The Siemens v. Argentina case reaffirmed investor protections under BITs, ruling Argentina’s termination of Siemens’ contract as unlawful expropriation. The ICSID tribunal awarded Siemens over $217 million, reinforcing fair treatment and state obligations in investment disputes.
The decision reinforced investor protections under BITs and highlighted state obligations regarding contract stability. The ruling underscored the importance of fair and equitable treatment, non-arbitrary measures, and the consequences of unlawful expropriation. It serves as a cautionary precedent for host states regarding the consequences of breaching BIT obligations in investor-state disputes.
Citation: Siemens A.G. v. The Argentine Republic, ICSID Case No. ARB/02/8
Date of Award: 17th January, 2007
Institution: International Centre for Settlement of Investment Disputes, ICSID
Panel: Dr. Andrés Rigo Sureda (President), Judge Charles N. Brower, Professor Domingo Bello Janeiro (Arbitrators)
Facts
- This case set an important precedent in investment arbitration, particularly concerning the assessment of unlawful expropriation. The Tribunal’s decision highlighted the broad protection available to foreign investors under BITs and the legal consequences of host state actions. The ruling clarified that investment treaties protect not only physical assets but also contractual rights. Furthermore, it reinforced that a single government action, such as a decree terminating a contract, could constitute an expropriation. The Tribunal’s preference for the book value method over discounted future profits demonstrated the importance of valuation methodologies in investment disputes. Additionally, the case underscored that compensation should be net of taxes, payable in USD, and accrue compound interest to ensure full reparation. These principles reaffirmed investor confidence in international arbitration mechanisms and served as a warning to host states about the costs of treaty breaches.
- The dispute in Siemens A.G. v. Argentina arose from a contract awarded by Argentina in 1996 for the provision of immigration control, personal identification, and electoral information technology services. Siemens A.G., a German multinational, won the tender through its Argentine subsidiary, Siemens IT Services S.A. (SITS). A contract was signed in 1998 for a six-year period, renewable for two three-year terms, and Siemens provided a USD 20 million performance bond to Argentina as a guarantee for performance.
- In 1999, prior to national elections, Argentina requested a temporary suspension of certain services. The newly elected government in 2000 further suspended services, initiated renegotiations, and later unilaterally altered contract terms. In May 2001, by way of Decree 669/01, Argentina officially terminated the contract without compensation. Siemens subsequently initiated arbitration under the Argentina-Germany Bilateral Investment Treaty (BIT), 1991 before the International Centre for Settlement of Investment Disputes (ICSID), claiming breach of treaty obligations, including expropriation, denial of fair and equitable treatment, failure to provide full protection and security, and arbitrary and discriminatory measures.
Decision
The Tribunal ruled in favor of Siemens, holding that Argentina unlawfully expropriated Siemens’ investment, failed to provide fair and equitable treatment, and took arbitrary measures. The Tribunal awarded Siemens USD 217,838,439, including the return of the performance bond and compensation for post-expropriation costs, with compounded interest at 2.66% per annum.
The Tribunal calculated compensation based on Siemens’ book value of investment rather than expected future profits. The final award included:
- USD 208,440,540 for expropriation (book value method used instead of Discounted Cash Flow method).
- USD 9,178,000 for post-expropriation costs.
- USD 219,899 for unpaid invoices.
- Return of the USD 20 million performance bond.
- Future indemnification for subcontractor claims.
- Interest at 2.66% per annum, compounded annually.
Key legal issues discussed
1. Was there an expropriation of Siemens’ investment?
Yes
The Tribunal found that the termination of the contract via Decree 669/01 amounted to an expropriatory act. While Siemens argued a ‘creeping expropriation,’ the Tribunal held that a single act (the decree) sufficed. The expropriation was deemed unlawful as Argentina neither provided justification nor compensated Siemens, violating Article 4 of the BIT.
2. Did Argentina violate the Fair and Equitable Treatment (FET) standard?
Yes
The Tribunal concluded that Argentina’s actions breached the FET obligation under Article 2(1) of the BIT. Key factors included the government's initiation of renegotiation without a public interest justification, lack of transparency, and failure to honor prior agreements with Siemens.
3. Did Argentina fail to provide full protection and legal security?
Yes
Under Article 4(1) of the BIT, Argentina was obligated to provide full protection and legal security. The Tribunal held that Argentina’s failure to uphold contractual commitments and ensure regulatory stability undermined Siemens’ legal security.
4. Were Argentina’s actions arbitrary?
Yes
The Tribunal found that Argentina’s suspensions and termination of services lacked justification. Notably, Argentina did not allow Siemens to correct a fingerprint error in identity documents, nor did it explain the indefinite suspension of an immigration control sub-system.
5. Did Argentina violate the umbrella clause?
Not decided
The Tribunal found that the contract was between Argentina and Siemens’ subsidiary (SITS), not Siemens itself. Since SITS was not a party to the arbitration, the Tribunal refrained from ruling on the umbrella clause.
6. Was Argentina’s expropriation unlawful?
Yes
The Tribunal deemed Argentina’s expropriation unlawful because:
- There was no public purpose justifying the termination.
- No compensation was provided.
- The government’s conduct indicated bad faith.
Under customary international law, as reflected in the Factory at Chorzów case[1], compensation for an unlawful expropriation must restore the investor to the financial position they would have had absent the expropriation.
7. Was Siemens entitled to compensation for loss of profits?
No
The Tribunal denied Siemens' claim for loss of profits because the project was still in its early stages. It found Siemens' revenue estimates speculative and noted that delays and tax obligations could have reduced potential profits significantly.
8. Was Siemens entitled to compensation for post-expropriation costs and unpaid invoices?
Yes
The Tribunal awarded Siemens compensation for post-expropriation costs incurred in maintaining a skeleton operation and for unpaid invoices related to services already rendered.
9. Did the Tribunal require Argentina to indemnify Siemens for subcontractor claims?
Yes
Since subcontractors could still claim damages from Siemens, the Tribunal required Argentina to indemnify Siemens for any past or future claims by these subcontractors.
10. Was Argentina required to return Siemens’ performance bond?
Yes
The Tribunal ruled that Siemens had met its contractual obligations and that Argentina had terminated the contract for reasons unrelated to Siemens’ performance. Hence, the $20 million performance bond had to be returned.
11. Did the Tribunal allow for taxation on the awarded compensation?
No
The Tribunal held that Siemens must receive compensation net of any taxes and costs, ensuring full reparations for the unlawful expropriation.
[1] Factory at Chorzow (Germ. v. Pol.), 1927 P.C.I.J. (ser. A) No. 9 (July 26).
