ICSID award on defence of necessity annulled

Practical Law UK Legal Update Case Report 4-503-0293 (Approx. 7 pages)

ICSID award on defence of necessity annulled

by PLC Arbitration

Background

Article 52(1)(b), (d) and (e) of the ICSID Convention provides:

"(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: ...

(b) that the Tribunal has manifestly exceeded its powers;

(d) that there has been a serious departure from a fundamental rule of procedure;

(e) that the award has failed to state the reasons on which it is based."

Rule 34(1) of the ICSID Arbitration Rules provides:

"The Tribunal shall be the judge of the admissibility of any evidence adduced and of its probative value."

Rule 26(2) of the ICSID Arbitration Rules provides:

"The Tribunal may extend any time limit that it has fixed."

Rule 26(3) of the ICSID Arbitration Rules provides:

"Any step taken after expiration of the applicable time limit shall be disregarded unless the Tribunal, in special circumstances and after giving the other party an opportunity of stating its views, decides".

Article 25 of the International Law Commission (ILC) Articles on Responsibility of States for Internationally Wrongful Acts (2001) (ILC Articles on State Responsibility), provides 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:

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."

Facts

The facts of the case are summarised in Legal update, Enron v Argentina: ICSID tribunal rejects defence of necessity.

In the annulment proceedings, the applicant relied on Articles 52(1)(b), (d) and (e) of the ICSID Convention in relation to the tribunal's findings that Argentina:

Could not rely on the defence of necessity (deriving from customary international law and the BIT).
Breached its obligations under the BIT.
Was obliged to pay compensation to the claimants.
Reliance was also placed on (among other things)
- failure to state reasons;
- the decision to admit certain evidence;
- the decision to close proceedings; and
- the failure to apply the law of Argentina.

Decision

The Annulment Committee annulled the award on the basis of Article 52(1)(b) of the ICSID Convention, finding that the tribunal manifestly exceeded its powers by failing to apply the applicable law (Article 25, ILC Articles on State Responsibility).

As a result, the committee ordered the annulment of the following parts of the award, which were linked to the established manifest excess of powers by the tribunal:

The finding that Argentina could not rely on the principle of necessity expressed in the BIT.
The finding that Argentina breached its obligations under the BIT.
The award of compensation to the claimants.

However, the committee rejected the other arguments advanced by Argentina. The parts of the award which could be separated from the annulled parts were not annulled.

Defence of necessity

The decision of the Annulment Committee contains important findings on the interpretation and application of Article 25 of the ILC Articles on State Responsibility, concerning the defence of necessity.

Article 25(1)(a) of the ILC Articles on State Responsibility: "the only way"

The Annulment Committee found that the tribunal failed to apply Article 25(1)(a) of the ILC Articles on State Responsibility for the following reasons:

More than one interpretation of the phrase "the only way" was possible. For example, the following interpretations were possible:
- a literal interpretation, according to which there were literally no other measures which the government could have taken. This was the interpretation applied by the tribunal. However, as there would inevitably be more than one way for the government to respond to any economic crisis, such interpretation would have meant that the principle of necessity under customary international law could rarely if ever be invoked in relation to measures taken by host states to deal with an economic crisis; and
- that there were no alternative measures available to the state which did not involve a similar or graver breach of international law. Under this interpretation, the principle of necessity would have been be available for measures involving the least grave violation, or no violation, of international law.
The tribunal was required to decide or assume the correct interpretation either expressly or impliedly in order to apply Article 25. However, the tribunal's reasoning failed to address a number of issues which were essential to deciding whether the "only way" requirement was met .
The tribunal did not address the following issues concerning the alternative measures available to the host state:
- the relative effectiveness of the alternative measures; and
- the proper application of "the only way" requirement of Article 25(1)(a) to the facts of the case. The Committee identified certain questions which should have been answered by the tribunal implicitly or explicitly in applying Article 25(1)(a).
By not addressing the above issues and instead relying on a report of an expert economist, the tribunal failed to apply Article 25(1)(a).
The tribunal also failed to state reasons for its decision, as it was not apparent from its reasoning how and why it came to its conclusion that "the only way" [requirement] was not satisfied.

