrease as a result of the devaluation from US$ 70.3 million in 2001 to
US$ 37.2 million in 2002. However, during the same period revenue decreased from
US$ 253 in 2001 to US$ 125.1 million in 2002. The end result was that operating
income fell by 52% in one year. In the Claimant's view, the devaluation did not
necessarily lead to a reduction in costs as many expenses remained fixed in
dollars and local suppliers quickly adjusted their prices to compensate for the
devaluation.
170. As a matter of principle, a devaluation of 300% must necessarily have an
effect on the company cost structure. However, costs are unlikely to decrease in
the same proportion, in part because some costs are kept in dollars and in part
because financial costs must also be considered, not just operating costs. This
issue has resulted in disagreement between the parties.
171. The Claimant has explained that its financial costs are reasonable for a
capital-intensive infrastructure industry. TGN financed about one half of its
investment by debt to be amortized over the life of the project. The total debt
of TGN, both domestic and external, amounts to US$ 590 million, of which 93%
corresponds to foreign loans and remains payable in dollars. Only 7% of TGN's
debt, that is the domestic portion, was pesified. As a result of the tariff
freeze, TGN has defaulted on all its loans and has ceased to repay capital,
paying approximately only one-third of the interest due.
51
172. The Claimant has also explained that higher debt resulted in lower capital
costs and thus in maximum efficiency. This, in its view, was the very reason
that led ENARGAS to use TGN's leverage of 46% debt to 54% equity in the
estimates preparatory to the second tariff review, which never took place.(76)
173. In the Respondent's view, such financial decisions are attributable only to
the company, as discussed above. In fact, the Government of Argentina believes
that TGN, in relying on foreign debt, chose the worst of all financial options
to the detriment of other alternatives, such as the use of its own capital or
debt in Argentina, in pesos or even in dollars, which was later pesified.(77) It
follows, in the Respondent's view, that the risk entailed in this decision
cannot now be attributed to Argentina and that, in any event, such proportion of
debt was unwise and the company was so warned by ENARGAS. The Respondent
explains that TGN increased its debt-equity ratio from approximately 0.50 in
1997 to over 1.00 in 2001; had TGN's ratio been used in calculating tariffs,
these would have been lower, not higher, because the rate of return required
would also have been lower.(78)
174. The Claimant believes differently. It could not borrow on the domestic
capital market as it did not have capacity to absorb large borrowing. Moreover,
no one could have foreseen that devaluation and decoupling of tariffs from
dollars would be forthcoming as all the guarantees offered pointed in the
opposite direction. Thus, at the time it made sense to borrow in international
markets thereby taking advantage of low interest rates.
175. As to the discussion about the debt-equity ratio, the Claimant also
explains that a 62% debt to total capital is standard in the gas industry, and
thus a 50% ratio as that of TGN is perfectly reasonable, particularly when
taking into account the stability surrounding the approval of the project.
Furthermore, it is explained that the initial tariffs were calculated by
52
the Government on a 33:67 debt to equity ratio, allowing for a lower cost of
capital and higher bidding for the licenses.
176. A related point of contention is that while the Respondent argues that the
company opted to distribute profits to shareholders instead of reinvesting it,
and thus failed to increase its own capital contribution as opposed to having
financed debt, the Claimant asserts that this is simply patently erroneous as
70% of its profits were reinvested and merely US$ 168 million paid in dividends,
a figure representing only a 4% annual return.
177. The Claimant is also of the view that debt restructuring as a mitigating
alternative mentioned in Argentina's argument is simply not possible because
creditors are not in a position at present to forecast companies' revenues. The
difficulty experienced by the very Government of Argentina in restructuring its
foreign debt proves in the Claimant's view that the exercise was not easy to
carry out, and even less so could this be done by way of reorganization under
the aegis of Argentine courts.
178. The conclusion of this discussion calls for a determination of whether
financial costs are a factor in the calculation of tariffs so as to reach the
fair and reasonable result mandated by the Law. In Respondent's view, it is not.
In the Claimant's view, it is an essential factor.
179. The Tribunal has no doubt that financial costs are included as an element
of the calculation of tariffs. This is so, first, because no project of this
magnitude could be carried out without its financing being calculated within the
return necessary to make it viable. Second, the legal meaning of the Gas Law
unequivocally leads to the same conclusion. Indeed, Article 38(a) of the Law
provides that the service providers who operate economically and prudently shall
have "the opportunity of obtaining an income sufficient to
53
recover all reasonable operating costs applicable to the service, taxes,
depreciation ("amortizacion" in Spanish) and a reasonable rate of return...". So
too Article 2(4) of the Gas Decree provides for the recovery of all reasonable
costs "including the cost of capital."
180. In the Tribunal's view it is quite clear that "depreciation" or
"amortizacion" refers, in particular, to the debt financing which is written off
over the years. There is yet a another reason supporting this conclusion. Debt
was a part of the tariff as calculated before the freeze and it is quite
unlikely that the Government and the regulatory agency, as well as all the
companies, would have read the Law mistakenly. Neither is there any reason to
believe that experienced companies would not have operated economically and
prudently.
181. It follows that the freeze adopted cannot be reconciled with the objective
of a fair and reasonable tariff, not just because of the dollar connection and
adjustment discussed above, but also because, by not taking into account the
financial reality of the project, such frozen tariffs do not reflect the real
costs of the operator. This is why financial costs were taken into account by
ENARGAS both in the first and the second five-year tariff review, even if the
latter was never finalized. Presumably this was also reflected in the
Government's 2000 tariff increases, which were subject to the court injunction,
and might also be included in the new increases that government officials have
repeatedly assured are a necessary step under the renogotiation process.
182. The effects of the devaluation have quite evidently given rise to profound
adjustments in the economy of Argentina, but not all such effects have benefited
the operator. Far from it: the combined effect of tariff freezes and
devaluation, even if the latter resulted in a decrease of operating costs, led
to the evaporation of operating income, prompted constant negative
54
results in the balance sheet and caused the default mentioned. A tariff causing
these results cannot be judged under any standard to be fair and reasonable.
183. The Tribunal cannot rule out the argument that a tariff kept and adjusted
in dollars might be unrealistic in view of the changing economic realities that
have been mentioned. But, even within the context of the Argentine legal
framework and the License itself, there are ways to take these changes into
account without abandoning the legal guarantees offered, as will be discussed
further below.
184. The Respondent has argued in addition that the tariffs were higher than
normal because they took into account, from the outset, the risk of devaluation
expressed in terms of the Argentine country-risk. To this end, the discount rate
used was also higher so as to allow for a greater return to the company because
of that risk ("WACC" or Weighted Average Cost of Capital), as was also the case
with the interest rate. The Stone & Webster consultant report commissioned by
ENARGAS in order to make the first five-year review of tariffs had suggested a
rate of return of 18.6% on the capital contributed by the company. This was
eventually established by the regulatory agency as a 16.07% rate of return, thus
reflecting, in the Respondent's view, the effect of the higher country-risk.
185. While this discussion is related more to the question of valuation of
damages and the determination of the value of the company made by the Claimant's
financial experts, which will be examined separately, it nonetheless reveals an
important feature of the tariff regime that, it is argued, did provide for
protection against devaluation. While, in the Claimant's view, this protection
was a part of the legal promises and assurances given, it appears in the
Respondent's view that it was given by means of the financial mechanisms put in
place, particularly the tariff. These arguments, it will be seen, have important
legal implications.
55
186. It follows that the devaluation must not only be considered as a part of
the broad economic measures affecting the country as a whole but also as a
specific feature applicable to the Claimant and having a direct impact on its
operations. As such and to that extent, it falls under the Tribunal's
jurisdiction. The Tribunal has noted above that the devaluation indeed did have
an adverse economic effect on the operator because, in conjunction with other
measures, it resulted in a tariff that was not fair and reasonable.
187. Moreover, the Claimant also explains, the distortions this situation has
created are at the very heart of the crisis of the energy sector affecting
Argentina. It is further asserted that artificially low tariffs led to an
increased demand and, as revenues are insufficient to make further investments
in transportation and distribution, the energy market has collapsed and has
required new and different arrangements, including the fiduciary fund mentioned
above and the importation of gas from Bolivia at high costs.(79) On this basis,
the argument about subsidization of other sectors of the economy becomes
convincing.
18. Investments and Exports
188. There is yet another element of the discussion relevant to the correct
understanding of the cost structure and the implications of devaluation and
pesification: the investment program and its connection with the export market.
189. The Claimant asserts that three kinds of investment were made: US$ 40
million of mandatory investment, principally related to the improvement of
safety and network integrity; US$ 12 million of non-mandatory investment
destined for expansion; and US$ 29.5 million for projects aimed at strengthening
efficiency. Not only were these goals achieved, the argument goes on, but TGN
made investments exceeding US$ 1 billion that resulted in
56
significant network expansion and distribution to many new users while keeping
the gas price among the lowest in the world.(80)
190. The Respondent challenges these assertions and argues that investment
targets were not met and that, as a consequence, the Claimant was fined
repeatedly and the posting of security required. In Respondent's view, most of
the investments made were related to the expansion of transportation networks
for export markets. These investments were additional to what was envisaged in
the License, the sole purpose of which was the supply of the domestic market and
not the international market. This point, however, is also disputed by the
Claimant.
191. Tariffs for the export market, as explained above, after the initial
clarifications of the measures adopted, have been kept in US dollars and
adjusted in accordance with the US PPI. About a fourth of TGN's revenues, the
Respondent explains, originate in exports and this, in its view, is an amount
sufficient to cover all the costs of the Claimant, including those related to
the domestic market and financial costs. Moreover, the Respondent has further
asserted, that the export tariffs are "excessive."(81)
192. Clarification of the question became necessary when several Chilean
importers of gas began making payments in pesified tariffs.(82) A later request
by the Chilean company Colbun, also an importer of gas, to the effect that
export tariffs should not be kept in dollars or adjusted in accordance with the
US PPI, was turned down by governmental decree in Argentina.(83)
193. The discussion does not end there since the Claimant explains that of the
US$ 1 billion invested only US$ 271 million were related to export sales, which
under the Gas Law,
57
was to be carried out under terms similar to those governing the domestic
business. According to the Claimant, Argentina derives many important benefits
from this export activity. Finally, the question of fines and security, it is
also argued, was raised in a context of political confrontation unrelated to the
real facts.
194. But even when taking into account the positive influence of exports on the
company's revenues, the Claimant argues, the end result has been that overall
revenues have been insufficient to cover operating and other costs and that this
shortfall is shown in expert reports which include export revenues.
195. The Tribunal is persuaded that the required investments were made and
indeed exceeded by far; it is also persuaded that the export markets have
somewhat compensated for revenue shortfalls. However, the compensating effect of
export revenues has not fully redressed a situation which carries the heavy
burden of the measures in force affecting the domestic market. This situation
amplifies the cross-subsidizing effects of the measures adopted in the Argentine
economy.
19. Duration of the License
196. The parties have also disputed another aspect relevant for the
determination of rights and obligations under the contract: the duration of the
License.
197. In the Claimant's view, TGN is entitled to an extension of the license
beyond the initial period of 35 years ending in 2027. This extension would,
under the terms of the License, be for an additional ten years, ending in 2037.
The Respondent believes, to the contrary, that the License does not entail a
right of automatic renewal and is subject to
58
performance requirements that have not been met by the Claimant, as well as to
other conditions set forth in Clause 3.2 of the License.
198. The Tribunal notes that the License provides for the right to an
additional ten-year extension, but that this right is subject to the compliance
with performance requirements, and has to be requested by the licensee and
approved by the Government. A discussion about performance requirements is
unnecessary for the Tribunal to reach a conclusion on this aspect of the
dispute.
199. Indeed, the License is very clear about the fact that this right is
conditional and subject to a number of steps, both substantive and procedural,
which might or might not take place. As it would be impossible to establish at
present whether these conditions might be met, the Tribunal is persuaded by the
Respondent's argument to the effect that no damages should be considered beyond
the year 2027. This will therefore be the year which the Tribunal will rely on
for its determination of damages.
20. Discussion of Legal and Contractual Obligations under Argentine Law
200. In view of the conclusions reached by the Tribunal on the question of
applicable law it must now examine the effect of the measures with reference to
Argentine law and the contracts involved in this dispute.
201. The fundamental legal principle guaranteeing the right to property is
established in Article 17 of the Constitution which provides that
"The right to property is inviolable and no inhabitant of the Nation
can be deprived of it except by a judicial decision founded in the
law."
59
202. The exercise of this basic guarantee, like other fundamental rights
enshrined in the Constitution, is regulated under the law, as indicated in
Article 14, but cannot be altered by that law, as expressly mandated by Article
28 of the Constitution. Indeed, this Article mandates that "the principles,
guarantees and rights recognized in the preceding articles shall not be altered
by the laws regulating their exercise."
203. The argument made by the Respondent to the effect that such guarantees are
not absolute and are subject to the requirements of social needs and public
interest is indeed correct,(84) but this does not contradict the central role of
the right to property and the obligation to pay compensation in case of
government interference with its exercise.
204. Article 42 of the Constitution has occasionally been invoked as an example
of the social needs restricting rights to property, in that this provision
recognizes the right of consumers and users of goods and services to the
protection of health, safety and economic interests, adequate and truthful
information, freedom of choice and equitable and dignified treatment. This
particular legitimate objective, pertains, however, to so-called third
generation rights and is embodied in a separate chapter of the Constitution
referring to new rights. To this extent such rights should be viewed as future
aspirations rather than enforceable rights similar to fundamental constitutional
rights.
205. The basic principle of Argentine law governing contracts and the ensuing
obligations is contained in Article 1197 of the Civil Code which provides:
"Conventions made in contracts constitute for the parties a rule that must
be observed as the law."(85)
60
206. This principle is in harmony with the rights protected under the
Constitution. There is indeed a long-standing tradition of Argentine court
decisions and the writings of distinguished jurists highlighting the importance
of the faithful enforcement of contracts as the expression of the will of the
parties.(86) There is also the view, however, that the State has the duty to
intervene under the law stipulated in the contract so as to redress possible
imbalances. (87) Here again the law does not ignore social needs but makes them
subject to very precise conditions and requirements. Thus, the need to ensure
stability remains a basic concern and any departure therefrom must be in the
form of a clearly established legal justification.
207. These various points of view underlie the legal arguments made by the
parties in this dispute. The Claimant has argued that there are a number of
rights, both under the law and under the contract, with particular reference to
the License, that have not been observed by the Respondent and these legal
obligations should be given full effect. The Respondent, however, is of the
view that if the parties had wished to contract in dollars they could have done
so explicitly under Article 1197 of the Civil Code, but they chose instead to
contract by reference to the Convertibility Law.(88) It is also argued that even
if the Gas Decree and the License had referred to a dollar-related tariff, these
instruments could not contradict the Law which itself did not refer to this
standard. In any event, the Respondent asserts, the economic conditions of the
crisis necessarily resulted in the change of the terms of the contract.
208. The Tribunal must note in this respect that the fact that the Gas Law did
not refer explicitly to the dollar-based tariff cannot be taken to mean that
this standard was not a part of the legal and contractual commitments made to
the investor. It was very much part of those undertakings as the legal and
contractual framework of the privatization amply evidences. There is thus no
contradiction between the law, the regulations and the contract
61
and the latter could only be ignored had it constituted an undertaking
prohibited by law, which is not the case here.
209. Moreover, the fact that the regulations and the contract provided for
tariffs in dollars is consistent with Article 619 of the Civil Code to the
extent that it provides that the obligation to pay a sum in a particular
currency is satisfied when payment is made in the stipulated currency at the
time it becomes due. This article amended a prior reference to payment in
national currency.
210. The Tribunal has stated above, however, that parallel to legally
enforceable obligations arising from the commitments and assurances that
Argentina gave in the privatization process, there have been inescapable
economic realities that cannot be ignored.
211. There is broad agreement on the fact that Argentina was affected by a deep
crisis of an economic, social and political nature. The downturn in the economy
commencing in 1999, the rising levels of poverty and the rapid turnover of
politicians occupying the highest offices in the nation, coupled with social
upheaval and civil disobedience, was a dramatic reality. Witness statements
introduced by the Respondent both in writing and in the oral hearing were
eloquent in this respect.(89) These developments have been deplored by the
Claimant. Needless to say, also the Tribunal has the greatest sympathy for the
plight of the Argentine people under the circumstances and respects its efforts
to overcome the situation.
212. The issue for the Tribunal to establish is whether, under Argentine law,
there is any valid excuse for not complying with the terms of the contractual
and legal arrangements Argentina had entered into.
62
213. The Argentine Government has invoked in the alternative the existence of a
state of necessity under international law as an exemption from liability. The
state of international law on this question will be examined separately.
214. Under domestic law, the state of necessity is not recognized by the
Argentine Civil Code or the law generally.(90) A number of court decisions,
however, have from time to time relied on the state of economic emergency to the
extent it had been declared by Congress, provided it was temporary and
reasonable.(91)
215. In the context of the current Emergency Law, the Supreme Court, relying on
the provisions of the Constitution, has emphasized, in addition to those
requirements, that the restrictions imposed must be aimed at providing a
solution and must not result in a change of the substance or the essence of a
right acquired under a contract. The Supreme Court decision relies in part on
the following statement:
"...it is not useless to remind, as the Tribunal has done for long, that
restrictions imposed by the State on the normal exercise of patrimonial
rights must be reasonable, limited in time, and constitute a remedy and
not a mutation in the substance or essence of the right acquired by
judicial decision or contract... It follows that the mechanisms devised to
overcome the emergency are subject to a limit and this is its
reasonableness, with the ensuing impossibility of altering or distorting
the economic significance of the rights of individuals... and it is beyond
doubt that to condition or limit those rights affects patrimonial
intangibility and puts an obstacle to the purpose of consolidating
justice."(92)
63
216. The Tribunal also notes that a decision of the Argentine Supreme Court
held, in respect of "pesification," that this measure was compatible with
Article 17 of the Constitution and that Articles 617 and 619 of the Civil Code
could not be read in a blind manner.(93) Based on the Emergency Law and force
majeure, the Court overturned a decision of the Federal Court of Parana. This
decision, however, does not overrule other decisions of the Supreme Court and
other tribunals in Argentina as it only applies to the case at hand. Moreover,
the Procurador General based his own report to the Court on the fact that the
measures were temporary and that the crisis was largely over, a consideration on
which the Court also relied.(94) Dissenting views were also expressed.(95)
217. In light of this discussion, the Tribunal is persuaded that the state of
necessity under domestic law does not offer an excuse if the result of the
measures in question is to alter the substance or the essence of contractually
acquired rights. This is particularly so if the application of such measures
extends beyond a strictly temporary period.
218. A second concept under which contractual rights might eventually be
adjusted is that of unjust enrichment. Although not formally invoked by the
Respondent in this dispute, it underlies some of its arguments, particularly the
argument that the dollar-based tariff would result in unfairness and
unreasonableness, or more importantly that tariffs would have been excessive
either in the domestic or the export markets.
219. A number of provisions of the Argentine Civil Code are inspired by the
concept of unjust enrichment and it has often been applied by Argentine
courts.(96) However, given the difficulty in establishing who has gained and who
has lost without legitimate cause, the application of the concept has been
surrounded by uncertainty.
64
220. In this particular instance, the application of the dollar standard at the
time of the recession might, for example, have appeared as an unfair advantage.
