Agustin R. Spotorno (Senior Associate, Winston & Strawn LLP, dual qualified lawyer in Argentina and England & Wales); Ian Burton (Principal at Ian Burton Legal, dual qualified lawyer in England & Wales and New York); Tomas Villaflor (Arnold & Porter LLP, qualified lawyer in Argentina)[1]
I. Introduction
This article is the second of a series, intended to improve knowledge of the Argentine and UK legal systems and the relationship between them. This piece focuses on foreign direct investment (“FDI”). FDI is defined as “international capital flows associated with investments in firms in which a foreign investor acquires a controlling state” or “those associated with purchases of stocks or bonds without a controlling stake as portfolio or equity investments.”[i] For example, Argentine-based company Metrogas S.A. is the largest natural gas distribution company in Argentina, and it was created as part of the 1992 privatization of Gas del Estado (State Gas), after which UK-based company British Gas (“BG”) took control of the new company, and gave it its current name MetroGas, investing capital directed towards improving infrastructure and service efficiency. [ii]
Recent statistics show that the annual outward value of FDI from the UK into Argentina was £8.5 billion, which accounted for 0.5% of total UK outward FDI investments. In turn, the inward stock of foreign direct investment (FDI) into the UK from Argentina was £11 million.[iii]
This article first provides a brief overview of the historical FDI relationship (Section II); then it addresses the evolution of the arbitration investment regime (Section III), and then assesses past disputes arising from that relationship (Section IV); before providing a conclusion (Section V).
II. Brief Background
The dawn of British investment into Argentina began in the mid-1820s. The then Argentine President Bernardino Rivadavia (1826-27)[iv] decided to liberalize the trade and investment regime[v] and to open land in Argentina for sale to foreign investors. Another aspect of this regime was the creation of a stable currency backed by precious commodities such as gold, and the creation of a privately owned bank, Banco de Buenos Aires. [vi]
The principal industry to which investments were attracted was mining, an obvious choice given Argentina’s vast resources. The other was the railway industry. More than ten private enterprises invested in the sector in Argentina: first under the concession system [vii](where private companies operated state-owned railways under long-term agreements, allowing them to manage and profit from the rail services while the state retained ownership); then through whole privatisation (where railway ownership was fully transferred to private entities allowing them to own, manage and profit from the assets independently. By 1937 there were ~40,000km of railways in Argentina, of which 66% were British owned[viii] directing lines to key locations for export and trade.[ix]
III. Evolution of the dispute resolution landscape
(i) Arbitration
The UK and Argentina have long acknowledged arbitration as an appropriate means of dispute resolution, it being understood that it offers a neutral forum detached from the home courts of the parties involved in a dispute. Modern arbitration has its roots in the context of Medieval guilds (which were associations of craftsmen and merchants formed to oversee the practice of their trade and ensure fair conduct) with sources pointing out that commercial arbitration was widely used in certain regions of Europe during the Middle Ages (c. 1000), with guilds serving as early arbiters of commercial disputes to maintain order and standards within the trades.[x] Many centuries later, today both countries (like much of the rest of the world) have modern arbitration statutes.[xi]
(ii) FDI and arbitration
Under the Argentine liberal government of the mid-1820s, the commercial relationship between the UK and Argentina commenced. In 1825, the first treaty in South America of Friendship, Commerce and Navigation (“FCN”) was signed between the United Provinces of the Río de la Plata and the British Crown. The FCN is one of the most familiar instruments in diplomatic tradition used to foster bilateral trade and political recognition, providing a basic accord establishing the ground-rules governing day-to-day relations between the two states. FCNs also typically contain protections for investors of both nations[xii], including guarantees of fair treatment, property rights and non-discriminatory measures, as well as a dispute resolution clause allowing for arbitration of conflicts arising from its interpretation or application, between the two countries. [xiii]
The 19th and 20th centuries saw an increase in the use of arbitration as a method of resolving disputes between international parties. One of the first geopolitical disputes which led to arbitration occurred during the government of the then Governor of Buenos Aires, Juan Manuel de Rosas and de-facto ruler of Argentina[xiv]. Mr Rosas is said to have put in place protectionist policies, which later led to a blockade in the La Plata River off the main port of Buenos Aires, first by France (1838-1840) and later by Britain (1845-1850) with warships patrolling the river. This led to the hindering of trade and so exerted economic pressure on Buenos Aires. The blockade severely affected the Argentine economy and its national and foreign interests, while also increasing national resistance against foreign intervention. Once the blockades ended, the countries involved decided to submit to the jurisdiction of a commission of decision-makers from the affected countries, that would establish the proper compensation owing in relation to damages caused during the blockade. This was an example of the early use of arbitration in relation to wartime damages to investments and trade, emphasizing international law over military solutions.[xv]
From 1840 to the early 1900s several commissions were established amongst both states for the resolution of geopolitical conflicts causing damages to their respective foreign nationals. But those commissions comprised of agreed-upon panel members which were either set by the UK and Argentina or, when individuals or commercial enterprises were affected, through diplomatic channels whereby the country of the affected entity would bring the case on behalf of the individual (or entity) investor, against the country who inflicted the harm. But there was not a system in place where individuals or entities could bring claims against the states themselves.
