Free Essay

Renationalization of Ypf Under International Law

In: Business and Management

Submitted By ninavls
Words 8411
Pages 34

Nina van Limburg Stirum

Brouwersgracht 48-1,
1013GX Amsterdam
10127305 Bachelor essay supervisor: Jim Mathis

Introduction 3
Chapter 1: Expropriation and Nationalization in general 3
Chapter 2: Nationalization under international law 5
1: Public Purpose 6
2: Discrimination 7
3: Due Process 8
4: Compensation 9
Investment Treaties 9
Chapter 3: YPF; Yacimientos Petrolíferos Fiscales 13
Short history 13
April 2012 14
Chapter 4: Nationalization of YPF under international law 15
Access to the ICSID 17
Application of the law 18
Ad. 1: Public interest 18
Ad. 2: Discriminatory measures 19
Ad. 3:In accordance with the law (Due process) 20
Ad. 4: Adequate compensation 20
Conclusion 23
Bibliography 24


On the 16th April 2012 Argentine president Cristina Fernandez de Kirchner stated that her government was going to renationalize 51 per cent of the 58 per cent share of Yacimientos Petrolíferos Fiscales (YPF) owned by Repsol. YPF is the biggest Argentine oil company, since 1999 partly owned by the Spanish multinational Repsol.
After months of negotiations the Argentine government accused Repsol of not investing sufficiently in YPF to maintain or recover reserves. Due to Repsol’s alleged neglect towards YPF the country was no longer self-sufficient in fuel. As result Argentina had to import fuel, at a huge expenditure each year, approximately 9 billion US$.
On the 3rd of December 2012 Repsol filed a complaint against the Argentine government at the International Centre for the Settlement of Investment Disputes (ICSID). Argentina has many outstanding debts, even if Repsol would win the case with the ICSID it remains highly unlikely that the country will comply with the award.

In this essay I will try to answer the question whether the renationalization of YPF should be considered illegal or not. The essay will mainly focus on the interpretation of the Bilateral Investments Treaty (BIT) from 1992 between Argentina and Spain and the legality of the nationalization under this BIT and international law. First I will discuss expropriation and nationalization in general. Secondly I will try to explain which law is applicable to nationalizations. Thirdly I will give a short summary on the history of YPF and shall try to interpret the applicable rules and apply them to the dispute between Repsol and Argentina.
Chapter 1: Expropriation and Nationalization in general
The risk of state seizure of assets has always been of great concern to international investors. This uncertainty about the viability of foreign assets is one of the main aspects of the political and financial risk of international investment. Whenever a foreign investor acquires assets in another sovereign state its property remains subject to the jurisdiction of the host state. Investors must calculate the risk of expropriation or nationalization. Establishing this risk can be very difficult since investments are often long-term transactions. A state may seem politically stable, but this can suddenly and dramatically change.
Nationalization of industries is understood to be the transition of private industry to collective industry. The state takes over ownership of industries, formerly owned and operated by private individuals or corporations. Boards of directors appointed by the government run them and their policies are subject to decisions of parliament or any other governing power of the nationalizing nation i.e., Argentina formally the national congress. The concept of nationalization is a 20th century phenomenon. Its goal is often to increase social and economic equality and is usually, although not always, applied as a principle of communist, socialist, or nationalist political systems.

Nationalization of industries usually takes place because of political or ideological reasons. Nevertheless, another reason for a government to nationalize an industry can be that it does not want foreign ownership of the countries valuable national resources. Two prominent examples are the nationalization of the Suez Canal in 1956 by president Egyptian Nasser and the nationalization of all international oil companies in 1938 by the Mexican president Lazaro Cardenas.
Though most industries tend to be successful at the moment of take- over, some industries are nationalized to avert their own demise. This happened to many financial enterprises during the crisis of 2008. A clear example is the nationalization by the Dutch government of Fortis and ABN-Amro. As recent as 2013 SNS bank was in such need of recapitalization that nationalization turned out to be the only option.
Two different types of expropriation exist: direct expropriation and indirect expropriation. Direct expropriation means the actual taking of property or the control of property by the host state from the private sector.
Since socialist doctrine has lost much of its credibility over the past few decades, privatization became prevalent in government policy in the developed world. Privatization is the opposite of nationalization, implying that an industry owned by a nation’s government is transferred to private ownership and operators. Throughout the twentieth century, many foreign investments were expropriated in Latin America, the Soviet Union, The Middle East and Eastern Europe. This trend prompted a move towards the drafting of investment treaties in order to establish a system of agreements on international rules to protect the property rights of foreign investors and promote investment. A significant recent trend in governmental policy is the curbing of the autonomy of foreign investors through invasive legislation without interference in the actual legal ownership of the foreign holding. The investor will still be in possession of his assets but their returns will be reduced, as the state’s benefits increase. Excessively applied former can amount to a form of indirect expropriation. Indirect expropriation is now the most common type of intervention.
Chapter 2: Nationalization under international law

In principle nationalization is subject to international investment law. The main objective of international investment law is to provide international standards and protection, as well as to assure foreign investors of access to an independent international tribunal in case of a dispute between the host state and an investor. It is based on the basic principles of protection by international law. When a state does not comply with the rights guaranteed to foreign legal entities under international law, this will lead to state responsibility. An international minimum standard of treatment has been recognized as the leading criteria protecting international investors. The underlying standard here is that of fair and equitable treatment. The arbitral tribunal in the case of Saluka Investments BV vs. the Czech Republic explains this principle as one that provides a minimum guarantee to safeguard foreign investment. It provides minimum protection and no more than that. In order to violate that standard, states’ conduct must be of a relatively high degree of inappropriateness. The exact meaning of the minimum standard will be determined by the tribunal and “must depend on the facts in the particular case.” Said principles are widely accepted, but are subject to discussion when it comes to the meaning and scope of certain standards. They are expanded through various bilateral international treaties.

