The casualty of investor protection in times of economic crisis.

• Author: Claussen, Kathleen
• Position: Arbitration decision in Continental Casualty Co. v. Argentina

On September 5, 2008, an international arbitral tribunal dismissed all but one of the claims brought by the Continental Casualty Company, a U.S. investor, against the government of Argentina. (1) The Chicago-based financial services provider sought to recover a loss of more than $45 million it claimed to have suffered as a result of Argentina's drastic regulatory measures taken during the state's 200l financial crisis. (2) Continental asserted that its investment in Argentina was protected under the terms of the U.S.-Argentina bilateral investment treaty (BIT). (3) It argued that Argentina breached the treaty by failing to meet its obligations to provide U.S. investors with fair and equitable treatment and pay them compensation in light of its acts of expropriation. (4)

Argentina argued in its defense, and the tribunal agreed, that the state's severe economic catastrophe justified its execution of the sweeping Emergency Law, which, among other changes, abolished the dollar-peso convertibility and froze investor bank deposits. (5) The tribunal found no breach of the treaty on Continental's major claims, citing language that the treaty "[does] not preclude" the United States or Argentina from applying measures "necessary for the maintenance of public order ... or the protection of its own essential security interests." (6) Rather than applying principles from international investment law, the tribunal applied principles of international trade law in interpreting the treaty to reach its conclusion.

This Comment argues that Continental Casualty Co. v. Argentine Republic perverts the question of what constitutes a valid "state of necessity" defense in investment law by applying interpretations from trade law--as embodied in dispute resolution panel decisions by the World Trade Organization (WTO)--to dismiss Continental's claim. The Comment explains that the tribunal's decision is unfounded for three reasons. First, its reasoning departs from prescribed treaty interpretation methodology set out in the Vienna Convention on the Law of Treaties (VCLT)--the codified authority on treaty interpretation in international law. Second, while the language of the U.S.-Argentina BIT may be similar to language in trade texts, investment law and trade law have evolved separately from one another since that language was first used. Therefore, neither body of law is germane in interpreting the other. Third, the two bodies of law cannot be compared because they are distinct practice areas, each with its own purposes. Textual parallels they may share are not appropriate tools for interpretation. This Comment concludes by explaining how the Continental Casualty tribunal's reasoning opens the door to watered-down protection for investors abroad and could raise questions as to what rights foreign investors in the United States have in light of the United States's recent economic restructuring. (7)

1. ARGENTINA'S CRISIS AND SUBSEQUENT DEFENSE

   Argentina's booming economic times and favorable regulatory climate in the mid-1990s led many foreign entrepreneurs to invest there, including Continental Casualty, which chose to invest in low-risk assets in Argentina through its acquisition of an Argentinean subsidiary in 1997. (8) These golden years were short-lived, however. Starting in 1999, the government adopted a series of fiscal and regulatory measures to counteract increasing external macroeconomic pressures and internal social instability. (9) The government rapidly instituted policies that abolished the one-to-one exchange rate of the peso to the dollar and devalued the peso. (10)

   When the value of its assets plummeted as a result, Continental initiated arbitration proceedings against Argentina at the International Centre for Settlement of Investment Disputes (ICSID), (11) as provided by the terms of the U.S.-Argentina investment treaty. It alleged that the effect of the measures taken by the state was equivalent to expropriation, depriving the company of two-thirds of its expected revenue. (12)

   In response, Argentina argued that the measures it instituted were essential for the survival of the state. (13) It couched its argument in language found in Article XI of the BIT: "This Treaty shall not preclude the application by either Party of measures necessary for the maintenance of public order ... or the protection of its own essential security interests...." (14) According to Argentina, "The [economic] crisis became an emergency situation when it turned into an institutional, social and economic collapse of unprecedented seriousness and depth." (15) On this basis, Argentina argued, the Emergency Law and accompanying regulatory measures were necessary to establish public order and security and, therefore, comprised a defense against wrongdoing under the treaty.

   Before Continental Casualty, ICSID tribunals had decided four cases brought by U.S. investors on the basis of alleged breaches of the U.S.-Argentina BIT. (16) Argentina advanced the same defense in each case, arguing that it had not violated the terms of the BIT on a plain reading of the text of Article XI. (17) None of these four tribunals found Argentina's "state of necessity" defense to be sufficient to wholly defeat the investors' claims. (18) By contrast, the Continental Casualty tribunal found that Argentina's defense outweighed the company's expropriation claims. In discussing whether the state's measures were "necessary," (19) the tribunal relied almost exclusively on international trade law, supplemented only by scholarly work in economics. (20) The absence of investment law analysis is alarming because it sets a dangerous precedent in the context of an already disparate body of law.

2. APPLES AND ORANGES: MISUSE OF THE LAW

   The invocation of a "necessity" defense to justify a state's protective action in light of national security considerations is a concept familiar in both international trade law and international investment law. The General Agreement on Tariffs and Trade (GATT), which serves as the constitutive legal text for dispute...