This week, Spanish energy firm Repsol put Argentina on notice of an arbitration claim under the Spain-Argentina bilateral investment treaty. The development comes as no surprise, as Repsol had been threatening for some weeks to take such a course if Argentina persisted in nationalizing the bulk of Repsol’s 57% stake in the Argentine firm YPF.

But am I the only person who was wondering whether Spain might step forward to sue Argentina on behalf of Repsol?

To be sure, a state-to-state claim would swim against the tide of conventional wisdom. After all, modern Bilateral Investment Treaties contain investor-to-state arbitration clauses precisely so that investors can fight their own legal battles.

However, in recent years, at least one European government has exercised diplomatic protection on behalf of its nationals by invoking the state-to-state arbitration provisions of a bilateral investment treaty. The recently-documented decision by Italy to sue Cuba on behalf of 16 putative investors has illustrated the potential utility of the oft-neglected state-to-state arbitration mechanism found in many BITs.

Several aspects of the Repsol-Argentina controversy make it an intriguing candidate for state-to-state arbitration.

Spain is likely to be dragged in at some stage anyway

In the days after the announcement of Argentina’s nationalization plans, Spain was swift to announce that it would take retaliatory action against Argentine imports. Even if Spain stays its hand for now – and lets the European Commission handle any trade retaliation – the Spanish government is likely to be dragged into the Repsol-Argentina dispute down the road.

Unless Argentina alters it present strategy of not paying final arbitral awards voluntarily, any foreign investor that pursues investor-state arbitration will inevitably turn back to its home state for political and legal muscle during the enforcement and collection phase. Just as the United States and France have been dragged into disputes after their respective investors have failed to collect on final arbitral awards against Argentina, Spain would likely be asked by Repsol to help play the role of collections agent.

If it is inevitable that Spain will get dragged into the dispute during the enforcement end-game, then authorities might have fewer illusions about the supposed “depoliticization” offered by investor-state arbitration. If Spain can look forward to wrestling with Argentina over the enforcement of an arbitral award, perhaps Spanish government lawyers might like to have a hand in the running of the case that gives rise to that award.

A more active Spanish role does not have a huge diplomatic downside

Greater involvement by Spain in the arbitration with Argentina would not necessarily come at the expense of diplomatic relations between the two countries. Increasingly frayed diplomatic relations between Spain and Argentina in recent years mean that Spain is unlikely to play an effective role as facilitator or honest-broker vis a vis Spanish investors and Argentina.

Spanish Foreign Minister José Manuel García-Margallo admitted as much in a recent interview with The Wall Street Journal, where he conceded that Spain had expended considerable diplomatic energy – ultimately in vain – to heading off the nationalization of Repsol.

A source familiar with the resolution of earlier ICSID disputes between Spanish companies and Argentina tells me that the warmer relations between Spain and Argentina in previous years were instrumental in getting several investment disputes – like those involving Gas Natural and Telefonica – resolved without needing to arbitrate them fully.

With Spain bereft of any hope of playing such a facilitative role this time around – and less encumbered by the need to safeguard its good political relations – perhaps the Spanish authorities would have fewer qualms about stepping forward and playing a more central role in any arbitration with Argentina.

Nothing to lose, but what is to be gained?

While Spain might have less to lose, what would be gained by bringing a state-to-state claim?

Perhaps most obvious is that Spain – at a time when it is itself facing arbitral claims from disgruntled foreign investors – might have an interest in playing a more hands-on role in the arbitral processes through which concrete meaning is given to the terms of Spanish investment treaties.

Equally, if Spain were to climb into the driver’s seat, the European Union might be keen to do some “backseat driving”. As is well known, the E.U. has taken over the competence to negotiate investment agreements on behalf of E.U. member-states with non-E.U. member-states, and the Brussels-based European Commission would certainly expect to work closely with Spain on any claim against Argentina.

Given the E.C.’s extensive experience in active claims-management on behalf of E.U. trading interests in the World Trade Organization, I suspect that Brussels might not find a claim by Spain to be so unusual or off-putting. Indeed, managing such a case might provide a further opportunity for Brussels to place its own stamp on the development and evolution of investment law. For some time now, Brussels has been reduced to the role of a peeping tom, seeking to peer into closed investor-to-state proceedings, and to make its views heard (sometimes over the objections of the parties involved.)

The question of speed

Another factor which Spain might consider in deciding whether to bring an arbitration claim against Argentina could be the speed with which a state-to-state arbitration might play out. It remains to be seen whether a state-to-state proceeding could offer a faster alternative to the clearly glacial pace of many investor-to-state claims against Argentina.

In some cases, it seems that state-to-state arbitration would be markedly swifter.

Under the U.S.-Ecuador BIT, such claims must be resolved in a mere 6 months after the constitution of a tribunal. Such a timetable – if applicable in real life – would be a massive improvement on the time it takes to resolve investor-state claims.

Unfortunately for Spain, the Spain-Argentina BIT does not contain the type of extreme fast-track process prescribed in certain outlier treaties like the U.S.-Ecuador BIT. However, even without such a treaty-imposed deadline, it strikes me that state-to-state arbitration could be faster than investor-to-state proceedings in some instances.