The concept that the right of a state to nationalize any property within that state’s jurisdiction is an attribute of the sovereignty of that state, finds widespread support. Resolutions of The General Assembly of the United Nations have recognized this right. The Charter on Economic Rights and Duties speaks of the right “to nationalize, expropriate or transfer foreign property”. Nationalization is therefore mostly considered legal under modern international law. The legality of nationalization however mostly depends on four factors: 1) it must serve a public purpose; 2) it should not be an act of discrimination; 3) the nationalization is in accordance with applicable laws and due process; and 4) it should be fully compensated. Obviously, all these conditions are subject to debate, especially so since they each contain vague terms and many scholars interpret them differently.
1: Public Purpose
According to Higgins the term “public purpose” should differentiate between seizure for purely private gain of the incumbent of power separated from those for reasons related to the economical benefit of the host country.
The UN Resolution 1803 on permanent sovereignty over natural resources requires that nationalizations have as its purpose “public utility, security and national interest”. The UN Charter on Economic Rights and Duties of States on the other hand does not mention this limitation. Nowadays a state’s judgement of public purpose is mostly accepted based on the principle that the state is the best judge in these matters.
Abovementioned limitation is kept alive in state practice. In the LIAMCO vs. Libya case the Tribunal declared that a state’s right to nationalize is sovereign and not limited by agreements and is subject to indemnification for the premature ending of concessions. However in the British Petroleum vs. Libya case, the relevance of public purpose was reaffirmed. More recently in the case of ADC vs. Hungary the tribunal introduced a new wording on the public purpose requirement. The tribunal stated that a treaty requirement for public interest needs a ‘genuine interest of the public’. The tribunal stated: “a treaty requirement for “public interest” requires some genuine interest of the public. If mere reference to “public interest” can magically put such interest into existence and therefore satisfy this requirement, then this requirement would be rendered meaningless since the Tribunal can imagine no situation where this requirement would not have been met.” The tribunal here rejected the view that states are free to determine themselves what is in the public interest. It demands a genuine public interest and furthermore requires the state to demonstrate said genuine public interest.
2: Discrimination
The limitation that nationalization cannot discriminate against investors and/or investments of other nations is supported by state practice and is a constant element in international law and treaties. The precise definition of this requirement is unclear. Discriminatory intervention singles out particular investors without a reasonable ground. In the LIAMCO vs. Libya case it was stated that nationalization with a purely discriminatory character is illegal and wrongful. Still the discrimination limitation will be applied as far as its logical possibilities go. When one foreign investor’s assets are expropriated and others not, this does not always imply discriminatory intervention. To decide whether an action is discriminatory one must consider two elements: 1) the state’s ratio motivating the act, 2) the possibility of adequate reasons for distinguishing between investors and/or investment. The tribunal in the Kuwait vs. American Independent Oil Company followed this reasoning. To ascertain if the nature of nationalization is discriminatory tribunals consider two aspects: 1) the basis of comparison and 2) the discriminatory intent. In the LG&E vs. Argentina case the ICSID decided that it is not necessary for a nationalization to have a discriminatory intent to be illegal though it is considered a relevant factor. A discriminatory government act must contain treatment favouring a national investor over foreign investors, both finding themselves in a similar situation.

