MILE 12 Assessment

STATE RESPONSIBILITY

DR. FREYA BAETENS

STUDENT ID: 12012

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Q 3.    A State may justify an internationally wrongful act through reliance on necessity as expressed in

Article 25 ARSIWA and in several BITs. However, arbitral panels have been reluctant to accept this

defence. Why have certain arbitral panels come to a different conclusion regarding similar facts? Which

approach do you agree with most? Is the threshold which needs to be satisfied in order to successfully

invoke necessity too high?

‘Exceptions’ are an integral part of many international agreements. They act as

safeguards against extraordinary or unpredictable situations whereupon a state may

adopt measures, not necessarily in conjunction with international obligations,

required to protect fundamental interests.1 Exceptions clauses can be found both in

treaties and Customary International Law, prominently, the General Article of Trade

and Tariff (GATT) 1947 Article XXI, General Agreement on Trade in Services (GATS)

Article XIV bis, Article 25 of Responsibility of States for Internationally Wrongful Acts

(ARSIWA) and many Bilateral Investment Treaties (BITs).2 Upon invocation of the

‘state of necessity’ signatory states are entitled to pass measures that are

“necessary” for that particular states’ “maintenance of public order” or the “Protection

of its own essential security interests”.3 This paper argues that while such safeguards

exist, legal opinion has been divided as to when a state may invoke the ‘necessity’

exception, particularly during economic and financial crises. Taking the case of the

Argentine emergency measures adopted during the economic crisis of 2001 and the

ensuing arbitration cases, the author is of the opinion that economic emergencies

have been dealt in piecemeal basis under treaty as well as customary international

law.

In international economic law, particularly investment law, there is an underlying

tension between legitimate expectations of investors and the state’s sovereignty over

its financial and economic policies. This becomes acutely manifest during times of

economic crises when international treaty obligations become overly burdensome

1 Gazzini, Werner and Dekker 2011, pp. 3-4

2 Kurtz 2008, pp. 3-4

3 Treaty Between the United States of America and the Argentine Republic Concerning the Reciprocal

Encouragement and Protection of Investment, signed at Washington D.C., Nov. 14, 1991, entered into

force Oct 20, 1994 [hereinafter U.S.-Argentina BIT], at Art. XI.

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and sometimes impossible as was evident during the Argentine economic crisis.4

During the crisis, Argentina implemented broad based emergency measures

including restructuring of the public utility system, eliminating the peso’s peg to the

U.S. dollar and termination of the gas tariff peg to inflation-adjusted dollars. These

measures seriously impaired foreign investments, particularly gas companies from

the U.S., which were drawn to Argentina after privatisation of the sector and other

government measures undertaken to promote foreign investments during the 1990s.

Many of the foreign companies sought compensation through arbitration by claiming

violation of the relevant BITs. Some 40 cases have been brought against Argentina,

of which five have been decided.5

In all the arbitration cases, particularly where claimants were U.S. based companies,

Argentina sought to justify the emergency measures by invoking the ‘necessity’

clause as ‘circumstances precluding wrongfulness’ under ARSIWA and the security

interest clause in Article XI under the U.S.-Argentina BIT.

Arbitral panels were divergent in their opinions and decisions of the cases. As

Kawashe noted, “[t]he tribunals were inconsistent with one another both in

interpretation of law and evaluation of the facts with respect to the relationship

between customary international law and BITs, the seriousness of the crisis, the

degree to which the Argentine government contributed to the crisis, and the

existence of a state of necessity to justify the emergency measures taken by

Argentina”.6 The two contrary and controversial decisions of the tribunals in the CMS

v Argentina and LG&E v Argentina exemplify these dichotomies, particularly, the

tribunals divergent approaches to the relationship between the BIT provision on

exceptions (Article XI) and the necessity clause in customary international law, here

the ARSIWA (Article 25).7 They were also the first two awards in the series of arbitral

cases, the decision in LG&E having distinguished itself from the CMS and the

subsequent Enron, awards.

4 Binder 2009

5 Four ICSID cases: CMS v Argentina, LG&E v Argentina, Enron v Argentina, and Sempra v Argentina

and one UNCITRAL case: BG v Argentina

6 Kawashe 2009

7 Binder 2009

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The CMS tribunal award looked at the conditions for invoking necessity under

customary international law, having disregarded the exception clause in the BIT.8 The

Tribunal stated that although the necessity clause was partially met, having recalled

the reference of International Court of Justice in Gabčíkovo-Nagymaros Project

where the court held that all of the conditions for the state of necessity had to be

present ‘cumulatively’ before the wrongfulness of a conduct in breach of the State’s

international obligation would be precluded, the Tribunal concluded the state of

necessity was not made out.9 On the other hand, LG&E Tribunal reached a different

conclusion by stating that Argentina’s invocation of the state of necessity under

Article XI of the BIT, satisfies the requirements under customary international law.10

While all the Tribunals agreed on the facts that Argentina had violated its obligations

under the fair and equitable treatment standard and the umbrella clause contained in

the applicable BIT, the conclusions reached by the CMS and LG&E Tribunals put

beyond a shadow of doubt that economic crisis as a state of necessity is largely open

for interpretation. In as much, the Enron Tribunal also disregarded that the

emergency provision contained in Article XI of the BIT constituted a lex specialis in

relation to customary international law.11

The CMS along with the Enron and Sempra tribunal followed a similar ‘interpretation

or conflation approach’, where they considered the exception clause in Article XI to

be imprecise regarding relevant economic emergencies and had to be read with

customary international law.12 In effect, the tribunals proceeded to judge the cases on

the basis of Article 25 of ARSIWA. The CMS Tribunal proceeded by stating that the

ground for necessity is exceptional and can only be invoked in rare circumstances so

as to avoid abuse. It then proceeded to examine whether there was a ‘grave and

imminent peril’; whether the measure was the ‘only way’ to avoid the crisis; and

8 CMS Gas Transmission Company v Argentine Republic (ICSID Case No. ARB/01/8), Award of 12

May 2005.