However, as discussed, the facts point in the opposite direction, namely to
where the operator of the service suffers the entire burden of the situation and
in fact subsidizes other sectors of the economy which thus become the real
beneficiaries. Therefore, although the crisis and the measures taken brought
about legal and economic uncertainties, the Tribunal cannot ignore contractual
rights on the basis of an alleged unjust enrichment.
221. This Tribunal wishes to add a further observation. In 1968 another
mechanism for the adjustment of contracts was introduced in the Argentine Civil
Code with the inclusion of Article 1198. Under the terms of this Article,
contracts must be done, interpreted and enforced in good faith in accordance
with what the parties should have reasonably understood. If the burden of one
party were to become excessively onerous as a result of extraordinary and
unforeseeable events, it could request the termination of the contract, except
if that party was liable and remiss; the other party could then offer more
equitable terms as a means to forestall termination. This mechanism has also
given rise to important scholarly writings and court decisions.(97)
222. The theory of "imprevision" was thus expressly introduced into the
Argentine Civil Code. The Respondent has relied on this theory in explaining the
meaning of the Emergency Law and its reference to this particular Article.(98)
The purpose of this law, in the Respondent's argument, is to rebalance the
benefits of the parties against the backdrop of changing realities.
223. The Federal judge issuing the 2000 injunction had this mechanism in mind as
well when she explained that "it could be that the balance of interests between
the licensees and
65
the consumers that was sought by the law broke down as a result of emerging
economic situations... It would seem possible to argue that the economic and
financial equation of the contract would break when the consumer must pay more
for the same service even if the economy is evidencing negative figures..."(99)
224. The legal extent of this concept both in civil and administrative law was
laid down by the French Conseil d'Etat in the landmark case "Gaz de Bordeaux,"
which, interestingly, also dealt with the gas industry.(100) The general
principles on the application of this theory in administrative contracts,
particularly those concerning concessions, were first identified in this
decision, pointing out that the event in question had to be unforeseeable and
external to the parties, exceed all reasonable expectations, and result in a
profound unbalancing of the contract. The redress also had to be temporary as
otherwise the long-term life of the contract would become unviable.(101)
225. The provisions of the Emergency Law, however, fail to meet certain
essential conditions for the operation of the theory of "imprevision." First, if
the imbalance were foreseeable, the theory is not applicable. As explained
above, in arguing that the tariff included both the devaluation as well as the
country risks, the Respondent is simultaneously admitting that this risk was
foreseeable and actually foreseen. In this respect the Claimant believes the
risk of devaluation was indeed foreseen as it argues that express guarantees
were offered to offset such risk. Second, the concept requires the aggrieved
party to request the termination of the contract before a competent court, while
in the present dispute the measure was unilaterally decided by one party. In
addition, the views of the courts have been rather critical of the measures
adopted as noted above. In essence, the pesification was imposed and the target
of rebalancing and compensating differences in 180 days was not met.
66
226. The approach taken by the French Conseil d'Etat, however, as will be
explained, is most pertinent for the attribution of liability in the present
case.
227. The Tribunal must note that other traditional legal excuses, such as force
majeure, are not available in this case as the events discussed were foreseeable
and foreseen.
21. Adjustment Mechanisms under the License and the Law
228. The Tribunal, however, does not need to look into general principles of
law to find an answer as to how the contract in this case could be adjusted to
new economic realities. The pertinent mechanisms are embodied in the law and the
License itself.
229. The Gas Law provided for a mechanism in which the final price to the
consumer would be determined by reference to three factors: first, the price of
gas at the wellhead, that is at the point of injection into the transportation
system; second, the transportation tariff; and third, the distribution tariff.
The Tribunal notes that the first of these factors has already been successfully
renegotiated and adjusted.(102)
230. The Respondent explains in this connection that, irrespective of the
currency used, the operator must obtain a reasonable return, as this is mandated
under the law in conjunction with the concept of a fair and reasonable tariff.
It is further explained that, in case of devaluation, the tariff should be
reduced as a consequence of lower domestic prices, while, in case of revaluation
of the peso, tariffs should increase as costs would also increase.(103)
231. To this end, the Law provided for the periodic revision of tariffs so as
to reflect the changes in the value of goods and services related to the
activities of the operator.(104) As
67
explained by the Respondent, three adjustment mechanisms were devised to attain
this result. The first was the January and July adjustments of tariffs in
accordance with the US PPI. The second adjustment mechanism was to take account
of increased efficiency (Factor X),(105) which would apply as from the first
five-year review and which could have resulted in the decrease of tariffs if
efficiency had increased. The third adjustment mechanism was to apply in
connection with investment (Factor K),(106) and was also applicable as from the
first five-year review. This third adjustment mechanism could result in the
increase of tariffs so as to finance investments that could not otherwise be
financed by the tariffs in force. The Claimant believes in this connection that
factors X and K could only be introduced in the context of five-year reviews and
not in other instances.
232. In addition, the Law provided for a five-year review(107) which would
undertake a comprehensive examination of the tariffs and the method used for
their calculation, also taking into account as far as possible factors X and K.
The parties have different interpretations as to the extent of the five-year
review. While, for the Claimant, adjustments would be basically automatic
following the application of factors X and K,(108) for the Respondent, this
review could be broader and include other elements relevant to tariff
determination.(109) Otherwise, the Respondent asserts, the Claimant would have
an insurance policy or a super-right under the License that would ensure profits
under any circumstances, irrespective of the prevailing economic conditions.
233. The Tribunal is of the view that Argentina's interpretation of this issue
is in part correct. While taking factors X and K into consideration, the review
might be broader if justified by circumstances. Annex F of the Offer, for
example, provides that future reviews of tariffs could include changes in the
form of tariffs and the categories of consumers and services available.(110)
68
234. This interpretation, however, does not mean that the tariff structure
envisaged under the law and the License could be dismantled at will. On the
contrary, the guiding principles would always have to prevail. Among such
principles was the guarantee of a reasonable rate of return; stability,
coherence and foreseeability; and the need to avoid significant variations in
the tariffs when applying factors X and K.(111) In this sense, as argued by the
Claimant, it is not a discretionary power.
235. It must also be kept in mind that the License expressly included a
commitment to the effect that it would not be altered unless the written consent
of the licensee was first obtained and that tariffs would not be frozen or
subject to price controls. Otherwise compensation would be paid.
236. The first five-year review was completed in 1997 but the second review,
scheduled to take place in 2002, was never completed.
237. The Gas Law also provides for an Extraordinary Review that can be
initiated by the licensees or ENARGAS so as to correct tariffs that might be
deemed inadequate, discriminatory or preferential in circumstances which are
both objective and justified.(112) The effect of certain taxes can also result
in a corresponding adjustment of the related tariffs.(113)
238. The Tribunal can therefore conclude that if a rebalance of the contractual
commitments was required because of changing economic circumstances and their
effect on costs and returns, the mechanisms to meet this objective were
available under the law and the License. The necessary adjustments could be
accommodated within the structure of the guarantees offered to the Claimant.
This approach, in turn, would have made any unilateral determination by the
Respondent unnecessary. The Claimant itself accepts that tariffs could
69
be lowered within the regulatory framework to reflect the reduction in peso
costs and thus also recognizes that the adjustment mechanism, under that
scenario, would not have worked to its advantage.(114)
22. Attribution of Liability under Argentine Law
239. From the above discussion, it is clear that the legal commitments made by
the Republic of Argentina to the Claimant under the applicable law and the
License were not kept. This is so under the legal framework governing the gas
sector but it is also so under the applicable provisions of the Civil Code and
administrative law. In the absence of any express and clear provision allowing
one party to depart from solemn contractual obligations undertaken toward
another party, the sanctity of contracts established in the Civil Code and the
protection of property mandated by the Argentine Constitution unquestionably
prevail as recalled on more than one occasion by the Argentine Supreme Court.
The Court has held that
"...when under a law in force an individual has fulfilled all the
substantial acts and obligations and formal requirements provided to
be entitled to a right, it must be held as acquired, and its
modification by a later norm is inadmissible without infringement of
the constitutional right to property."(115)
This is the case in the context of this dispute.
240. There is of course the question of the reality of the crisis that has been
described. The Tribunal explained above that this reality cannot be ignored and
it will not do so. The crisis, however, can only be taken into account as a
matter of fact. And facts of course do not eliminate compliance with the law but
do have a perceptible influence on the manner in which the law can be applied.
70
241. In the case of Compagnie Generale d'eclairage de Bordeaux, also known as
Gaz de Bordeaux, cited above, the French Conseil d'Etat had to decide a dispute
in 1916 which, in a number of respects, was similar to the present one. As a
consequence of the Great War the price of coal had more than tripled, amply
surpassing the price originally envisaged under the concession contract for the
provision of public gas lighting to the City of Bordeaux. The concession
contract was held to govern the respective obligations of the parties until its
expiration, in particular the provision of a public service and its remuneration
by means of the tariffs stipulated. Normal market conditions could move the
price in a manner favorable or unfavorable to the company and this was to be
considered a normal business risk that each party was to have considered at the
time of entering into legal obligations.
242. envisaged The economic impact of the war led to such price increases that
the adjustment under the contract was clearly insufficient and the economic
viability of the contract was profoundly affected. The company could not,
therefore, be required to provide the service in such abnormal conditions. The
Conseil d'Etat accordingly held that
"...just as the Company cannot argue that it should not be required
to bear any increase in the price...it would be totally excessive if
it is admitted that such increases are to be considered a normal
business risk; on the contrary, it is necessary to find a solution
that puts an end to temporary difficulties, taking into account both
the general interest...and the special conditions that do not allow
the contract to operate normally...; to this end it is necessary to
decide, on the one hand, that the Company is required to provide the
concession service and, on the other hand, that during this period
it must bear only that part of the adverse consequences that the
reasonable interpretation of the contract allows..."(116)
71
243. On this basis, it was decided that the City of Bordeaux should pay
compensation covering the remaining deficit and that, failing agreement of the
parties on the amount of compensation, this was to be fixed by the judge to whom
the case was remanded.
244. While in the instant dispute the conditions for the operation of the
"theorie de l'imprevision" are not met, for the reasons already explained, the
fact is that the Claimant cannot ask to be entirely beyond the reach of the
abnormal conditions prompted by the crisis, as this would be unrealistic.
However, at the same time, it would be wholly unjustifiable that the Claimant be
overburdened with all the costs of the crisis. This is particularly so in light
of the subsidization that the Claimant has in effect had to meet in respect of
other businesses in Argentina, a burden which if necessary has to be born by the
Government, at least in part.
245. The Government has the duty to redress this abnormal situation, first, by
putting an end to what by definition should be a temporary situation, a step
that might be adequately taken in the context of the continuing negotiations
between the parties, and next by paying compensation for the damage caused.
246. Similar to what was the case in Gaz de Bordeaux, since the parties have as
yet been unable to reach an agreement through the process of contract
renegotiation, compensation is to be fixed by a judge. As this Tribunal has no
judge to whom the case could be remanded for that purpose, it will fix the
compensation to that effect on its own authority.
23. Crisis Period Distinguished
247. The Argentine Government has argued that a distinction should be made
between two sets of measures. On the one hand, the measures adopted in 2000,
which specifically affected
72
the gas industry. And on the second hand, those of general economic impact not
directly related to the gas industry, which were adopted in 2001 - 2002 in the
context of the then unfolding crisis. This distinction of the origin of the
measures is not feasible. Thus, it has been shown that the general economic
policy measures of 2001-2002 also had very specific effects on the Claimant,
effects which the Tribunal is bound to take into account separately from the
wider effects or justification of those measures.
248. The factual situation, however, allows the Tribunal to take into account
different situations present at distinct periods in time. The crisis had in
itself a severe impact on the Claimant's business, but this impact must to some
extent be attributed to the business risk the Claimant took on when investing in
Argentina, this being particularly the case as it related to decrease in demand.
Such effects cannot be ignored as if business had continued as usual. Otherwise,
both parties would not be sharing some of the costs of the crisis in a
reasonable manner and the decision could eventually amount to an insurance
policy against business risk, an outcome that, as the Respondent has rightly
argued, would not be justified. On the other hand, a number of the measures
adopted did indeed contribute to such hardship and the burden of those ought not
to be placed on the Claimant alone.
249. These events and effects, however, must be separated and distinguished
from the situation that has characterized the Argentine economy in the aftermath
of the crisis, including the situation that prevails today. The Tribunal does
not wish to imply that the crisis in Argentina is fully over, because
aftershocks are still felt in the economy, particularly in the social sector,
but the repercussions are no longer as intense or widespread. Considering the
question of time necessary for recovery, an expert for the Respondent stated
that past economic downturns have taken up to eight years to overcome.(117) Be
that as it may, the fact is that the Argentine economy has improved
substantially in the past several months and it is
73
at present clearly heading towards recovery in the short to medium term. All
relevant indicators show unequivocally this to be the case.(118)
250. In light of the economic information available, the Tribunal considers
that sometime between late 2004 and early 2005 the crisis period came to an end.
The Tribunal notes in this respect that the Emergency Law declared emergency
until December 10, 2003 and that renegotiation was extended for an additional
year.(119) A further extension was enacted in 2004.120
251. The Tribunal will take into account these different realities in reaching
a determination on the appropriate compensation. However, it must first examine
the extent of the protection granted under the Treaty and the issue concerning
the state of necessity under international law.
24. Has there been Expropriation of the Investment?
252. Having established that the Respondent did not keep the commitments and
obligations it had undertaken under its own legislation, regulations and the
Licence to TGN, the question is then what is the legal situation in terms of the
protection granted by the Treaty to the investor.
253. The Claimant's first major allegation in this respect is that there has
been an expropriation in breach of the express provision of Article IV(1) of the
Treaty. This Article provides as follows:
"Investments shall not be expropriated or nationalized either
directly or indirectly through measures tantamount to expropriation
or nationalization
74
('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 law
and the general principles of treatment provided for in Article II
(2)."
254. The Claimant argues in this connection that expropriation need not be
direct or result in the transfer of title or physical possession but that it can
also be indirect if the result, as held by the Tribunal in Metalclad, is to
deprive the owner "...in whole or in significant part, of the use or
reasonably-to-be-expected economic benefit of property even if not necessarily
to the obvious benefit of the host State."(121) A wealth of cases and scholarly
writings are invoked in support of this contention and of the argument that such
an expropriation might be entirely independent of the State's intention.(122)
255. The Claimant further asserts that expropriation might be "creeping " in
that it may unfold through a series of acts over a period of time.(123) The
State's interference with assurances and undertakings offered to the investor,
it is also argued, might result in the breach of an acquired right.(124) Not
even the public purpose of an expropriation, it is further asserted, can alter
the legal obligation to pay compensation.(125) The Claimant also argues that the
measures adopted stemmed less from the prevailing economic conditions than from
the political antagonism which the Government had developed towards foreign
investors generally and towards some companies in particular whether because of
electoral strategies or ideological connotations of successive governments.
256. The Claimant argues that the measures adopted by the Argentine Government
during the period 2000-2002 resulted in indirect and creeping expropriation of
acquired rights in the form of legal commitments, assurances and guarantees
expressly offered to the investor. The
75
Claimant says that as a result, it can no longer rely on the basic conditions
that were critical for its decision to undertake the project; that the value of
its assets has been wiped out; and that it cannot enjoy the economic benefits
reasonably expected of the investment. The specific date of the expropriation
is, in the Claimant's view, August 18, 2000, the date that the court injunction
was issued and with it the beginning of a process that had the creeping effect
described above.
257. The Argentine Government has not been short of arguments to oppose the
expropriation claim and has presented a wealth of relevant cases and writers to
refute the Claimant's arguments. It is first held that not only has there been
no transfer of property of any kind but that none of the measures taken amount
to an interference which could be compared to or result in an expropriation. It
is also explained that none of the commitments invoked by the investor have the
meaning the investor assigns to them and, even less so, could they qualify as an
acquired right or constitute a legitimate expectation. This, in the Respondent's
view, is particularly so because the commitments invoked arise not from the
Government's undertakings, but from the Information Memorandum prepared by
private consultants.
258. According to the Respondent, TGN has continued to operate normally and has
full use of its property and there has been no redistribution of wealth of any
kind nor has there been an intention to do so, unlike the situation
characterizing all the decisions invoked by the Claimant;(126) neither has the
State derived any benefit from the measures taken, thus meeting the standard set
in the Lauder v. Czech Republic case when denying the occurrence of
expropriation.(127) The Respondent, as noted, also argues that the measures
adopted are temporary.
76
259. Emphasis is placed by the Respondent on the argument that neither has there
been substantial deprivation of the fundamental rights of ownership nor have
these rights been rendered useless; to the contrary, the value of shares of a
comparable company has been increasing since the crisis. In the Respondent's
discussion of the issue, it is stated that all the specific criteria used to
deny substantial deprivation in the Pope & Talbot v. Canada case are met in this
case also: the investor is in control of the investment, the Government does not
manage the day-to-day operations of the company, no officers or employees of the
company is under arrest, the payment of dividends has not been interfered with,
the directors and managers of the company are appointed by the company, and the
investor has full ownership and control of the investment.(128)
260. The Tribunal has examined with great attention the views expounded by the
parties on this issue. Both parties are in agreement that no direct
expropriation has taken place. The issue for the Tribunal to determine is then
whether the measures adopted constitute an indirect or regulatory expropriation.
The answer is of course not quite simple for indeed the measures have had an
important effect on the business of the Claimant.
261. The Tribunal in the Lauder case rightly explained that
"The concept of indirect (or "de facto", or "creeping")
expropriation is not clearly defined. Indirect expropriation or
nationalization is a measure that does not involve an overt taking,
but that effectively neutralized the enjoyment of the
property."(129)
262. The essential question is therefore to establish whether the enjoyment of
the property has been effectively neutralized. The standard that a number of
tribunals have applied in recent cases where indirect expropriation has been
contended is that of substantial
77
deprivation. In the Metalclad case the tribunal held that this kind of
expropriation relates to incidental interference with the use of property which
has "the effect of depriving the owner, in whole or in significant part, of the
use or reasonable-to-be-expected economic benefit of property even if not
necessarily to the obvious benefit of the host State."(130) Similarly, the Iran
- - United States Claims Tribunal has held that deprivation must affect
"fundamental rights of ownership,"(131) a criteria reaffirmed in the CME v.
Czech Republic case.(132) The test of interference with present uses and
prevention of the realization of a reasonable return on investments has also
been discussed by the Respondent in this context.(133)
263. Substantial deprivation was addressed in detail by the tribunal in the Pope
& Talbot case.(134) The Government of Argentina has convincingly argued that the
list of issues to be taken into account for reaching a determination on
substantial deprivation , as discussed in that case, is not present in the
instant dispute. In fact, the Respondent has explained, the investor is in
control of the investment; the Government does not manage the day-to-day
operations of the company; and the investor has full ownership and control of
the investment.
264. The Tribunal is persuaded that this is indeed the case in this dispute and
holds therefore that the Government of Argentina has not breached the standard
of protection laid down in Article IV(1) of the Treaty.
265. It remains necessary to examine the extent of the interference caused by
the measures on the Claimant's business operations under the other standards of
the Treaty. This question will be addressed next by the Tribunal.
78
25. Has there been a Breach of Fair and Equitable Treatment?
266. The second substantive standard of protection provided to investors under
the Treaty is that of fair and equitable treatment. Article II(2)(a) provides:
"Investment shall at all times be accorded fair and equitable
treatment, shall enjoy full protection and security and shall in no
case be accorded treatment less than that required by international
law."