Another emerging example of arbitration use in the 19th century were concession contracts between the Argentine Republic and British investors in Argentina for the operation of public services or assets such as railways. For example, in 1863, a concession agreement between the Argentine Republic and a British investor (Central Railway) was signed to construct and operate a steam locomotive in a single railroad from Santa Fe Province to Cordoba Province. Article 25 of the agreement stipulated that any question arising must be submitted for the decision of arbitrators, named by either party according to the law of the country. [xvi]
Towards the later part of the 19th century, arbitration in respect of FDI matters started to face challenges from an emerging opposition voice. In 1868, an Argentine diplomat known as Carlos Calvo posited in his treatise Theoretical and Practical International Law in Europe and America a doctrine according to which FDI disputes fell under the jurisdiction of the courts of the country in which the investment was made, prohibiting redress through diplomatic protection or armed intervention before local resources were exhausted.[xvii] Calvo also denied that a government would be responsible by way of indemnity for any losses or injuries sustained by foreigners in time of internal troubles or civil war (provided the government is not at fault), on the grounds that the admission of such a principle of responsibility would establish an unjustifiable inequality between local citizens and foreigners from more powerful states and so would undermine the independence of weaker states. He also did not admit that diplomatic channels were open to claimants in such cases.[xviii] The Calvo Doctrine was followed in 1902 by a new principle asserted by another Argentine foreign affairs minister, Luis Maria Drago, who criticized “gunboat” diplomacy by European nations through the misuse of “financial intervention” as a pretext for conquest, arguing for a principle according to which public debt of a Latin American state could not justify armed intervention or actual territorial occupation, with the effect that it further supported the need to exhaust local remedies first before proceeding to any other options.[xix]
The first half of the 20th century witnessed extensive production and growth in Argentina, important British investments as part of this growth, and a relatively liberal economy.[xx] In 1965, to provide a structured method for resolving disputes between foreign investors and home states, many countries signed the ICSID Convention (International Centre for Settlement of Investment Disputes). This ICSID Convention aimed to replace the traditional methods of diplomatic intervention or diplomatic espousal, with a legal framework allowing private investors to bring claims directly against states. The ICSID Convention facilitated a more predictable and neutral dispute resolution process, promoting international investment by ensuring legal certainty and protection for investors. [xxi] However, it is important to note that Argentina also underwent significant nationalisations particularly in the mid-20th century. Industries such as railways, telecommunications, and oil were nationalised, and this led to disputes with British investors. These disputes were often resolved through prolonged negotiations with varying outcomes ranging from compensation agreements to arbitration. Despite these challenges, investments continued to flow into agriculture, livestock, modernization of transport networks, and other projects associated with the hinterland and fertile pampas[xxii] influenced by the broader economic and legal frameworks in place. [xxiii]
Crucial to the modern development of UK-Argentine relations was the 1993 Agreement between the UK and Argentina, for the Promotion and Protection of Investments (“UK-Argentina BIT”).[xxiv] This was, and is, the existing legal framework to promote and protect foreign direct investments. The UK-Argentina BIT contains provisions prohibiting: (i) expropriation – except for specific public purposes and upon payment of compensation; (ii) non-discrimination in the treatment of foreign investors relative to domestic investors or other foreign ones[xxv]; (iii) protection against unfair and inequitable treatment; (iii) as well as the settlement of disputes by means of arbitration (although with a requirement that investors must first comply with local litigation requirements). This treaty has had the effect of attracting British investments to Argentina in a variety of economic sectors including gas, electricity, water and sewage systems.
