Krishna Agarwal (Gujarat National Law University, India)

1. Introduction

The unprecedented COVID-19 pandemic has grappled the world and is comparable to the Argentine crisis as the States have taken emergency measures like Argentina in the wake of economic crisis.[1] However, unlike Argentina, the States have taken multiple emergency measures to curb the adverse effects of COVID-19 such as enactment of Emergency Laws, imposition of lockdown, closing non-essential businesses, restricting border movements etc.

Such measures may breach different standards in the Bilateral Investment Treaty (“BIT”) as they may lead to the violation of due process, or constitute abusive treatment to the investors, arbitrariness and discrimination, causing Expropriation, violation of Fair and Equitable Treatment or full protection and security.  Article 36 of the ILC Articles on the Responsibility of State for Internationally Wrongful Acts, 2001 (“ARSIWA”) obligates the State to compensate for the damages caused due to the international wrongful acts and which shall include lost profits if it comes within the ambit of financially assessable damages.

In pursuance of this the Host-State may attempt to apply different defenses provided under the Investment treaty such as the Right to Regulate clause or Non-Precluded Measures (“NPM”) clause or rely on customary international law provided for the plea of necessity or the application of force majeure clauses.

However, a pertinent question which remains is that if such defenses are not accepted by the Tribunal given the facts of the dispute, does the Host-State have any other method to reduce the compensation to take into account the economic well-being of the Host-State?

2. Analysis of Argentinian Cases

In the backdrop of the Argentine crisis, the Tribunals in several cases have dwelled into the concerns pertaining to economic factors. While analyzing the cases, it is important that the researchers comprehend the reasoning given by tribunals while calculating the amount of compensation. Some of the important case-laws during Argentinian crisis are as follows-

2.1 CMS, Enron & Sempra

In CMS v. Argentina, though the Tribunal noted that the Argentinian crisis was severe, yet it came to the conclusion that wrongfulness cannot be precluded by invoking Article 25, ARSIWA keeping in view the relative effect of the crisis and the contribution of Argentinian policies towards the crisis. Additionally, even if the wrongfulness of the act is precluded due to the necessity, still according to the interpretation of Article 27, ARSIWA it does not exclude the duty to compensate the one whose right is violated.[2]

A similar view was taken in Enron v. Argentina and Sempra v. Argentina where Tribunals acknowledged that since the term ‘essential interest’ is not defined under the Article XI, Argentina-US BIT cannot be applied for rescue of the host-state.[3]

However, with regard to the calculation of the quantum of compensation, despite finding that neither the customary international law nor the investment treaty can preclude the wrongfulness of the act, on account of a severe economic crisis, tribunals interestingly in CMS, Enron and Sempra have reduced the compensation.

The Tribunal in CMS has reduced the amount of compensation calculated by the expert by adjusting the demands and tariffs by taking into account the magnitude of the crisis faced by Argentina.[1] In Sempra, the Tribunal differentiated between the standard of compensation and the manner in which law has to be applied; the latter is required to assess the effects of crisis and was duly considered while calculating the Cost of Equity, Market Discount, Tariff increase and other adjustments.[2]  Similarly, in Enron the Tribunal while granting compensation adjusted the Tariff across the time period of six years for a better spread of Weighted Average Cost of Capital.[3] 

The Tribunal while calculating the quantum of compensation noted:-

While these unfortunate events do not in themselves amount to a legal excuse, neither would it be reasonable for the Claimants to believe they are not affected by some of the effects…This is something the Tribunal will duly take into account in considering the compensation that follows such finding of liability and how the crisis period influences its determination.”

Therefore, we can draw a conclusion that the Tribunals in these cases have accepted the view that even if the economic crisis does not preclude the wrongfulness of the act under customary international law still it might have a bearing on the issue of valuation of the compensation.

2.2 LG&E v. Argentina

The LG&E v. Argentina, the Tribunal has taken an opposite view and held that Argentina is liable for damages for the breach of the treaty except during the time period of economic crisis. It considered the Argentinian crisis in different light and has justified the emergency and application of doctrine of necessity for a limited period of time. The Tribunal considered that though Article 25, ARSIWA is not fully satisfied still the findings could be used to conclude that on the application of Article XI, Argentina-US BIT, the state of necessity is the ground of exclusion from the liability till certain level of stability has been recovered. Further as Article XI, Argentina-US BIT and Article 27, ARSIWA are silent on the question if the compensation for the losses is payable during the state of necessity; the damages suffered should be borne by the investor only.[4]