‘The national treatment principle’ deals with discrimination based on nationality. This prevents governments from discriminating against foreign investors and/or investments. To establish whether an act is discriminatory we have to verify whether the domestic investor and the foreign investor find themselves in a similar situation or not. In the Methanex case the tribunal made the distinction between ‘like products’ and ‘like circumstances’. It is not required that “investments be identical, merely that the two investors or investments be in ‘like circumstances’.” Moreover we have to establish whether the treatment of the foreign investor is less favourable than the one given to the domestic investor. The treatment towards the foreign investor does not necessarily have to be equal to the treatment of the domestic investor, but it cannot be less favourable. Then the final question arises, are there sufficient justifications for the measure?
The non-discrimination principle is not absolute, since the idea of reverse discrimination to favour historically disadvantaged groups is widely accepted in domestic law systems. In former colonies of western powers, where many foreign investors originate from the former colonising state, the non-discrimination principle will not hold.
3: Due Process
This requirement is often understood to be a condition that defines the obligation to provide a possibility to review the expropriation and the form of compensation before an independent body. Unlike the other three requirements, the due process requirement is more of a formal condition than a substantive one. There is little case law on this subject. In the Goetz vs. Burundi case the tribunal faced the question whether an expropriation, which complied with the legal requirements of the applicable investment treaty, was in accordance with the condition stated in the treaty that measures should be taken in a legal manner. The tribunal concluded that for an expropriation to be lawful “the measure must not only be supported by valid reasons, it must also have been taken in accordance with a lawful procedure.”
4: Compensation
Under international law there is a obligation to compensate in case of expropriation, but it does not specify the nature of compensation. It is often argued that compensation should be interpreted as “full” compensation. The Hull Formula defines full; “prompt, adequate and effective”. Though many investment treaties require full compensation, it is not universally accepted as a standard of compensation. The North Atlantic Free Trade Agreement (NAFTA) does not mention full compensation, but in practice compensations paid in the framework of NAFTA come close to this standard. But for ‘prompt, adequate and effective’, there does not exists a universal interpretation. In practice the exact level of compensation depends on the relevant treaty. Treaties often contain clauses that clarify the meaning of ‘appropriate compensation’. Often appropriate compensation is based on ‘market value’ of the investment before the moment the public knew of the intended nationalization. Accrued interest on the sum owed by the government from the date of the act of nationalization and the date of payments can then be awarded as part of the compensation. The tribunal gave a more specific meaning to the term ‘market value’ in the Starret Housing Corp vs. Iran case. According to the tribunal market value means “ the price that a willing buyer would pay to a willing seller in circumstances in which each had good information, each desired to maximize its financial gain and neither was under duress or threat, the willing buyer being a reasonable person.” A second problem that occurs when dealing with compensation is the valuation method the tribunal should apply to set the price on the market value. There are four different methods under international customary law: 1) Book value, 2) replacement value, 3) liquidation value and 4) going-concern value. Depending on the circumstances of each specific case, the tribunal decides on which method to follow.
Investment Treaties
Investment treaties came into force during the late 20th century. By that date many nationalizations had taken place and states were looking for a way to protect their investors and investments from nationalization and expropriation by host governments. States however disagreed on the law applicable.
In conflicts that arise out of international investment agreements, two questions arise. Firstly, what law is applicable to the issues? Secondly, how should these applicable rules be interpreted?
International investment treaty disputes can be brought before three different fora: 1) international arbitration pursuant to the dispute resolution mechanisms in the investment treaties; 2) domestic courts if integrated in the relevant domestic law system; 3) a contractually agreed forum in the case of an investor-state contract.
The terms of international investment treaties allow for two types of dispute resolution mechanisms.
• The first consists of international arbitration for inter-state disputes. These disputes are mostly between sovereign contracting parties about the interpretation and application of the international investment treaties.
• The second mechanism consists of international arbitration for investor-state disputes. These are disputes between a protected investor of a contracting state and another contracting state.
The second mechanism is the more common. Since states are subject to international law, inter-state disputes under international investment treaties concern an international agreement and are governed by international law. This principle is established in Article 2(1)(a) of the Vienna convention on the Law of Treaties. When the dispute relates to a specific investment in the case of an investor-state dispute, domestic law may be applicable. To establish applicable law in these scenarios we have to consider three questions. First we have to establish what law is applicable to determine the extent of the rights and obligations that the investor can enforce. Secondly, we have to ascertain what law is applicable to determine the scope of the arbitration agreement. And last, but not least we have to agree on the law applicable to the procedure and therefore regulates the arbitration process.

The bilateral investment treaty (BIT) is a much-used instrument to define the rights of parties. Though they are diverse, their basic characteristics are more or less the same. Most treaties tend to cover five areas: 1) definition of investor and related investment; 2) admission of foreign investors; 3) fair and equitable treatment of investors; 4) compensation in the event of expropriation; and 5) methods of settling disputes. A BIT is meant to protect investors from non-commercial risks. Especially so since indirect expropriations are now the most used methods of expropriation, a BIT is the solution to regulate these cases in detail. BIT’s limit the freedom of states and give an outline of the conditions for expropriation. It depends on the provisions of the relevant BIT whether there exists a requirement to exhaust local remedies before international arbitration is possible. However the convention of the ICSID does not require this, unless the state agrees.
Though limitations vary from treaty to treaty, all treaties do have two aspects in common. First, they all recognize the state’s right to nationalize. The justification for this lies in the state’s fundamental purpose to protect and preserve the public interest of its citizens. If nationalization helps to pursue this purpose, the state must be free to do so. Secondly, all treaties however place limitations and conditions on an individual state’s exercise of this right. As a first requirement to consider conditions and limitations placed on nationalizations, one must classify the scope of the relevant acts that are covered by the clause. Because BIT’s often do not define the term nationalization, we must reverse to general international law to establish their meaning. The Vienna Convention on the Law of Treaties provides a codification of the rules of interpretation under international law. If an act does not fall within the scope of the term ‘nationalization’, it will not be subject to limitations and conditions provided by the investment treaty. We must consider three elements that are of fundamental concern for the interpretation of nationalization clauses: 1) the nature of the nationalizing party, 2) the nature of the property nationalized and 3) the nature of the nationalizing act.
The nature of the nationalizing party depends on whether latter is a sovereign state or a non-governmental organisation. Treaties on nationalization address actions by contracting states and not by private organisations or non-contracting states. The nationalization must therefore be attributable to a contracting state.
It is difficult to determine which actions fall within the scope of nationalization when applying an investment treaty. Treaties define the term investment broadly to include both tangible and intangible assets. It depends on the definition of the term investment whether the treaty could protect both physical property as well as intangible property. In the Norwegian Shipowners case the U.S. government argued that contractual rights could not be considered property in international law. The arbitral tribunal disagreed and ruled that contractual rights can definitely be considered as property. In the Chorzow factory case, which concerned the effect of Polish measures against a German company, that had contractual rights to operate and manage the factory in question, the Permanent Court of International Justice ruled that these measures constituted an act of expropriation. These developments in international law show that both tangible and intangible assets are considered properties under modern international law.
Furthermore, to establish whether the nature of a specific nationalization is such that the treaty provides limitations and conditions for a particular case, one must define the scope of the word ‘measure’. Since most treaties do not define this term, it is not clear if a state’s failure or refusal to act counts as a measure.
Open phrases are used because they enable the treaty to be applied on many acts that could have an expropriating effect to foreign investment. This approach is based on the idea that general principles of international law will usually clarify the application of the treaty.

