investment arbitration cases
25 August 2020
Peru, Mexico, Argentina, Bolivia and Guatemala are just some of the Latin American countries being hit by the investment protection regime in the midst of the COVID-19 pandemic. Foreign investors are threatening to bring claims before international arbitration tribunals due to the measures states are taking to mitigate the effects of the pandemic. Arbitrators are refusing to accept states’ requests to postpone ongoing arbitration cases and are obliging governments to disburse millions to investors at a time when public funds are required for more urgent priorities. Once again, the current crisis reveals the perverse consequences of the investor-state dispute settlement system and the urgent need to break free from it.
For decades, countries in Latin America and the Caribbean have been suffering the consequences of having signed more than 470 trade and investment protection agreements. Foreign investors have brought nearly 300 known claims before international arbitration tribunals against the region’s states. However, the COVID-19 pandemic and the crises it has unleashed could further exacerbate the risks of the investment protection regime by triggering a new wave of claims.
“Investment treaty protections are no longer viewed as remedies of last resort, but important tools in an investors’ armoury.” Simmons and Simmons law firm
Impacts of the investment protection regime on Latin America1
The 282 known arbitration claims by investors against countries in Latin America and the Caribbean mean that it is the region with the second highest number of disputes in the world. The vast majority of completed cases were settled in favour of the investor, with Latin American states being ordered or agreeing to pay a total of US$ 31 billion as a result of these claims. This is more than three times the amount that the World Bank, the Inter-American Development Bank and the Development Bank of Latin America have together made available to the region’s countries in the form of loans to tackle the COVID-19 crisis as of July 2020.2
The sums demanded by investors in the pending claims (where the amount is known) total US$ 40 billion.
Peru – the first country in the world to be threatened with arbitration claims due to measures related to COVID-19
“This is no doubt going to lead to six arbitration claims against us at ICSID [the World Bank’s International Centre for Settlement of Investment Disputes]” declared the president of Ositrán, the Peruvian government agency that supervises investment in public transport infrastructure, when Peru’s Congress approved a law at the beginning of April to suspend the collection of tolls on the country’s roads during the emergency caused by the coronavirus crisis. The purpose of this measure was to facilitate the transport of essential goods or workers at a time when so many Peruvians had lost their income.
International law firms have wasted no time in questioning the measures adopted by sovereign states in Latin America and the rest of the world and explaining how they could give rise to international arbitration claims – for which, of course, they offer their specialized services. For example, a lawyer from the firm Alston & Bird (minute 49:20) questioned the proportionality and necessity of the measure adopted by Peru. He stated that the government could have adopted other, less damaging measures to protect public health, such as introducing toll collection technology to replace the people taking payments in toll booths.
The warnings about potential disputes began to materialize in June when it was confirmed that several toll road concession-holders had expressed their intention to initiate international arbitration proceedings.
“It is reasonable to predict that the measures taken by states, and by Peru in particular, will lead to more than one dispute”, Pablo Mori Bregante from the law firm GST LLP
In order to “contain this threat by the concession-holders”, in June Peru’s executive branch initiated unconstitutionality proceedings to overturn the law suspending toll payments. In her justification of this measure, Peru’s Minister of the Economy, María Antonieta Alva, made it clear that the aim is to avoid “the contingencies we’re going to face in the International Centre for Settlement of Investment Disputes (ICSID). Not only is there the likelihood of claims against us; not only will we have to pay for all the legal costs and lawyers. We’re also going to have to pay compensation”.
The threats of arbitration claims usually seek – in many cases successfully – to deter governments from enacting legislation in order to avoid disputes that may cost them millions of dollars, an effect known as “regulatory chill”. Whether or not the corporations concerned decide to pursue their claims will depend on the ruling by Peru’s Constitutional Court.
Mexico – threatened by the energy giants
Mexico was the second Latin American country to receive threats of investor claims due to measures adopted in response to the COVID-19 crisis. In this case, for imposing restrictions on renewable energy generation due to the fall in demand for electricity caused by the pandemic.