2.3 CMS, Enron, Sempra Annulment Committees

The CMS Annulment Committee has acknowledged the reasoning of the CMS Tribunal for considering the impact of Argentinian crisis with respect to the calculation of the quantum of compensation.[5] At the same time, the CMS, Enron & Sempra Annulment Committees found that the defences provided under Article 25, ARSIWA and Article XI, Argentina-US BIT are distinct in their operation and the Tribunals while assessing them should adopt a two-step approach wherein only if the present circumstances of the dispute are not covered under the NPM clause, customary international law should be applied as a subsidiary means.[6]

This two-step approach was followed by Continental Casualty v. Argentina and the compensation awarded was only concerned with specific commitments in contracts which were not covered by the defence of necessity and Article XI, Argentina-US BIT.[7]

2.4 El Paso & Impregilo

In El Paso v. Argentina and Impregilo v. Argentina, the majority Tribunal observed that Argentina has substantially contributed to its own economic crisis and therefore neither the BIT nor Article 25, ARSIWA can come to rescue.

Whereas, the minority arbitrator, Arbitrator Stern was not convinced with the evidence that Argentinian authorities has substantially contributed to the economic crisis and was against the light assumption of the economic crisis.[8] She was inclined to accept the reasoning given in Continental and if needed she was open to accept the arrangement sort out by the Tribunal in LG&E.[9]

2.5 BG & Suez

In BG v. Argentina, the Tribunal believed that Argentina was unable to meet the conditions laid down in Article 25, ARSIWA and Argentina-UK BIT. However, the Tribunal while calculating the damages did not rely on the MetroGAS 2001 projections which was referred in Wood Collins Report because such projections were oblivious to economic crisis and therefore no compensation for the historical losses were granted.[10]  Similarly, in Suez v. Argentina, the Tribunal has considered the economic crisis while calculating the quantum of compensation, using a but-for scenario with respect to a reasonable regulator.[11]

3. Valuation of Compensation- Balancing the interests

We find that the tribunals were primarily divergent with respect to two questions. First, if the plea of necessity provided in BIT or customary international law is satisfied or not. Second, even if the plea of necessity is not satisfied, can the valuation of the compensation be reduced. We are interested with the second question and the Tribunals in Argentinian cases have taken varied approaches to the answer the second question.

A probable dimension to the divergent reasoning could be seen with reference to the difference between two conceptions of ex aequo et bono and equitable principles. The former is applied when the Tribunal is allowed to disregard a legal rule, after the prior consent of the parties i.e. equity contra legem.[12] Whereas, to apply the latter, no special consent is required as it is inherent in the paradigm of ‘Rule of Law’.

Hence, the Tribunal may reduce the compensation because the objective of the BIT is not to protect foreign property but rather to protect the process of foreign investment. It will be inequitable if the outcome of the BIT entails catastrophic consequences of the livelihood and the economic well-being of the population.[13]. Therefore, in wake of serious economic crisis, even if the host-state has breached the treaty obligations, the process of valuation of compensation can be tweaked to ensure that injustice is not done to the public at large.

4. Doctrine of Abuse of Rights

The Tribunal in Himpurna v. PLN after recognizing the unfettered right of the Claimant to compensation has declined to assess the lost profits and awarded less than 10% of the amount claimed by the investor as it believed that it would lead to ‘abuse of rights’ against the backdrop of economic crisis.[14] In Mobil v. Venezuela, the Tribunal observed that to determine the abuse of rights, it is necessary to take into account all the circumstances of the case.[15] Thus, the concept of doctrine of abuse of rights is generally used in investment jurisprudence when the party seeks to avail the benefit of BIT with regard to the circumstances which were not foreseeable.[16]

Undoubtedly, there might be treaty violations but the question that is needed to be answered is if the circumstances of COVID-19 were foreseeable enough that the host-state has voluntary put the economy and public at large at risk?

The host-state is not a commercial entity; its special character and the responsibilities towards the well-being of the people has to be recognized. It is unreasonable to presume that a State already having a deregulated economy has agreed to a national economic disaster when it has accepted foreign investments. Therefore, when the breach of the IIAs is caused due to the measures taken by the Host-State to curb the adverse effects of COVID-19, the grant of lost profits should be discouraged.

