## Facts

- U.S. investor entities held shareholding interests in three Argentine natural gas distribution licensees created under Argentina’s 1990s privatization framework.
- The investment framework included U.S.-dollar-denominated tariffs, tariff adjustments indexed to the U.S. Producer Price Index, and stability commitments reflected in the licenses and regulatory regime.
- During Argentina’s 2001–2002 economic crisis, Argentina enacted emergency legislation that converted dollar-based arrangements into pesos and eliminated indexation and related mechanisms affecting tariff setting.
- The investors alleged that these measures fundamentally altered the regulatory environment and breached protections in the U.S.–Argentina bilateral investment treaty (BIT).
- In a prior jurisdictional decision, the tribunal affirmed jurisdiction; this decision addressed liability, with damages determined later.

## Issues

1. Whether Argentina’s emergency measures constituted an indirect expropriation in breach of the BIT.
2. Whether the measures breached the BIT’s fair and equitable treatment standard, umbrella clause, and protections against arbitrary or unreasonable measures.
3. Whether customary international law necessity (and any related treaty-based defense) precluded the wrongfulness of otherwise wrongful conduct.
4. Whether any necessity defense applied only for a limited period during the height of the crisis.

## Decision

- The tribunal held Argentina’s measures did not amount to indirect expropriation because the investors were not substantially deprived of the investment, including ownership and control.
- The tribunal found Argentina breached the BIT by failing to provide fair and equitable treatment and by adopting arbitrary or unreasonable measures, and it also found a breach of the umbrella clause based on non-observance of commitments linked to the license framework.
- The tribunal accepted a state of necessity under customary international law for a limited period, precluding wrongfulness of certain breaches during the acute phase of the crisis.
- The tribunal held necessity was temporary and did not terminate Argentina’s treaty obligations; once the acute crisis period ended, continued non-compliance constituted internationally wrongful conduct.

## Legal Principles

- Indirect expropriation requires a sufficient degree of interference amounting to substantial deprivation; serious regulation does not constitute expropriation absent effective neutralization of the investment’s benefits or loss of control.
- Treaty interpretation in investor–state arbitration follows customary interpretive rules reflected in the Vienna Convention on the Law of Treaties.
- Fair and equitable treatment protects investors against abrupt, far-reaching departures from the basic stability assurances and expectations induced by the host state’s investment framework.
- An umbrella clause may internationalize specific commitments undertaken by the state in connection with an investment; breach may occur when the state fails to observe such commitments embedded in the investment’s legal framework.
- “Arbitrary” conduct in international law includes measures reflecting a willful disregard of due process or surprising juridical propriety; a violation need not meet an “egregious” threshold to be internationally wrongful.
- Under customary international law necessity (as reflected in Article 25 of the ILC Articles), wrongfulness may be precluded only temporarily and only while the necessity conditions persist; obligations revive once the necessity period ends.

## Conclusion

The tribunal rejected the indirect expropriation claim but held Argentina liable for violating fair and equitable treatment, the umbrella clause, and the prohibition on arbitrary or unreasonable measures, while recognizing a limited necessity period that temporarily precluded wrongfulness during the peak of the economic crisis.


LG&E Energy Corp. v. Argentine Republic, ICSID Case No. ARB/02/1 (Oct. 3, 2006)