To be fair, any head-start conferred on state-claimants by the Spain-Argentina treaty – which allows for claims to be filed a mere 6 months, rather than (an arguable*) 24 months after notification for investor-claimants – would be offset by the requirement for the exhaustion of domestic remedies that applies in diplomatic protection contexts. I’m not sure if the exhaustion requirement might be applied flexibly in this case, but there is certainly a possibility that domestic remedies could be protracted. If Repsol were obliged to spend years in the Argentine courts, then it might take Spain longer to get to the arbitral starting line than if Repsol proceeded in its own name.

It would remain to be seen whether the actual arbitration process would be faster or slower in a state-to-state context than in an investor-state one. However, until we see a few test-cases brought by states – and can measure their overall pace – I remain open-minded as to whether state-to-state claims could be arbitrated more swiftly than investor-state claims.

In the coming months, we’ll see if Spain decides to interpose itself into the legal phase of the Repsol controversy. Probably, it won’t.

However, the precedent set by the recent Italy-Cuba BIT arbitration – coupled with the recent tendency of home-states to get dragged into investor-state cases anyway during the enforcement end-game – should be enough to open the eyes of home-states to the long-overlooked prospect of bringing state-to-state arbitration claims under bilateral investment treaties.

(* Note that views will differ as to whether Repsol could, in light of recent arbitral developments, expect to use an MFN clause in order to steer around a treaty requirement of 18 months of local litigation prior to international arbitration.)


Luke Eric Peterson is Editor of Investment Arbitration Reporter, an online news and analysis service specializing in foreign investment law and policy. By invitation of Kluwer, he contributes occasional commentary to the Kluwer Arbitration Blog


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2 comments

  1. Dear Luke,

    Thank you for your comments. One underlying legal question which could (should) be further researched is the relationship between BIT clauses on investor – state dispute settlement and BIT clauses on State to State arbitration. Your comments, and the Italy-Cuba precedent, suggest that those legal avenues may be used alternatively in case an investor – State dispute arises. Yet, I wonder whether giving an alternative to investors was contemplated by drafters.

    For recollection, Article IX of the Spain – Argentina BIT states that “any dispute between the [contracting] parties related to the interpretation or implementation of [the BIT]” shall be resolved through diplomatic negotiation, to the possible extent (and submitted to treaty designed arbitration otherwise). Article X of the same treaty provides that “disputes that arise between a contracting party and an investor of the other party in relation to investments” shall be resolved amicably, to the possible extent (and submitted to judicial review or arbitration otherwise).

    Reading Articles IX and X together, one could argue that Article X was intended to apply to investor state dispute as lex specialis. Examining the Repsol case, we note that
    (i) at this stage, the dispute is in relation to an investment (and the underlying contract) specifically. General issues of interpretation or implementation of the BIT which would be distinct from the investment dispute have not arisen, as far as I know;
    (ii) the dispute arose not between Contracting parties, but between an investor and a contracting party. At this stage, and as far as I know, the prejudice lies with Repsol, not the Spanish government. The “effet utile” interpretation of the treaty (requiring that Article X be given its full legal force), and perhaps the “object of the treaty text” interpretation (depoliticizing investor state disputes related to investments) hint to a preference for the use of Article X in the case of investor state disputes. I wonder whether this preference could be framed as a presumption (i.e. Article X should be used except when impracticable) or an exclusion (i.e. if the dispute falls under the scope of article X, then Article IX cannot apply before a decision has been rendered by the authorities mentioned in Article X).
    – Another hint would be that Article X sets out that investor state disputes SHALL be settled amicably first, and then submitted to judicial review/arbitration if necessary. In this vein, resorting to Article IX, and calling for diplomatic protection to settle the dispute is, in itself, a breach of Article X.

    Overall, I think that clarification would be necessary to better understand the relationship between the two types of provisions.
    The contrary view that both avenues are available concurrently is of course arguable. For instance, there is no clause on the prohibition of resort to diplomatic protection during arbitral proceedings in the concerned BIT (this clause exists in other BITs).
    I would be very interested to receive any comment or additional information on this topic.

    Kind Regards to all,

    Alexis

  2. Dear Alexis,

    Thanks for the comments. I’m hopeful that others will feel free to weigh in. However, my initial reaction is that you are quite right to suggest that there is room for debate as to whether a BIT’s state-to-state clause was intended to permit diplomatic protection claims. Certainly, Italy’s use of the BIT in that fashion struck me by surprise, and it’s notable that Cuba raised jurisdictional objections on this very point. Ultimately, these were rejected by majority. The Cuban arbitrator’s dissenting views do not appear to have been recorded for posterity.

    In support of the Italian approach, it’s noteworthy that similarly-worded clauses (referring to disputes over interpretation or application of the treaty) have long been viewed as capable of giving rise to diplomatic protection claims. The ELSI case brought by the U.S. against Italy comes to mind.

    Sticking to the U.S. context, I recently spoke with a U.S. BIT negotiator from the 1980s who indicated that, in his view, the inclusion of an investor-state clause in U.S. BITS was *not* meant to preclude use of the state-to-state clause for diplomatic protection claims (although it was expected that the latter would be invoked less frequently once investors were given their own pathway to arbitration).

    Of course, all of these anecdotes about Italian or U.S. practice do not tell us much about the meaning of Article IX of the Spain-Argentina BIT. They may suffice, however, to embolden some governments to take a crack at the state-to-state arbitration option. And, as a long-time observer of investment arbitration, it’s nice to stumble upon occasional topics in this increasingly well-tilled field that have yet to be worked to death. So, I look forward to seeing more commentary and analysis on this issue.

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