Exploring Latin America’s ICSID Arbitration Landscape

Introduction

The International Centre for Settlement of Investment Disputes (ICSID), which administers most of the world’s arbitrations between states and foreign investors, gets busier every year. In 2021, ICSID registered 66 arbitrations, the most in its history and significantly more than its next-highest total, 58 arbitrations, in 2020. Between 2012 and 2022, ICSID registered 541 arbitrations – accounting for nearly 60 per cent of its total caseload.

Nevertheless, for the first 30 years after ICSID was established in 1966, ICSID was a sleepy institution, handling at most a few arbitrations a year. The first arbitration at ICSID was registered in 1972, and thereafter there were many years in which no arbitrations were registered at all. In no year prior to 1997 did ICSID register more than four arbitrations. In its first 30 years of existence, ICSID only registered a total of 32 arbitrations.

This began to change in the late 1990s, as ICSID registered 10 or more arbitrations per year starting in 1997, and its caseload increased significantly starting in 2000. It is not surprising that the 2000s is the decade when ICSID came into prominence. The decade before had seen a tremendous increase in global trade as globalisation became ‘an all-conquering force’ after the fall of the Soviet Union, and privatisation became ‘the global economic phenomenon of the 1990s’. Bilateral investment treaties (BITs) proliferated after 1990, and the World Trade Organization was founded in 1995. With increased private investments worldwide, an increase in disputes between foreign investors and states was bound to follow, and ICSID was well positioned to administer these disputes.

One of the regions that pushed ICSID into the limelight was Latin America. In the 1980s and 1990s, many Latin American countries joined the ICSID Convention after initially having viewed ICSID with great scepticism. During the 1980s and 1990s, Latin American countries also entered into a significant number of BITs and to a greater or lesser extent liberalised their markets. A decade later, factors such as economic volatility and changing political tides resulted in an exponential increase in investment disputes in the region.

By the end of 2010, more than a third of ICSID’s cases had originated in Latin America. Moreover, by the end of 2010, the four countries with the most ICSID cases against them were in Latin America (including Argentina and Venezuela in the first and second spots, respectively).

Today, the countries with the most ICSID cases against them are still Argentina (56) and Venezuela (53). Between them, they account for almost 12 per cent of ICSID’s historical caseload. Most of the cases against them resulted from sweeping policy changes, specifically, emergency legislation in response to a severe economic crisis in 2001 in Argentina and a policy of nationalisation in Venezuela starting in 2007. These policy changes resulted in many investment disputes arising out of the same or similar measures.

These cases are important not only because of their outsized contribution to the growth of ICSID arbitration, but because they revealed potential limitations of the ICSID system. Because each ICSID arbitration is an ad hoc proceeding related to one particular case, a series of cases with very similar facts could and did lead to inconsistent arbitral awards and annulment decisions. In response, critics of ICSID bemoaned a lack of coherence in ICSID decisions and called for an ICSID appellate system to replace or supplement the annulment system.

Argentina: diverging approaches to state of necessity

In the 1990s, Argentina privatised many of its state enterprises. As a result, a large number of foreign investors acquired concessions to provide public services in Argentina. One of the key incentives for investors was that the tariffs for these services would be calculated in US dollars, converted to Argentine pesos (which were pegged to the dollar) at the time of invoicing, and adjusted every six months according to the US Producer Price Index (PPI).

Starting in 1998, Argentina suffered a severe economic crisis that resulted in a reduction in GDP, deflation and increased unemployment. The crisis worsened in 2001, and in December of that year Argentina defaulted on its sovereign debt. In early 2002, Argentina passed emergency legislation enacting a variety of measures to counter the crisis, including freezing utility tariffs, abolishing the dollar-to-peso tariff calculation, and ending the convertibility regime that had pegged the Argentine peso to the US dollar.^[14]

With tariffs calculated in pesos, and the peso’s value against the dollar having fallen by more than two-thirds, foreign investors faced both a substantial loss of income and US dollar denominated debt outside Argentina they could no longer service. These investors filed numerous ICSID arbitrations against Argentina alleging various BIT violations, such as failure to accord fair and equitable treatment (FET), discrimination based on nationality, and indirect expropriation.

The CMS and LG&E awards

CMS Transmission Company (CMS) v. Argentina and LG&E Corp. v. Argentina were among the first ICSID cases brought against Argentina as a result of the economic crisis. The claimants, two gas transportation and distribution companies, alleged violations of the Argentina–US BIT. In both cases, in addition to its other defences, Argentina claimed that any alleged breaches were excused due to a state of necessity. In asserting this defence, Argentina relied both on Article XI of the BIT and on customary international law as codified in Article 25 of the Articles on State Responsibility.

Both tribunals found Argentina otherwise liable, but they differed in crucial ways in their approach to Argentina’s necessity defence. The CMS tribunal first analysed Article 25 and found that Argentina could not invoke necessity as a defence for several reasons. First, while the tribunal acknowledged the crisis had been severe, it was not sufficiently so to meet the requirement under Article 25(1)(a) that an ‘essential interest’ was in ‘grave and imminent peril’. Second, the tribunal found that the policy response chosen by Argentina was not the ‘only’ response to the crisis it could have chosen. Other responses could have included the ‘dollarization of the economy’ or granting ‘direct subsidies to the affected population’. Because there was more than one alternative, the tribunal held

SDGs, Targets, and Indicators

SDGs Addressed or Connected to the Issues Highlighted in the Article:

1. SDG 16: Peace, Justice, and Strong Institutions
2. SDG 17: Partnerships for the Goals

Specific Targets Under Those SDGs Based on the Article’s Content:

• Target 16.3: Promote the rule of law at the national and international levels and ensure equal access to justice for all.
• Target 17.16: Enhance the Global Partnership for Sustainable Development, complemented by multi-stakeholder partnerships that mobilize and share knowledge, expertise, technology, and financial resources.

Indicators Mentioned or Implied in the Article:

• No specific indicators are mentioned in the article.

The article discusses the International Centre for Settlement of Investment Disputes (ICSID) and its role in resolving arbitrations between states and foreign investors. The issues highlighted in the article are related to the functioning and legitimacy of ICSID, as well as the growth of investment disputes in Latin America. These issues are connected to SDG 16, which aims to promote peace, justice, and strong institutions. Target 16.3 specifically focuses on promoting the rule of law at the national and international levels and ensuring equal access to justice for all. The article highlights the need for coherence and consistency in ICSID decisions, indicating a need for equal access to justice and fair treatment of all parties involved in investment disputes.

The article also mentions the importance of partnerships and cooperation in addressing investment disputes and promoting sustainable development. This is connected to SDG 17, which focuses on partnerships for the goals. Target 17.16 emphasizes the need to enhance the global partnership for sustainable development, including multi-stakeholder partnerships that mobilize and share knowledge, expertise, technology, and financial resources. The article highlights the support of some Latin American states for ICSID and their commitment to resolving investment disputes through international arbitration.

Although the article does not mention specific indicators, progress towards the identified targets can be measured through indicators such as the number of investment disputes resolved through international arbitration, the consistency of decisions in similar cases, and the level of support and participation from different stakeholders in the resolution of investment disputes.

Table: SDGs, Targets, and Indicators

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Source: globalarbitrationreview.com

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