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Current international controversies

The legitimacy of the international investment dispute system is being seriously questioned in Latin America.  Proliferating claims, startlingly expansive readings of investor rights, and cases compelled against unwilling nation-states are all part of the problem.

Investor claims against Argentina
The Republic of Argentina has been sued more often under international investment agreements than any other country.  Most of these cases arose in response to emergency measures taken by the Argentine government--in particular, its 2001 devaluation of the currency.  As a result of this financial panic among investors, Argentina was forced to end the convertibility of its peso with the U.S. dollar and it defaulted on $82 billion in debt. 

Investors, particularly in public utilities and other privatized industries, argued that the currency devaluation and related measures destroyed a large part of the value of their assets in violation of international investment treaties.  In reply, Argentina has invoked a “necessity defense,” arguing that the measures were unavoidable in a financial crisis.

The response of investment tribunals to Argentina’s “necessity" defense has been mixed. Investment tribunals have already awarded more than $750 million to plaintiffs in these cases.  A large number of cases remain to be resolved.  Even worse from the perspective of system legitimacy, tribunals facing very similar 'fact patterns' in these cases have reached diametrically opposed conclusions.

MTD Equity v. Chile
In MTD Equity v. Chile, an international investment tribunal held that the Republic of Chile breached its obligation to provide fair and equitable treatment under international law to MTD, a Malaysian firm. MTD had received approval to build a gigantic property development project involving industrial, commercial, and residential uses.  MTD was basically proposing to create a brand-new satellite city in an area near Santiago that is part of Chile's agricultural breadbasket.  National and local authorities had different views on the project, but clearly the project as proposed violated regional land use and urban planning regulations.

The case, decided in favor of the Malaysian investor, is significant for three reasons:

  • It illustrates how easily plaintiffs in international investment disputes can target government land use regulations, particularly in those cases where national policies may be at odds with local zoning and land-protection rules.
  • It shows that international investment agreements provide greater rights to foreign investors than are generally available under domestic law to  challenge such regulations.
  • The MTD case included a 'creative' and expansive reading by the tribunal of the most favored nation (MFN) article of the Chile/Malaysia bilateral investment treaty (BIT).  The MFN provision in the Chile/Malaysian BIT obligated Chile to accord MTD Equity treatment “not less favorable than that accorded to investments made by investors made by any third state.”  The tribunal found that because Chile had signed BITs with Denmark and Croatia, which required the necessary permits to be issued once a foreign investment had been approved, the same treatment must be accorded to MTD Equity under the MFN clause of the Chile/Malaysian BIT. 
In other words, the tribunal reached outside of the Chile-Malaysian Bilateral Investment Treaty and used language from another BIT in order to rule against Chile.  This ruling provides a powerful incentive for foreign companies to 'treaty-shop,' looking for the BIT or free trade agreement that provides the most expansive reading of investor rights. 

Bolivia's withdrawal from ICSID
On May 2, 2007 the Republic of Bolivia sent a notification to the World Bank denouncing the International Centre for Settlement of Investment Disputes (ICSID),  In doing so, Bolivia withdrew the consent that would allow ICSID to arbitrate future disputes against the country.

Almost six months later, Telecom Italia (ETI), a telecom subsidiary in Bolivia, filed a request for arbitration at ICSID against Bolivia for allegedly expropriating its investment without just compensation. ETI argues that Bolivia’s offer to consent to ICSID arbitration was given through a Holland-Bolivia bilateral investment treaty, and the consent was still valid when ETI filed its claim.

Bolivia argues that it revoked its offer to ICSID arbitration by denouncing the ICSID Convention, and that ETI could not compel it to respond to arbitration against its sovereign wishes.  Authority over this case is still pending--but thus far, ICSID and authorities at the World Bank have sided with ETI, not with Bolivia.

ETI will likely argue that Bolivia is not only violating its treaty obligations in a bilateral investment treaty (BIT) between Bolivia and Holland, but is also undermining an important element of the international legal system – i.e. the system of investor-State arbitration.  In doing so, ETI will attempt to persuade the tribunal to consider not only the particular dispute before it, but also the larger implications of the jurisdictional issue for the system of investor-State arbitration.

On the other hand, Bolivia’s position is bolstered by the principle articulated by the Permanent Court of International Justice in the 1923 Eastern Carelia decision.  The PCIJ observed that as a basic attribute of sovereignty, “no State can, without its consent, be compelled to submit its disputes . . . to arbitration, or any other kind of . . . settlement.”

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