Repsol may never get paid for YPF

Argentina's delaying tactics are legendary, and collecting from sovereign nations is near impossible

Argentine senators discuss the bill to expropriate YPF
Former Argentine Secretary of Energy, Daniel Montamat (L), talks to senators during the second day of senate hearings to discuss the bill to expropriate Spanish oil company Repsol's YPF subsidiary. Photograph: Getty Images

This is the second of two posts explaining the legal battlefield on which Repsol and Argentina are fighting. The first can be found here.

The expropriation by Argentina of the majority of the shares of YPF provoked an immediate response from representatives of Repsol, the Spanish company whose shares were being expropriated, promising resort to international arbitration if acceptable compensation was not paid. International arbitration is certainly an option for Repsol, and investment arbitration plays an important part in securing compensation for mistreated foreign investors. However, the practical realities of contemporary investment arbitration do not work entirely in Repsol’s favour, and the speed of investment arbitration in particular is likely to place significant pressure on Repsol to settle for less compensation than the full market value of its expropriated shares.

Repsol’s ability to take Argentina to arbitration arises from the bilateral investment treaty (BIT) between Spain and Argentina, in Article 10 of which both states agree to arbitrate with any investor from the other state that claims it has been treated in a way that violates the substantive promises included in the BIT. Although arbitration cannot take place without the consent of both parties, such statements in a BIT are now universally accepted as constituting a "standing offer" from the State to arbitrate with any qualifying investor. Consequently, if Repsol invokes the BIT’s arbitration clause, Argentina cannot refuse to arbitrate.

Nonetheless, although Argentina is bound by its offer to arbitrate, the requirement that it must have consented to arbitration means that any conditions on its consent that are included within the Spain-Argentina BIT operate as constraints on Repsol’s ability to commence arbitration.  That is, Repsol can force Argentina to arbitrate, but only on the terms on which Argentina originally offered to arbitrate.

The difficulty this creates for Repsol is that the Spain-Argentina BIT contains provisions that may considerably delay Repsol’s ability to commence arbitration. According to Article 10(1-2) of the BIT, for example, prior to commencing any arbitration Repsol must initially spend a period of at least six months negotiating with Argentina over its alleged violations of the BIT.

Even once this six-month negotiation period has concluded, however, Repsol will still not have a clear right to commence arbitration, as Article 10(2-3) also requires that any claim against Argentina must initially be brought in Argentina’s domestic courts, not in arbitration. Moreover, Repsol must pursue its claim in Argentine courts for at least eighteen months before commencing arbitration, unless the Argentine courts successfully resolve the matter at an earlier date.

As Repsol will have been advised, there are legal arguments through which it can attempt to avoid this 18 month "local courts" requirement, and they would allow Repsol to commence arbitration immediately. However, these arguments are controversial, and have been rejected by as many arbitration tribunals as have accepted them. Consequently, given the time required to constitute an arbitration tribunal, to hold hearings on the question of Repsol’s ability to avoid the "local courts" requirement, and then to receive the decision from the arbitrators, if Repsol chooses to commence an arbitration immediately it risks spending a year or more in arbitration only to be told by the tribunal that it must indeed spend 18 months in Argentine courts – delaying the start of the real arbitration yet further.

Consequently, while it is possible that Repsol will be able to commence arbitration against Argentina this year, it is just as likely that it will not be able to do so until 2014 or even later.

Whatever delays might arise in the course of commencing the arbitration, moreover, the practical reality of investment arbitration is that it is an indisputably slow process, with many arbitrations taking 4-5 years or longer before a decision is delivered. Repsol faces particular difficulties in this respect because, due to the number of investment arbitrations commenced against Argentina after its economic crisis of a decade ago, Argentina has developed a specialized investment arbitration team that is widely recognised as equal in skill to even the best international law firms. Repsol can expect, then, that any arbitration with Argentina will be hard-fought, and consequently time-consuming, risky and expensive.

Moreover, even if Repsol does prevail in the arbitration, and is awarded compensation by the tribunal, further delays will likely ensue before it actually receives any of the money it has won. Argentina has consistently refused to pay previous investment arbitration awards made against it, and although enforcement without Argentina’s consent is certainly possible, this would involve delays of its own.

Repsol have indicated that it is likely to file for arbitration at the International Centre for Settlement of Investment Disputes (ICSID), one of the two options provided in the Spain-Argentina BIT. However, while ICSID is unquestionably the leading investment arbitration forum, its procedural rules create a significant problem for any investor desiring rapid compensation, as the losing party in any ICSID arbitration is allowed to request "annulment" of the original decision. That is, the losing party may request that a second arbitration be held, to determine whether the first arbitration was conducted appropriately. The grounds on which annulment will be given are narrow, but Argentina has been consistent in its use of requests for annulment, and can be expected to request annulment of any award won by Repsol.

A request for annulment will, of course, further delay Repsol's receipt of any compensation for the expropriation of its shares in YPF. Annulment proceedings themselves usually take at least two years, and if the application for annulment is successful the arbitration will have to be held a second time. In addition, if Repsol is successful in the second arbitration, Argentina could also apply for annulment of this second award.

All of the above delays are, of course, merely potential, and Repsol may successfully avoid some or even all of them.  However, regardless of how quickly Repsol secures an award against Argentina, it will still be faced with the enormous difficulty of enforcing an arbitration award against a state that is unwilling to pay voluntarily – and Argentina has yet to pay any investor that has been successful against it in investment arbitration. Just how difficult this will be is well illustrated by the case of Franz Sedelmayer, a German citizen who received an arbitration award against the Russian Federation in 1998.  Sedelmayer was first able to secure partial enforcement of the award in 2006, and he is still pursuing enforcement of the remainder.

None of the above means, of course, that Repsol is wrong to present investment arbitration as an important option should Argentina not offer fair compensation for the expropriated shares of YPF.  However, the usefulness of arbitration as a means of securing compensation must be seen in the context of the delays that it will involve. If YPF was only a minor component of Repsol’s business, then potentially having to wait a decade or more for compensation might be a viable option. Since this is not the case, it should not be surprising if Repsol ultimately decides to accept a significant loss on its expropriated shares rather than pursue investment arbitration – which involves no guarantee of success, but an almost certainty of significant delays.