IV. Investor-State Disputes between the UK and Argentina.
The British company ICS Inspection and Control Services Limited (“ICS”) entered into an agreement with the Argentine Minister of Economy and Public Works relating to the provision of auditing services for a government-supervised scheme under which goods bound for import to Argentina would be inspected prior to shipment. In 2002, in the context of a financial crisis in Argentina, a law that had stabilised the 1:1 exchange parity between the U.S. dollar and the Argentine peso was repealed. This measure and the huge devaluation that ensued affected the economics of ICS’s business leading it to bring arbitration against Argentina for the payment failure and the measures taken. [xxvi] Because the investor failed to comply with the UK-Argentina BIT’s pre-arbitration requirement, i.e., to resort in the first instance to local courts in Argentina, the tribunal dismissed the case for lack of jurisdiction.[xxvii]
Another British investor who was incentivised by Argentina’s privatisation of certain state-owned companies, including the gas transportation and distribution monopoly of state-owned entity Gas del Estado, was British Gas Group plc (“BG”) who made a major investment in Argentina’s natural gas industry, as the successful bidder for the 70% ownership interest of MetroGAS the local entity with rights to distribute gas in the Buenos Aires Province. According to BG, the regulatory framework on which it relied when it invested in Argentina[xxviii] was disrupted by Argentina’s emergency measures to address macroeconomic pressures, social unrest and political instability in 1999. Bypassing the 18-month precondition to first attempt to resolve the dispute before the local courts, BG submitted claims for damages for expropriation and breach of fair and equitable treatment under the UK-Argentina BIT before an arbitral tribunal.[xxix] Although the award was ultimately annulled in the U.S., the arbitral tribunal found that the changes to Argentina’s judicial system excused the 18-months precondition and awarded BG US$185 million in damages.[xxx]
Another British group AWG Group Ltd and others gained ownership and managed the Argentine company Aguas Argentinas, which had a 30-year concession contract with the Argentine government to provide public water and sewage services. This was described as “one of the world’s largest water distributions and wastewater treatment privatizations in a great city”.[xxxi] The Argentine government devalued the Argentine peso in the early 2000s by ending its peg to the U.S. dollar and refused to revise the fees and tariffs charged by Aguas Argentinas, significantly impacting the revenues Aguas Argentinas needed to meet its financial obligations, invest in the water distribution and waste management systems, and allow its investors to earn a reasonable return on their investment. The investor successfully took Argentina to arbitration to recover its losses.
Finally, British firm National Grid became a shareholder in two corporations, Transener and Transba, which were granted 95-year concessions to provide high-voltage electricity transmission services. In addition to the concessions, National Grid made investments in the upgrading and expansion of Argentina’s electricity transmission system, via Transener. Transener was awarded three contracts to construct, operate and maintain transmission lines in return for periodic payments for the beneficiaries of the lines. Following the amendment of the Convertibility Law, National Grid commenced arbitral proceedings against Argentina, asserting that the amendments destroyed the remuneration regime. The arbitral tribunal found that Argentina had breached the fair and equitable treatment and protection and constant security standards owed to National Grid under Article 2(2) of the UK-Argentina Bilateral Investment Treaty and found it liable for US$53 million in damages.[xxxii]
One of the most distinct features of these arbitrations was the analysis made by tribunals with regards to the emergency measures adopted by the Argentine government to overcome the economic crisis in the year 2001. Argentina argued that the measures taken constituted an exception to the liability on damages because the measures fell under the customary international law doctrine of state of necessity pursuant to the ILC Articles on States Responsibility for Internationally Wrongful Acts. Tribunals have taken different approaches, some clearly inclined in favour of the government’s position, others inclined against (i.e., sympathetic to the claimant), and others alleging that even when the government defence had merit, the State was nonetheless liable to pay compensation.
V. Conclusion
We see how the use of arbitration has both evolved in, and encouraged the development of, the UK-Argentina trading and investment relationship over the past 200 years, as it has also done generally in a world whose trading and investment relationships have become ever more complex and connected in the same period. Given the fact that Argentina is a vast country of huge natural resources, with the effect that much of the FDI that it attracts for the time being is investment of a nature and scale commensurate with major engineering/energy extraction projects, it is clear that arbitration will continue to play a significant role. The great importance of access to effective, reliable arbitration, to meet both the needs of the commercial parties undertaking the projects and to ensure such foreign investment continues and expands in the future, is self-evident.
[1] The notes expressed in this short article and the references cited herein have an academic purpose of improving the exchange of information in line with SOBAL’s mission. Nothing herein must be deemed as any of the authors taking fixed positions whether political, legal or otherwise. The authors appreciate the contributions and thoughts shared by SOBAL’s editors and members; Dr. Mauro Pucheta; Guillermo Grüning for their support; to SOBAL’s Board Member Liz Merchant for all her assistance and to Ricardo Spotorno for the great historical insights that went into this note.