Three kinds of expropriation usually prohibited by treaties exist:
1. Direct nationalization or expropriation
2. Indirect nationalization or expropriation
3. Governmental acts that have equal effects to nationalization or expropriation
Treaties deal with these three possible types of expropriation in various ways. The first category ‘taking by the state’ takes place through a state’s actions seizing legal title and control of the investor over its investments. In the NAFTA case of Fireman’s Fund Insurance Company vs. United Mexican States, the tribunal summarized previous jurisprudence and identified ten key components that have to be present in the case of direct expropriation:
a) “ 1. Expropriation requires a taking by a government authority of an investment by an investor covered by NAFTA.
b) The covered investment may be intangible as well as tangible property.
c) The taking must be a substantially complete deprivation of the economic use and enjoyment of the rights to the property, or identifiable distinct parts thereof.
d) The taking must be permanent.
e) The taking usually involves a transfer of ownership to another person, but that is not necessarily so in certain cases.
f) The effects of the measures taken by the host state are negative, not the underlying intent, to determine whether there is expropriation.
g) The taking may be de jure or de facto.
h) The taking can be indirect or direct.
i) The taking may have the form of a single measure or a series related or unrelated measures over a period of time.
j) To distinguish between a compensable expropriation and a non- compensable regulation by a host State, the following factors (usually in combination) may be taken into account: whether the measure is within the recognized police powers of the host State; the (public) purpose and effect of the measure; whether the measure is discriminatory; the proportionality between the means employed and the aim sought to be realized;161 and the bona fide nature of the measure.”
Though these ten elements were specifically drafted for NAFTA, they are applicable to other treaties that do not specify the meaning of expropriation nor its essential elements.
Chapter 3: YPF; Yacimientos Petrolíferos Fiscales
Short history
Yacimientos Petroliferos Fiscales (YPF) is an Argentine oil company founded in 1922 under the administration of president Hipólito Yrigoyen. In 1993 Argentine president Carlos Menem initiated the privatization of some of the firm’s factories. The company was running a deficit and the privatization was supposed to make the company profitable again.
The Spanish multinational Repsol acquired 98 per cent of YPF shares in 1999. Throug the years, Repsol sold 40 per cent of the YPF shares to other investors. 58 per cent of the shareholding remained with Repsol. The union of the two companies operated under the name Repsol YPF.
YPF accounted for 50 per cent of the production and 40 per cent of the firm’s financial reserves. In May 2011, the Argentine Petersen Group became partner of Repsol and purchased a 15 per cent shareholding in YPF, followed by the purchase of another 10 per cent later that year. The majority of the YPF shares remained with Repsol.
April 2012
On April the 16th, 2012 Argentine president Cristina Fernandez de Kirchner announced that 51 per cent of YPF shares would be renationalized. Repsol had to account for aforementioned 51 per cent out of its participation. Prior to the renationalization, the Argentine government cancelled various concessions of YPF. In addition the Spanish foreign ministry reported incidents of threats and intimidation as Argentine officials expelled Spanish executives and occupied YPF’s headquarters in Buenos Aires.
Legal steps taken by Repsol On the 15th of May 2012, Repsol took the first steps towards legal action against Argentina through the ICSID. Repsol let the Argentine government know that a dispute existed under the Treaty for investment Promotion and Protection between Argentina and Spain. The two countries were given six months to come to an agreement, but since this did not transpire, the case is now under review at ICSID. Repsol, together with its subsidiary Texas Yale Capital Corp, also sued Argentina in the U.S. Court for the Southern District in New York for breach of contract on the grounds that Argentina failed to comply with Securities and Exchange Commission requirements to provide investors relevant information. The claimants stated in court that Argentina had promised the shareholders that it would not retake control of the company without offering the investors a compensated exit. This measure was meant to encourage the public to invest in YPF. Argentina was to be prohibited from taking control over YPF, unless it complied with a tender offer for all D class shares. D class shares being the equity floated to raise funds. Absence of a tender offer on Repsol’s shares would contractually deprive Argentina of all rights connected to her 51 per cent participation after the nationalization, such as dividend payments and a vote in the shareholders meeting. The Spanish government gained support from the European Commission, as they condemned Argentina’s unilateral action from the start.
Chapter 4: Nationalization of YPF under international law
Applicable law To establish whether the nationalization of YPF is lawful under international law, we start with the question what the applicable law rules are and secondly, how we should interpret these rules. In international law treaties are applicable if both countries are parties. First we have to establish whether there is a valid bilateral investment treaty between Spain and Argentina. The Agreement between the Argentine Republic and the Kingdom of Spain on the Reciprocal Promotion and Protection of Investments from 1992 indeed exists. Secondly we look at the applicable customary international law and multinational treaties. Since in this case there is a conflict that arose from a BIT, we have to establish what law is applicable to the application of the aforementioned BIT and on the interpretation of the said BIT. Furthermore, the following treaties may be applicable:
• United Nations Charter of Economic Rights and Duties of States (1974)
• International Covenant on Civil and Political Rights (1966)
• Vienna Convention on the Law of Treaties (1969)
• The General Agreement on Tariffs and Trade (1994)
• United Nations Convention on the Jurisdictional Immunities of States and Their Property (2004)
• The Convention on the Settlement of Investment Disputes between States and Nationals of Other States, (1965)
• Articles on the Responsibility of States for Internationally Wrongful Acts (2001)
Because there are no special rules, we must look at customary international law to interpret any uncertainties in a treaty. The rules on interpretation of treaties are codified in the Vienna Convention on the Law of Treaties. Article 31, 1 is relevant here. This article states: ”A treaty shall be interpreted in good faith and in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.” Article 31 also says that one should use the preamble to help find the meaning of ambiguities in the treaty. Article 32 states that if after the use of article 31 ambiguities still exist, one can also revert to supplementary means of interpretation such as the preamble of BITs.
Since Repsol claims to be a protected investor on grounds of the BIT between Spain and Argentina, we are dealing with an investor-state dispute. Since the BIT is a treaty between two member states, the Vienna Convention on the Law of Treaties is applicable and the BIT is consequently governed by international law. To establish what law is furthermore applicable, e.g. domestic law, we must examine the BIT itself. First we have to establish whether the BIT is applicable. We must therefore consider the following elements: the nature of the nationalizing party, the nature of the property nationalized and the nature of the nationalizing act.
