In Sempra Energy International v The Argentine Republic, an ICSID annulment committee granted Argentina's application for annulment. It did so on the basis that the tribunal had manifestly exceeded its powers by adopting customary international law, rather than the bilateral investment treaty (BIT) between the US and Argentina, as the primary source of law in relation to Argentina's defence of necessity. The necessity defence is used to justify measures taken by a State in times of economic or other emergency.
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.
Sempra was an investor in two gas companies which has been granted distribution licences 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. 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, including the entitlement to calculation of tariffs in US dollars.
In 2002, Sempra filed a request for arbitration on the basis that the emergency measures (including the enactment of an emergency law and the calculation of the tariffs in pesos rather than US dollars) amounted to a repudiation of Sempra's rights under the regulatory framework and were in breach of the protections under the BIT. These included expropriation of its investment, breach of the fair and equitable treatment provision and the umbrella clause.
Argentina maintained that the legal and regulatory framework had been strictly upheld when adopting the measures. 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.
In 2008, the government of Argentina filed an application requesting annulment of the award. As regards emergency under international law, Argentina alleged that the tribunal had manifestly exceeded its powers by finding that customary international law "trumped" the BIT.
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. 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.
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. 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, 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.
Sempra Energy International v The Argentine Republic (ICSID Case No ARB/02/16) (Annulment proceeding)