267. Under this provision, the Claimant asserts that Argentina has breached the
fair and equitable treatment standard and has not ensured full protection and
security to the investment, particularly insofar as it has profoundly altered
the stability and predictability of the investment environment, an assurance
that was key to its decision to invest. The Claimant cites a number of
distinguished writers and decisions pointing out the significance of this
particular requirement, with particular reference to the CME case, where it was
held that
"[The Government] breached its obligation of fair and equitable
treatment by evisceration of the arrangements in reliance upon
[which] the foreign investor was induced to invest."(135)
268. The Claimant also relies on the following finding of the tribunal in the
Tecnicas Medioambientales Tecmed, S.A. v. Mexico case to the effect that fair
and equitable treatment:
"...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..."(136)
79
269. According to the Claimant's argument, the uncertainty characterizing the
period 2000 - 2002 and the final determinations under the Emergency Law that
dismantled all the arrangements in reliance on which the investment had been
made, are the main events that resulted in the breach of this standard.
270. In the Respondent's view, the standard of fair and equitable treatment is
too vague to allow for any clear identification of its meaning and, in any
event, it only provides for a general and basic principle found in the law of
the host State which at the same time is compatible with an international
minimum standard. A deliberate intention to ignore an obligation or even bad
faith would be required to breach the standard, the argument adds.
271. The Respondent argues next that the standard is not different from the
international minimum standard, citing to this effect a number of authors and
cases and in particular the tribunal's holding in the Robert Azinian and others
v. Mexico case that an "investor should not be dealt with in a manner that
contravenes international law."(137) The Pope & Talbot case is also discussed by
the Respondent in this context, explaining that in spite of the fact that it
opted for a NAFTA standard additional to or higher than that of customary
international law it still based its test on equity, justice and
reasonableness.(138)
272. Argentina believes that none of the measures adopted breaches the standard
or for that matter international law as the legislative prerogatives of the
State cannot be frozen in time and the Emergency Law is just one such exercise
of its prerogative. In the Respondent's view, stability does not mean
immobilization and the measures adopted, particularly the "pesification", were
the solution necessary to prevent greater social damage and poverty. It is
further argued that there is ample precedent upholding the legality of
devaluation, both under domestic and international law, with particular
reference to the situation in the United States
80
in the 1930s. It is also asserted that the Claimant has not proved any damage in
connection with its allegation of breach of this standard and the compensation
claimed under this item cannot in any way be assimilated to that corresponding
to expropriation, as the Claimant requests.
273. The key issue that the Tribunal has to decide is whether the measures
adopted in 2000 - 2002 breached the standard of protection afforded by
Argentina's undertaking to provide fair and equitable treatment. The Treaty,
like most bilateral investment treaties, does not define the standard of fair
and equitable treatment and to this extent Argentina's concern about it being
somewhat vague is not entirely without merit.
274. The Treaty Preamble makes it clear, however, that one principal objective
of the protection envisaged is that fair and equitable treatment is desirable
"to maintain a stable framework for investments and maximum effective use of
economic resources." There can be no doubt, therefore, that a stable legal and
business environment is an essential element of fair and equitable treatment.
275. The measures that are complained of did in fact entirely transform and
alter the legal and business environment under which the investment was decided
and made. The discussion above, about the tariff regime and its relationship
with a dollar standard and adjustment mechanisms unequivocally shows that these
elements are no longer present in the regime governing the business operations
of the Claimant. It has also been established that the guarantees given in this
connection under the legal framework and its various components were crucial for
the investment decision.
81
276. In addition to the specific terms of the Treaty, the significant number of
treaties, both bilateral and multilateral, that have dealt with this standard
also unequivocally shows that fair and equitable treatment is inseparable from
stability and predictability. Many arbitral decisions and scholarly writings
point in the same direction.(139)
277. It is not a question of whether the legal framework might need to be frozen
as it can always evolve and be adapted to changing circumstances, but neither is
it a question of whether the framework can be dispensed with altogether when
specific commitments to the contrary have been made. The law of foreign
investment and its protection has been developed with the specific objective of
avoiding such adverse legal effects.
278. It was held by the Tribunal in the Metalclad case that Mexico had in
several ways failed to provide a
"...predictable framework for Metalclad's business planning and
investment. The totality of these circumstances demonstrate a lack
of orderly process and timely disposition in relation to an investor
of a Party acting in the expectation that it would be treated fairly
and justly..."(140)
279. So too the Tribunal in the Tecnicas Medioambientales case has held in this
respect:
"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..."(141)
82
280. The Tribunal believes this is an objective requirement unrelated to whether
the Respondent has had any deliberate intention or bad faith in adopting the
measures in question. Of course, such intention and bad faith can aggravate the
situation but are not an essential element of the standard.
281. The Tribunal, therefore, concludes against the background of the present
dispute that the measures adopted resulted in the objective breach of the
standard laid down in Article II(2)(a) of the Treaty.
282. There is one additional aspect the Tribunal must examine having heard the
arguments of the parties. That is whether the standard of fair and equitable
treatment is separate and more expansive than that of customary international
law, as held by the tribunal in Pope and Talbot, or whether it is identical with
the customary international law minimum standard, as argued by Argentina.
283. The Tribunal is mindful of the discussion prompted by these arguments,
particularly with reference to the NAFTA Free Trade Commission's Note of
Interpretation identifying the fair and equitable treatment standard with that
of customary internation law.(142) This development has led to further treaty
clarifications as in the Chile - United States Free Trade Agreement.(143)
284. While the choice between requiring a higher treaty standard and that of
equating it with the international minimum standard might have relevance in the
context of some disputes, the Tribunal is not persuaded that it is relevant in
this case. In fact, the Treaty standard of fair and equitable treatment and its
connection with the required stability and predictability of the business
environment, founded on solemn legal and contractual
83
commitments, is not different from the international law minimum standard and
its evolution under customary law.
26. Has there Been Arbitrariness and/or Discrimination?
285. Article II(2)(b) of the Treaty provides that
"Neither Party shall in any way impair by arbitrary or discriminatory
measures the management, operation, maintenance, use, enjoyment,
acquisition, expansion, or disposal of investments."
286. The Claimant invokes the test defined in the Pope and Talbot case, and
asserts that because the measures adopted are opposed to the rule of law or
surprise a sense of judicial propriety, it follows that there has been arbitrary
treatment of the investor and hence the Treaty standard has been breached. In
the Claimant's view, dismantling the whole legal framework of the gas industry
is contrary to any reasonable expectation.
287. The Claimant further asserts that such measures are discriminatory because
they result in a dissimilar treatment of investors in similar situations, in
accordance with the test defined in the Goetz v. Burundi case.(144) In
particular, the Claimant explains that other public services relying on
dollar-based tariffs, such as telephone companies, water distribution
enterprises, banks, waterway transportation companies and other businesses, and
significantly, the gas producers, have all been treated in a more favorable
manner.(145) It is also argued that discrimination does not relate exclusively
to nationality and can result from the compulsory transfer of resources of one
economic agent or sector to another, as has happened in the Argentine economy.
84
288. The Respondent rejects such considerations and argues that the measures
adopted were reasonable and proportional to the objective pursued. It is argued,
following the findings in the ELSI case, that discrimination requires
intentional treatment in favor of a national and to the detriment of a foreign
investor, a treatment that does not apply to other nationals in a similar
situation.(146) The Genin v. Estonia case is also invoked by the Respondent to
the effect that discrimination and arbitrariness require bad faith or a willful
disregard of due process of law.(147)
289. The Respondent also asserts, following Professor Schachter, that
arbitrariness can in no case be used to describe legislation to carry out
economic, social or political objectives.(148) In any event, it is argued, the
standard provides that discrimination is forbidden in respect of similarly
situated groups or categories of people, which is not the case in respect of the
gas industry. Neither, in the Respondent's view, is there any discrimination
based on nationality, this being the only one envisaged by the prohibition under
international law.
290. The standard of protection against arbitrariness and discrimination is
related to that of fair and equitable treatment. Any measure that might involve
arbitrariness or discrimination is in itself contrary to fair and equitable
treatment. The standard is next related to impairment: the management,
operation, maintenance, use, enjoyment, acquisition, expansion, or disposal of
the investment must be impaired by the measures adopted.
291. In the Lauder case, an equivalent provision of the pertinent investment
treaty was explained in accordance with the definition of "arbitrary" in Black's
Law Dictionary, which states that an arbitrary decision is one "depending on
individual discretion; ... founded on prejudice or preference rather than on
reason or fact."(149)
85
292. This Tribunal is not persuaded by the Claimant's view about arbitrariness
because there has been no impairment, for example, in respect of the management
and operation of the investment. Admittedly, some adverse effects can be noted
in respect of other matters, such as the use, expansion or disposal of the
investment, which since the measures were adopted have been greatly limited. To
the extent that such effects might endure, the test applied in the Lauder case
becomes relevant and could result in a factor reinforcing the related finding of
a breach of fair and equitable treatment.
293. The situation in respect of discrimination is somewhat similar. The
Respondent's argument about discrimination existing only in similarly situated
groups or categories of people is correct, and no discrimination can be
discerned in this respect. Admittedly, it is quite difficult to establish
whether that similarity exists only in the context of the gas transportation and
distribution industry or extends to other utilities as well.
294. Be that as it may, the fact is that to the extent that the measures
persisted beyond the crisis, the differentiation between various categories or
groups of businesses becomes more difficult to explain. Indeed, the Government
of Argentina has successfully concluded renegotiations and other arrangements
with a number of industries and businesses equally protected by guarantees of
investment treaties. This includes the gas producers, but not the transportation
and distribution side of the industry. The gas producers have been allowed to
proceed to a gradual tariff adjustment to be completed by mid-2005.(150) The
longer the differentiation is kept the more evident the issue becomes, thus
eventually again reinforcing the related finding about the breach of fair and
equitable treatment.
295. The Tribunal, therefore, cannot hold that arbitrariness and discrimination
are present in the context of the crisis noted, and to the extent that some
effects become evident they will
86
relate rather to the breach of fair and equitable treatment than to the breach
of separate standards under the Treaty.
27. Has the Protection under the Umbrella Clause been Breached?
296. The Claimant invokes yet another ground on which the protection and
guarantees of the Treaty have been breached by the Respondent, as under Article
II(2)(c) of the Treaty which provides that each party "shall observe any
obligation it may have entered into with regard to investments."
297. The Claimant argues in this respect that all the commitments made by
Argentina towards the investment, whether under the legislation in force or
contractual arrangements, have been breached as a result of the measures adopted
and particularly the dismantling of the tariff regime and related matters.
Therefore, the argument follows, the umbrella clause of the Treaty has also been
breached.
298. In the Respondent's view, first of all no commitments were made under the
law, and those that were made under the License were purely contractual.
Following the Azinian case in respect of concessions contracts,(151) and the
Genin(152) and SGS v. Pakistan cases in respect of Licenses,(153) the Respondent
argues that not all contract breaches amount to treaty breaches and hence cannot
be protected under a clause of this kind. In any event, it is asserted that the
Claimant can invoke no rights or commitments under the License as these concern
only TGN.
299. The Tribunal will not discuss the jurisdictional aspects involved in the
Respondent's argument, as these were dealt with in the decision on jurisdiction.
Regarding the merits of the argument, however, the Tribunal believes the
Respondent is correct in arguing that not all
87
contract breaches result in breaches of the Treaty. The standard of protection
of the treaty will be engaged only when there is a specific breach of treaty
rights and obligations or a violation of contract rights protected under the
treaty. Purely commercial aspects of a contract might not be protected by the
treaty in some situations, but the protection is likely to be available when
there is significant interference by governments or public agencies with the
rights of the investor.
300. This discussion has been, to an important extent, clarified in recent
decisions of arbitral tribunals having to deal with the issue of contract and
treaty claims. This is particularly so in the Lauder v. Czech Republic, Genin v.
Estonia, Aguas del Aconquija v. Argentina,(154) Azurix v. Argentina,(155) SGS
v. Pakistan, SGS v. Philippines(156) and Joy Mining v. Egypt cases,(157) among
others. In these decisions, commercial disputes arising from a contract have
been distinguished from disputes arising from the breach of treaty standards and
their respective causes of action.
301. None of the measures complained of in this case can be described as a
commercial question as they are all related to government decisions that have
resulted in the interferences and breaches noted.
302. While many, if not all, such interferences are closely related to other
standards of protection under the Treaty, there are in particular two
stabilization clauses contained in the License that have significant effect when
it comes to the protection extended to them under the umbrella clause. The first
is the obligation undertaken not to freeze the tariff regime or subject it to
price controls.(158) The second is the obligation not to alter the basic rules
governing the License without TGN's written consent.(159)
88
303. The Tribunal must therefore conclude that the obligation under the umbrella
clause of Article II(2)(c) of the Treaty has not been observed by the Respondent
to the extent that legal and contractual obligations pertinent to the investment
have been breached and have resulted in the violation of the standards of
protection under the Treaty.
D. STATE OF NECESSITY CONTENDED IN THE ALTERNATIVE
304. The Government of Argentina has contended in the alternative that in the
event the Tribunal should come to the conclusion that there was a breach of the
Treaty the Respondent should be exempted from liability in light of the
existence of a state of necessity or state of emergency.(160) Force majeure,
emergency and other terms have also been used by the Respondent in this context.
305. This contention is founded on the severe economic, social and political
crisis described above and on the belief that the very existence of the
Argentine State was threatened by the events that began to unfold in 2000. The
Respondent asserts in this respect that economic interest qualifies as an
essential interest of the State when threatened by grave and imminent peril.
306. It is argued that the Emergency Law was enacted with the sole purpose of
bringing under control the chaotic situation that would have followed the
economic and social collapse that Argentina was facing. State of necessity based
on this crisis would exclude, in the Respondent's argument, any wrongfulness of
the measures adopted by the government and in particular would rule out
compensation.
89
307. In support of its argument the Respondent invokes first the existence of
the state of necessity under Argentine law and its acceptance under the
Constitution and the decisions of courts. The Tribunal has already discussed the
meaning of the state of necessity and the state of emergency under Argentine law
and its interpretation by the Supreme Court, with particular reference to its
temporary nature and the requirement not to upset the rights acquired by
contract or judicial decision. These issues will not be discussed here again.
308. The Respondent has also invoked in support of its contention the existence
of a state of necessity under both customary international law and the
provisions of the Treaty. In so doing, the Respondent has raised one fundamental
issue in international law.
28. The Respondent's View of the State of Necessity under Customary
International Law
309. The Respondent has mainly based its argument on this question on the ruling
of the International Court of Justice in the Gabcikovo-Nagymaros case which held
that the state of necessity is recognized by customary international law for
"precluding the wrongfulness of an act not in conformity with an international
obligation."(161)
310. The French Company of Venezuelan Railroads case is invoked so as to justify
that the government's duty was to itself when its "own preservation is
paramount."(162) Further support is found in the Dickson Car Wheel Co. case
where it was decided that the "foreigner, residing in a country which by reasons
of natural, social or international calamities is obliged to adopt these
measures, must suffer the natural detriment to his affairs without any remedy,
since Governments...are not insurers against every event."(163)
90
311. In addition to the discussion of these and other cases, the Government of
Argentina also relies on the work of the International Law Commission under the
leadership of the Special Rapporteurs F. V. Garcia-Amador, Roberto Ago and James
Crawford. In particular the Respondent argues that it meets the criteria set out
in Article 25 of the Articles on International Responsibility.(164) The specific
terms of Article 25 will be discussed further below.
312. In the Respondent's view the Argentine State was not only facing grave and
imminent peril affecting an essential interest, but it did not contribute to the
creation of the state of necessity in a substantive way. This situation, it is
argued, was prompted for the most part by exogenous factors. It is further
asserted that the measures adopted, particularly the pesification of contractual
relations, were the only measures capable of safeguarding the essential economic
interests affected. By introducing the measures, the Respondent argues, the
essential interests of another State that was a beneficiary of the obligation
breached or, for that matter, those of the international community as a whole
were not affected and foreign investors were also not treated in a
discriminatory manner.
29. The Claimant's View of the State of Necessity Under Customary
International Law
313. The Claimant first argues in connection with the state of necessity that
the Respondent has not met the heavy burden of proof required by the
International Court of Justice in the Gabcikovo-Nagymaros case. The Claimant
notes that the Court made reference to the work and views of the International
Law Commission insofar the latter explained that "...the state of necessity can
only be invoked under certain strictly defined conditions which must be
91
cumulatively satisfied; and the State concerned is not the sole judge of whether
those conditions have been met... ...Those conditions reflect customary
international law." (165)
314. The Claimant asserts next that neither has the Respondent complied with the
conditions set down for the operation of state of necessity under Article 25 of
the Articles on State Responsibility. In the Claimant's view, severe as the
crisis was, it did not involve "grave" or "imminent" peril nor has it been
established that the Respondent State did not contribute to the emergency as
most of the causes underlying the crisis were endogenous. Moreover, it is
asserted that the Respondent has not shown that the measures adopted were the
only means available to overcome the crisis.
30. The Tribunal's Findings in Respect of the State of Necessity under
Customary International Law
315. The Tribunal, like the parties themselves, considers that Article 25 of the
Articles on State Responsibility adequately reflect the state of customary
international law on the question of necessity. This Article, in turn, is based
on a number of relevant historical cases discussed in the Commentary,(166) with
particular reference to the Caroline,(167) the Russian Indemnity,(168) Societe
Commerciale de Belgique,(169) the Torrey Canyon(170) and the Gabcikovo-Nagymaros
cases.
316. Article 25 reads as follows:
"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:
92
(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."
317. While the existence of necessity as a ground for precluding wrongfulness
under international law is no longer disputed, there is also consensus to the
effect that this ground is an exceptional one and has to be addressed in a
prudent manner to avoid abuse. The very opening of the Article to the effect
that necessity "may not be invoked" unless strict conditions are met, is
indicative of this restrictive approach of international law. Case law, state
practice and scholarly writings amply support this restrictive approach to the
operation of necessity.(171) The reason is not difficult to understand. If
strict and demanding conditions are not required or are loosely applied, any
State could invoke necessity to elude its international obligations. This would
certainly be contrary to the stability and predictability of the law.
318. The Tribunal must now undertake the very difficult task of finding whether
the Argentine crisis meets the requirements of Article 25, a task not rendered
easier by the wide variety of views expressed on the matter and their heavy
politicization. Again here the Tribunal is not called upon to pass judgment on
the measures adopted in that connection but
93
simply to establish whether the breach of the Treaty provisions discussed is
devoid of legal consequences by the preclusion of wrongfulness.
319. A first question the Tribunal must address is whether an essential interest
of the State was involved in the matter. Again here the issue is to determine
the gravity of the crisis. The need to prevent a major breakdown, with all its
social and political implications, might have entailed an essential interest of
the State in which case the operation of the state of necessity might have been
triggered. In addition, the plea must under the specific circumstances of each
case meet the legal requirements set out by customary international law.
320. In the instant case, the Respondent and leading economists are of the view
that the crisis was of catastrophic proportions; other equally distinguished
views, however, tend to qualify this statement. The Tribunal is convinced that
the crisis was indeed severe and the argument that nothing important happened is
not tenable. However, neither could it be held that wrongfulness should be
precluded as a matter of course under the circumstances. As is many times the
case in international affairs and international law, situations of this kind are
not given in black and white but in many shades of grey.
