Thomson Reuters | 3 January 2021
Sempra v Argentina: award annulled for manifest excess of powers in failure to apply BIT defence of necessity
by Joanne Greenaway, Herbert Smith LLP
An update on Sempra Energy International v The Argentine Republic (ICSID Case No ARB/02/16) (Annulment proceeding), in which the tribunal granted Argentina’s application for annulment.
In Sempra Energy International v The Argentine Republic (ICSID Case No ARB/02/16) (Annulment proceeding), Argentina’s application for annulment was granted on the basis that the tribunal had manifestly exceeded its powers by adopting customary international law, rather than the bilateral investment treaty (BIT), as the primary source of law in relation to Argentina’s defence of necessity.
The decision is controversial because it is not entirely clear that the tribunal did, in fact, apply customary international law to the exclusion of the BIT. The decision also calls into question the extent of review assigned to an annulment committee which is, in theory, more limited than that of an appellate body. The distinction between a review of the law and the five grounds of procedural irregularities set out in Article 52 underpins the legitimacy of the ICSID process in the view of many and has, in some respects, been blurred in this case.
On 14 November 1991, the US and Argentina entered into a bilateral investment treaty (BIT) concerning the reciprocal encouragement and protection of investment.
Article XI of the BIT states:
"This Treaty shall not preclude the application by either Party of measures necessary for the maintenance of public order, the fulfilment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests".
Article 52(1) of the ICSID Convention provides the grounds to annul an award, namely:
"(1) Either party may request annulment of the award by an application in writing addressed to the Secretary-General on one or more of the following grounds:
(a)that the tribunal was not properly constituted;
(b)that the tribunal has manifestly exceeded its powers;
(c)that there was corruption on the part of a member of the Tribunal;
(d)that there has been a serious departure from a fundamental rule of procedure; or
(e)that the award has failed to state the reasons on which it is based."
Only (c) was not alleged in this case by Argentina.
The claimant, Sempra Energy International (Sempra), was an indirect investor in two Argentinian gas companies which had been granted licences for the distribution of gas in Argentina. The licences were granted following a favourable legal and regulatory framework introduced in 1991 under a privatisation programme which fixed the Argentine peso to the US dollar at an exchange rate of one to one. In December 2001, following the financial crisis in Argentina, the government of Argentina undertook a number of measures which, in Sempra’s view, constituted a wholesale repudiation of rights under the licences and regulatory environment. These rights concerned the entitlement of the licensed companies to calculation of tariffs in US dollars and semi-annual adjustments based on the US Producer Price Index.
In 2002, Sempra filed a request for arbitration on the basis that the emergency measures adopted by Argentina from 2000 to 2002 amounted to a repudiation of Sempra’s rights under the regulatory framework and was in breach of all of the protections under the BIT (namely, expropriation of its investment, breach of the fair and equitable treatment provision and the umbrella clause). These emergency measures included the:
Argentina challenged the tribunal’s jurisdiction. In respect of the substantive allegations, Argentina maintained that the legal and regulatory framework had been strictly upheld when adopting the measures complained of and that none of those measures amounted to a breach of the licenses or the BIT. Moreover, it argued that its liability was excluded by the defence of necessity in Article XI of the BIT. In this context, Argentina’s economic emergency meant that the measures it introduced were justified.
In 2007, the tribunal issued an award on the merits, which held that Argentina had breached the fair and equitable standard and the umbrella clause of the BIT. In so doing, it looked at the defence raised by Argentina and concluded that the Article did not deal with the legal elements necessary to invoke a state of necessity. Therefore, the provision could not be self-judging and the tribunal had to apply criteria in customary international law, namely, Article 25 of the International Law Commission (ILC) Articles (and to apply them restrictively). On this basis, Argentina failed to meet the said criteria, the defence was not proven and Sempra was awarded damages. (For further discussion, see Legal update, Argentina breached fair and equitable standard.)
In 2008, the government of Argentina filed an application requesting annulment of the award under four of the five grounds set out in Article 52(1) of the ICSID Convention, namely:
Argentina’s request for an annulment included arguments that the tribunal was mistaken in assuming jurisdiction, as it did so without stating reasons and its decision to do so was a manifest excess of power.
As regards emergency under international law (the key issue addressed in the award), Argentina alleged that the tribunal had manifestly exceeded its powers by finding that customary international law, as enunciated in Article 25 of the ILC Articles, "trumped" Article XI of the BIT. Sempra argued that the tribunal had interpreted the conditions under which Article XI could be invoked to be the same as those required by customary international law and found, as a matter of fact, that Argentina failed to satisfy those conditions. No excess of power, let alone any manifest excess of power, was involved.
The application for annulment also contained a request, under Article 52(5) of the ICSID Convention and ICSID Arbitration Rule 54(1) for a stay of enforcement of the award until the application for annulment was decided. The stay was granted, but was eventually lifted due to the government of Argentina’s failure to comply with escrow requirements.
The annulment committee dismissed the majority of Argentina’s claims but concluded that the award should be annulled on the basis that the tribunal had manifestly exceeded its powers within the meaning of the ICSID Convention. In this regard, it stated that there was a difference between the failure to apply the law correctly, which would not result in an annulment, and the failure to apply the law at all, which would result in an annulment. It concluded that the tribunal had adopted Article 25 of the ILC Articles as the primary law rather than Article XI of the BIT. Rather, the BIT should have been the primary source given that the "consent to submit to international dispute resolution is predicated on the very terms of the BIT" (paragraph 190). The tribunal should have asked first whether the treaty was breached (or whether the defence applied) and only then moved on to the question of whether the ILC rules applied.
Also, it reasoned that Article 25 was wrongly applied: its application should be limited to justifying cases where the act is deemed internationally wrongful whereas the defence in Article XI necessarily prevents the measures from being internationally wrongful. Therefore, the two Articles deal with different situations and do not work together (paragraph 200). The committee identified this as a fundamental error in identifying and applying the applicable law.
The decision has sparked a great deal of controversy, not least given the time and cost spent coming to the original decision. Although the tribunal did adopt the ILC Articles, it did not necessarily seek to trump the BIT. It did so on the basis that they were equivalent to Article XI of the BIT rather than superior. In paragraph 388 of the award (cited in paragraph 207 of the annulment decision) the tribunal said that there was no need to "undertake a further judicial review under Article XI given that this Article does not set out conditions different from customary law in such regard". Therefore, the tribunal’s application of the law may not have been as inappropriate as the committee suggest and may not have justified annulment on the basis of "manifest excess of powers". Ultimately, the committee’s finding that the tribunal "failed altogether to apply the applicable law" (paragraph 165) seems far fetched.
Various commentators have discussed what "manifest" should mean in this context. It seems reasonable to suggest that where the legal answer is not obvious to a reasonable person, there can be no "manifest excess of powers". Therefore, the decision is at least questionable.
It also calls into question the extent of review assigned to an annulment committee which is, in theory, more limited than that of an appellate body. The distinction between a review of the law and the five grounds of procedural irregularities set out in Article 52 underpins the legitimacy of the ICSID process in the view of many and has, in some respects, been blurred in this case.