Article 25(2)(b) of the ILC Articles on State Responsibility: "contributed to the situation of necessity"

The Annulment Committee found that the tribunal failed to apply Article 25(2)(b) of the ILC Articles on State Responsibility for the following reasons:

More than one interpretation of the phrase "contributed to the situation of necessity" was possible, of which the tribunal was required to decide or assume the correct interpretation, either expressly or impliedly, in order to apply Article 25 to the facts of the case. For example, the following interpretations were possible:
- a literal interpretation, according to which any causal link at all between the conduct of the state and the situation of necessity, regardless of any blame or foreseeability of the consequences of such conduct, would amount to a contribution to the situation of necessity; and
- an interpretation whereby the conduct constituting a contribution to the situation of necessity must involve some sort of fault on the part of the state - an interpretation apparently applied by the tribunal.
In connection with the issue of fault, the tribunal did not clarify what conduct of the state would amount to the fault, and therefore did not define the legal elements of Article 25(2)(b) and further did not apply these elements to the established facts of the case.
Instead, the tribunal relied on a report of an expert economist on an economic issue (constituting the facts of the case) to reach its conclusion and did not apply this opinion to the legal requirements of Article 25(2)(b), which constituted a failure to apply the applicable law.

Article 25(1)(b) of the ILC Articles on State Responsibility: no serious impairment of interest of the State towards which the obligation exists

The tribunal did not expressly find that this aspect of Article 25(1)(b) was not satisfied. If the tribunal had made such a finding, it was unclear to the committee what the reasons were for such a finding. Consequently, the committee concluded that the tribunal had failed to state its reasons for this finding.

Article 25(2)(a) of the ILC Articles on State Responsibility: BIT itself "excludes the possibility of invoking necessity"

The tribunal had failed to address whether the BIT itself excluded the possibility of invoking the defence of necessity.

Rejection of other grounds for annulment

Failure to state reasons

The committee found that:

There were no rigid or formulaic requirements as to the form or method of stating reasons.
The tribunal had a duty to deal with questions submitted to it. It did not have to address all the arguments presented by the parties, provided it was clear how the tribunal arrived at its conclusions (that is, that the rationale for its conclusion was clearly stated).
It was not the role of the Annulment Committee to analyse whether the tribunal's reasoning or rationale was convincing or correct.
There was no failure to state reasons by incorporating by reference reasoning of a previous ICSID decision, any other arbitration or judicial decision, the reasoning in a commentary or publication or any other source, without repeating at length the reasoning contained in that other source.

Admission of evidence over Argentina's objections

The tribunal found that:

The tribunal had a right, under ICSID Arbitration Rules 34(1), 26(1) and 26(3) to accept a filing by a party of an expert report after the deadline fixed for such filing, if the tribunal considered there were good reasons for doing so. The tribunal carefully examined Argentina's objections to such admission and there were no grounds for finding that the tribunal's actions violated the principles of equality of the parties, the right of defence or fair treatment.
Even if the above admission of evidence was in violation of the parties' procedural agreement, it did not constitute a serious departure from the fundamental rule of procedure (the principle of party autonomy).

Serious departure from fundamental rules of procedure

For the departure from fundamental rules of procedure to be serious, such departure must have caused the tribunal to reach a result substantially different from what it would have awarded had such a rule been observed.

Failure to apply the law of Argentina

A tribunal's failure to apply the law applicable under Article 42 of the ICSID Convention could be a ground for annulment, but the incorrect or erroneous application of the law was not.
The law applicable in the present case was the ICSID Convention, the BIT and applicable international law. The law of Argentina was not relevant for establishing Argentina's liability under the BIT. It was only relevant as a matter of fact, to establish whether Argentina undertook certain guarantees to attract foreign capital and certain obligations towards the investment. The applicable law to establish liability was not the law of Argentina and therefore the tribunal did not fail to apply it. It was not within the Committee's mandate to consider whether the tribunal articulated and applied the law of Argentina correctly for the above purposes.

Manifest excess of powers in applying certain clauses of the BIT

There was no manifest excess of tribunal's powers in applying the FET clause and the umbrella clause. The applicant's argument was based on the allegation that the tribunal's interpretation of these clauses was wrong, which was not a valid ground for annulment.

Comment

Annulment of the part of the award which related to the necessity defence had a domino effect on virtually all other findings of the tribunal, concerning Argentina's liability as well as the amount of damages, and caused the annulment of practically the whole award. As the defence of necessity is relied on by Argentina in virtually all cases filed by investors against it in disputes concerning the Argentinean economic crisis, the current annulment decision may have an important influence on other pending investment treaty arbitrations.

Case

Enron Creditors Recovery Corp, Ponderosa Assets, LP v Argentina (ICSID Case No ARB/01/3) (Annulment Proceeding)

ICSID award on defence of necessity annulled | Practical Law