Between 29 April and 15 May, a critical time for the country due to the rapid increase in cases of COVID-19, the government issued two resolutions to postpone when renewable-energy power plants can start to operate and restrict electricity generation by wind and solar energy facilities.
These measures mainly affect major European energy transnationals – such as the Spanish firms Iberdrola, Naturgy and Acciona, Italy’s Enel and France’s Engie – and Canadian and US corporations that have invested in Mexico’s renewable energy sector, taking advantage of highly favourable contracts. The government has argued that the changes introduced, which give it more power to control the Mexican energy market, were necessary during the pandemic and are aimed at “safeguarding energy security and independence” and guaranteeing “the power supply”, especially for essential services such as the health system.
Almost immediately, various international law firms specializing in investment disputes, such as DLA Piper, reacted by warning that “foreign investors in wind and solar electricity generation facilities in Mexico may wish to consider their rights and potential remedies under applicable investment treaties”. The well-known Spanish arbitrator Bernardo Cremades also predicted that “protection for domestic firms may lead to AMLO having to face a number of costly claims […] investors are likely to have recourse to the arbitration mechanisms provided by investment protection treaties”. The law firm Crowell & Moring declared that the measures “imperil foreign investments in renewable energy projects” and were quick to offer their specialized international arbitration services to investors in Mexico.
Some of the Spanish corporations affected by the measures have already started to prepare international arbitration claims against the Mexican government. Canadian firms, including ATCO, the largest energy infrastructure corporation in Canada, have also warned that the government’s measures could infringe NAFTA 2.0.
Three things stand out about the corporations preparing to file claims. First, several of them have ample experience of using investment arbitration against states, including Mexico itself, to obtain profits from failed investments. For example, in 2018 the Canadian firm ATCO brought a claim before the London Court of International Arbitration against the state electricity company – the Federal Electricity Commission (CFE) – alleging breach of contract when construction of the Ramal-Tula gas pipeline was suspended due to social opposition to the project. For its part, Naturgy has an ongoing claim against Colombia for US$ 1.6 billion, won US$ 2 billion in an arbitration case against Egypt and is preparing to launch new claims against Algeria and Nigeria, among others. The Spanish firm Iberdrola has also made use of investment arbitration against Bolivia and Guatemala.
Second, even though they have investments in the renewable energy sector in Mexico, most of them are large transnational corporations with portfolios of investments in fossil fuels. Moreover, in some cases such as the energy giant Iberdrola, they have been historic enemies of renewable energy.
“Behind the smokescreen of green capitalism, the major electricity firms see the renewables sector as an opportunity to diversify their capital accumulation strategies”, OMAL
Third, they have an amply documented track record of human and social rights violations, which remains unpunished due to the lack of sanctions mechanisms. For example, Iberdrola, which controls a large slice of the Mexican electricity market, has been accused of corruption, criminalization and displacement of local communities, and failing to carry out free, prior and informed consultation, thus infringing ILO Convention 169. Detailed reports on the wind farms in Oaxaca show that the company has avoided paying taxes and has signed contracts detrimental to the farmers who agreed to lease their land.
Argentina – under pressure from investment funds and the law firm White & Case
On 22 May, in the midst of the pandemic, Argentina found itself unable to pay part of its public debt to a group of international bondholders, including BlackRock – the US firm that is the largest investment management corporation in the world. This “default” occurred while tough negotiations were taking place with creditors to restructure US$ 66 billion in debt, a measure considered necessary even by the International Monetary Fund. The government and the bondholders sealed an agreement on 4 August 2020, under which Argentina agreed to pay US$ 54.8 for every US$ 100 of debt. This figure is very close to the US$ 56 demanded by the major bondholders led by BlackRock and much higher than Argentina’s initial offer of US$ 39, making it clear that the pressure exerted by the firms was successful.