9 Olleson 2007

10 LG&E Energy Corp., LG&E Capital Corp., LG&E International Inc. v Argentine Republic (ICSID

Case No. ARB/02/1), Decision on Liability of 3 October 2006.

11 Enron Corporation and Ponderosa Assets L.P. v Argentine Republic (ICSID Case No. ARB/01/3),

Award of 22 May 2007, para. 334

12 Binder 2009

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whether, the state is responsible for creating the circumstances.13 The Tribunal

discussed the issue of whether the Argentine economic crisis could be considered

under the scope of Article XI of the BIT without having conclusively decided whether

Argentina could invoke Article XI in situations of economic emergencies. However,

the tribunal was conclusive in deciding that the conditions for the state of necessity

had to be present ‘cumulatively’ and in so far was right in its award. This approach, in

my humble opinion, was more rigorous and upheld the principles of international

economic law.

The LG&E tribunal, in contrast to the CMS tribunal, used the ‘Legitimisation

approach’ and held that Argentina was ‘excused […] from liability for any breaches of

the Treaty’ in the period between 1 December 2001 and 26 April 2003 under the

‘emergency’ clause contained in Article XI of the BIT (also at issue in CMS), due to

the existence of ‘a period of crisis during which it was necessary to enact measures

to maintain public order and protect its essential security interests’.14 The LG&E

tribunal further examined that its conclusion made on the basis of Article XI of the BIT

found support in the state of necessity under customary international law, stating ‘the

Tribunal recognizes that satisfaction of the state of necessity standard as it exists in

international law (reflected in Article 25 of the ILC’s Draft Articles on State

Responsibility) supports the Tribunal’s conclusion’.15

The threshold for successfully invoking the necessity is particularly high and

restrictive in customary international law as stated in Article 25 of ARSIWA. Several

conditions have to be fulfilled ‘cumulatively’ for the preclusion of breach. Further, the

necessity defence may not be relied upon if a treaty excludes the possibility of

invoking necessity and if the State contributed to the necessity. Even after its

invocation, international practice and a large number of doctrines and precedents

argue in favour of compensation to the aggrieved party. The necessity principle in

Article 25 is more narrowly construed and rigorous so as to avoid its corruption.16

13 CMS Gas Transmission Company v Argentine Republic (ICSID Case No. ARB/01/8), Award of 12

May 2005, para.317-329.

14 LG&E Energy Corp., LG&E Capital Corp., LG&E International Inc. v Argentine Republic (ICSID

Case No. ARB/02/1), Decision on Liability of 3 October 2006.

15 Ibid.

16 Binder 2009

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Article XI of the U.S.-Argentina BIT, in contrast, has a broader requirement stipulating

that the measures taken should be ‘necessary’ for the state’s ‘security interest’.17

Article XI can be invoked even if the State is not threatened by a ‘grave and imminent

peril’. Further it defines the grounds of invocation of a state of necessity more clearly

than in customary international law. At the conceptual level, the treaty based

exceptions forms part of the ‘primary rules’, in contrast to the necessity defence

under ARSIWA that are considered ‘secondary rule’.18

Coming back to the contentious decisions in each case, it could be attributable to the

fact that the quoted exception/exemption provisions in both customary internatioanl

law and the treaty exceptions are extremely generally termed, and that these

provisions are, in principle, intended for situations constituting emergencies in

political or military terms and not necessarily formulated for cases of economic

emergencies. This raises two concerns; first,  such shortcomings in the exceptions

without an economic safeguard clause could, “discourage host countries from making

significant commitments in investment treaties and, contrary to the intended purpose

of such treaties, undermine the predictability of the investment environment”; second,

“the legitimacy of the arbitral tribunals interpreting and applying the

exception/exemption provisions - or even the entire investment arbitration system -

could be seriously undermined”.19 Thus, there is an imminent need to create a

comprehensive institutional mechanism capable of dealing with cases during

economic emergencies as was evident in the Argentine incidents.

17 Ibid.

18 Ibid.

19 Kawashe 2009

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List of References

Binder, C., ‘Changed Circumstances in Investment Law: Interfaces between the Law

of Treaties and the Law of State Responsibility with a Special Focus on the Argentine

Crisis’, in: Binder, C., Kriebaum, U., Reinisch, A., Wittich, S., International Investment

Law for the 21st Century: Essays in Honour of Christoph Schreuer, OUP, 2009.

Gazzini, T., Werner, W.G., and Dekker, I.F., ‘Necessity Across International Law: An

Introduction’, in I. F. Dekker and E. Hey (eds.), Netherlands Yearbook of International

Law Volume 41, 2010.

Kawashe, T., ‘A State of Necessity as an Economic Safeguard Clause under

Investment Treaties: Limitations and implications as seen in the Argentine economic

crisis’, RIETI Discussion Paper Series 09-J-003, 2009.

Kurtz, J., ‘Adjudging the Exceptional at International Law: Security, Public Order and

Financial Crisis’, Jean Monnet Working Paper 06/08, 2008.

Olleson, S., ‘The Impact of the ILC’s Articles on Responsibility of States for

Internationally Wrongful Acts’, British Institute of International and Comparative Law,

2007.