321. It follows that the relative effect that can be reasonably attributed to
the crisis does not allow for a finding on preclusion of wrongfulness. The
Respondent's perception of extreme adverse effects, however, is understandable,
and in that light the plea of necessity or emergency cannot be considered as an
abuse of rights as the Claimant has argued.
322. The Tribunal turns next to the question whether there was in this case a
grave and imminent peril. Here again the Tribunal is persuaded that the
situation was difficult enough to justify the government taking action to
prevent a worsening of the situation and the danger
94
of total economic collapse. But neither does the relative effect of the crisis
allow here for a finding in terms of preclusion of wrongfulness.
323. A different issue, however, is whether the measures adopted were the "only
way" for the State to safeguard its interests. This is indeed debatable. The
views of the parties and distinguished economists are wide apart on this matter,
ranging from the support of those measures to the discussion of a variety of
alternatives, including dollarization of the economy, granting of direct
subsidies to the affected population or industries and many others. Which of
these policy alternatives would have been better is a decision beyond the scope
of the Tribunal's task, which is to establish whether there was only one way or
various ways and thus whether the requirements for the preclusion of
wrongfulness have or have not been met.
324. The International Law Commission's comment to the effect that the plea of
necessity is "excluded if there are other (otherwise lawful) means available,
even if they may be more costly or less convenient," is persuasive in assisting
this Tribunal in concluding that the measures adopted were not the only steps
available.(172)
325. A different condition for the admission of necessity relates to the
requirement that the measures adopted do not seriously impair an essential
interest of the State or States towards which the obligation exists, or of the
international community as a whole. As the specific obligations towards another
State are embodied in the Treaty, this question will be examined in the context
of the applicable treaty provisions. It does not appear, however, that the
essential interest of the international community as a whole was affected in any
relevant way, nor that a peremptory norm of international law might have been
compromised, a situation governed by Article 26 of the Articles.
95
326. In addition to the basic conditions set out under paragraph 1 of Article
25, there are two other limits to the operation of necessity arising from
paragraph 2. As noted in the Commentary, the use of the expression "in any case"
in the opening of the text means that each of these limits must be considered
over and above the conditions of paragraph 1.(173)
327. The first such limit arises when the international obligation excludes
necessity, a matter which again will be considered in the context of the Treaty.
328. The second limit is the requirement for the State not to have contributed
to the situation of necessity. The Commentary clarifies that this contribution
must be "sufficiently substantial and not merely incidental or peripheral". In
spite of the view of the parties claiming that all factors contributing to the
crisis were either endogenous or exogenous, the Tribunal is again persuaded that
similar to what is the case in most crises of this kind the roots extend both
ways and include a number of domestic as well as international dimensions. This
is the unavoidable consequence of the operation of a global economy where
domestic and international factors interact.
329. The issue, however, is whether the contribution to the crisis by Argentina
has or has not been sufficiently substantial. The Tribunal, when reviewing the
circumstances of the present dispute, must conclude that this was the case. The
crisis was not of the making of one particular administration and found its
roots in the earlier crisis of the 1980s and evolving governmental policies of
the 1990s that reached a zenith in 2002 and thereafter. Therefore, the Tribunal
observes that government policies and their shortcomings significantly
96
contributed to the crisis and the emergency and while exogenous factors did fuel
additional difficulties they do not exempt the Respondent from its
responsibility in the matter.
330. There is yet another important element which the Tribunal must take into
account. The International Court of Justice has in the Gabcikovo-Nagymaros case
convincingly referred to the International Law Commission's view that all the
conditions governing necessity must be "cumulatively" satisfied.(174)
331. In the present case there are, as concluded, elements of necessity
partially present here and there but when the various elements, conditions and
limits are examined as a whole it cannot be concluded that all such elements
meet the cumulative test. This in itself leads to the inevitable conclusion that
the requirements of necessity under customary international law have not been
fully met so as to preclude the wrongfulness of the acts.
31. The Emergency Clause of the Treaty
332. The discussion on necessity and emergency is not confined to customary
international law as there are also specific provisions of the Treaty dealing
with this matter. Article XI of the 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."
97
333. Article IV(3) of the Treaty reads as follows:
"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."
334. The meaning and extent of these clauses has prompted an important debate
between the parties and the legal experts requested by them to discuss the
issue, namely Dean Anne-Marie Slaughter and Professor Jose E. Alvarez.
335. The Tribunal will now consider the views of the parties and the experts on
this matter, beginning with those of the Claimant.
32. The Claimant's View of the Treaty's Emergency Clauses
336. The Claimant argues that the Treaty clauses provide very narrow and
specific exceptions to liability that do not allow the Respondent to invoke the
operation of the state of necessity or emergency.
337. The Claimant asserts first that under Article 25(2) of the Articles on
State Responsibility necessity may not be invoked if the international
obligation in question excludes the possibility of invoking necessity. This, in
the Claimant's view, is the case here as the object and purpose of the Treaty,
which is to provide protection to investors in
98
circumstances of economic difficulty, exclude reliance on such difficulties for
non-performance of the obligations established under the Treaty. Moreover, the
Claimant argues, both under the Treaty umbrella clause embodied in Article
II(2)(c) and Article X the Respondent has the duty to observe obligations
entered into with regard to investments.
338. The Claimant invokes in support of its views the Himpurna case where force
majeure was not accepted as precluding the wrongfulness of acts of devaluation
and the contractual obligations were upheld even in circumstances of economic
adversity.(175) Socobelge,(176) on which the Himpurna tribunal relied in part,
is also invoked by the Claimant as an example of contract enforcement in spite
of an economic crisis. To the same effect the Claimant invokes the Martini
case.(177)
339. In connection with the specific clause of Article XI of the Treaty the
Claimant, following the expert opinion of Professor Jose E. Alvarez, argues
first that this clause is not self-judging, and therefore requires the Tribunal
and not the Respondent to decide when or to what extent essential security
interests were at stake. The Claimant makes the further point that if the State
were to have discretion in this regard, such discretion should be provided
expressly. Provisions of this kind include Article XXI of the GATT as well as
provisions in the bilateral investment treaties concluded by the United States
with Russia(178) and with Bahrain.(179) It is further affirmed, that this
requirement was also the conclusion of the International Court of Justice in the
Nicaragua case,(180) and the Oil Platforms case.(181)
340. The Claimant argues next that economic crises do not fall within the
concept of "essential security interests," which is limited to war, natural
disaster and other situations threatening the existence of the State. In its
view, this is also the meaning of Article 25 of the
99
Articles on State Responsibility, the interpretation given to Article XXI of the
GATT and the scope of the Russian Indemnity case.
341. A third argument made by the Claimant is that, in any event, Article XI
does not exempt the Respondent from liability as this provision does not allow
for the denial of benefits under the Treaty.
342. The Claimant discusses in this context the meaning of Article IV(3) of the
Treaty which, it is argued, is not intended to reduce the obligations of the
host state to investors but rather to reinforce such obligations, and cannot be
read to include economic emergency. The ICSID cases American Manufacturing v.
Zaire(182) and AAPL v. Sri Lanka(183) are invoked as precedents supporting this
interpretation.
343. It is further argued in this regard that even if the Article were to
include economic difficulties the Claimant would still be entitled to full
protection under the most favored nation clause (MFNC) of both Articles II(1)
and IV(3) of the Treaty, and certainly nothing less than the treatment local
investors or those from other countries have received from the Respondent. The
MFNC is also invoked in support of the argument that other bilateral investment
treaties concluded by the Respondent do not contain provisions similar to
Article XI and thus the Claimant is entitled to the better treatment resulting
from the absence of such exceptions.
33. The Respondent's View of the Treaty's Emergency Clauses
344. Articles IV(3) and XI of the Treaty provide, in the Respondent's view, for
the lex specialis governing emergency situations which the Government has
implemented in order to
100
maintain public order, protect its essential security interests and reestablish
its connections with the international economic system, all with a view to
granting investors treatment not less favorable than that granted to nationals.
345. The Respondent argues first that the object and purpose of the Treaty do
not exclude the operation of necessity or emergency, which are expressly
provided for in periods of distress. To this effect, the Respondent further
argues, the decisions invoked by the Claimant in support of its views are not
relevant to the present case.
346. The Respondent particularly rejects the reliance by the Claimant on the
tribunal's decision in the Himpurna case. The Claimant invoked that decision to
draw a comparison with the Indonesian crisis and to show that the tribunal in
that case had held that necessity was excluded by specific commitments
undertaken by contract and treaty. The present dispute, the Respondent argues,
has emerged under circumstances very different from those that prevailed in
Indonesia and the Himpurna case in no way contradicts the position taken by
Argentina in light of extraordinary circumstances.
347. The Respondent also rejects the relevance of the situation of Greece in the
1930s as taken into account in the decision in the Socobelge case. This decision
was also invoked by the Claimant to show that the obligations under a contract
were upheld in spite of financial hardship, in the case of Greece. The
Respondent believes the Argentine crisis to have been much worse and deeper and
that force majeure as discussed in that case was held to be beyond the powers of
the Permanent Court of International Justice.
348. As to the Martini case, invoked by the Claimant as an example of state of
necessity not having been accepted as an excuse and of contractual commitments
having been strictly
101
enforced, the Respondent does not consider it relevant to the present case as it
did not deal with a case of institutional abnormality.
349. The expert opinions of Dean Anne Marie Slaughter, introduced by the
Respondent on December 15, 2003 and June 23, 2004, elaborate on the meaning and
the coverage of the relevant Treaty articles. It is first asserted in this
respect that Article XI of the Treaty needs to be interpreted broadly and this
in fact was the intention of the parties.
350. Since the very outset of the United States' model bilateral investment
treaties it has been apparent, in the expert's view, that this country desired
to safeguard certain sovereign interests by means of "non-precluded measures"
such as those of Article XI. This trend was strengthened after the decision in
the Nicaragua case which held that similar provisions of another treaty could
not be understood to be self-judging. At the time the Treaty was signed with
Argentina, it is further argued, this trend had become manifest as evidenced by
the treaties negotiated with other countries and debates in the United States
Congress.
351. On the basis of the principle of reciprocity, it is explained next,
Argentina should be accorded the benefit of a similar understanding when
invoking necessity and emergency. The self-judging character of these
provisions, in the expert's view, should not be understood as precluding their
submission to arbitration as the Tribunal must determine whether Article XI
applies and whether measures taken thereunder comply with the requirements of
good faith.
352. The expert's opinions also emphasize that security interests include
economic security, particularly in the context of a crisis as severe as that of
Argentina, and that, as in many instances of force majeure, the State should be
released from treaty obligations. It is
102
held, moreover, that the Claimant has not been treated differently from
nationals or other investors under Article IV(3) of the Treaty.
34. The Tribunal's Findings in Respect of the Treaty's Clauses on
Emergency
353. The first issue the Tribunal must determine is whether the object and
purpose of the Treaty exclude necessity. There are of course treaties designed
to be applied precisely in the case of necessity or emergency, such as those
setting out humanitarian rules for situations of armed conflict. In those cases,
as rightly explained in the Commentary to Article 25 of the Articles on State
Responsibility, the plea of necessity is excluded by the very object and purpose
of the treaty.(184)
354. The Treaty in this case is clearly designed to protect investments at a
time of economic difficulties or other circumstances leading to the adoption of
adverse measures by the Government. The question is, however, how grave these
economic difficulties might be. A severe crisis cannot necessarily be equated
with a situation of total collapse. And in the absence of such profoundly
serious conditions it is plainly clear that the Treaty will prevail over any
plea of necessity. However, if such difficulties, without being catastrophic in
and of themselves, nevertheless invite catastrophic conditions in terms of
disruption and disintegration of society, or are likely to lead to a total
breakdown of the economy, emergency and necessity might acquire a different
meaning.
355. As stated above, the Tribunal is convinced that the Argentine crisis was
severe but did not result in total economic and social collapse. When the
Argentine crisis is compared to other contemporary crises affecting countries in
different regions of the world it may be noted that such other crises have not
led to the derogation of international contractual or treaty
103
obligations. Renegotiation, adaptation and postponement have occurred but the
essence of the international obligations has been kept intact.
356. As explained above, while the crisis in and of itself might not be
characterized as catastrophic and while there was therefore not a situation of
force majeure that left no other option open, neither can it be held that the
crisis was of no consequence and that business could have continued as usual, as
some of the Claimant's arguments seem to suggest. Just as the Tribunal concluded
when the situation under domestic law was considered, there were certain
consequences stemming from the crisis. And while not excusing liability or
precluding wrongfulness from the legal point of view they ought nevertheless to
be considered by the Tribunal when determining compensation.
357. A second issue the Tribunal must determine is whether, as discussed in the
context of Article 25 of the Articles on State Responsibility, the act in
question does not seriously impair an essential interest of the State or States
towards which the obligation exists. If the Treaty was made to protect investors
it must be assumed that this is an important interest of the States parties.
Whether it is an essential interest is difficult to say, particularly at a time
when this interest appears occasionally to be dwindling.
358. However, be that as it may, the fact is that this particular kind of treaty
is also of interest to investors as they are specific beneficiaries and for
investors the matter is indeed essential. For the purpose of this case, and
looking at the Treaty just in the context of its States parties, the Tribunal
concludes that it does not appear that an essential interest of the State to
which the obligation exists has been impaired, nor have those of the
international community as a whole. Accordingly, the plea of necessity would not
be precluded on this count.
104
359. The third issue the Tribunal must determine is whether Article XI of the
Treaty can be interpreted in such a way as to provide that it includes economic
emergency as an essential security interest. While the text of the Article does
not refer to economic crises or difficulties of that particular kind, as
concluded above, there is nothing in the context of customary international law
or the object and purpose of the Treaty that could on its own exclude major
economic crises from the scope of Article XI.
360. It must also be kept in mind that the scope of a given bilateral treaty,
such as this, should normally be understood and interpreted as attending to the
concerns of both parties. If the concept of essential security interests were to
be limited to immediate political and national security concerns, particularly
of an international character, and were to exclude other interests, for example,
major economic emergencies, it could well result in an unbalanced understanding
of Article XI. Such an approach would not be entirely consistent with the rules
governing the interpretation of treaties.
361. Again, the issue is then to establish how grave an economic crisis must be
so as to qualify as an essential security interest, a matter discussed above.
362. It is true that Paragraph 6 of the Protocol attached to the Treaty
qualifies the reference to maintenance or restoration of international peace and
security as related to obligations under the Charter of the United Nations.
Similarly, the letter of submission of the Treaty to Congress in Argentina and
the Report of the pertinent Congressional Committee, refer in particular to
situations of war, armed conflict or disturbance.(185) However, this cannot be
read as excluding altogether other qualifying situations.
105
363. Since the Security Council assumes to be many times the law unto
itself,(186) and since there is no specific mechanism for judicial review under
the Charter, it is not inconceivable that in some circumstances this body might
wish to qualify a situation of economic crisis as a threat to international
peace and security and adopt appropriate measures to deal with a given
situation. This would indeed allow for a broad interpretation of Article XI.
364. As explained by Professor Alvarez, in practice the Security Council has, to
a limited extent, adopted decisions connecting economic measures with security
matters, for example, in the formulation of the sanctions program enacted as a
consequence of the 1991 Gulf War and other instances.(187) In such cases, it is
explained, there could be a treaty breach under the authority of the Security
Council. However, this sort of situation does not have to do with the present
case.
365. It is also important to note that in Dean Slaughter's understanding of the
reference to the United Nations in the Treaty Protocol, such clause should not
be considered as self-judging to the extent that the issue relates to the
maintenance or restoration of international peace and security, involving a
broader understanding of the concept as opposed to a nation's own security
interest. The latter would in her view allow for self-judging insofar as the
security interest is not a part of the maintenance or restoration of
international peace and security.(188) The question of the self-judging
character of these provisions will be discussed next.
366. The fourth issue the Tribunal must determine is whether the rule of Article
XI of the Treaty is self-judging, that is if the State adopting the measures in
question is the sole arbiter of the scope and application of that rule, or
whether the invocation of necessity, emergency or other essential security
interests is subject to some form of judicial review.
106
367. As discussed above, three positions have emerged in this context. There is
first that of the Claimant, supporting the argument that such a clause cannot be
self-judging. There is next that of the Respondent, who believes that it is free
to determine when and to what extent necessity, emergency or the threat to its
security interests need the adoption of extraordinary measures. And third, there
is the position expressed by Dean Slaughter to the effect that the Tribunal must
determine whether Article XI is applicable particularly with a view to
establishing whether this has been done in good faith.(189)
368. The Tribunal notes in this connection that, as explained by Dean Slaughter,
the position of the United States has been evolving towards the support of
self-judging clauses insofar as security interests are affected. This policy
emerged after the Nicaragua decision, which will be discussed below, and was
expressly included in the U.S. - Russia bilateral investment treaty, which has
incidentally not been ratified. With some changes it was also included in the
U.S. - Bahrain investment treaty, the precise meaning of which is debated by the
experts. The GATT self-judging clause was also mentioned above. Other treaties
have not included a self-judging clause but this again is debated by the
experts, and in any event such policy would also be reflected in the 2004 U.S.
Model bilateral investment treaty.
369. The discussion of these treaties in the U.S. Congress allows for a variety
of interpretations but does not clearly support the conclusion that all such
clauses are self-judging. The record shows that during the discussion of the
first round of bilateral investment treaties in 1986 a proposal to allow for the
termination of treaties in light of security needs was not accepted, although
this discussion apparently did not address specifically the question of
self-judging clauses. The expert discussion of the Exon-Florio law has also
generated much debate on its meaning.(190)
107
370. The Tribunal is convinced that when States intend to create for themselves
a right to determine unilaterally the legitimacy of extraordinary measures
importing non-compliance with obligations assumed in a treaty, they do so
expressly. The examples of the GATT and bilateral investment treaty provisions
offered above are eloquent examples of this approach. The first does not
preclude measures adopted by a party "which it considers necessary" for the
protection of its security interests. So too, the U.S. - Russia treaty expressly
confirms in a Protocol that the non-precluded measures clause is self-judging.
371. The International Court of Justice has also taken a clear stand in respect
of this issue, twice in connection with the Nicaragua case and again in the Oil
Platforms case noted above. Referring to the 1956 Treaty of Friendship, Commerce
and Navigation between the United States and Nicaragua, the Court held:
"Article XXI defines the instances in which the Treaty itself
provides for exceptions to the generality of its other provisions,
but it by no means removes the interpretation and application of
that article from the jurisdiction of the Court... The text of
Article XXI of the Treaty does not employ the wording which was
already to be found in Article XXI of the General Agreement on
Tariffs and Trade. This provision of GATT, contemplating exceptions
to the normal implementation of the General Agreement, stipulates
that the Agreement is not to be construed to prevent any contracting
party from taking any action `which it considers necessary for the
protection of its essential security interests', in such fields as
nuclear fission, arms, etc. The 1956 Treaty, on the contrary, speaks
simply of `necessary' measures, not of those considered by a party
to be such."(191)
108
372. As explained above, in the Gabcikovo-Nagymaros case the International Court
of Justice, referring to the work and views of the International Law Commission,
notes the strict and cumulative conditions of necessity under international law
and that "the State concerned is not the sole judge of whether those conditions
have been met."(192)
373. In light of this discussion, the Tribunal concludes first that the clause
of Article XI of the Treaty is not a self-judging clause. Quite evidently, in
the context of what a State believes to be an emergency, it will most certainly
adopt the measures it considers appropriate without requesting the views of any
court.(193) However, if the legitimacy of such measures is challenged before an
international tribunal, it is not for the State in question but for the
international jurisdiction to determine whether the plea of necessity may
exclude wrongfulness. It must also be noted that clauses dealing with
investments and commerce do not generally affect security as much as military
events do and, therefore, would normally fall outside the scope of such dramatic
events.
