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 states sovereignty over its financial and economic policies. This becomes acutely manifest during times of economic crises when international treaty obligations become overly burdensome

Gazzini, Werner and Dekker 2011, pp. 3-4 Kurtz 2008, pp. 3-4 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 pesos 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.

Binder 2009 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 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 Gabkovo-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 States 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 Argentinas 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 LG&E Energy Corp., LG&E Capital Corp., LG&E International Inc. v Argentine Republic (ICSID Case

10

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 ILCs Draft Articles on State Responsibility) supports the Tribunals 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. Binder 2009

16

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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 states 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. Ibid. Kawashe 2009

18

19

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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 ILCs Articles on Responsibility of States for Internationally Wrongful Acts, British Institute of International and Comparative Law, 2007.