Investor-State Attacks: Financial Stability

 

Saluka v. Czech Republic
Too-big-to-fail
Investor win (awarded $236 million)

 

Saluka Investments, a Netherlands investment company, filed an investor-state claim in 2001 under the Netherlands-Czech Republic BIT against the Czech government for not bailing out a private bank, in which the company had a stake, in the same way that the government bailed out banks in which the government had a major stake. The bailouts came in response to a widespread bank debt crisis. Investicni a Postovni Banka (IPB), the first large bank to be fully privatized in the Czech Republic, along with three large banks in which the government retained significant ownership, had been suffering from significant debt and borderline insolvency, threatening the Czech banking sector. Consequently, the government placed IPB into forced administration in 2000 and then sold the bank for one crown to another bank.

 

Saluka, a minority shareholder in IPB, claimed the Czech government violated the BIT’s “fair and equitable treatment” provisions because the government did not give IPB the same degree of assistance as it gave to the banks in which the government possessed a large stake. The government argued that rectifying IPB’s debt problems was the responsibility of private shareholders, while the problems of the large banks in which the government had a major shareholding interest were the government’s responsibility.

 

The investor-state tribunal decided that the Czech Republic had violated the BIT’s “fair and equitable” treatment obligation and acted discriminatorily by giving greater government aid to banks in which the government was a major stakeholder. The tribunal ordered the government to pay Saluka $236 million.

 

CMS Gas v. Argentina
Emergency stability measures
Investor win (awarded $133 million plus interest)

 

In July 2001, CMS Gas Transmission Company, a U.S. energy firm, filed a claim against Argentina under the U.S.-Argentina BIT for financial rebalancing policies enacted in response to a 2001 economic meltdown spurring social and political unrest. The case particularly targeted the government’s limitations on gas utility rate increases – an effort, as part of Argentina’s Economic Emergency Law, to stem runaway inflation.

 

While utility rates were frozen, the international value of the Argentine peso, which had been pegged to the dollar, dropped precipitously. CMS claimed large revenue losses, argued that the freezing of consumers’ rates violated the BIT’s expropriation and “fair and equitable treatment” obligations, and demanded taxpayer compensation. The Argentine government contended that the reforms were non-discriminatory and that domestic investors also had to face economic losses as a result of the emergency measures.

 

Argentina further argued that the measures were necessary, given that it faced a national emergency. The U.S.-Argentina BIT states, “This Treaty shall not preclude the application by either Party of measures necessary for the maintenance of public order, the fulfilment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.” But the tribunal decided that that the economic crisis in Argentina was not sufficiently severe for Argentina to be able to use this defense. It ruled that the government had denied CMS “fair and equitable treatment” and that Argentina’s taxpayers owed the company $133 million, plus interest. A year and a half later, a tribunal in another investor-state case came to a different conclusion, accepting Argentina’s “necessity defense” for the same economic crisis. In that case, also brought under the U.S.-Argentina BIT, three U.S. energy companies known collectively as LG&E challenged Argentina’s emergency measures, alleging the same BIT violations that CMS alleged. But in contrast to the tribunal in the CMS case, the LG&E tribunal concluded that Argentina’s actions were permissible under the BIT’s “necessity defense” because Argentina “faced an extremely serious threat to its existence, its political and economic survival, to the possibility of maintaining its essential services in operation, and to the preservation of its internal peace.”

 

In response to the tribunal’s contrasting decision in the CMS case, Argentina’s Minister of Justice Horacio Rosatti noted that it was obvious to every Argentine citizen that consumer rates for public utility services should not be decided by a foreign tribunal. CMS eventually sold the “financial claim” resulting from its investor-state award to a “vulture fund” subsidiary of Bank of America. The bank subsidiary, Blue Ridge Investment, purchased from CMS the rights to collect on the investor-state tribunal’s award and has since sought to enforce the award in U.S. courts.

 

Eureko v. Poland
Insurance privatization
Case settled (investor received $1.6 billion)

 

In 2003, Eureko, a Netherlands-based company, filed a claim against Poland under the Netherlands-Poland BIT for prohibiting it from taking a controlling stake in PZU, Poland’s first and largest insurance company. Facing significant public and political opposition to a previous administration’s decision to sell a controlling share of Poland’s public insurance firm to a foreign corporation, the Polish government reversed its privatization plans.

 

Eureko argued that the government’s actions amounted to a violation of its BIT-mandated obligation to provide “fair and equitable treatment.” While divided, the majority of the tribunal held in a 2005 decision that Poland indeed violated that obligation, in addition to the prohibition against uncompensated expropriation. The tribunal also decided that the government’s actions had violated a private contract with Eureko, and that this alleged contractual violation itself constituted a violation of the BIT. The tribunal determined that it was able to use the BIT to enforce the terms of a private contract through what is known as an ‘umbrella clause’ – a BIT provision that empowers foreign investors to elevate contractual disputes to BIT investor-state cases. The dissenting tribunal member noted that empowering a firm to transform a contractual dispute into a BIT case “created a potentially dangerous precedent.”

 

Poland also took issue with the appointment by Eureko of the arbitrator Judge Stephen Schwebel, who had a working relationship with a law firm that was launching other investor-state cases against Poland. After Poland’s attempt to challenge the appointment of Schwebel failed, the arbitration was expected to proceed to the damages phase, when a settlement was reached instead. Under the settlement, Eureko obtained a reported $1.6 billion for Poland’s decision to maintain domestic control of the country’s largest insurance firm.