374. The Tribunal must conclude next that this judicial review is not limited to
an examination of whether the plea has been invoked or the measures have been
taken in good faith. It is a substantive review that must examine whether the
state of necessity or emergency meets the conditions laid down by customary
international law and the treaty provisions and whether it thus is or is not
able to preclude wrongfulness.
375. The Tribunal must still consider the question of the meaning and extent of
Treaty Article IV(3) in light of the discussion noted above. The plain meaning
of the Article is to provide a floor treatment for the investor in the context
of the measures adopted in respect of the losses suffered in the emergency, not
different from that applied to nationals or other foreign investors. The Article
does not derogate from the Treaty rights but rather ensures
109
that any measures directed at offsetting or minimizing losses will be applied in
a non-discriminatory manner.
376. As noted above, the Tribunal is satisfied that the measures adopted by the
Respondent have not adversely discriminated against the Claimant.
377. Although the MFNC contained in the Treaty has also been invoked by the
Claimant because other treaties done by Argentina do not contain a provision
similar to that of Article XI, the Tribunal is not convinced that the clause has
any role to play in this case. Thus, had other Article XI type clauses
envisioned in those treaties a treatment more favorable to the investor, the
argument about the operation of the MFNC might have been made. However, the mere
absence of such provision in other treaties does not lend support to this
argument, which would in any event fail under the ejusdem generis rule, as
rightly argued by the Respondent.
378. The Tribunal must finally conclude in this section that the umbrella
clauses invoked by the Claimant do not add anything different to the overall
Treaty obligations which the Respondent must meet if the plea of necessity
fails.
35. Temporary Nature of Necessity
379. The Tribunal is also mindful that Article 27 of the Articles on State
Responsibility provides that the invocation of a circumstance precluding
wrongfulness is without prejudice to "(a) compliance with the obligation in
question, if and to the extent that the circumstance precluding wrongfulness no
longer exists."
110
380. The temporary nature of necessity is thus expressly recognized and finds
support in the decisions of courts and tribunals. The Commentary cites in this
connection the Rainbow Warrior(194) and Gabcikovo-Nagymaros cases. In this last
case the International Court of Justice held that as soon "as the state of
necessity ceases to exist, the duty to comply with treaty obligations
revives."(195)
381. This does not appear to be contested by the parties as various witness
statements did in fact clearly establish that the crisis had been evolving
toward normalcy over a period of time. The Claimant invokes to this effect the
statements of Ambassador Remes Lenicov and Doctor Folgar, who explained how the
crisis was subsiding by the end of 2002.(196) This was also the view of the
Argentine Supreme Court and the Procurador General noted above. It may be
observed that this positive trend continued to evolve thereafter.
382. Even if the plea of necessity were accepted, compliance with the obligation
would reemerge as soon as the circumstance precluding wrongfulness no longer
existed, which is the case at present.
36. Necessity and Compensation
383. Article 27 also expressly provides that any circumstance precluding
wrongfulness is without prejudice to "(b) the question of compensation for any
material loss caused by the act in question". Again this conclusion finds
support in the Gabcikovo-Nagymaros case, where the Court noted that "Hungary
expressly acknowledged that, in any event, such a state of necessity would not
exempt it from its duty to compensate its partner."(197)
111
384. This criterion was also the basis for the decisions in earlier cases, such
as the Compagnie Generale de l'Orinocco case(198) and the Properties of the
Bulgarian Minorities in Greece case(199) invoked by the Claimant, or the Orr &
Laubenheimer case.(200) In these cases the concept of damages appears to have
been broader than that of material loss in Article 27.
385. The Respondent has argued in this connection that the Compagnie Generale de
l'Orinocco dealt with a totally different set of issues, all involving illicit
acts, and is therefore not relevant to the present case. The Respondent further
invokes the Gould Marketing, Inc. case, where the Iran-United States Tribunal
held that injuries caused as a result of social and economic forces beyond the
power of the State to control through due diligence are "not attributable to the
state for purposes of its responding for damages."(201)
386. The Claimant, however, contends that "[i]n any event, Article XI does not
exempt Argentina from liability," since it "provides only a temporary and
limited suspension of benefits, and Argentina is still therefore obliged to
provide compensation for the permanent losses [...]".(202) It recalls that the
Treaty shows a difference between clauses that (a) "do not preclude or do not
impede certain measures", (b) "permit a Party clearly to deny treaty benefits",
or (c) "permit treaty termination" -- Articles XI, I (2) and XIV (2),
respectively.
387. Because the Argentine crisis, as explained above, gradually subsided, the
Claimant asserts that "[e]ven assuming that at the beginning of 2002 Argentina
was experiencing an emergency of the sort covered by Article XI, Argentina has
not demonstrated that the crisis persists today. Argentina's measures promise to
remain in effect indefinitely, and [...the Respondent] must therefore compensate
CMS for the harm it has suffered, regardless of the applicability of Article
XI."(203)
112
388. The Claimant's reasoning in this respect is supported by Article 27 and the
decisions noted above, as well as by the principle acknowledged even in the
generality of domestic legal systems: the plea of state of necessity may
preclude the wrongfulness of an act, but it does not exclude the duty to
compensate the owner of the right which had to be sacrificed. Still more
stringent are the requirements of emergency under Argentine case law as
discussed above.
389. The Respondent contends to the contrary that no compensation is due if the
measures in question were undertaken in a state of necessity, under the rule
contained in Article XI of the Treaty,(204) and that the norm which prescribes
that the Parties shall avoid uneven treatment of investors does not otherwise
establish a duty to compensate even if the investor had been submitted to unfair
or unequal treatment.(205)
390. The Tribunal is satisfied that Article 27 establishes the appropriate rule
of international law on this issue. The Respondent's argument is tantamount to
the assertion that a Party to this kind of treaty, or its subjects, are supposed
to bear entirely the cost of the plea of the essential interests of the other
Party. This is, however, not the meaning of international law or the principles
governing most domestic legal systems.
391. The Tribunal's conclusion is further reaffirmed by the record. At the
hearing the Tribunal put the question whether there are any circumstances in
which an investor would be entitled to compensation in spite of the eventual
application of Article XI and the plea of necessity.(206)
392. The answer to this question by the Respondent's expert clarifies the issue
from the point of view of both its temporary nature and the duty to provide
compensation: while it is
113
difficult to reach a determination as long as the crisis is unfolding, it is
possible to envisage a situation in which the investor would have a claim
against the government for the compliance with its obligations once the crisis
was over; thereby concluding that any suspension of the right to compensation is
strictly temporary, and that this right is not extinguished by the crisis
events.(207)
393. The Tribunal also notes that, as in the Gaz de Bordeaux case, the
International Law Commission's Commentary to Article 27 suggests that the States
concerned should agree on the possibility and extent of compensation payable in
a given case.(208)
394. It is quite evident then that in the absence of agreement between the
parties the duty of the Tribunal in these circumstances is to determine the
compensation due. This the Tribunal will do next.
E. REMEDIES
37. The Parties' Submissions
395. The Claimant has argued that its investment has been expropriated by the
Respondent without prompt, adequate and effective compensation and that the
Respondent has also violated the standards of treatment set out in Article II of
the Treaty. The Claimant requests the Tribunal to grant full compensation for
these breaches in terms of recovering the fair market value of the investment
calculated immediately before the date of expropriation, with interest paid at
the rate of six-month certificates of deposit in the United States, compounded
semi-annually. The Claimant also undertakes to relinquish title to its shares to
the Government of Argentina upon payment of compensation.
114
396. To this end, the Claimant asserts that the fair market value is the price
of an asset in a hypothetical market, which in the case of an income-producing
asset or "going concern" is also the measure of future prospects. The discounted
cash flow method (DCF) is favored, in the Claimant's view, in both international
finance and international arbitration. It is also asserted that the relevant
date of valuation in this case is August 17, 2000. Relying on the Report
prepared by its expert, the Claimant submits that the fair market value at that
date is US$ 261.1 million in the event that the Government of Argentina decides
to take title to CMS' shares in TGN, or US$ 243.6 million in the event that
title to the share remains with CMS.(209)
397. The Respondent objects to the dates and estimates used by the Claimant
because it has chosen the worst moments of the crisis to undertake the downside
valuation and has not taken into account the sharp decline of all the economic
indicators for that period. The Respondent objects in particular to the
assumption that no renegotiation will succeed and that the emergency will
continue until 2037, as well as to the assumption that income and costs
denominated in US dollars will not change. The Respondent also argues that the
rate of exchange used between Argentine pesos and U.S. dollars in the valuation
process is too high. Other issues raised by the Respondent have been examined
above, such as debt restructuring, export tariffs and the duration of the
license.
398. The Respondent also asserts that the DCF method is not appropriate and that
it has resulted in gross overvaluation of the shares. In the Respondent's view,
the discount rate used in the pesification scenario is also grossly exaggerated.
The Respondent argues that a more accurate method is the stock exchange
valuation of shares of similarly situated companies. It also asserts that what
CMS paid for its shares in 1995 and 1999 was overvalued
115
by 50% and 26.53% respectively at the date of valuation chosen.(210) As noted
above, the Respondent has not submitted its own valuation.
38. The Standards of Reparation under International Law
399. It is broadly accepted in international law that there are three main
standards of reparation for injury: restitution, compensation and
satisfaction.(211) As this is not a case of reparation due to an injured State,
satisfaction can be ruled out at the outset.
400. Restitution is the standard used to reestablish the situation which existed
before the wrongful act was committed,(212) provided this is not materially
impossible and does not result in a burden out of proportion as compared to
compensation. The Permanent Court of International Justice concluded in the
landmark Chorzow Factory case that
"restitution in kind, or, if this is not possible, payment of a sum
corresponding to the value which a restitution in kind would bear;
the award, if need be, of damages for loss sustained which would not
be covered by restitution in kind or payment in place of it -- such
are the principles which should serve to determine the amount of
compensation due for an act contrary to international law."(213)
401. Compensation is designed to cover any "financially assessable damage
including loss of profits insofar as it is established."(214) Quite naturally
compensation is only called for when the damage is not made good by
restitution.(215) The decision in Lusitania, another landmark case, held that
"the fundamental concept of `damages' is...reparation for a loss suffered; a
judicially ascertained compensation for wrong. The remedy should be commensurate
with the loss, so that the injured party may be made whole."(216)
116
402. The loss suffered by the claimant is the general standard commonly used in
international law in respect of injury to property, including often capital
value, loss of profits and expenses.(217) The methods to provide compensation, a
number of which the parties have discussed, are not unknown in international
law. Depending on the circumstances, various methods have been used by tribunals
to determine the compensation which should be paid but the general concept upon
which commercial valuation of assets is based is that of "fair market value."
That concept has an internationally recognized definition which reads as
follows:
"the price, expressed in terms of cash equivalents, at which
property would change hands between a hypothetical willing and able
buyer and a hypothetical willing and able seller, acting at arms
length in an open and unrestricted market, when neither is under
compulsion to buy or sell and when both have reasonable knowledge of
the relevant facts."(218)
403. In the case of a business asset which is quoted on a public market, that
process can be a fairly easy one, since the price of the shares is determined
under conditions meeting the above mentioned definition. However, it happens
frequently that the assets in question are not publicly traded and it is then
necessary to find other methods to establish fair market value. Four ways have
generally been relied upon to arrive at such value. (1) The "asset value" or the
"replacement cost" approach which evaluates the assets on the basis of their
"break-up" or their replacement cost; (2) the "comparable transaction" approach
which reviews comparable transactions in similar circumstances; (3) the "option"
approach which studies the alternative uses which could be made of the assets in
question, and their costs and benefits; (4) the "discounted cash flow" ("DCF")
approach under which the valuation of the assets is arrived at by determining
the present value of future predicted cash flows,
117
discounted at a rate which reflects various categories of risk and
uncertainty.(219) The Tribunal will determine later which method it has chosen
and why.
404. Decisions concerning interest also cover a broad spectrum of alternatives,
provided it is strictly related to reparation and not used as a tool to award
punitive damages or to achieve other ends.(220)
405. The Tribunal will now consider these various options in the light of the
present dispute.
39. Restitution by Means of Negotiation
406. Restitution is by far the most reliable choice to make the injured party
whole as it aims at the reestablishment of the situation existing prior to the
wrongful act. In a situation such as that characterizing this dispute and the
complex issues associated with the crisis in Argentina, it would be utterly
unrealistic for the Tribunal to order the Respondent to turn back to the
regulatory framework existing before the emergency measures were adopted, nor
has this been requested. However, as the Tribunal has repeatedly stated in this
Award, the crisis cannot be ignored and it has specific consequences on the
question of reparation.
407. Just as an acceptable rebalancing of the contracts has been achieved by
means of negotiation between the interested parties in other sectors of the
Argentine economy, the parties are free to further pursue the possibility of
reaching an agreement in the context of this dispute. As long as the parties
were to agree to new terms governing their relations, this would be considered
as a form of restitution as both sides to the equation would have
118
accepted that a rebalancing had been achieved. This was in fact the first major
step for the settlement of the dispute in the Gaz de Bordeaux case.
40. Compensation
408. The Tribunal, however, cannot leave matters pending until an agreed
settlement is reached; this is a matter strictly in the hands of the parties and
its outcome is uncertain. In the absence of such agreed form of restitution, the
Tribunal must accordingly determine the amount of compensation due.
41. The Applicable Standard
409. A first question the Tribunal needs to address is that of the standard of
compensation applicable in the circumstances of this dispute. As was the
situation in the Feldman v. Mexico case,(221) the Tribunal is faced with a
situation where, absent expropriation under Article IV, the Treaty offers no
guidance as to the appropriate measure of damages or compensation relating to
fair and equitable treatment and other breaches of the standards laid down in
Article II. This is a problem common to most bilateral investment treaties and
other agreements such as NAFTA. The Tribunal must accordingly exercise its
discretion to identify the standard best attending to the nature of the breaches
found.
410. Unlike the circumstances in the Feldman case, however, the Tribunal is
persuaded that the cumulative nature of the breaches discussed here is best
dealt with by resorting to the standard of fair market value. While this
standard figures prominently in respect of expropriation, it is not excluded
that it might also be appropriate for breaches different from expropriation if
their effect results in important long-term losses. Moreover, precisely
119
because this is not a case of expropriation, the Claimant has offered to
transfer its shares in TGN to the Argentine Republic, and the Tribunal will
address this question in due course.
42. The Valuation Method to be Used
411. The Tribunal has concluded that the discounted cash flow method it the one
that should be retained in the present instance.
412. First of all, the shares of TGN are not publicly traded on a stock exchange
or any other public market. The Respondent has argued that, in order to estimate
the value of TGN, reference should have been made to TGS, another natural gas
transporter, and three other natural gas distributors which were listed on the
Argentine stock exchange. However, as noted by Mr. Bello, "(...) market
capitalization in illiquid markets as Argentina is not the most adequate method
to value companies (...)".(222) Moreover, as noted also by Mr. Bello, there were
significant differences between TGN and those companies regarding asset levels,
business segments, financing policy, and other issues. In the circumstances, the
Tribunal has come to the conclusion that this approach would not be appropriate.
413. As to the asset value approach, it would be inappropriate in the present
circumstances. CMS is a minority shareholder in TGN which is an ongoing company
with a record showing profits.
414. As to the comparable transaction approach, the Tribunal has not been
provided with any significant evidence of such transactions and it would be a
most speculative enterprise to try and determine the compensation due to CMS on
that basis.
120
415. As to the option valuation method, it does not appear to be of any help in
this case. TGN is a gas transportation company and it is very difficult to
imagine what uses or options there could be for gas transmission lines other
than to transport gas.
416. This leaves the Tribunal with the DCF method and it has no hesitation in
endorsing it as the one which is the most appropriate in this case. TGN was and
is a going concern; DCF techniques have been universally adopted, including by
numerous arbitral tribunals, as an appropriate method for valuing business
assets; as a matter of fact, it was used by ENARGAS in its 1996/7 tariff review.
Finally, there is adequate data to make a rational DCF valuation of TGN.
417. The Tribunal also notes that in spite of the disagreement between the
parties as to the appropriate application of the valuation method, experts from
both sides have shared the view that DCF was the proper method in this case for
determining losses that extend through a prolonged period of time.(223)
43. The Valuation of Damages
418. This leaves the Tribunal with the assessment of the damages claimed. In
this task, the Tribunal was greatly helped by the submissions and the
testimonies of the experts produced by the Parties in this case. As will be seen
below, the Tribunal however is of the view that certain assumptions and
arguments of those experts require some adjustments. In its study of those
submissions and testimonies, the Tribunal was ably assisted by its own experts,
Professors Jacques Fortin and Alix Mandron of the Ecole des Hautes Etudes
Commerciales de Montreal. The Parties were informed of their appointment and
given an opportunity to
121
comment on their analysis of the parties' expert submissions. Those comments
were the subject of careful review by the Tribunal. The Tribunal wishes to
express its gratitude to all the experts for their contribution.
419. In arriving at its own estimates of the value loss suffered by the
Claimant, the Tribunal will discuss a number of points mentioned in the experts'
reports which it questions. The word "estimates" is quite appropriate in trying
to establish value loss in a case involving a license valid until 2027. This
task is all the more challenging in that, in order to arrive at a value loss, it
is necessary to evaluate not only what the years 2000 to 2027 would have been
like had TGN's license and regulatory environment remained unchanged but also to
foresee what the future holds for TGN under the new (and not completely known)
regulatory environment. The uncertainty surrounding Argentina's future economic
health, the exchange rate with the US dollar, the evolution of production costs,
required future investments for the maintenance of the pipeline system's
efficiency and security are only some of the factors to be taken into account.
420. This being said, such estimates need not be arbitrary or analogous to a
shot in the dark; with the appropriate methodology and the use of reasonable
alternative sets of hypotheses, it is possible to arrive at figures which
represent a range of values which can be rationally justified, even though there
is general agreement that their accurateness can only be fully assessed some 22
years later.
122
44. Methodology Used
421. As already stated, all the experts consulted on this matter agree that the
best methodology to be used in a case like the one before the Tribunal is the
discounted cash flow methodology and the Tribunal shares that conclusion.
422. As far as the parties are concerned, Mr. Wood-Collins is the only expert to
have estimated the value loss suffered by CMS on its TGN's shares. In doing so,
he used the forecasted figures prepared by TGN for internal use in 2000, in the
context of an unchanged regulatory environment. From this basis, he produced two
scenarios, one for the "no regulatory change" context (or "without
pesification," as the Tribunal will describe it) and the other for the "new
regulatory context" (or "with pesification"). The use of a company's internal
forecast prepared in the normal course of business is quite acceptable as a
starting point in the valuation of a company. The Tribunal sees no reason to
reject it.
423. However, the Tribunal will wish to revisit some the more crucial
assumptions contained in those scenarios, some of which were questioned in Mr.
Bello's report. But before doing so, the Tribunal will address a preliminary
issue raised by Mr. Bello concerning the capital structure of TGN and the
opportunity for debt renegotiation.