For the BIT to be applicable, the nationalization must be an act performed by the state or state authorities. In the case of YPF we can assume that this is what happened because of the announcement made by President Fernandez. Also the occupation by Argentine officials of the YPF headquarters in Buenos Aires shows that the nationalization was initiated and performed by government authorities. Secondly we have to look at the nature of the nationalized property. In the BIT article 1(2) investments are described as “all kinds of assets, property and rights of every kind, acquired or effected in accordance with the legislation of the country receiving the investment.” The 51% YPF shares, which were nationalized emanated from the 58% shareholding, owned by Repsol, and must therefore be considered property as meant under article 1(2) of the BIT.
Thirdly we must look at the nature of the nationalizing act. In this case the act of renationalization was the government repossessing of Repsol’s shares in YPF. This can be interpreted as direct expropriation. An act of direct expropriation requires a ‘taking’ through a state action that usurps the legal title from the investor or takes the investor’s control of the investment. Since in this case the Argentine government deprives Repsol of its control over its shares in YPF, this counts as direct expropriation.
Based on the former three criteria the BIT is applicable on the YPF vs. Repsol case.
Access to the ICSID
A prominent question arising from access to the ICSID of Repsol under the BIT between Argentina and Spain lies in the following. Article X(1) states that a dispute between two parties should be settled through diplomatic channels within six months. Article X(2) states that if no settlement is forthcoming, the issue shall at the request of either party, be submitted to the competence of a tribunal in the territory of the party in which the investment was made. In addition article X(3) allows the possibility to submit a dispute to an international tribunal. Latter also becomes possible on the request of either party, either when no decision has been reached on the matter eighteen months after the judicial proceedings provided for by the tribunal of the host state (art. X(3)(a)) or when after such decision has been reached but the dispute persists (X(3)(b)) . Article X(4) state that parties can take their case to either the ICSID or an ad hoc tribunal, as stated in paragraph 3. As Repsol filed her claim in December 2012 and her case now resides with the ICSID, this seems somewhat irregular only several months after president Fernandez’s announcement.
Rapid access to the ICSID was possible because the BIT contains a ‘most favoured nations’ clause. ‘Most favoured nation treatment’ ensures that within the territory of the host state equal treatment of all investment parties and investments of all other states is guaranteed. If either of the states entered upon another BIT, which contains more favourable conditions for investors of the investing state, these more favourable conditions also apply to the conflict between the two parties of the original BIT. Article VII (1) states that: “if the matter of conflict is also governed by another treaty of which both parties are party and this other agreement has more favourable terms, these terms shall also apply on this matter.” Paragraph 2 of the article states that if one party has entered upon another agreement with a third state, which includes more favourable conditions for investors than the relevant BIT provides, these can also be applied.
The BIT between Argentina and Chile only requires a six month consultation term to come to an amicable settlement. Article 10(2) of this BIT states that if no amicable settlement transpires within these six months, parties can choose to either submit the dispute to ICSID or the national court of the territory where the investment was made. Since this is a more favourable term, it can be applied to the dispute in question.
Originally the most favoured nation treatment only applied to substantive matters or material aspects of the treatment. In the case of Emilio Augustin Maffezini vs. Kingdom of Spain, the ICSID decided that the most favourable nation treatment also applied to procedural rights from other agreements.
Application of the law
To establish whether the nationalization of YPF was legitimate, we must look at article V of the BIT. This article states “nationalization by the authorities of one party against investments made in its territory by investors of the other party shall be effected only in the public interest, in accordance with the law, and shall in no case be discriminatory. The party adopting such measures shall pay the investor or his assignee appropriate compensation without delay and in freely convertible currency.” These are the same requirements as exist under customary international law.
Ad. 1: Public interest
We have to establish whether the public interest requirement is fulfilled. Since ADC vs. the Republic of Hungary, this c requires that there is a genuine public interest that is reflected in the state’s acts. President Fernandez stated in her speech that Argentina was one of the few countries that does not have control over its own oil reserves. During the year prior to nationalization, Argentine fuel imports doubled. The nationalization will give the government control over the country’s oil reserves. One of the Argentine government’s most important arguments in favour of nationalization lies therefore in obtaining self-sufficiency in oil. This demonstrates Argentina’s genuine public interest in the nationalization and will most likely stand during the arbitration process.
Ad. 2: Discriminatory measures
To analyse if the act of the Argentine government was discriminatory we must examine the ratio behind the act and the possibility of adequate reasons for distinguishing between investors in similar situations. To determine whether the act was of a discriminatory nature we now focus on the basis of the comparison and the discriminatory intent.
In this case the 51 per cent shareholding over which control was taken back by the government, came from Repsol’s 58 per cent shareholding. The Peterson Group, an Argentine investor, also had a shareholding in YPF, but this was left untouched. Both were investors in YPF, the only difference being that one was foreign and the other local. The element of comparison is relevant here since both investors were in the same position. Therefore this can be considered a discriminatory basis of comparison, i.e. touching on the nationality of the investors. The nationalization can be considered to be favouring the Argentine investors and is detrimental to the Spanish investor as this measure is only enforced on the Spanish company Repsol and not on the Peterson Group, both finding themselves in similar circumstances.
Article IV (5) addresses the ‘national treatment standard’. It states, “Each party shall apply, in accordance with their national law, to the investments of the investors of the other party, a treatment no less favourable than that extended to its own investors.” In this case all investors were in a similar situation and the treatment given to the foreign investors was clearly less favourable than the treatment granted to the domestic investors. To establish whether there is a breach of article IV (5) of the BIT, we have to analyse whether the measures are justified. President Fernandez put forward the argument that Argentina is the only country that does not control its own oil supplies. This does not count as a justification since other measures, in agreement with Repsol could have been taken. Some specialists opined that Repsol neglected to invest enough in YPF during the last decade, and that therefore Argentina cannot be self-sufficient in energy. However this argument has not been brought forward in the case.
Based on the previous facts the nationalization should be considered discriminatory. There also appears to be a clear breach of article IV (5) and article V of the BIT.
Ad. 3:In accordance with the law (Due process)
