Argentina’s Debt Crisis and the need for an International Investment Court

Connor Rubin
Vol. 40 Associate Editor

After the election of Carlos Menem as President of Argentina in 1989, the country began a period of rapid economic growth.” This can partially be credited to the government’s policies that increased foreign direct investment (FDI). These included signing Bilateral Investment Treaties (BITs) with nations like the United States, and pegging the value of the Argentine Peso to the U.S. Dollar.[1] These policies lowered inflation and encouraged FDI across a variety of economic sectors, including energy. Two American companies, CMS Gas Transmission Co. and LG&E Corp., were a part of that investment boon.[2]

However, as all good things must come to an end, the country entered a crippling economic crisis in 1998 that lasted until 2002.[3] In response to the near total economic collapse and widespread disorder, the government enacted sweeping economic policy changes.[4] These changes affected the same foreign investors who had benefited from the prior policies, some of whom – including LG&E and CMS – brought complaints against the Argentine Republic saying the breached their BIT obligations.[5] In both energy companies’ arbitrations, Argentina raised a defense based on “necessity” under Article XI of the US-Argentina BIT.[6] Under identical facts, one arbitration (CMS) found that the Argentine Government could not argue a necessity defense, while the other (LG&E) found such a defense acted as a total bar to liability.[7] Under the current system, neither decision was wrong. This is problematic.

These Argentine cases are by no means the sole examples of inconsistent application of foreign investor treaties.[8] The ability of the same set of facts to yield antithetical results is a clear sign that the current system of investor-state dispute (ISD) resolution needs revision. As BITs and other treaties encouraging investment like Free Trade Agreements (FTAs) have become more common[9], disputes over their terms as well as inconsistent arbitral decisions have also increased in number.

An international adjudication system can be considered legitimate when it is “(1) fair and unbiased, (2) interpreting and applying norms consistent with what states believe the law should be, and (3) transparent and imbued with democratic norms.”[10] An international investment court would serve these interests, while the current system fails in all three respects. The current system has bias built into it, the decisions are inconsistent and arbitrary, and there is relatively little transparency behind them. A permanent court would greatly alleviate those problems.

Under the current dispute resolution system, only investors can call for arbitrations. This means that arbiters are only selected if and when investors choose to pursue action. Investors will only pursue such action if arbiters are willing to find in their favor.[11] Because arbiters rely on repeat business, there is incentive to favor those that create the demand. This cyclical relationship has led to a global scheme in which “tribunals have interpreted the principles of foreign investment law or the provisions of BITs and FTAs in most cases as liberally or as broadly as possible in favour of foreign investors… [and have] expanded the scope and meaning of various principles of foreign investment law in as pro-investment a manner as possible.”[12]

These issues with the current system could be resolved or diminished by creating a permanent international investment court. In a court system, even if it remains the case that only investors can bring suits, the fact that judges would be permanent, neutral, employees of the court would drastically curtail the perverse incentives that arbitrators face as partisan adjudicators. Since states have an interest in protecting their own pecuniary interests as well as protecting their investors, nominated judges would most likely be un-biased, arbitrators have no such motivation.

A feature of arbitration generally is that individuals can act as both advocates and adjudicators. Attorneys are allowed to act as arbitrators in one case, and represent parties in another – often at the same time on the same issues.[13] This is especially problematic in those instances where national regulations and economic policy, not just the outcomes of two private actors, depends on the adjudicatory decision. Decisions with a magnitude as great as ISD arbitrations should be made by neutral judges, not hired adjudicatory guns. In a standing court, judges would preside over a docket solely as neutral decision makers. To further promote fairness, the proposed court could follow the lead of the International Court of Justice, where if a judge is from one of the countries in question, the other nation is allowed to appoint an ad-hoc judge to “balance” the bias.[14]

Creating an international investment court with jurisdiction over BITs would also decrease expected costs and constrain actors’ behavior more efficiently than ad-hoc arbitrations. In the current ad-hoc system, prior arbitration decisions and other treaties can serve an informative role in ISD arbitration decisions but there is no requirement for the arbitrators to pay attention to either.[15] The inconsistency of awards and application of international law in the current arbitration system points to the incompatibility between ad-hoc arbitrations and the second factor of legitimacy which calls for “interpreting and applying norms consistent with what states believe the law should be.”[16] This prong of the framework reflects a basic tenant and goal of contracting; limit the behavior of parties in the future, to make that behavior more predictable, and to therefore decrease expected costs for both parties.[17]

Inconsistent decisions across like-facts frustrates the purpose and efforts of signing these FDI-increasing treaties. Nations are encouraged, in the current system, to regulate in ways that other tribunals have found unacceptable because those decisions have no impact beyond individual cases. For the same reasons, investors are incentivized to bring action on issues that have failed in the past.