45. Optimal Capital Structure and Debt Renegotiation
424. Mr. Bello has argued, both in his report and in his oral testimony, that an
excessive level of debt was partly responsible for the precipitous drop in TGN's
value, that TGN would not have defaulted on its obligations had it been less
indebted and, finally, that the probable
123
terms of an agreement with the lenders should be considered to compute the true
value of CMS's share in TGN.
425. Mr. Bello's argument raises two questions: (1) whether or not the degree of
indebtedness affected the size of the equity value loss; and (2) whether the
issue of renegotiation needs to be considered in order to assess the equity
value loss. The answer of the Tribunal to those two questions is in the
negative.
426. As to the first question, the Tribunal believes that, even if TGN had
maintained a much lower debt ratio than the 50.3% it had in 2000, its shares
would have lost the same value because of Argentina's decision (in absolute
terms, not in relative terms), except under extremely adverse circumstances. In
fact, contrary to what Mr. Bello assumes, in extremely adverse situations, the
absolute value loss is smaller, not higher, with a highly leveraged capital
structure. It can easily be demonstrated that, in that case, the shareholders of
such a company may suffer smaller absolute losses in adverse times (compared
with the shareholders of a less leveraged company), because of their limited
liability.
427. Since the problem at hand is not the percentage loss but the absolute value
loss suffered by the Claimant as a shareholder, the issue of TGN's "excessive"
leverage does not need to be considered. There is no firm ground to believe that
the absolute change in value of those shares would have been smaller had TGN
opted for less debt in its capital structure before 2000, quite the contrary.
428. Moreover, the evidence put before the Tribunal does not indicate that TGN's
debt/equity ratio was significantly different from the one commonly found in
pipeline companies; the Tribunal sees no reason why it should be questioning the
TGN decisions
124
taken in this regard in the normal course of business. For the purpose of its
analysis, the Tribunal will endorse the 50% debt/equity ratio adopted by Mr.
Wood-Collins in his scenario.
429. As to the question of debt renegotiation, the Tribunal is also of the view
that it can be ignored in the present case because, whichever way one looks at
the future, shareholders will bear the consequences of the current default,
except in the most improbable circumstances where the creditors would renounce
repayments that had come due. The Tribunal cannot envisage such gross
inefficiency or irrationality in the market. On the contrary, in the real world,
creditors would require to be paid first, one way or the other, at the expense
of the shareholders. Moreover, since the Claimant has offered to transfer its
shares in TGN to the Respondent, upon payment of compensation, the Respondent
would stand to benefit after the transfer of shares if, as argued by the
Respondent, a favorable renegotiation were eventually to be concluded.
46. Computing the Value of Equity
430. There are two recognized ways of computing the value of a firm and its
securities on a DCF basis. One can start computations with the cash flows to the
firm before interest and debt repayments, discount such flows at the weighted
average cost of capital (the "WACC") and add the discounted cash flows to the
firm to establish its value; then, the value of debt is subtracted and the
residual value is the value of equity ("the indirect equity value").
Alternatively, one can compute first the cash flows to equity (cash flows from
operations, minus interest and debt repayments), discount them at the cost of
equity ("COE") and add the discounted cash flows to equity to establish the
value of equity ("the direct equity value"); then, one adds the value of debt to
establish the value of the firm. The Tribunal has been
125
advised that, by and large, analysts have tended to favor the first method. This
is the approach taken by Mr. Wood-Collins but he appears to have applied it in a
circular way. Having computed the cash flows to equity and the cash flows to
creditors, he then adds them up and discounts them at the weighted average cost
of capital (the "WACC"); the sum of these discounted cash flows represents the
value of the firm, from which the value of the debt is subtracted to arrive at
the present value of equity. In fact, Mr. Wood-Collins goes from equity to debt
to the firm and then back to equity.
431. The Tribunal does not see the need for this detour and shares the view of
its own experts that having computed the cash flows to equity, Mr. Wood-Collins
needed then only to discount them at the cost of equity ("COE") to obtain the
present value of TGN's equity.
432. The distinction between the two methods of computing value is not a purely
academic matter. In general, under the first method, the computed value is
larger than under the second one, because the WACC implicitly assumes that
shareholders and creditors will receive a proportional share (according to the
weights included in the WACC) of the firm's cash flows. Such appears to be the
case when cash flows to the firm are larger than, or equal to what the creditors
are due and such was the result of the calculations made by Mr. Wood-Collins in
this case, where the Tribunal has calculated, on the basis of Mr. Wood-Collins'
hypotheses, a net difference of some USD$40 million between the two methods.
433. In making its own calculations, the Tribunal will use the second method
(the direct equity value).
126
47. The Tribunal's Evaluation of Damages
434. Notwithstanding the reservations expressed above, the Tribunal is of the
view that the general approach of Mr. Wood-Collins to the evaluation of damages
suffered by the Claimant remains a valid one. However, as will be seen, the
Tribunal will apply a number of changes to his assumptions.
435. Since the Tribunal was not provided with the algorithms sustaining the
figures contained in the TGN forecast prepared in 2000, the Tribunal, with the
help of its experts, has built its own model; it then tested its model by
applying the same hypotheses as the ones embedded in Mr. Wood-Collins' forecasts
of equity cash flows. The Tribunal obtained essentially the same results as Mr.
Wood-Collins would have obtained, had he applied the direct equity valuation
method to his own data.
436. From that model, the Tribunal tested a number of scenarios by changing
different variables; the Tribunal focused on the most important determinants of
value (as well as the main sources of uncertainty). Not surprisingly, depending
on the choices of variables to which changes were made and the size of such
changes, significantly disparate results were reached. Some, like a reduction of
the discount rate under the "with pesification" scenario, produced a rather
small decrease in value loss, if Mr. Wood-Collins' revenue forecast were
maintained at the pessimistic level he has selected. However, as soon as modest
rates of sales growth and an upward tariff revision every five years were
assumed, the value loss was significantly decreased.
127
437. However, all other things being equal, assumptions about ENARGAS' tariff
decisions and about additional investments and operations and maintenance costs
under the "no pesification" case have an even larger impact.
438. Under the "no pesification" case, the crucial factors would have been
ENARGAS' decisions about tariff revisions and investments. Under that scenario,
the question is: "Would ENARGAS have lowered tariffs to keep the rate of return
on equity within reasonable bounds?" In contrast, in the "pesification" case,
the question is: "Would ENARGAS raise tariffs to provide shareholders with a
positive return?" To a large extent, the estimate of value loss depends on the
answer to these two questions.
48. The Modifications to Mr. Wood-Collins' Assumptions
i) The Duration of the Contract
439. For the reasons previously mentioned, the Tribunal has eliminated the ten
year potential extension of the License to 2037. In the Tribunal's calculations,
the License expires in 2027. Under the Tribunal's assumptions, this decision
leads to a reduction by some US$ 10 million of the value loss suffered by CMS.
ii) The Reference Years for Valuation
440. Mr. Wood-Collins computes the changes in share value between August 2000
and May 2002 (in his first report) and December 2003 (in his second report). The
Tribunal has concluded that, it would be more logical and mathematically correct
to assess the value lost by shares as of a single date. Moreover, as a
consequence of this decision, the large discrepancy noted between the TGN and
Wood-Collins forecasted (US$ 73 million) and the
128
actual (US$ 36 million) capital expenditures for 2001 (a proportional
discrepancy for 2002, 2003 and 2004 would be likely) becomes a non-issue; in
using August 2000 as the reference point, all the investments budgeted are
assumed to have taken place and "justify" the revenues forecast for all the
years up to 2027. The negative drag crated by the "theoretical" investments is
compensated by the boost caused by a long series of "theoretical" (boosted)
revenues.
441. The Tribunal has concluded, in this regard, that the date to be relied upon
for the computation of values (with and without pesification) will be August 17,
2000, the day before the Argentine court action referred to above was taken. In
order to arrive at the value at that date under the pesification scenario, the
Tribunal has used Mr. Wood-Collins' forecast for 2000-2002 under the without
pesification scenario and subtracted the amount resulting from the
non-indexation under PPI, as it appears in the relevant TGN Annual Reports &
Accounts, non-indexation being the sole factor at play during that period.
iii) The Demand for Gas and Revenues
442. In discussing the demand for gas, the Tribunal has only addressed the issue
of domestic sales. The export sales have been kept as forecasted by Mr.
Wood-Collins.
443. Under the no pesification scenario, Mr. Wood-Collins assumes that the major
economic crisis suffered by Argentina would have had no negative impact on the
demand for gas transported by TGN and that there would be a 2.5% yearly increase
until 2007 (a combination of increased volume, until the pipeline is fully
utilized, and indexation to PPI) and then a regular 1.5% increase in prices (PPI
adjustment) every year until the end of the license.
129
444. The Tribunal believes it would be inappropriate to assume that the demand
for gas would have remained stable, had the tariffs been set in US dollars
despite the economic crisis. CMS has argued that since at least some of its
contracts were on ship-or-pay basis, its revenues would not have been affected
by a reduction in demand; but, taking into account the magnitude of the crisis
faced by Argentina, it would be highly unrealistic to assume that some
adjustments to those ship-or-pay contracts would not have been made between the
parties concerned. In any event, if such adjustments had not been made, the net
result would have meant that the peso price of transportation would have more
than tripled, with the consequential impact on the final consumer's bills and
use of gas. Already, in its 2001 Annual Report & Accounts, TGN mentions that
"The year 2001 was strongly influenced by Argentina's economic crisis which
drove the company's production decrease and the postponement of investment in
different industry sectors which resulted in a stagnation of consumption.
Industrial and residential consumption decreased by 5% and 1.5% respectively as
compared with the prior year." (p.32). Residential consumption representing only
22% of the gas transported by TGN,(224) the overall decline in domestic demand
would have been around 4%. This was for 2001, the year during which the
Argentine GDP declined by 4.4%(225) and while the application of the PPI was
suspended. It is true that, between 2000 and 2001, the sales revenues remained
stable but this was probably the result of an increase in export revenues. The
GDP declined a further 10.9% in 2002.
445. It is difficult to believe that, with a tripling of the gas transportation
costs under the no pesification scenario, there would not have been a further
reduction in demand and/or a significant rise in delinquent accounts, with its
consequent impact upon TGN's cash flows. To figure a more precise impact of such
a situation upon the volume of gas transported by TGN, and on its revenues,
studies of the Argentine elasticity of demand with respect to gas prices would
be needed. No such study has been produced.
130
446. The Tribunal has concluded that it is reasonable to assume that sales
revenues would have decreased by 5% in each of 2002 and 2003 and by 1% in 2004.
This would reflect the delayed impact of the decline of the Argentine GDP in
2001(-4.4%) and 2002 (-10.9%), somewhat mitigated by the maintenance of the
non-pesification of export revenues which continued in addition to be adjusted
to the PPI. On the other hand, in 2003 and 2004, the Argentine GDP rose
significantly, by 8.8% and 7.8% respectively.(226) It would be normal that that
turnaround would manifest itself in an increase in the industrial and
residential demand for gas. Moreover, there would have been, by the end of 2004,
an excess capacity of some 19% (6% original surplus capacity existing in 2001
plus 13% additional capacity created by the reduced demand between 2002 - 2004).
The Tribunal is of the view that a gradual increase in demand over the following
years would have taken place until full capacity would have been achieved in
TGN's pipelines. The Tribunal has therefore forecasted an increase in sales of
3% in 2005, 6% in each of 2006, 2007 and 2008, 4.5% in 2009, 3.5% in 2010 and 3%
in 2011. This would allow for the full recuperation of the excess capacity in
the gas transportation system of TGN. Thereafter, the sales would only increase
by 1.5% each year under the PPI formula.
447. Then, under the pesification regime, Mr. Wood-Collins has assumed 0%
increase in revenues until 2027. The Tribunal does not find this assumption
realistic. While the price for gas would probably not have been adjusted during
the crisis and the first few years following it, it is reasonable to assume
that, with pesification, there would have been a gradual absorption of most of
the surplus capacity in TGN's pipeline system. The Tribunal has therefore
provided for a 1% yearly increase in sales revenues between 2003 and 2008
inclusive. Then, it is also fair to assume that, taking into account the rate of
inflation in Argentina, ENARGAS would have allowed some adjustment to the
tariff. The Tribunal
131
notes that, although Argentina has known a decline to 4.4% of its rate of
inflation in 2004, it had rates of 25.9% in 2002 and 13.4% in 2003.(227)While
it is to be hoped that the declining trend will continue, there is obviously no
guarantee to that effect.
448. In this regard, the Tribunal has introduced in its scenario, from 2008, a
very moderate yearly increase of 1.5% in the tariff.
iv) The Exchange Rate
449. Under the pesification scenario, Mr. Wood-Collins has assumed a peso
exchange rate to the US dollar of 3.59. This was indeed the rate prevalent at
the time he did his first valuation in 2002, but there has been since then an
appreciable improvement in the peso rate. For the last year, it has moved
between 2.90 and 2.97. In these circumstances, the Tribunal has concluded that
it would be appropriate to fix an exchange rate of 2.97 as fairly representative
of what the value of the peso could be expected to be in a stabilizing or a
reasonably stable environment.
v) The Equity Discount Rate
450. Under the pesification scenario, Mr. Wood-Collins has assumed an equity
discount rate of 45.04% when valuing from May 2002 to the end of 2037 and of
41.05% when valuing from January 1, 2004 to the end of 2037. Under the no
pesification scenario, a discount rate of 13.45% was used. The Tribunal finds
the first rate excessive and the second too low.
451. Under the first scenario, Mr. Wood-Collins bases his figures on the cost of
defaulted securities in May 2002 and in December 2003. Because of that default,
their value was low compared with their nominal value, yielding therefore a very
high rate of discount. But
132
proceeding this way is implicitly assuming that TGN will, until 2027, repeatedly
live through shocks of the same magnitude as the pesification shock. The impact
of that measure is already impounded in the cash flows being valued, pesified
tariffs translating into much lower dollar cash flows. That negative event has
taken place and has had its negative impact upon cash flow, current and future,
but some kind of normalcy should rule in the future. Already, there are
encouraging signs in that regard in the Argentine economy.
452. Under the circumstances, the Tribunal has concluded that an equity discount
rate of 18% would be a reasonable assumption under the pesification scenario.
453. Under the second scenario, the Tribunal estimates that the proposed
discount rate of 13.45% should be increased to 14.5%.
454. To arrive at the first figure, Mr. Wood-Collins used a "risk-free" rate of
5.94%, a country-risk premium of 5.21% based on the country-risk premium of
TGN's debt over the US Treasury rate and a 2.296% equity risk premium (market
equity risk premium of 5.6% multiplied by TGN's beta factor of 0.41). It appears
that Mr. Wood-Collins has in fact equated the country risk premium on equity and
the country risk premium on TGN's debt. While it is true that the risk borne by
shareholders is also borne by debtholders, it is well recognized that
shareholders bear a significantly larger risk, because their claims are
residual. Mr. Wood-Collins argues that ENARGAS in its 1997 tariff review had
settled on a cost of equity very close to the one computed by him. It is quite
understandable that, in setting the equity country risk, a State regulatory
agency would adopt a conservative approach; first of all, such an agency would
wish to project a positive image of that country as a foreign investment venue
and, secondly, the higher the cost of equity it would set, the higher the tariff
would be. The Tribunal also notes that the equity rate of return adopted by
ENARGAS
133
in the 1996-1997 tariff review was 16%(228) and that, for the 2002 review which
was never completed, a rate of 15% was envisaged by ENARGAS.(229)
455. The Tribunal is of the view that, taking into account the historical
evidence on the economic and political performance of Argentina and the above
facts, the cost of the equity investment made by the Claimant should be
increased from 13.45% to 14.5%.
vi) The Tariff Adjustments
456. Under the no pesification scenario, Mr. Wood-Collins assumes an average
yearly rate of revenue increase of 2.5% up to 2007 and of 1.5% thereafter.
However, this leads to very high rates of return gradually increasing from about
20% in 2012 to close to 100% in 2027. The Claimant argues that those rates of
return would allow a catch-up for lower rates of return in earlier years. While
the Tribunal is willing to concede that a certain amount of recuperation might
have been allowed by ENARGAS, it is difficult to conceive that it could have
tolerated the kind of escalation described above, without making downward
adjustments to the tariff on the occasion of its Five Year Reviews starting in
2013. Therefore, the Tribunal has decided to introduce a 5% decrease in tariffs
at the time of each of the tariff reviews in 2013, 2018 and 2023. This still
leaves growth in the return on equity which amply covers the catch-up mentioned
by the Claimant.
457. Under the pesification scenario, Mr. Wood-Collins assumes that there will
be no increase in tariffs for the whole duration of the License. The Tribunal
considers this hypothesis unrealistic. It has received evidence that Argentina
has already offered to TGN a 7% tariff increase, albeit accompanied by some
conditions that have been turned down by TGN. With the disappearance of the US
PPI adjustment, it would be strange to say the least
134
that TGN would be left in a situation where, as forecasted by Mr. Wood-Collins,
its domestic sales revenue would remain completely flat for the next 22 years;
under that scenario, TGN's equity remains negative until 2023 (according to Mr.
Wood-Collins' report of May 22, 2002) or until 2019 (according to his March 19,
2004, report). Here again, it is difficult to believe that TGN would not have
been able to convince ENARGAS that this was an unacceptable situation and that
some increase in the tariff was required on the occasion of its Five Year
Reviews. The Tribunal has already indicated that, in its forecast, it has
allocated a yearly increase of 1.5% in the tariff from 2008 to take account of
Argentine inflation. The Tribunal also concludes that, starting in 2008, a 5%
increase on the occasion of each Five Year Review should be assumed, in order to
advance the moment when TGN could again be equity positive.
vii) Operations and Maintenance Expenditures ("O&M")
458. In its report, Mr. Wood-Collins projects the following percentages to sales
for O&M: 10.20% to the end of 2004, 9.40% to the end of 2014, 8.40% to the end
of 2020 and 7% to the end of 2037. The Tribunal considers those projections too
conservative for three reasons.
459. To begin with, they are significantly below the levels which were achieved
during the years previous to 2002.
460. Secondly during a period of steep decline in sales, it would be unrealistic
to expect that there would not be an appreciable increase in the proportion of
O&M to sales. There is significant amount of rigidity in this type of
expenditures in a regulated industry where the maintenance of safety has to be
paramount.
135
461. Thirdly, even when growth in sales has returned, the requirements for
safety do not decrease and with aging equipment, maintenance expenditures will
tend to rise rather than decline.
462. However, noting the fact that sales are expected to increase over the years
after 2005, the Tribunal is willing to recognize that there would be a certain
decline in the percentage of O&M but it is not ready to endorse as steep a
decline as the one envisaged by Mr. Wood- Collins. Consequently, the Tribunal
has adopted the following percentages for O&M in its scenario: 11.5% to the end
of 2004, 11.00% to the end of 2014, 10.00% to the end of 2020 and 8% to the end
of 2027.
viii) Other Hypotheses
463. A number of other factors were part of Mr. Wood-Collins scenario and the
Tribunal sees no valid reason to modify those. We refer, in particular, to US$
export sales, tax rate, depreciation, interest tax rate, target debt ratio and
additional capital expenditures.
ix) Value of the Shares
464. The Claimant has requested an order that "Argentina compensate CMS in the
amount of $261.1 million in the event that (...) Argentina determines to take
CMS's shares in TGN or $243.6 million in the event that title to the shares
remain remains with CMS,"(230) which attributes a value of US$17.5 million to
those shares. This last amount represents the value of those shares on May 29,
2002.