Regarding the requirement ‘due process’, we must consider whether there exists a possibility to have the dispute reviewed by an independent tribunal . Since there is indeed such a possibility, this requirement is fulfilled. The Spain-Argentina BIT provides the opportunity to bring the dispute before the tribunal of the state where the investment was made (article X (2)), or before an international tribunal (article X (3) of the BIT). In the case in question the application of article 10(2) of the Argentina-Chile BIT results in the possibility to proceed to the ICSID after only six months instead of eighteen months. This applies here because of the most favoured nation clause in article VII (1) of the Argentina Spain BIT.
Ad. 4: Adequate compensation
Article V of the BIT only states that appropriate compensation must be paid in case of nationalization. This article does not provide further guidelines on how the term ‘appropriate’ should be interpreted. The tribunal will probably assume that appropriate compensation equals market value. Thus “the price that a willing buyer would pay to a willing seller in circumstances in which each had good information, each desiring to maximize its financial gain and neither being under duress or threat, the willing buyer being a reasonable person.” The tribunal shall use one of the previously described four valuation methods to determine the market value.
In addition company bylaws may also be relevant. Article X, section 28 of the bylaws of YPF state that in the case of renationalization Article III, section 7 (v) is applicable. This article gives rules on specifying valuations in the case of renationalization. The section provides four scenarios and possible ways of valuations: “A) The highest price per share or security paid by the Bidder, or on behalf thereof, in relation to any acquisition of class D shares of stock or securities convertible into class D shares of stock within the two-year period immediately preceding the notice of Takeover, adjusted as a consequence of any division of shares, stock dividend, subdivision or reclassification affecting or related to class D shares of stock; or B) The highest closing price, at the seller’s rate, during the thirty-day period immediately preceding such notice, of a class D share of stock as quoted by the Buenos Aires Stock Exchange, in each case as adjusted as a consequence of any division of shares, stock dividend, subdivision or reclassification affecting or related to class D shares of stock; or C) A price per share equal to the market price per class D share of stock determined as stated in paragraph (B) herein multiplied by the ratio between: (a) the highest price per share paid by the Bidder, or on his behalf, for any class D share of stock, in any share acquisition of this class within the two-year term immediately preceding the notice date indicated in paragraph (i), and (b) the market price for class D share of stock on the day immediately preceding the first day of the two-year period in which the Bidder acquired any type of interest or right in a class D share of stock. In each case the price shall be adjusted taking into account the subsequent division of shares, stock dividend, subdivision or reclassification affecting or related to class D; or D) The Corporation’s net income per class D share during the last four complete fiscal quarters immediately preceding the notice date indicated in paragraph (i), multiplied by the higher of the following ratios: the price/income ratio for that period for class D shares of stock (if any) or the highest price/income ratio for the Corporation during the two-year period immediately preceding the notice date indicated in paragraph (i). Such multiples shall be determined by applying the regular method used by the financial community for computing and reporting purposes.“
Option A and C are not applicable because the Argentine Government did not purchase any shares during the two years prior to nationalization. For the remaining options B and D as well as for the valuation methods, which can be used under the BIT, the date of the nationalization is of mayor importance to determine the market value since the valuation is based on the stock market value of the company shares on the date of nationalization.
With direct nationalization the date of nationalization would be on a clearly specified date, but in this case share prices had already been falling since January 2012, after the first rumours on nationalization started. The exact date of the expropriation is now an important question. To settle this matter, the tribunal could treat the nationalization as if it were indirect, resulting out of various government acts during the proceeding months. In the case of Compania de Dessarollo de Santa Elena, S.A. vs. Costa Rica the ICSID ruled that the date of valuation should be ”the date on which the governmental ‘interference’ has deprived the owner of his rights or has made those rights practically useless.”
The Argentine government started to repeal concession agreements up to April the 17th 2012. Because YPF was seriously losing production capacity during this period, the share price dropped heavily. Depending on the volume lost, the tribunal will opt for either 27th of January or the 17th of April 2012 as the decisive date.
In the matter of the determination of the compensation sum a mayor problem remains. The various abovementioned methods of compensation only apply in the case of a legal expropriation. If the nationalization of YPF by the Argentine government is deemed illegal by the tribunal, a different standard must be applied. Since the BIT between Spain and Argentina does not contain a clause that refers to the relevant procedure in the case of an illegal expropriation, we must take principles of customary international law in consideration. An alternative standard can be found in the Chorzow case. Here the tribunal decided that in the case of an illegal nationalization: “Restitution in kind, or, if this is not possible, payment of a sum corresponding to the value which a restitution in kind would bear; the award, if need be, of damages loss sustained which would not be covered by restitution in kind of payment in place of it.” If the tribunal decides that Argentina’s renationalization of YPF constitutes an illegal act, the use of the Chorzow-case standard to determinate the sum of the compensation is most likely. A restitution of Repsol’s YPF shares would no longer be a relevant option as these will have decreased considerably in value. In practice a price indication will not be feasible. Therefore the tribunal will decide on a sum that compensates the original value of Repsol’s participation.
The ICSID will probably have jurisdiction over the dispute between Repsol and Argentina, based on the most favoured nation clause in the BIT between Spain and Argentina. Because of the discriminatory nature of the nationalization and the subsequent breach of article IV (5), the tribunal will in my opinion most likely come to the conclusion that Argentina breached article V of the BIT and that consequently the renationalization is illegal. The illegality of the renationalization having been established, the tribunal will grant appropriate compensation according to the standard derived form the Chorzow case. The awarded sum will be far in excess of the compensation that would apply had the renationalization been legal and one of the valuation methods applicable. In all probability the tribunal will honour Repsol’s claim. It is however most unlikely that the Argentine government will comply with the relevant ruling. Defiance of international rulings is common practice in Argentina. In the recent past the Argentine government has refused to compensate holders of various types of sovereign paper and nationalized private enterprises. The regime even benefits internally from the refusal to submit to international jurisdiction, emphasizing the independent nature of the country. In the long term this will lead to further isolation of Argentina in the international community since it will no longer attract international investments.

