$16 billion judgment against Argentina reversed:  breach of contract or expropriation?

Private investors in an Argentinian oil company (YPF) sued in the Southern District of New York when Argentina nationalized part of the ownership in YPF.  Years of ensuing litigation under the Foreign Sovereign Immunities Act (FSIA) focused on whether the litigation was based on an expropriation (as the defendants argued) or a “commercial activity” (as the plaintiffs argued).  The Second Circuit eventually held for the plaintiffs in 2018, allowing the case to go forward under the commercial activity exception to the FSIA, resulting in a breach of contract judgment in Peterson v. Argentina for over $16 billion. The same panel of the Second Circuit has now reversed, reasoning that expropriation is the appropriate framework for the merits determination under substantive Argentine law.

Merits

YPF was privately owned from the early 1990s until 2012, when Argentina expropriated a majority of YPF’s common shares following economic decline and rising nationalism. Argentina did not conduct a tender offer to minority shareholders, even though YPS’s bylaws required it to do so.   Plaintiffs, who include a Spanish company owned by Argentinians and a New York hedge firm that acquired the interests of some shareholders, sued for breach of contract and promissory estoppel. The district court (Judge Loretta A. Preska) eventually granted summary judgment to the plaintiffs and then awarded them $16.1 billion after a bench trial on damages.

The bylaws themselves are not in dispute. They protect minority shareholders from takeover acquisitions by requiring the purchaser to make a public tender offer to all holders of outstanding shares, following specific procedures that include compliance with the rules of the New York Stock Exchange and the Securities and Exchange Commission. The bylaws also provided pricing formulas for the shares, which had to be tendered at an above-market price.

Also undisputed:  the bylaws apply to acquisitions by the government of Argentina, but they were not followed when Argentina expropriated the controlling ownership interest in YPF’s shares. Instead, Argentina passed legislation that pronounced a national public need for the shares and declared that 51% of the YPF shares were subject to expropriation, which then ensued.

Plaintiffs focus on the bylaws. Although the bylaws were not followed, the defendants argue that YPF was not contractually obligated to follow them and that under Argentine law, corporate bylaws do not give rise to bilateral obligations at all. The plaintiffs argued that bylaws were unique in the clarity with which they made promises and that the breach was “uniquely egregious.”

Defendants focus on Argentine law governing expropriation. That law ultimately “informed” the court of appeals’ interpretation of the bylaws. The expropriation laws provide a comprehensive procedure for plaintiffs whose property has been expropriated – but it does not permit third party lawsuits that “impede” the expropriation.  Plaintiffs noted that the expropriation occurred, so that their lawsuit is not an impediment to it. The court of appeals disagreed, reasoning that the litigation has “saddled the Republic with ten years of litigation and a damages award representing 45% of its annual national budget” so that it could not fall outside the plain meaning of “impede.” In end, even if the bylaws created reciprocal obligations, the expropriation laws would preclude this litigation, the appellate court reasoned. The court hedged a bit, however, proclaiming also that it need not “decide whether the [expropriation law] displaces the private contract law of the Civil Code,” but that “the subject and substance of the [expropriation law] certainly suggest that these claims implicate Argentine public law.”

Judge Cabranes dissented, noting the incredibly extensive factfinding and legal analysis performed by the district court judge over the past decade, which he would not have disturbed despite the de novo standard of review for determinations of foreign law.

Immunity

The same basic question – contract or expropriation – was also dispositive of the question of foreign sovereign immunity. The plaintiffs cannot satisfy the expropriation exception, but they can satisfy the commercial activity exception: so, which one is the appropriate framing?  The Second Circuit held back in 2018 that the commercial activity exception applied, meaning no immunity. But if what happened was really an expropriation, shouldn’t Argentina be immune from suit unless the expropriation exception is satisfied?

Not necessarily. The FSIA governs immunity. The merits of the case are governed by Argentine law and nothing requires the FSIA to follow Argentine law. Yet the incongruity is disquieting. Argentina unsuccessfully argued that it was immune from suit because the plaintiffs’ claims were based on the “the sovereign act of expropriation, rather than any commercial activity” and that (as described by the Second Circuit’s opinion) the lawsuit constituted an “an impermissible effort to ‘enforce the bylaws.’” That is pretty much what the Second Circuit decided on the merits eight years later. In the immunity opinion, the court reasoned that an award of damages based on the bylaws was just like any other contract case. That reasoning is in tension with the 2026 merits opinion’s reasoning that the lawsuit must have “impeded” the expropriation.

To be sure, it is entirely consistent to decide that the case should go forward under the commercial activity exception to the FSIA and then to decide on the merits that the plaintiffs have not adequately proven a breach of the contractual obligation upon which the suit was purportedly based.  So, it would be fine to conclude that the bylaws did not give the plaintiffs a contractual remedy on these facts, so that they lose on the merits although the defendants were not entitled to immunity. But the Second Circuit very explicitly relies on the expropriation laws to support its evaluation of the contract claim, as described above. It even opines that “[p]laintiffs could have sought compensation by bringing a claim against the Republic under the [expropriation] procedures.”

Conclusion

Argentina was probably right when it argued that the plaintiffs’ claims were based on a sovereign act, not on commercial activity, and that it was accordingly entitled to immunity. Commentators have made strong arguments to that effect, noting in part that the commercial activity exception to immunity has been increasingly interpreted broadly to allow “contractual claims that are intimately connected with, but factually distinguishable from, sovereign conduct by foreign states.” The recent victory before the Second Circuit spares Argentina from a massive judgment, but not from ten years of extremely complex and expensive litigation.