136
465. Asking for the value of the shares remitted to the Government of Argentina
is a legitimate claim, so long as CMS is ready to transfer to the Respondent the
title to those shares, which it has indicated willingness to do.
466. The question remains whether the amount claimed for the value of the shares
is the correct one. On the basis of the scenario relied upon by the Tribunal, as
described above, the value of the shares is significantly lower than the one
claimed by CMS. The Tribunal has arrived at a value of US$7,443,700, on August
17, 2000. In addition, from that value, one has to deduct any dividend received
by CMS after August 17, 2000, as it would otherwise be doubly compensated.
According to the 2001 TGN Annual Report & Accounts (pp. 48 and 51), TGN made two
dividend distributions of US$9 million each after that date. On the basis of a
29.42% share ownership in the company, the Claimant did receive a total of
US$5,295,600. This leaves a net value of US$2,148,100 for CMS' shares in TGN on
August 17, 2000. Additional amounts, if any, received by CMS since August 17,
2000, as equity holder in TGN should also be deducted from the residual value
just mentioned.
467. As the dividends paid were deducted from the shares value, in order to
avoid double counting, the counter point that interest from August 17, 2000
should be paid equally holds and the Tribunal will so order.
49. Amount of Compensation for Damages and Value of the Shares
468. After the modifications mentioned above, the Tribunal arrives at a DCF loss
valuation of US$133.2 million for the Claimant, on August 17, 2000, representing
the compensation owed in that regard by the Respondent to the Claimant at that
date.
137
469. Moreover, the Tribunal concludes that the Claimant must transfer to the
Respondent the ownership of its shares in TGN, upon payment by the Respondent of
the additional sum of US$2,148,100. Additional amounts, if any, to the
US$5,295,600 already received by CMS as dividends, which would have been
received by it in its capacity of shareholder should be deducted from the price
to be paid by Argentina, when it exercises its right to buy those shares. On the
other hand, the Tribunal does not consider that it would be appropriate to leave
that option open-ended; it therefore rules that the Government of Argentina will
have a time limit of one year from the date of this Award to purchase CMS'
shares in TGN.
50. Interest
470. The Claimant has requested that the interest should be set at the average
rate applicable to U.S. six-month certificates of deposit, compounded
semi-annually starting on August 18, 2000.
471. The Tribunal is of the opinion that the U.S. Treasury Bills rate is more
appropriate under the circumstances and that the interest should be simple for
the period extending from August 18, 2000, to 60 days after the date of this
decion or the date of effective payment if before. For this period the interest
rate shall be 2.51% which corresponds to the annualized average rate for the
U.S. Treasury Bills as reported by the Federal Reserve Bank of St. Louis.(231)
Thereafter, the interest shall be the arithmetic average of the six-month U.S.
Treasury Bills' rates observed on the afore-mentioned date and every six months
thereafter, compounded semi-annually. That amount shall be calculated from the
same source as the
138
one mentioned above. Interest shall apply to both the value loss suffered by CMS
and the residual value of its shares.
51. Costs of the Proceedings
472. Each party shall bear the expenses incurred by it in connection with the
present arbitration. The arbitration costs, including the fees of the members of
the Tribunal, shall be borne in equal shares by the parties.
139
NOW THEREFORE THE ARBITRAL TRIBUNAL
DECIDES AND AWARDS AS FOLLOWS
1. The Respondent breached its obligations to accord the investor the fair
and equitable treatment guaranteed in Article II (2) (a) of the Treaty and
to observe the obligations entered into with regard to the investment
guaranteed in Article II (2) (c) of the Treaty.
2. The Respondent shall pay the Claimant compensation in the amount of
US$133.2 million.
3. Upon payment of the compensation decided in this Award, the Claimant shall
transfer to the Respondent the ownership of its shares in TGN upon payment
by the Respondent of the additional sum of US$2,148,100. The Respondent
shall have up to one year after the date this Award is dispatched to the
parties to accept such transfer.
4. The Respondent shall pay the Claimant simple interest at the annualized
average rate of 2.51% of the United States Treasury Bills for the period
August 18, 2000 to 60 days after the date of this Award, or the date of
effective payment if before, applicable to both the value loss suffered by
the Claimant and the residual value of its shares established in 2 and 3
above. However, the interest on the residual value of the shares shall
cease to run upon written notice by Argentina to the Claimant that it will
not exercise its option to buy the Claimant's shares in TGN. After the
date indicated above, the rate shall be the arithmetic average of the
six-month U.S. Treasury Bills rates observed on the afore-mentioned date
and every six months thereafter, compounded semi-annually.
140
5. Each party shall pay one half of the arbitration costs and bear its own
legal costs.
6. All other claims are herewith dismissed.
The Arbitral Tribunal
(signed) (signed)
- ------------------------ ---------------------------
Marc Lalonde, Arbitrator Francisco Rezek, Arbitrator
Date: 15/04/05 Date: 25/04/05
(signed)
----------------------------------
Francisco Orrego Vicuna, President
Date: 20/04/05
141
NOTES
- -----------------
(1) Treaty between the United States of America and the Argentine Republic
Concerning the Reciprocal Encouragement and Protection of Investment, November
14, 1991, in force from October 20, 1994. Hereafter cited as the U.S.-Argentina
BIT or the Treaty.
(2) Under Article 38 of the ICSID Convention, if the Tribunal is not constituted
within 90 days after the notice of registration of the request has been
dispatched, the Chairman of ICSID's Administrative Council shall, at the request
of either party, and after consulting both parties as far as possible, appoint
the arbitrator or arbitrators not yet appointed and designate an arbitrator to
be the President of the Tribunal.
(3) CMS Gas Transmission Co. v. Republic of Argentina, Decision of the Tribunal
on Objections to Jurisdiction, July 17, 2003, 42 ILM 788 (2003).
(4) Law No. 23.696 of 1989 on the Reform of the State.
(5) Law No. 23.928 of 1991 on Convertibility.
(6) Law No. 24.076 of 1992 on the Privatization of the Gas Sector (Gas Law).
(7) Decree No. 1738/92 on the Implementation of the Gas Law (Gas Decree).
(8) Decree No. 1189/92 establishing TGN and other companies.
(9) Pliego de Bases y Condiciones, Llamado a Licitacion Publica Internacional
para la Privatizacion de Gas del Estado, July 17, 1992.
(10) Information Memorandum on the Privatization of Gas del Estado, prepared by
N. M. Rothschild & Sons Ltd. and Goldman, Sachs & Co., September 1992.
(11) Decree No. 2255/92, December 2, 1992.
(12) Decree No. 2457/92, December 18, 1992 (License).
(13) Offering Memorandum of July 7, 1995.
(14) ENARGAS Resolution No. 1471, January 10, 2000.
(15) Decree No. 669/2000, August 4, 2000, with particular reference to
Preambular paragraph 5.
(16) Decree No. 1570/01, December 3, 2001.
(17) Law No. 25.561, January 6, 2002 (Emergency Law).
(18) Decree No. 293/02, February 14, 2002.
(19) Statement by Dr. Jorge G. Simeonoff, August 13, 2004, Hearing, Vol. 5, at
1010-1011; Written Witness Statement of Dr. Jorge G. Simeonoff, annexed to
Argentina Rejoinder; Alegato Final de la Republica Argentina, September 20,
2004, at 8. All citations to the Argentine Memorials are to the Spanish text.
(20) Statement by Mr. John Wood-Collins, August 16, 2004, Hearing, Vol. 6, at
1336.
(21) Statement by Mr. Bernardo Velar de Irigoyen, August 11, 2004, Hearing, Vol.
3, at 604-605.
(22) Argentina Rejoinder, para. 464, 465, with reference to CMS Reply, para.
353. All citations to the Claimant's Memorials are to the English text.
(23) Argentina Rejoinder, para. 393.
(24) Argentina Rejoinder, para. 394.
(25) Argentina Answer, paras. 100-110.
(26) ENARGAS note No. 1906, April 27, 1999, and note No. 3735, September 3,
1999.
(27) TGN Investment Prospectus, July 7, 1995.
(28) Cited in Argentina Answer, para. 287.
(29) Argentina Answer, para. 298.
(30) Statement of Dr. Cristian Folgar, August 12, 2004, Hearing, Vol. 4, at
797-800.
(31) Statement by Minister Horacio Daniel Rosatti, August 20, 2004, Hearing,
Vol. 10, at 2254.
(32) Statement of Dr. Fabian Bello, August 19, 2004, Hearing, Vol. 9, at
1999-2004.
(33) See in particular Gas Decree, Article 41.
(34) License, Para. 9.2.
(35) License, Para. 18.2.
(36) Statement of Mr. Thomas L. Miller, August 10, 2004, Hearing, Vol. 2, at
438-442; Written Witness Statements of Mr. Thomas L. Miller were prepared on
June 10, 2002 and March 16, 2004.
(37) Decree No. 669/2000, August 4, 2000, with particular reference to
Preambular paragraph 5.
(38) CMS Reply, at 58.
(39) Gas Law, Article 2, Article 38 (a), as discussed in Argentina's Answer, at
56.
(40) Argentina Rejoinder, at 5-6.
(41) With reference to Miguel S. Marienhoff: Tratado de Derecho Administrativo,
Vol. II, 1993, Chapter IV; Argentine Supreme Court, Raul Fernandez c/ Poder
Ejecutivo Nacional, Fallos 322:3008 (1999).
(42) Gas Law, Article 38 (d).
(43) Argentina, Post-hearing brief, at 14-15; Witness Written Statement of Dr.
Christian Folgar, at 7-9, annexed to Argentina Rejoinder.
142
(44) Expert Statement of Professor Nouriel Roubini, August 18, 2004, Hearing,
Vol. 8, at 1690-1692; Argentina, Post-hearing brief, at 16-17.
(45) Argentina Rejoinder, at 199, with reference to the Written Witness
Statement of Dr. Jorge Remes Lenicov, para. 30, annexed to the Rejoinder.
(46) Written Witness Statement of Dr. Jorge Remes Lenicov, explaining the nature
and extent of the crisis, annexed to Argentina Rejoinder.
(47) Argentina Opening Statement, August 9, 2004, Hearing, Vol. 1, at 233-234,
302; Argentina Post-hearing brief, August 20, 2004, Hearing, Vol. 10, at
2328-2329.
(48) Public Utilities National Regulatory Act, Draft bill submitted to the
Argentine Congress on August 24, 2004, as cited by the CMS Post-hearing brief,
at 6-7.
(49) Statement of Dr. Eduardo Ratti, August 13, 2004, Hearing, Vol. 5, at
1155-1156; Written Witness Statement of Dr. Eduardo Ratti, annexed to Argentina
Rejoinder.
(50) Nota UNIREN No. 258/04, July 2, 2004.
(51) Statement by Dr. Jorge G. Simeonoff, August 13, 2004, Hearing, Vol. 5, at
1036-1042.
(52) TGN, letter to UNIREN, July 19, 2004; Statement by Dr. Bernardo Velar de
Irigoyen, August 11, 2004, Hearing, Vol. 3, at 544-547; Written Witness
Statements of Dr. Velar de Irigoyen were prepared on June 13, 2002 and March 16,
2004; Statement by Dr. Francisco A. Mezzadri, August 11, 2004, Hearing, Vol. 3,
at 649-650; Written Witness Statements were prepared by Dr. Mezzadri on June 4,
2002 and March 12, 2003.
(53) TGN, letter of January 22, 2003 to UNIREN.
(54) CMS Reply, at 59.
(55) CMS Reply, at 60, with reference to Asian Agricultural Products Limited v.
Democratic Socialist Republic of Sri Lanka (Case No. ARB/87/3), Final Award of
June 27, 1990, 6 ICSID Rev. -- FILJ 526 (1991); 30 ILM 577 (1991); Int'l Arb.
Rep., No. 5, at Sec. A (May 1991); 4 ICSID Rep. 246 (1997), and other ICSID
cases at footnote 277.
(56) Tecnicas Medioambientales Tecmed, S.A. v. United Mexican States (Case No.
ARB(AF)/00/2) (Tecmed), Award of May 29, 2003,
<http://www.worldbank.org/icsid/cases/laudo-051903%20-English.pdf>; 43 ILM 133
(2004), para 56.
(57) Argentine Constitution, Articles 27, and 75 (22).
(58) Guillermo Barrera Buteler: "La dignidad de la persona humana como fuente de
los derechos fundamentales", Derecho Constitucional, Facultad de Derecho y
Ciencias Sociales, Universidad Nacional de Cordoba, 2004, 143-156, at 146-147.
(59) KlocknerIndustrie-Anlagen GmbH and others v. United Republic of Cameroon
and Societe Camerounaise des Engrais (Case No. ARB/81/2), ad hoc Committee
Decision on Annulment of May 3, 1985, 2 ICSID Rep. 95 (1994), para. 69; AMCO
Asia Corporation and others v. Republic of Indonesia (Case No. ARB/81/1), ad hoc
Committee Decision on the Application for Annulment of May 16, 1986, 1 ICSIDRep.
509 (1993), at 515; and discussion of both cases by Emmanuel Gaillard and Yas
Banifatemi: "The Meaning of `and' in Article 42(1), Second Sentence, of the
Washington Convention: The Role of International Law in the ICSID Choice of Law
Process", 18 ICSID Review -- FILJ 375 (2003), at 389-393.
(60) W. M. Reisman: "The Regime for Lacunae in the ICSID Choice of Law Provision
and the Question of Its Threshold", 15 ICSID Review -- FILJ 362 (2000).
(61) Wena Hotels Limited v. Arab Republic of Egypt, ad hoc Committee Decision on
Application for Annulment of February 5, 2002, 41 ILM 933 (2002), at 941.
(62) Argentina Opening Statement, August 9, 2004, Hearing, Vol. 1, at 301-302;
also Argentina Post-hearing brief, at 24.
(63) Argentine Supreme Court, Decision in Ekmekdjian v. Sofovich, July 7, 1992.
(64) CMS Gas Transmission Company v. Argentine Republic (Case No. ARB/01/8),
Decision of the Tribunal on Objections to Jurisdiction, July 17, 2003, 42 ILM
788 (2003), paras. 25-32.
(65) CMS Gas Transmission Company v. Argentine Republic (Case No. ARB/01/8),
Decision of the Tribunal on Objections to Jurisdiction, July 17, 2003, 42 ILM
788 (2003), para. 33.
(66) Argentina Rejoinder, at 21, para. 70.
(67) Statement of Dr. Christian Folgar, August 12, 2004, Hearing, Vol. 4, at
744-745; also Argentina post-hearing brief, at 2.
(68) CMS Opening Statement, August 9, 2004, Hearing, Vol. 1, at 20-24.
(69) Committee on the Privatization of Gas del Estado. Minutes of the meeting
held on October 2, 1992, Section 2; also CMS post-hearing brief, at 2-3.
(70) Decree No. 2457/92, Basic Rules Governing the License, Clause 9.8.
(71) Decree No. 669/2000, approving Act No. 2 on the July 2000 postponement.
(72) Rosalyn Higgins: "The Taking of Property by the State: Recent Developments
in International Law", Recueil des Cours de l'Academie de Droit International,
Vol. 176, 1982-III, 259.
143
(73) Argentina Answer, at 44, with reference to TGN's Public Offer of July,
1995, which devotes a Section to Convertibility and exchange rate risks.
(74) Argentina Post-hearing brief, at 2-4, with reference to the Statement by
Dr. Patricio Carlos Perkins, August 10, 2004, Hearing, Vol. 2, at 396; and the
Statement of Dr. Bernardo Velar de Irigoyen, August 11, 2004, Hearing, Vol. 3,
at 552.
(75) Expert Statement of Professor Nouriel Roubini, August 18, 2004, Hearing,
Vol. 8, at 1681-1684; Argentina, Post-hearing brief, at 5.
(76) CMS Post-hearing brief, at 5, with reference to ENARGAS Note 5498 and the
calculation of the cost of capital for the second five-year review, November 13,
2001, Annex I.
(77) Statement of Dr. Christian Folgar, August 12, 2004, Hearing, Vol. 4, at
748-757; Expert Statement by Dr. Fabian Bello, August 19, 2004, Hearing, Vol. 9,
at 1958-1967; Written Expert Report of Dr. Fabian Bello, annexed to Argentina
Rejoinder.
(78) Argentina Reply, at 66-68. Expert Statement by Dr. Fabian Bello, August 19,
2004, Hearing, Vol. 9, at 1964- 1967.
(79) CMS Reply, at 7.
(80) Statement by Dr. Francisco A. Mezzadri, August 11, 2004, Hearing, Vol. 3,
at 654-660.
(81) Argentina Answer, at 250.
(82) CMS Memorial, at 53.
(83) Argentina Rejoinder, at 89, 140, with reference to Colbun's S. A.,
Complaint introduced before ENARGAS on February 5, 2003; and ENARGAS Decree No.
2812, March 25, 2003, rejecting the complaint. Colbun later requested judicial
intervention and protective measures, rejected by the competent Appeals Court on
September 22, 2003. Both Colbun (Courbis to TGN, letter of June 29, 2004) and
Metrogas (Morande to TGN, letter of July 14, 2004) complained about the terms
and conditions of the supply of gas to those companies.
(84) Argentine Supreme Court, Ercolano c. Lanteri, Fallo 136:161 (1922).
(85) Argentine Civil Code, Article 1197.
(86) Guillermo A. Borda: Tratado de Derecho Civil, 1971; Obligaciones, 1989.
(87) Ruben S. Stiglitz: Contratos Civiles y Comerciales, 1998, at 503-505.
(88) Argentina Opening Statement, August 9, 2004, Hearing, Vol. 1, at 210-219.
(89) Statement by Dr. Carmelo Angulo Barturen, August 13, 2004, Hearing, Vol. 5,
at 1189 et seq.; and Written Witness Statement of June 24, 2004, attached to
Argentina Rejoinder; Vivian Foster: "Impacto Social de la Crisis Argentina en
los Sectores de Infraestructura", World Bank Office for Argentina, Chile,
Paraguay and Uruguay, Documento de Trabajo No. 5/03, April 2003, Annex V to
Written Witness Statement of Dr. Christian Folgar, annexed to Argentina
Rejoinder; Written Witness Statement of Mrs. Angela Cristina Calvo, annexed to
Argentina Rejoinder; Expert publication of Equis, Investigacion Social: "La
Crisis Argentina", June 2004, annexed to Argentina Rejoinder.
(90) Ruben H. Compagnucci de Caso: Manual de Obligaciones, 1997, at 209.
(91) Ruben S. Stiglitz: Contratos Civiles y Comerciales, 1998, at 28-30.
(92) Argentine Supreme Court, Judgment in the case "Provincia de San Luis c. P.
E. N. - Ley 25561, Dto. 1570/01 y 214/02 s/ amparo)", March 5, 2003. Translation
by the Tribunal.
(93) Argentine Supreme Court, Judgment in the case "Bustos, Alberto Roque y
otros c/Estado Nacional y otros s/amparo", October 26, 2004, in
www.csjn.gov.ar/documentos/novedades.jsp
(94) Report of the Procurador General, October 22, 2004, in
www.csjn.gov.ar/documentos/novedades.jsp
(95) Dissenting Opinion of Supreme Court Judge Carlos S. Fyat.
(96) Ruben H. Compagnucci de Caso: Manual de Obligaciones, 1997, at 82.