[i] Laura Alfaro and Jasmina Chauvin, “Foreign Direct Investment, Finance and Economic Development” Mariana Spatareanu (ed), Encyclopedia of International Economics and Global Trade Vol. 1: Foreign Direct Investment and the Multinational Enterprise (World Scientific 2020) 231–258.
[ii] “Metrogas S.A. Company Profile – Argentina” at <https://www.emis.com/php/company profile/AR/Metrogas_SA_en_1106506.html> accessed 28 May 2024; “YPF takes over Argentina’s main gas distribution company belonging to BG” MercoPress (Montevideo, 30 November 2012) <https://en.mercopress.com/2012/11/30/ypf-takes-over-argentina-s-main-gas-distribution-company-belonging-to-bg> accessed 28 May 2024.
[iii] “Argentina-UK Trade and Investment Factsheet: Foreign Direct Investment”, available at <https://assets.publishing.service.gov.uk/media/66447aa1993111924d9d3492/argentina-trade-and-investment-factsheet-2024-05-17.pdf> accessed 28 May 2024.
[iv] Henry Stanley Ferns, “Beginnings of British Investment in Argentina” (1952) 4 The Economic History Review 341. At the time Argentina was known as United Provinces of the Rio de la Plata, a union of provinces in the La Plata River, which emerged from the 25 May 1810 Revolution, and the Argentine War of Independence (1810-1818). It comprised most of the former Spanish Viceroyalty of the Rio de la Plata dependencies and has Buenos Aires as its Capital.
[v] Part of the liberalization regime of the time had started some decades earlier and included the introduction of machinery and utensils destined for mining exploitation, which was freed from tariffs, as well as the commercialization of quicksilver or mercury used in gold and silver benefaction operations, which was declared free. The law then also empowered foreign investors to denounce mines in the territory of the United Provinces and declared them citizens, six months after the mining works were installed, if they so requested it, also empowering them to freely remove their goods from the country. A Mining Court was also established with a seat in Potosi, which would be governed by the provisions of the New Spain or Mexico Ordinances, which were put into effect in the territory in 1783.
[vi] The Banco de Buenos Aires (Bank of Buenos Aires) was created by the Law of 22 June 1822 and of whose 9 directors 3 were British and enjoyed a controlling proportion.
[vii] A concession contract was entered into between Argentina and the Central Rail, for the purpose of building a single railroad for a steam locomotive, which from Rosario city to Cordoba
[viii] Julian S. Duncan, “British Railways in Argentina” (1937) 52 Political Science Quarterly 559.
[ix] An important legal note with respect to Article 25 of the concession contract between Argentina National and Central Rail signed in March 16 of 1863 stipulated that any question arising between Government and the company shall be submitted for the decision to arbitrary, named by either according the law of the country.
[x] Sir Woodbine Paris, KCH, The Project Gutenberg, – Buenos Aires and the Provinces of the Rio de La Plata https://www.gutenberg.org/cache/epub/47169/pg47169-images.html accessed 28 May 2024.
[xi] Arbitration Act 1996 (UK); International Commercial Arbitration Law No. 27,449 (Argentina).
[xii] Hernan Walker Jr., “Modern Treaties of Friendship Commerce and Navigation” (1958) 42 Minnesota Law Review 805.
[xiii] Paris (n10).
[xiv] Mr. Rosas – known as “El Restaurador de las Leyes”— was a prominent Argentine politician and military leader who played an important role in Argentine history during the 19th century. Born in 1793, Rosas rose to power in Buenos Aires in the 1820s and became known for his authoritarian rule and efforts to centralize power. He was a Federalist, advocating for the autonomy of provincial governments against the centralist Unitarian Party. His tenure was marked by strict control, suppression of opposition and significant influence over national policies.
[xv] John Lynch, Caudillos in Spanish America 1800-1850 (Oxford University Press 1992) ch. 6.
[xvi] Paul B. Goodwin, Jr, The Central Argentine Railway and the Economic Development of Argentina, 1854–1881, Hispanic American Historical Review, Duke University Press, available at https://read.dukeupress.edu/hahr/article/57/4/613/150600/The-Central-Argentine-Railway-and-the-Economic; Hans Smit, The Forum Selection Clause in Arbitration Under a Bilateral Investment Treaty – Vol. 16 No. 2 – American Review of International Arbitration, available at https://aria.law.columbia.edu/issues/16-2/the-forum-selection-clause-in-arbitration-under-a-bilateral-investment-treaty-vol-16-no-2/
[xvii] But this rule does not apply in case of a gross or palpable denial of justice, where local remedies are wanting or insufficient, where judicial action is waived, where the act complained of is in itself in violation of international law, or where there is undue discrimination against foreigners on the part of the authorities. In relation to the latter, the prevalence of national sovereignty in judicial matters is observed, to the detriment of arbitration solutions outside the territory where the investment was made.