J.W. Salacuse, The Law of Investment Treaties, New York: Oxford University Press Inc. 2010.
A. Reinsch, Standards of Investment Protection, New York: Oxford University Press Inc. 2008.
S. P. Subedi, International Investment Law. Reconciling Policy and Principle, Portland: Hart Publishing 2008.
M. Sornarajah, The Pursuit of Internationalized Property, Dordrecht: Martinus Nijhoff Publishers 1986.
S. Mont, State Liability in Investment Treaty Arbitration. Global Constitutional and Administrative Law in the BIT Generation, Portland: Hart Publishing 2009.
A. Newcombe & L. Paradell, Law and Practice of Investment Treaties, Alphen aan de Rijn: Kluwer Law International 2009.
R. Dolzer & C. Schreuer, Principles of International Investment Law. Second Edition, Oxford: Oxford University Press 2012.

B.A. Chernow & G. A. Vallasi, The Columbia Encyclopedia. 5th edition, New York: Columbia University Press 1993.
J. Large, “Nationalization, the big picture”,
Revista de Negocios Internacionales, 2012-5, p. 55-61. (, last visited on June 1st, 2013)
A. Gaudín, “Argentina Nationalizes Subsidiary of Spanish Oil Company Repsol”, NotiSur, Latin America Data Base, 2012, p.1-4. (, last visited on June 1, 2012)
A. Lifschitz, “Repsol files int'l complaint on Argentina YPF takeover”, Reuters, 2012.
(, last visited on 1st of June, 2012)
C. Rampell, “When Governments Take Over Industries in Trouble”, New York Times, Jan. 22, 2009. (, last visited Jun 1, 2013)
P. Fernandez, “Valoracion de una expropiacion: YPF y repsol en Argentina ( Valuation of an Exproperiated Company: the Case of YPF and repsol in Argentina)”, IESE Business School, University of Navarra, Jan. 30. 2013. (, last visited on June 1, 2013)
S. Llaudes & P. Kaczyński, “Duel between the EU and Argentina: Weapons in the EU Arsenal”, Centre for European Policy Studies, CEPS Commentaries, Sept. 13, 2012. p. 1-4. (, last visited 1 June, 2013)
I. Filip , “Oil Giant Repsol Sues Argentina”, Courthouse News Service, May 18, 2012. (, last vsited on 1 June, 2013)
S. Downey, “Repsol files YPF nationalization claim at ICSID”, Commercial Dispute Resolution, 5 December, 2012. (, last visited on 1 June, 2013)
N. Posthumus, “Woede in Spanje om nationalisatie Argentijnse oliemaatschappij”, NRC Handelsblad, April 17, 2012. (, Last visited 1 June, 2013)
S. Ripinsky & K Williams, “Case summary Libyan American Oil Company (LIAMCO) vs. The Libyan Arab Republic (in the course of research for “Damages in International Investment Law”)”, British Institute for International and Comparative Law, 2008.
(, last visited June 1, 2013)