(97) Witness Statement by Dr. Eduardo Ratti, August 13, 2004, Hearing, Vol. 5,
at 1139-1144.
(98) Argentine Answer, at 241, with reference to Article 11 of the Emergency Law
and its connection to Article 1198 of the Civil Code.
(99) Court Injunction of August 18, 2000, as cited in Argentine Answer, at
86-87. Translation by the Tribunal.
(100) Conseil d'Etat, Compagnie Generale d'Eclairage de Bordeaux, Rec. 125,
concl. Chardenet, 30 Mars 1916, in M. Long, P. Weil et al. Les Grands Arrets de
la Jurisprudence Administrative, 2003, at 188-189 (hereinafter Gaz de Bordeaux).
(101) CMS Memorial, at 53.
(102) Agreement between the Secretary of Energy and the gas producers signed on
April 2, 2004, and Resolution 208/2004 related thereto.
(103) Argentina Answer, at 60.
(104) Gas Law, Article 41.
(105) Gas Decree, Article 41; Clause 9.4.1.2 of the License.
(106) Gas Decree, Article 41 (2); Clause 9.4.1.3 of the License.
(107) Gas Law, Article 42.
144
(108) CMS Reply at 22; Witness Statement of Dr. Patricio Carlos Perkins, August
10, 2004, Hearing, Vol. 2, at 342-343; Written Witness Statement of Dr. Patricio
Carlos Perkins of March 12, 2004.
(109) Argentina Answer, at 69-73, with reference to the preparatory documents of
the second five-year review (RQT II).
(110) Public Offer of July 17, 1992, Annex F, 1.3; Consultants Report concerning
RQT II, March 8, 2001; Argentina Answer, at 68.
(111) CMS Reply, at 23.
(112) Gas Law, Article 47.
(113) Gas Law, Article 41.
(114) CMS Post-hearing brief, at 3; Witness Statement of Dr. Patricio Carlos
Perkins, August 10, 2004, Hearing, Vol. 2, at 342-343.
(115) Argentine Supreme Court, Fallos 296:737; 299:379; 303:1877; 307:305, as
cited in Argentine Supreme Court, Judgment in the case "Provincia de San Luis c.
P. E. N. - Ley 25561, Dto. 1570/01 y 214/02 s/ amparo)", March 5, 2003.
Translation by the Tribunal.
(116) Gaz de Bordeaux, at 188-189. Translation by the Tribunal.
(117) Expert Statement of Professor Nouriel Roubini, August 18, 2004, Hearing,
Vol. 8, at 1777; see generally the Written Expert Report of Professor Nouriel
Roubini, annexed to Argentina Rejoinder.
(118) United Nations Economic Commission for Latin America and the Caribbean,
"Preliminary Overview of the Economies of Latin America and the Caribbean", Doc.
LC/G.2265-P/I, December 2004.
(119) Law No. 25.790, Boletin Oficial, October 22, 2003; Argentina Answer, at
199.
(120) Law No. 25.972, approved by Congress on December 17, 2004.
(121) Metalclad Corporation v. United Mexican States (Case No. ARB(AF)/97/1
(Metalclad), 40 ILM 55 (2001), para. 103; CMS Memorial, at 71-72.
(122) i. e. Tippetts, Abbett, McCarthy, Stratton v. TAMS-AFFA Consulting
Engineers of Iran, 6 CTR 219 (1984-II). See also generally UNCTAD: Taking of
Property, 2000.
(123) i. e. Compania del Desarrollo de Santa Elena S. A. v. Republic of Costa
Rica (Case No. ARB/96/1), Final Award of February 17, 2000, 15 ICSID Review --
FILJ 169 (2000).
(124) i. e. CME Czech Republic B.V. (The Netherlands) v. Czech Republic (CME),
Partial Award of September 13, 2001, as published in
<http://www.mfcr.cz/static/Arbitraz/en/PartialAward.pdf>.
(125) i. e. Santa Elena, para. 68.
(126) Argentina Answer, at 179, with reference to the table of cases invoked by
the Claimant.
(127) Ronald S. Lauder v. Czech Republic (Lauder), UNCITRAL Final Award of
September 3, 2001, <http://www.mfcr.cz/static/Arbitraz/en/FinalAward.doc>, para.
203; S. D. Myers, Inc. v. Government of Canada, Partial Award of November 13,
2000, http://www.dfait-maeci.gc.ca/tna-
nac/documents/myersvcanadapartialaward_final_13-11-00.pdf>, para. 280.
(128) Pope & Talbot Inc. v. Government of Canada (Pope & Talbot), Interim Award
of June 26, 2000, as published in
<http://www.appletonlaw.com/cases/P&T-INTERIM%20AWARD.PDF>, para. 100; Argentina
Answer, at 205-208.
(129) Lauder, <http://www.mfcr.cz/static/Arbitraz/en/FinalAward.doc>, para. 200.
(130) Metalclad, 40 ILM 55 (2001), para. 103.
(131) Tippetts, Abbett, McCarthy, Stratton v. TAMS-AFFA Consulting Engineers of
Iran, 6 CTR 219 (1984-II), at 225; see also Phelps Dodge Corp. v. Islamic
Republic of Iran, 10 CTR 121 (1986-I).
(132) CME, <http://www.mfcr.cz/static/Arbitraz/en/PartialAward.pdf>, para. 688.
(133) U.S. Supreme Court, Penn Central Transportation Co. v. New York City, 438
U.S. 104 (1978); Argentina Rejoinder, at 182.
(134) Pope & Talbot, <http://www.appletonlaw.com/cases/P&T-INTERIM%20AWARD.PDF>,
paras. 96, 102.
(135) CME, <http://www.mfcr.cz/static/Arbitraz/en/PartialAward.pdf>, para. 611.
See also generally OECD: Fair and Equitable Treatment Standard in International
Investment Law, September 2004.
(136) Tecmed, Award of May 29, 2003,
<http://www.worldbank.org/icsid/cases/laudo-051903%20-English.pdf>; 43 ILM 133
(2004), para. 154.
(137) Robert Azinian and others v. United Mexican States (Case No. ARB(AF)/97/2)
(Azinian), Award of November 1, 1999,14 ICSID Review -- FILJ 538 (1999); 39 ILM
537 (2000); 121 I.L.R. 2 (2002); 5 ICSID Rep. 272 (2002); American Manufacturing
& Trading, Inc. v. Democratic Republic of the Congo (Case No. ARB/93/1), Award
of February 21, 1997, 36 ILM 1534 (1997); 12 Int'l Arb. Rep., No. 4, at Sec. A
(Apr. 1997); 5 ICSID Rep. 14 (2002), Argentina Answer, at 225-227.
(138) Argentina Answer, at 226.
(139) Alex Genin and others v. Republic of Estonia (Case No. ARB/99/2) (Genin),
Award of June 25, 2001, 17 ICSID Rev. -- FILJ 395 (2002); P. Juillard:
"L'evolution des sources du droit des investissements", Recueil des Cours de
l'Academie de Droit International, Vol. 250, 1994.
(140) Metalclad, 40 ILM 55 (2001), para. 99.
145
(141) Tecmed,
<http://www.worldbank.org/icsid/cases/laudo-051903%20-English.pdf>; 43 ILM 133
(2004), para. 154.
(142) NAFTA Free Trade Commission, Interpretation of NAFTA Article 1105(1), July
21, 2001,< http://www.dfait-maeci.gc.ca/tna-nac/NAFTA-Interpr-en.asp>.
(143) Chile-United States Free Trade Agreement of June 6, 2003,
<http://www.ustr.gov/assets/Trade_Agreements/Bilateral
/Chile_FTA/Final_Texts/asset_upload_file1_4004.pdf >, Article 10.4.2.
(144) Antoine Goetz and others v. Republic of Burundi, Award embodying the
parties' settlement agreement of February 10, 1999, 15 ICSID Review -- FILJ 457
(2000).
(145) In respect of the renegotiation with gas producers see the Witness
Statement of Dr. Bernardo Velar de Irigoyen, August 11, 2004, Hearing, Vol. 3,
at 524-525.
(146) Case Concerning Elettronica Sicula, International Court of Justice,
Judgment of July 20, 1989, ICJ Reports 1989, 15.
(147) Genin, Argentina Answer, at 255. Also Myers, Argentina Answer, at 257.
(148) Oscar Schachter: International Law in Theory and Practice, 1991, at 313,
Argentina Answer, at 259.
(149) Lauder, para. 221.
(150) Witness Statement of Dr. Christian Folgar, August 12, 2004, Hearing, Vol.
4, at 765-769; Witness Statement of Dr. Bernardo Velar de Irigoyen, August 11,
2004, Hearing, Vol. 3, at 524-525.
(151) Azinian, 14 ICSID Review -- FILJ 538 (1999); 39 ILM 537 (2000); 121 I.L.R.
2 (2002); 5 ICSID Rep. 272 (2002); Argentina Answer, at 225.
(152) Genin, 17 ICSID Rev. -- FILJ 395 (2002); Argentina Answer, at 223-224.
(153) SGS Societe Generale de Surveillance S.A. v. Islamic Republic of Pakistan
(Case No. ARB/01/13) (SGS v. Pakistan), Decision on Objections to Jurisdiction,
August 6, 2003, 18 ICSID Review -- FILJ 301 (2003) , para. 35.
(154) Compania de Aguas del Aconquija S.A. and Vivendi Universal v. Argentine
Republic (ICSID Case No. ARB/97/3), Award of November 21, 2000, 16 ICSID Review
- -- FILJ 641 (2001), 641.
(155) Azurix Corp. v. Argentine Republic (Case No. ARB/01/12), Decision on
Jurisdiction of December 8, 2003, 43 ILM 262 (2004).
(156) SGS Societe Generale de Surveillance S.A. v. Republic of the Philippines
(Case No. ARB/02/6) (SGS v. Phillipines), Decision of the Tribunal on Objections
to Jurisdiction, January 29, 2004,
<http://www.worldbank.org/icsid/cases/SGSvPhil-final.pdf>.
(157) Joy Mining Machinery Limited v. Arab Republic of Egypt (Case No.
ARB/03/11) (Joy Mining), Award on Jurisdiction, August 6,
2004,<http://www.asil.org/ilib/JoyMining_Egypt.pdf>.
(158) License, Clause 9.8.
(159) License, Clause 18.2.
(160) Argentina Answer, p. 585; Argentina Rejoinder, p. 833.
(161) International Court of Justice, Gabcikovo-Nagymaros Project, ICJ Reports
1997, 7, para. 51.
(162) French Company of Venezuelan Railroads, July 31, 1905, UNRIAA, Vol. X, at
353.
(163) Dickson Car Wheel Co., July 1931, UNRIAA, Vol. IV, p. 670-682. The
Respondent also cites in this connection the Sea-Land Service Inc. v. Iran, June
20, 1984, Iran-United States Claims Tribunal Reports, Vol. IV, p. 149-175.
(164) Responsibility of States for Internationally Wrongful Acts, UNGA
Resolution 56/83, January 28, 2002.
(165) Gabcikovo-Nagymaros Project, pars. 51-52.
(166) James Crawford: The International Law Commission's Articles on State
Responsibility, 2002, at 178 et seq.
(167) The Caroline incident of 1837 and related diplomatic correspondence of
1842, as discussed in Crawford, at 179-180.
(168) Russian Indemnity case, UNRIAA, Vol. XI, 431 (1912).
(169) Permanent Court of International Justice, Societe Commerciale de Belgique,
1939, Series A/B, No. 78.
(170) The Torrey Canyon, Cmnd. 3246, 1967.
(171) Eric Wyler: L'Illicite et la Condition des Persones Privees, 1995, at 192
et seq.
(172) Crawford, at 184.
(173) Crawford, at 185.
(174) Gabcikovo-Nagymaros Project, pars. 51-52.
(175) Himpurna California Energy Ltd. v. P.T., May 4, 1999, as cited in
Claimant's Reply, note 403.
(176) Permanent Court of Internacional Justice, Societe Comerciale de Belgique
v. Greece, 1939, Ser. A/B, No. 78, pars. 167-174.
(177) The Martini case, as cited in Claimant's Reply, at 102-103.
(178) U. S.- Russia Investment Treaty, June 17, 1992, Para. 8 of the Protocol,
as cited in Claimant's Reply, note 442. The treaty is not in force.
(179) U. S.-Bahrain Investment Treaty, September 19, 1999, as cited in
Claimant's Reply, note 443.
146
(180) International Court of Justice, Case Concerning Military and Paramilitary
Activities in and Against Nicaragua, (Merits), ICJ Reports, 1986, at 14, paras.
222, 282; also decision on Jurisdiction and Admissibility, ICJ Reports, 1984, at
392, para. 83.
(181) International Court of Justice, Case Concerning Oil Platforms, Merits,
November 6, 2003, para. 43.
(182) American Manufacturing and Trade Inc. v. Zaire, ICSID Case No. ARB/93/1,
February 21, 1997.
(183) AAPL v. Sri Lanka, ICSID Case No. ARB/87/3, June 27, 1990.
(184) Crawford, at 185.
(185) Letter from the President of Argentina to Congress submitting the text of
the Treaty, January 24, 1992, in Camara de Diputados, Reunion No. 70, April 30,
1992, at 6722-6723; Report of the Committees of Foreign Affairs and Worship and
Economy, ibid.
(186) As discussed by an experienced diplomat, "With no higher authority to
gainsay it, threats to international peace and security are what the Security
Council says they are"; Gareth Evans: "When is it Right to Fight?", Survival,
Vol. 46 (3), 2004, 59-82, at 69.
(187) Statement by Professor Jose E. Alvarez, Hearing, Vol. 7, August 17, 2004,
at 1633-1637.
(188) Statement by Professor Anne Marie Slaughter, Hearing, Vol. 8, August 18,
2004, at 1947-1949.
(189) Statement by Professor Anne Marie Slaughter, Hearing, Vol. 8, August 18,
2004, at 1844.
(190) Exon-Florio Amendment to the 1988 Trade Act, 50 USC app. para. 2170,
(Supp. 1989). See generally the discussion in Hearing, Vol. 7, August 17, 2004,
and Hearing, Vol. 8, August 18, 2004, with particular reference to the
discussion by the parties and experts of Jose E. Alvarez: "Political
Protectionism and United States International Investment Obligations in
Conflict: The Hazards of Exon-Florio", Virginia Journal of International Law,
Vol. 30, 1989, 1.
(191) Nicaragua, 1986, para. 222.
(192) Gabcikovo-Nagymaros, pars. 51-52. The reference to the International Law
Commission's work is to International Law Commission, Yearbook, 1980, Vol. II
(Part Two), at 34-52, para. 36.
(193) International Law Commission, Yearbook, 1980, Vol. II (Part Two), at
34-52, para. 36.
(194) Rainbow Warrior, RIAA, Vol. XX, 1990, 217, at 251-252, para. 75; Crawford
at 189.
(195) Crawford, at 189.
(196) Claimant's post-hearing brief, at 11.
(197) Gabcikovo-Nagymaros, paras. 152-153; Crawford, at 190.
(198) Compagnie Generale de l'Orinocco, 1905, UNRIAA, Vol. X, 184.
(199) Properties of the Bulgarian Minorities in Greece, Yearbook of the
International Law Commission, 1980, Vol. II (Part Two), 34, para. 13, as cited
in Claimant's Reply, note 494.
(200) Orr & Laubenheimer, June 16, 1900, RSA, Vol. XV, 37, at 40, as cited in
Wyler, at 193-194.
(201) Gould Marketing, Inc., Iran-U. S. C. T. Reports, Vol. 3, 147, as cited in
Argentina Reply, note 702.
(202) Claimant's Rejoinder, para. 304.
(203) Claimant's Rejoinder, para. 307.
(204) Argentina Rejoinder, paras. 960 et seq.
(205) Argentina Rejoinder, para. 981.
(206) Hearing, August 18, 2004, Vol. 8, at 1940-1941.
(207) Hearing, August 18, 2004, Vol. 8, at 1941-1942.
(208) Crawford, at 190.
(209) Statement by Ms. Lucy Reed, 20 August, 2004, Hearing, Vol. 10, at 2211.
(210) See generally the Report of Mr. Fabian Bello on TGN's indebtedness and the
Word-Collins Report, June 11, 2004.
(211) Responsibility of States for Internationally Wrongful Acts, UNGA
Resolution 56/83, January 28, 2002, Article 34.
(212) Responsibility of States for Internationally Wrongful Acts, UNGA
Resolution 56/83, January 28, 2002, Article 35.
(213) Permanent Court of International Justice, Chorzow Factory case, Merits,
1928, Series A No. 17, at 47; and comments by F. V. Garcia-Amador: The Changing
Law of International Claims, Vol. II, 1984, at 578-580.
(214) Responsibility of States for Internationally Wrongful Acts, UNGA
Resolution 56/83, January 28, 2002, Article 36.2.
(215) Responsibility of States for Internationally Wrongful Acts, UNGA
Resolution 56/83, January 28, 2002, Article 36.1.
(216) Lusitania, RIAA, Vol. VII, 1923, p. 32, at 39, emphasis in original; and
comments by James Crawford: The International Law Commission's Articles on State
Responsibility, 2002, at 178 et seq.
(217) James Crawford: The International Law Commission's Articles on State
Responsibility, 2002, at 225, para. 21.
(218) International Glossary of Business Valuation Terms, American Society of
Appraisers, ASA website, June 6, 2001, p.4
147
(219) Damodaran, "Investment Valuation", John Wiley & Sons, New York, 2002,
pp.946-949.
(220) Responsibility of States for Internationally Wrongful Acts, UNGA
Resolution 56/83, January 28, 2002, Article 38.
(221) Marvin Feldman v. Mexico, Award of December 16, 2002, 18 ICSID Review --
FILJ 488 (2003), par. 194.
(222) Expert Report of Dr. Fabian Bello, June 11, 2004, at 24.
(223) Mr. John Wood-Collins states: "DCF valuation, by contrast, is an
appropriate and practical approach for the valuation of CMS's interest in TGN",
Valuation Report of 17 June 2002, p.5; Dr. Fabian Bello also states: "In order
to value a company, there's different mechanisms that can be used. I consider
that the most adequate ones are those that use the cash flow method, which is
the method used by Mr. Wood-Collins because that method is the most effective
one, the discounted method", 19 August, 2004, Hearing, Vol. 9, at 1969. Dr.
Bello, however, questions the way Mr. Wood-Collins has proceeded in applying the
DCF method; expert report of Dr. Fabian Bello, June 11, 2004, par. 94.
(224) Statement of Mr. Nigel Blackaby, August 20, 2004, Hearing, Vol. 10, at
2183.
(225) The Economist Intelligence Unit, Argentina Country Report, March 2005, p.
7, <www.eiu.com>.
(226) The Economist Intelligence Unit, Argentina Country Report, March 2005, p.
7, <www.eiu.com>.
(227) The Economist Intelligence Unit, Argentina Country Report, March 2005, p.
7, <www.eiu.com>.
(228) Rebuttal Statement of witness for CMS Mr. T. Miller, March 16, 2004, p.5.
(229) Statement by Ms. Lucy Reed, August 9, 2004, Hearing, Volume 1, at 28.
(230) Statement by Ms. Lucy Reed, 20 August, 2004, Hearing, Vol. 10, at 2211.
(231) Federal Reserve Bank of St. Louis, Series "6 month t. Bill, Secondary
Market Rates, Weekly."