[xviii] Manuel R. García-Mora, “The Calvo Clause in Latin American Constitutions and International Law” (1950) 33 Marquette Law Review 205. Calvo’s theories under international law partly arose as a result of the first French intervention of Mexico (First Franco Mexican War – 1838-1839) with the naval blockade of Mexican ports, the point being preventing the abuse of the jurisdiction of weak nations by more powerful nations.
[xix] Frank Griffith Dawson, “Contributions of Lesser Developed Nations to International Law: The Latin American Experience” (1981) 13 Case Western Reserve Journal of International Law 37. Luis María Drago, by participating in 1907 in the Second International Peace Conference in The Hague, managed to partially institutionalize his thinking in art. 1 of the Convention for the limitation of the use of force for the collection of debts (signed on October 18, 1907). However, the United States amended, through its representative, Mr Porter, Drago’s proposal, that is, while the renunciation of the use of force for the collection of debts was established, nevertheless it was allowed under certain conditions, particularly when the debtor country refused to submit the matter to arbitration or, if it accepted, it did not appoint the arbitrator in a timely manner, or in the case of an arbitration concluded, it did not comply with the decision. A comparison between the views of Calvo and Drago as above expressed will show that they differ in two very important respects. The Drago Doctrine is much narrower in scope than that of Calvo. Drago merely denounces armed intervention as a legitimate or lawful means of collecting public debts, whereas Calvo denies the right to employ force in the pursuit of all private claims of a pecuniary nature. Indeed, Calvo advances a step beyond this position. He absolutely denies that a government is responsible by way of indemnity for any losses or injuries sustained by foreigners in time of internal troubles, civil war, or for injuries resulting from mob violence (provided the government is not at fault) on the grounds that the admission of such a principle of responsibility would “establish an unjustifiable inequality between nationals and foreigners” and would undermine the independence of weaker states. He does not even admit that the ordinary channels of diplomacy are open to claimants in such cases. In his message of December 5, 1905, President Roosevelt pronounced himself with his wonted vigor in favor of the Drago Doctrine. These were messages for England as one country of the old world and main investor of Argentina.
[xx] Alan M. Taylor, “Argentina and the world capital market: saving, investment, and international capital mobility in the twentieth century” (1998) 57 JDE 147.
[xxi] Yarik Kryvoi, “The Path of Investor-State Disputes: From Compensation Commissions to Arbitral Institutions” (2018) 33 FILJ 743.
[xxii] Victor Bulmer-Thomas, The Economic History of Latin America since Independence (Cambridge University Press 2014) 46-48, 71.
Roberto C Conde, “The Political Economy of Argentina in the Twentieth Century” Cambridge University Press, 978-o-521-88232-3
[xxiv] Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Argentina for the Promotion and Protection of Investments (Argentina-United Kingdom) (adopted 11 December 1990, entered into force 19 February 1993) 41 UKTS 2 <Https://Investmentpolicy.Unctad.Org/International-Investment-Agreements/Treaties/Bit/161/Argentina—United-Kingdom-Bit-1990-> accessed 28 May 2024.
[xxv] National Treatment and Most-Favoured Treatment, standards drawn from previous treaties on trade.
[xxvi] Information about the case available at: <Https://Www.Italaw.Com/Cases/551>.
[xxvii] ICS Inspection and Control Services Limited (United Kingdom) v. The Republic of Argentina (UNCITRAL), Award dated 10 February 2012, para 1; para 326.
[xxviii] Which included the Gas Act (Law 24.076 of 20 May 1992), the Gas Decree (1738 of 18 September 1992) and the MetroGAS License of 21 December 1992.
[xxix] Information about the case available at: <https://Www.Italaw.Com/Cases/143>.
[xxx] BG Group Plc v. The Republic of Argentina (UNCITRAL), Award dated 24 December 2007 (“BG v Argentina”), para 300.
[xxxi] Suez, Sociedad General de Aguas de Barcelona S.A., and Vivendi Universal S.A. v. The Argentine Republic and AWG Group v. The Argentine Republic (ICSID Case No. ARB/03/19), Decision on Liability dated 30 July 2010 (“AWG v Argentina”), para 26.
[xxxii] National Grid plc v The Argentine Republic (UNCITRAL), Award dated 3 November 2008 (“National Grid v Argentina”).
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