Some of this pressure came in the form of threats to bring international claims. White & Case is the US law firm advising the group of Argentina’s bondholders led by BlackRock. On 17 June it issued a statement containing a direct threat: “our group is now considering all available rights and remedies”. One of the potential legal remedies is to bring an investment arbitration claim.
The possibility of bondholders bringing an investment arbitration claim against Argentina is not a far-fetched idea. White & Case is not just any law firm: it is one of the elite law firms specializing in investment arbitration, and has been involved in at least 73 investor-state disputes brought before ICSID. Even more relevant, however, is that White & Case was the law firm that represented 60,000 Italian bondholders that brought a claim against Argentina in 2007 (the Abaclat case) as these bondholders refused to accept the debt restructuring that followed the 2001 crisis. In 2016, this law firm was instrumental in securing a payment of US$ 1.35 billion for the 60,000 bondholders.
Argentina: an example of how foreign investors use investment protection agreements to bring claims against countries in crisis.
Investor-state disputes “often follow economic, financial, or other crisis.” Lawyers from Debevoise & Plimpton
In 2001, Argentina underwent the worst economic and social crisis in its history. To mitigate the effects, the Argentine state adopted measures such as debt restructuring and freezing public utility tariffs. The “aggrieved” foreign investors brought 43 claims related to the crisis. The vast majority (77%) were settled in favour of the investor, either through a tribunal award or an agreement between the parties. Argentina was ordered or agreed to pay investors a total of at least US$ 3.3 billion. Despite the devastating social situation, in 11 of the 14 cases in which Argentina made use of the necessity defence, the arbitration tribunals rejected the argument.3
Other law firms specializing in international arbitration, such as Dechert, wasted no time in identifying “impending sovereign bond disputes”.
“The protections offered by international investment law may provide creditors means of recourse against a State [...] following sovereign debt defaults or restructurings – even when they are necessary or unavoidable.” Dechert law firm4
Although Argentina has avoided these “impending” claims for the moment, the bondholders' threat to use them is an effective intimidation tactic and presumably influenced the government to concede and make a more favourable offer.
Bolivia – pleas for arbitration proceedings to be put on hold while it struggles with the pandemic are unsuccessful
While the country undergoes the worst political crisis in a decade, the government of Bolivia not only has to deal with the health and economic crisis unleashed by the COVID-19 pandemic, but also has to continue to fight four lawsuits brought before international arbitration tribunals by private companies, where there are millions of dollars at stake.
“Between them, these four international arbitration claims amounting to more than 3 billion dollars are under the jurisdiction of international arbitrators, who unfortunately refused to put them on hold despite the pandemic.” José María Cabrera, Solicitor-General of the Plurinational State of Bolivia
In this context, the government of Bolivia requested the suspension of arbitration proceedings in two of the ongoing cases related to mining: one is the dispute with the Swiss firm Glencore and the other a dispute with the US investor Julio Miguel Orlandini Agreda. It based these requests on the “grounds of force majeure, in relation to the COVID-19 health crisis” (p.2) and argued that the various measures applied by countries in response to COVID-19 had made it "materially impossible" (p.5) to deliver the required documents. It also explained that “quarantine-related measures have severely hindered its ability to prepare" (p.3) the documents it is required to present.
The arbitrators in both cases refused to suspend the proceedings. Arbitrators in the Glencore case, for example, stated that the tribunal “does not consider that there is any sufficient basis on which to suspend these proceedings” (p.6). In the Orlandini Agreda case, the arbitrators took the view that suspension was not necessary because in other cases “the proceedings have not been suspended or ruled impossible to continue” (p.9).
“… the Tribunal cannot ignore the effects of the current global health crisis and, on the other hand, it must also […] adhere to its duties to avoid unnecessary delay”, arbitrators in the Glencore vs Bolivia case.
The government argues that, as a result of the tribunal’s decision, “Bolivia has been prevented from exercising its right to defence” (p.8).
