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ICSID Case No. ARB/09/1
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Date of Award 21 July 2017
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Claimants Teinver SA, Transportes de Cercanías SA and Autobuses Urbanos del Sur SA
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Respondent Argentine Republic
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1BIT Agreement between the Argentine Republic and the Kingdom of Spain on the Reciprocal Promotion and Protection of Investments, entered into force on 28 September 1992 (BIT)
Introduction
On 21 July 2017, an International Centre for Settlement of Investment Disputes (ICSID) tribunal (Tribunal) chaired by Judge Thomas Buergenthal, with co-arbitrators Henri C. Alvarez (Claimants’ appointee) and Kamal Hossain (Respondent's appointee), issued its award in Teinver SA and others v. Argentine Republic (Award). The Tribunal upheld, by a majority, several of Claimants’ claims, and ordered Argentina to pay US$320 million in compensation, as well as 20% of Claimants’ legal costs and expenses.Footnote 1 On 22 November 2017, Argentina registered a request to have the Award annulled.
Claimants − three Spanish incorporated companies − filed a claim under the BIT against Argentina at ICSID. Claimants requested US$1.6 billion in compensation for various measures taken by Argentina,Footnote 2 including its alleged failure to set economically reasonable airfares or to increase regulated airfares, and for issuing a law expropriating Claimants’ investment. Claimants claimed that these measures amounted to unfair and inequitable treatment, unjustified and/or discriminatory measures, and unlawful expropriation in violation of Articles IV(1), III(1), and V of the BIT, respectively. Claimants also invoked the umbrella and full protection and security provisions in the Argentina−US BIT, which they attempted to import via the Most Favored Nation (MFN) provision in Article IV(2) of the BIT.
Claimants had invested in Argentina in 2001 through their indirect purchase of an Argentine entity, Interinvest, which in turn, owned a majority stake in two Argentine airlines. At the time of investment, the airlines were in dire financial condition. Under Claimants’ management, the airlines’ financial condition initially improved significantly, but declined again in subsequent years and eventually became insolvent. In 2008, the parties entered into an agreement for the sale of Claimants’ shares in the airlines, which included a valuation methodology for determining the purchase price (July 2008 Agreement). Pursuant to the methodology, each party would appoint a valuer and the valuers would jointly agree a purchase price; if they could not reach agreement, a third neutral valuer would instead determine the price. Claimants’ valuer, Credit Suisse, provided a combined valuation for the airlines of US$330 million–US$540 million. By contrast, Argentina's valuer estimated a negative value of minus US$832 million. Unsurprisingly, the valuers could not reach agreement on the purchase price. However, instead of appointing a third neutral valuer in accordance with the July 2008 Agreement, Argentina proceeded to formally expropriate the airlines without notice in December 2008. Argentina paid Claimants one peso in compensation.
Why Is This Case Relevant?
The Award serves as a reminder for investors of the importance of carrying out due diligence before making an investment. Failure to carry out sufficient due diligence can jeopardize later claims for breach of the investor's legitimate expectations. The Tribunal in this case was not convinced that Claimants legitimately held the expectations they claimed at the time of making their investment. The lack of evidence presented of due diligence was determinative for the Tribunal in reaching this decision.Footnote 3 As Argentina asserted, the fair and equitable treatment protection does not operate as an insurance policy against bad investments.Footnote 4
The Award highlights the significance of negotiating BIT language. The MFN clause in the BIT refers to ‘all matters governed by this Agreement’ and, on its face, appears wide in scope. However, the Tribunal interpreted this language as limiting the scope of the clause to enhancing standards already appearing in the BIT by reference to protections in other treaties.Footnote 5 Consequently, it did not permit Claimants to import protections from other treaties that the BIT did not already encompass.