5. Conclusion

To facilitate balance of rights of the Host-State and the investors, the future Investment Treaties should entail an exhaustive list of the exceptions which should clarify the extent of economic crisis covered under the ambit of ‘public interest’ and the reduction of compensation for the same. One such exception should be of ‘public health’ and a caveat may be attached that measures taken in pursuance of public health should not be arbitrary or discriminatory to the investors/investments and shall be temporary and confirm with the basic notions of proportionality.[17]

Additionally, the force-majeure clause included in the IIA should have the scope for the States to limit their financial liabilities that are concerned with COVID-19. States might expressly include a self-judging clause which excepts the measures taken by the States during a serious economic crisis and public health.[18]

With respect to the investment treaties before COVID-19, the Tribunal if not satisfied with the application of Article 25 of the ARSIWA and the NPM clause, should on the basis of equitable principles determine the valuation of the compensation. This is because it is an accepted fact that the investors and their investments to some extent are affected by the unprecedented crisis of COVID-19 and thus all the losses cannot solely be attributed to the host-states.

Moreover, while quantifying the compensation amount according to a particular standard of compensation, the calculation by Tribunal should consider the measures which should have been taken by the reasonable regulatory authority during COVID-19. It can agree not to grant lost profits to the foreign investors as it might lead to catastrophic consequences and in legal perspective might lead to ‘abuse of rights’. It can also mitigate the amount of compensation while calculating the rate of interest and allowing the cost of proceedings to be borne by the respective parties rather than the unsuccessful party i.e. the Host-State.

[1] CMS Gas Transmission Company v. The Republic of Argentina ICSID Case No. ARB/01/8 ¶¶ 456-457.

[2] Sempra Energy International v. The Argentine Republic, ICSID Case No. ARB/02/16, Award.

[3] Enron Corporation and Ponderosa Assets v. Argentine Republic ICSID Case No. ARB/01/3 ¶¶ 232 415.

[1] Suksham Chouhan, Young ISDS Club- Corona Pandemic investment disputes, Efila Blog, Young ISDS Club – Corona pandemic investment disputes – EFILA Blog (9 June 2020).

[2] CMS Gas Transmission Company v. The Republic of Argentina, ICSID Case No. ARB/01/8, Award ¶ 390.

[3] Enron Corporation and Ponderosa Assets v. Argentine Republic, ICSID Case No. ARB/01/3, Award ¶ 334.

[4] LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc .vArgentine Republic, ICSID Case No. ARB/02/1, Decision on Liability.

[5] CMS Gas Transmission Company v. Argentine Republic, ICSID Case No. ARB/01/8, Decision of the Ad-Hoc Committee on the Application for Annulment of the Argentine Republic ¶¶ 156.

[6] CMS Gas Transmission Company v. Argentine Republic, ICSID Case No. ARB/01/8, Decision of the Ad-Hoc Committee on the Application for Annulment of the Argentine Republic ¶¶ 119-128; Enron Creditors Recovery Corp. Ponderosa Assets, L.P. v. The Argentine Republic, ICSID Case No. ARB/01/3, Decision on the Application for Annulment of the Argentine Republic ¶¶ 147-161; Sempra Energy International v. The Argentine Republic, ICSID Case No. ARB/02/16, Decision on the Argentine Republic’s Application for Annulment of the Award pp. 29-34.

[7] Continental Casualty Company v. The Argentina Republic, ICSID Case No. ARB/03/9, Award pp. 70-94.

[8] Impregilo S.p.A. vArgentine Republic, ICSID Case No. ARB/07/17, Award, ¶ 360.

[9] El Paso Energy International Company v. The Argentine Republic, ICSID Case No. ARB/03/15 ¶ 670.

[10] BG Group Plc. v. The Republic of Argentina, UNCITRAL (1976), Final Award ¶ 449.

[11] Suez, Sociedad General de Aguas de Barcelona, S.A.and Vivendi Universal, S.A. vArgentine Republic, ICSID Case No. ARB/03/19 ¶ 41.

[12] Christoph Schreuer, Decisions Ex Aequo et Bono Under the ICSID Convention, 11(1) ICSID Rev. 37-63 (1996).

[13] Ian Brownlie, CME Czech Republic B.V. v. Czech Republic, UNCITRAL (Separate Opinion) ¶¶ 77-80.

[14] Himpurna California Energy Ltd. v PT. (Persero) Perusahaan Listruik Negara, Final Award

[15] Venezuela Holdings B.V. et. al. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Award.

[16] Orascom TMT Investments S.a.r.l v. People’s Democratic Republic of Algeria, (Award), ICSID Case No. ARB/12/35, 31 May 2017, Award.

[17] Investment Policy Response to the COVID-19 Pandemic, UNCTAD (4 May 2020),