Guatemala – request to postpone payment to investors is denied despite the crisis
The US electricity corporation TECO, represented by the law firm White & Case, is engaged in a legal battle to collect the US$ 21 million it was awarded by an arbitration tribunal in a dispute against Guatemala. Taking account of interest, it is estimated that this award would be worth US$ 36.5 million today.
Payment of the arbitration award to TECO must be confirmed in the US courts. Having declared a state of national calamity due to the pandemic, Guatemala has asked for the payment to be suspended, arguing that “payment of this award would worsen the economic situation in the country at a time when it has to deal with the COVID-19 pandemic.” Despite this, a US judge in a District of Columbia court rejected Guatemala’s request.
For Guatemala, the second poorest country in Latin America, where the hospital system has collapsed as a result of COVID-19, the millions at stake are significant. For example, the government could use that money to buy 108,000 extra beds for COVID-19 patients.4 This amount is also equivalent to 24% of the additional budget given to the Ministry of Health to tackle the current health crisis.5
Foreign investors continue to file arbitration claims despite the crisis
The region’s countries are under pressure to deal with the health, social and economic crisis resulting from the current pandemic, but the reaction by foreign investors has not been to ease up on their host states. On the contrary, the filing of new arbitration claims has continued during the pandemic, putting extra pressure on governments’ already stretched capacities.
From the beginning of March 2020 to the end of July, at least 16 new arbitration claims have been filed worldwide, and nine of them are against countries in Latin America and the Caribbean – three claims have been brought against Colombia, two against Mexico, two against Peru and two against Panama.
Although these disputes are not directly related to the measures taken by states in response to the pandemic, they divert funds and efforts from where they are most needed: to combat the COVID-19 pandemic and its socio-economic consequences.
International law firms warn of other potential claims against Latin American countries
Since the start of the pandemic, international law firms have begun to speculate about potential international arbitration claims related to the measures taken by states in response to COVID-19. The law firm Ropes & Gray, for example, asserts that "for companies with foreign investments, investment agreements could be a powerful tool to recover or prevent loss resulting from COVID-19 related government actions".
In dozens of written communications to their corporate clients, the law firms identify measures taken by governments, including in Latin America, that could give rise to claims that invoke the ample safeguards provided by the investment protection agreements currently in force.
“With this new generation of claims, arbitrators are going to be scrutinizing the limits on a state’s ability to regulate and manage crisis situations, and the proportionality and reasonableness of the measures adopted”, Aníbal Sabater, partner in the law firm Chaffetz Lindsey.
For example, Colombia, Honduras, Paraguay and Argentina have adopted measures that provide direct support to water service users, such as making it unlawful to cut off the supply due to a failure to pay bills during the crisis. The law firm Hogan Lovells warned that these measures “may encourage foreign investors to seek recourse under protections found in investment treaties”.
Similarly, Chile and Ecuador have facilitated the issuing of compulsory licences that seek to prevent patents on medicines and equipment being monopolized by a single company. However, lawyers in the field of investment arbitration believe (webinar minute 6:48) that measures by “governments both forcing producers to sell drugs at significantly discounted prices and/or taking the intellectual property for themselves and/or disseminating that intellectual property to third parties without permission” constitute expropriation and could give rise to claims under the investment treaties.
“Argentina showed the world in 2002 how an economic and political crisis can be a catalyst for investment arbitration claims. If we add a global pandemic to the mix, it seems likely that we will see a new wave of investor claims, especially in the light of recent government measures”, Aníbal Sabater, partner in the law firm Chaffetz Lindsey
The general attitude of these law firms is summed up in the statement made by Alex Yanos from the law firm Alston & Bird, who pronounced (webinar minute 1:01:36) that “some states will end up losing cases to investors, notwithstanding the way that it might come across as unfair.”
COVID-19: the straw that will break the camel’s back of the investment protection regime?
Whichever way it is viewed, the treaties protecting foreign investment could aggravate the crisis situation in the countries of Latin America and the Caribbean. At the very least, they are yet another worry and a source of additional pressure, which is the last thing governments need at this time.