Main Findings of the Arbitral Tribunal
Argentina Violated the Fair and Equitable Treatment Standard by Failing to Follow the Agreed Valuation Methodology
The Tribunal upheld Claimants’ claim that Argentina had breached its obligation to provide fair and equitable treatment (FET) by refusing to follow the agreed methodology for valuing the airlines in the July 2008 Agreement.Footnote 6 The Tribunal found that this conduct also amounted to unjustified measures in breach of Article III(1) of the BIT.Footnote 7
The Tribunal did accept Argentina's argument that not every breach of contract by a State constitutes a violation of the FET standard.Footnote 8 However, the Tribunal found that the July 2008 Agreement was not simply a commercial agreement, but an agreement intended to put an end to the ‘long and difficult relationship’ between the parties, and Claimants had a legitimate expectation that Argentina would honor its commitments to purchase Claimants’ shares in accordance with their agreement.Footnote 9
The Tribunal declined to find that the other measures that Claimants alleged amounted to a breach of the FET standard.Footnote 10 Specifically, Argentina had disputed Claimants’ claim that it had a legitimate expectation − allegedly based on regulatory standards existing at the time of their investment − that they would be able to charge economically reasonable airfares.Footnote 11 Noting there was no evidence to indicate that Claimants had carried out due diligence on the basis of the relevant regulatory standards regarding the anticipated airfares before investing in the airlines, the Tribunal determined that Claimants could not legitimately have held the expectations they claimed with respect to airfares at the time of making their investment.Footnote 12
Argentina Unlawfully Expropriated Claimants’ Investment
Following the July 2008 Agreement, Argentina assumed de facto control of the airlines, giving rise to an indirect expropriation. A few months later, in December 2008, Argentina formally expropriated Claimants’ shares in the airlines. The Tribunal held that, while expropriation was made in the bona fide public interest to preserve connectivityFootnote 13 and was not discriminatory,Footnote 14 the expropriation was unlawful as it was done not in accordance with lawFootnote 15 and Argentina did not provide adequate compensation.Footnote 16 In particular, it was not open to Argentina to unilaterally adopt a valuation methodology different to that agreed among the parties in the July 2008 Agreement, and to proceed to a formal expropriation on another basis.Footnote 17
The Tribunal Rejected Claimants’ Efforts to Import New Protections from the Argentina−US BIT via the BIT's MFN Clause
Article IV(2) of the BIT provides that ‘[i]n all matters governed by this Agreement’, treatment shall be no less favourable than that given to investments by investors of third countries. Giving the words their plain and ordinary meaning, the Tribunal found that this clause permitted the incorporation of more favorable standards from other BITs, but that this was the limit of its scope. In particular, Claimants could not invoke Article IV(2) to import new protections that did not already appear in the BIT. Footnote 18 The Tribunal acknowledged that its finding diverged from that in earlier cases, recognizing that additional protections could be imported through the MFN clauseFootnote 19 but noted that the language of the MFN clauses in those cases could be distinguished.Footnote 20
On this basis, the Tribunal rejected Claimants’ efforts to import the umbrella clause in the Argentina−US BIT as the BIT relied on by Claimants did not contain an umbrella clause.Footnote 21 However, the Tribunal found that the MFN clause could be used to invoke the full protection and security standard in the Argentina−US BIT, as the Argentina−Spain BIT included this protection.Footnote 22 However, the Tribunal ultimately dismissed Claimants’ full protection and security claims.Footnote 23
The Dissenting Opinion
In his dissenting opinion, Respondent's appointee, Mr Hossain returned to issues in his 2012 dissent to the Tribunal's jurisdictional decision,Footnote 24 in particular his view that Claimants did not hold an investment within the meaning of the BIT.Footnote 25 On the merits, Mr Hossain did not consider any measures taken by Argentina to breach the BIT. In his view, the July 2008 Agreement was non-binding and merely represented a commitment to explore a share purchase.Footnote 26 As such, Argentina was justified in deciding not to honour its commitments under that agreement.
The Tribunal Awarded Damages, Together with Costs Proportional to the Damages
In assessing damages, the Tribunal adopted the ‘full reparation’ standard.Footnote 27 The Tribunal held that, notwithstanding its findings of breach of multiple BIT standards, the single consequence was that Claimants were denied payment for their shares in accordance with the agreed valuation mechanism under the July 2008 Agreement.Footnote 28 Relying on Credit Suisse's valuation, the Tribunal ordered Argentina to pay compensation to Claimants in the amount of US$320 million − approximately 20% of the sum Claimants’ originally claimed.Footnote 29 The Tribunal also ordered Argentina to pay 20% of Claimants’ claimed costs, amounting to US$3.5 million.Footnote 30