M. Cassidy,”YPF and Argentina: The Return of National Sovereignty “The Argentina Dependent, 18 April 2012.
(, last visited on June 1, 2013)

R. Orihuela, “Argentina Seizes Oil Producer YPF, as Repsol gets ousted”, Bloomberg, April 17, 2012.
(, last visited June 1, 2013)

ICSID December 18, 2012, No. ARB/12/38 Repsol, S.A. and Repsol butano, S.A. vs. Argentine Republic (Repsl vs. Argentina)
ICSID July 17, 2006, No. ARB(AF)/02/1, Fireman’s Fund Insurance Company vs. United Mexican States (Fireman’s Insurance).
ICSID October 2, 2006, No. ARB/03/16, 2 Oct. 2006, ADC Affiliate Limited and ADC & ADMC Management Limited vs. Republic of Hungary (ADC vs Hungary).
ICSID October 3, 2006, No. ARB/02/1, LG&E Energy Corp., LG&E Capital Corp and LG&E International Inc.1
vs. Argentine Republic (LG vs. Argentina).
ICSID August 3, 2005, Methanex Corp. vs. United States (Methanex).
ICSID November 13, 2000, No. ARB/97/7, Emilio Augustin Maffezini vs. Kindom of Spain (Maffezini v. Spain).
ICSID October 2, 2006, No. ARB/03/16, ADC Affiliate Limited and ADC & ADMC Management Limited vs. Republic of Hungary (ADC vs. Hungary).
ICSID February 17, 2000, No. ARB/96/1, Compania del Dessarollo de Santa Elena, S.A. vs. Costa Rica (Dessarollo vs. Costa Rica).

ICSID February 10, 1999, No. ARB/95/3, Antoine Goetz and others vs. Republic of Burundi (Goetz vs. Burundi).
Ad Hoc Tribunal October 10, 1973, No. 53 I.L.R. 297, BP Exploration Co (Libya) Ltd vs. Government of the Libyan Arab Republic (BP vs Libya).
Ad Hoc Tribunal March 24, 1982, No. 21 ILM 976, Government of the State of Kuwait vs. American Independent Oil Company (Aminoil).

Ad Hoc Tribunal April 12, 1977, No. 62 I.L.R. 141, Libyan American Oil Company (LIAMCO) vs. Libyan Arab Republic (LIAMCO vs Libya).

Iran-US CTR 14 August, 1987, No. 24, Starrett Systems, Inc., Starrett Housing International, Inc. vs. The Government of the Islamic Republic of Iran, Bank Omran, Bank Mellat (Starrett Housing vs. Iran).

PCIJ September 13, 1928 , No. Ser. A., No. 17, Judgement No.13, Case Concernning the Factory at Chorzow, Germany vs. Poland (Chorzow)

Permanent Court of Arbitration October 13, 1922, Norwegian Shipowners Claims, Norway vs. U.S. (Norwegian Shipowners).

UNCITRAL May 17, 2006, Saluka Investments BV v. Czech Republic (Saluka vs. Czech Republic).

United Nations Charter on Economic Rights and Duties of States (1974)

Vienna Convention on the Law of Treaties (1969)

Agreement between the Argentine Republic and the Kingdom of Spain on the Reciprocal Promotion and Protection of Investments (1992)

Treaty between the Argentine Republic and the Republic of Chile on the reciprocal promotion and protection of investments (1991)

By-laws of YPF Sociedad Anonima (1993)
(available at /Paginas/Estatutos.aspx, last visited June 1, 2013)

Similar Documents