The main negative consequence is that international arbitration disputes will deprive countries of the resources they need to combat the virus and the socio-economic crisis accompanying it. At a time when all efforts should be focused on dealing with this unprecedented situation, Latin American governments are being forced to divert their attention and allocate scarce resources to address the threats of legal action as a result of the measures taken to tackle the COVID-19 crisis. They also have to put up with the indifference of arbitrators and judges to requests to suspend arbitration proceedings and orders to pay investors money that is needed to address immediate priorities.
In a recent bulletin, the law firm Garrigues pondered “the question that arises therefore is whether COVID-19 is a new break for investment arbitration due to the surge in claims that will arise from it or whether, conversely, it will be a final sweep of the sword by discouraging states from including this dispute resolution mechanism in their treaties.”
It will be difficult for governments to avoid the wave of claims that this new crisis will unleash. But they do have the power to prevent the same thing happening in the future. The way to do that is to add their voice to the more than 600 social organizations speaking out against the current investment protection treaties and halt all the negotiations now under way. The high costs that investment protection treaties entail can no longer be justified when there is no evidence that they bring any benefits.
Published by Transnational Institute
24 August 2020
Ilustration: Anastasya Eliseeva
Translation from Spanish: Sara Shields
The authors gratefully acknowledge the comments and feedback on the text by Luciana Ghiotto, Alberto Arroyo, Manuel Perez-Rocha and Ana Romero.
1 All the figures mentioned in this box are drawn from the report https://isds-americalatina.org/wp-content/uploads/2020/03/Informe-ISDS-en-AL-Febrero-2019.pdf
2 The World Bank has disbursed US$ 4 billion https://www.worldbank.org/en/news/factsheet/2020/04/02/world-bank-response-to-covid-19-coronavirus-latin-america-and-caribbean. The Inter-American Development Bank (IDB) has disbursed US$ 2 billion and the Corporación Andina de Fomento (CAF) has disbursed US$ 2.9 billion https://repositorio.cepal.org/bitstream/handle/11362/45731/1/S2000153_en.pdf (p. 43).
3 El Paso Energy Int. Co. (ICSID ARB/03/15); LG&E Energy Corp. (ICSID ARB/02/1); Enron (ICSID ARB/01/3); Suez/Aguas de Barcelona/Vivendi (ICSID ARB/03/19); Suez/Aguas de Barcelona/Interagua (ICSID ARB/03/17); Anglian Water Group (AWG) (UNCITRAL); Continental (ICSID ARB/03/09); CMS Gas (ICSID ARB/01/08); Impregilo (ICSID ARB/07/17); TOTAL S.A. (ICSID ARB/04/01); Sempra Energy (ICSID ARB/02/16)
4 The country received a grant of US$ 1 million from the Central American Bank for Economic Integration to buy 3,000 beds for Covid patients. https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19#G
5 The government authorized 1.2 billion quetzales (equivalent to more than US$ 151 million) to increase the budget of the Ministry of Public Health in response to the pandemic. The 36 million “owed” to TECO is equivalent to 24% of this allocation of 151 million. https://www.minfin.gob.gt/images/downloads/leyes_acuerdos/acuerdogub64_040520.pdf
6 Rabobank (NL) vs Mexico ARB/20/23; Espiritu Santo Holdings, LP (Canadian) vs Mexico ARB/20/13; Campos de Pesé, S.A. (Italian) vs Panama ARB/20/19; Salini Impregilo S.p.A.) (Italian) vs Panama ARB/20/10; SMM Cerro Verde Netherlands B.V. (Dutch) vs Peru ARB/20/14; Freeport-McMoRan Inc. (U.S.) vs Peru ARB/20/8; AFC Investment Solutions S.L. (Spanish) vs Colombia ARB/20/16; South32 SA Investments Limited (British) vs Colombia ARB/20/9; Neustar, Inc. (U.S.) vs Colombia ARB/20/7