A primary motivator for arbitration between private parties is flexibility. However, unlike private arbitration, ISDs relate to public regulations. In this sphere, “flexibility” is more often arbitrary decisions. Systems like this, with “unprincipled and unpredictable decisions bring high costs.”[18] The costs for states take the form of monetary awards they have to pay, duplicated labor and lost time in re-crafting legislation to fit with the panel’s decision, and costs to the citizens of a country which fails to regulate out of fear. Investors bear theses costs in the form of bringing a new suit each time state(s) create the same violations, and in lost awards or profits based on arbitrary decisions that do not go their way. States and investors deserve to know the costs of regulating and investing. States also have a sovereignty interest in knowing the means in which their potential regulations would or would not violate international law. In a stable court system, the decisions would have stare decisis effects which would inform both parties (or potential parties) the rules of the game. This would allow both sets of parties to make more informed decisions and decrease long-term, systemic costs.

The proposed court system would also bring greater transparency to settling foreign investor disputes. Arbitration is a less public process than litigation; awards are often confidential and under some ISD regulations, must remain that way unless there is “consent of all the parties or where and to the extent disclosure is required of a party by legal duty.”[19] Even if an award is made public by required law, there is no court-record of the proceedings. An international court to handle such matters would create public, precedential decisions that nations could use in determining future regulatory actions. This would enable states and foreign investors to plan future business ventures within a consistent regulatory structure.

Bias in arbitrations, a lack of consistency, and a lack of transparency all show the need to reform our international ISD resolution system. An international investment court would substantially improve these problem areas and help investors and nations play on the same, level, field.

[1] Joint Econ. Comm. U.S. Cong., 108th Cong., Argentina’s Economic Crisis: Causes and Cures 5 (2003).

[2] Gebhard Bücheler, Proportionality in Investor-State Arbitration, 214 (2015).

[3] Joint Econ. Comm., Supra note 1, at i.

[4] Id. at 14 (These policies included converting all U.S. Dollar investment deposits into pesos and de-pegging the Peso from the U.S. Dollar); Michelle Wallin and Pamela Duckerman, Argentina’s President de la Rúa Resigns, Unable to Quell Deepening Finance Crisis, Wall Street Journal (Dec. 21, 2001),

[5] See Bücheler, supra note 2, at 211, 214; BITs are intended to standardize treatment between domestic and foreign investors in a country’s economy. See Office of The United States Trade Representative: Bilateral Investment Treaties, (last visited Oct. 29, 2018); If a dispute over the terms of a BIT arises between an investor and the state, non-precedential arbitration is often the only means of dispute resolution.

[6] CMS Gas Transmission Co. v. Argentine Republic, ARB/01/18 ICSID Rep. ¶ 355; LG&E v. Argentine Republic, ARB/02/01 ICSID Rep. ¶ 229-40.

[7] Id.

[8] David Howard, Creating Consistency Through a World Investment Court, 41 Fordham Int’l L. J. 1, 28-31 (2017).

[9] See United Nations Conference on Trade and Development, Bilateral Investment Treaties 1995-2006: Trends in Investment Rulemaking, p. xi, UNCTAD/ITE/IIA/2006/5, (Apr. 12, 2007).

[10] Nienke Grossman, Legitimacy and International Adjudicative Bodies, 41 Geo. Wash. Int’l L. Rev. 107, 115 (describing what makes an international adjudicative body justified and therefore legitimate).

[11] Jeffrey L. Dunoff, et. al., International Law, Norms, Actors, Process, 707-08, (4th ed. 2015).

[12] Surya P. Subedi, International Investment Law: Reconciling Policy and Principle, [conclusion], 2008.

[13] Dunoff, supra n. 13, 707-08

[14] Statute of the International Court of Justice art. 31 ¶. 2

[15] Patrick M. Norton, The Role of Precedent in the Development of International Investment Law, 33 ICSID Review 280 (2018).

[16] Grossman, supra n. 11.

[17] See Contract, Black’s Law Dictionary (10th ed. 2014).

[18] Jens Dammann & Henry Hansmann, Globalizing Commercial Litigation, 94 Cornell L. Rev. 1, 35 (2008).

[19] United Nations Commission on International Trade Law, Arbitration Rules, art. 34(5) (2010).

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