In search of necessity: congruence, proportionality, and the least-restrictive means in investor-state dispute settlement.

Author:Engan, Luke

TABLE OF CONTENTS I. INTRODUCTION II. BACKGROUND: NECESSITY ANALYSES IN INTERNATIONAL TRADE AND INVESTMENT LAW A. Necessity Defenses in CIL and BITs: The Investment Law Understanding B. Necessity Exceptions in the WTO Covered Agreements 1. The Korea--Beef Factors 2. Reasonably Available Alternative Measures III. CASE LAW AND LITERATURE ON NECESSITY DEFENSES AND EXCEPTIONS A. Observations on Trade and Investment Necessity Jurisprudence. B. An Adapted Framework Applicable to Necessity Defenses in Investment Cases 1. Analogizing Jurisdiction in WTO and ICSID Proceedings 2. Legal Propositions for Investment Arbitration from WTO Case Law IV. CONCLUSION I. INTRODUCTION

In two recent cases, arbitral awards for investors were annulled upon finding fault with the tribunal's necessity reasoning. (1) Such investment tribunals are issuing unpredictable awards after applying inconsistent standards, when faced with a question whether a state of necessity justifies deviation from otherwise applicable treaty obligations. In contrast, panels and the Appellate Body (AB) of the World Trade Organization (WTO) apply a consistent framework that is suitable given the core purposes of necessity provisions. The framework can be seen in panel and arbitral construction of necessity provisions in trade as well as investment treaties, coupled with arbitral consideration of the state of customary international law (CIL) with regard to necessity. Following the lead of the tribunal in Continental Casualty Co. v. Argentine Republic, (2) investor-state tribunals should consider the definition and analytical framework of necessity applied in trade law in order to advance the rapidly emerging body of international investment law while advancing the purposes of investment treaties as facilitators of cross-border investment flows.

Standards of necessity occur within the various general exceptions in the WTO covered agreements, among other places. (3) The general exceptions serve the purpose of allowing a WTO member to adopt a measure that it would otherwise be precluded from adopting by virtue of a discipline contained within the WTO treaty texts. These provisions with respect to goods are found in Article XX of the General Agreement on Tariffs and Trade (GATT), which contains a list of ten general exceptions that justify failures to conform to disciplines contained elsewhere within the covered agreements. (4)

The AB's cases give rise to a procedural definition of necessity as it appears in these provisions, allowing dispute panels to consider several factors in their judgments. (5) This coherent definition applies with relative uniformity across the various occurrences of the term "necessary" considered here, and despite the fact that the AB considers the context of each occurrence.

A review of the cases in trade and investment law construing necessity supports the conclusion that the two areas of law and adjudication have sufficient similarity for necessity to be defined in a common fashion. It also illustrates the existence of common objectives that are best met by panels applying the WTO definition. Investment tribunals should reformulate their approach to defining necessity in treaties and CIL, considering the AB's approach persuasive.


    Investment tribunals have applied the narrow CIL necessity defense, which may be invoked only in cases of grave and imminent peril, as well as the various necessity defenses in bilateral investment treaty (BIT) clauses permitting states to maintain public order. Tribunals have been inconsistent both as to whether and how to analyze both of these defenses in a given case. Within the WTO covered agreements, a party must satisfy a necessity test in order to exercise general exceptions for measures necessary for the preservation of human, animal, or plant life or health; protection of public morals; or compliance with laws and regulations. WTO case law on these necessity exceptions illustrates an analysis based on congruence, proportionality, and the least-restrictive means.

    1. Necessity Defenses in CIL and BITs: The Investment Law Understanding

      Under CIL as articulated by the International Law Commission (ILC), a state may invoke the necessity defense in limited circumstances after it breaches an international obligation. (6) Yet the defense may only be invoked if the breach (a) is the only way for the acting state to safeguard an essential interest against a grave and imminent peril, and (b) does not seriously impair an essential interest of a state toward which the obligation exists, or of the international community as a whole. (7) Even if these two elements are satisfied, the necessity defense is unavailable if the international obligation precludes the state from exercising it or if the state contributed to the situation of necessity. (8)

      This has been illustrated in a series of decisions issued by tribunals and Annulment Committees of the International Centre for Settlement of Investment Disputes (ICSID) involving measures taken by the Argentine Republic in response to its economic crisis. (9) These cases drew the rule of CIL from ILC Article 25, together with the decision of the International Court of Justice (ICJ) in Gabcikovo-Nagymaros Project. (10)

      In that case, the ICJ applied the criteria for preclusion of wrongfulness in Article 33 of the ILC's Draft Articles on the International Responsibility of States. (11) Under Article 33, a state may not invoke necessity unless the act taken "was the only means of safeguarding an essential interest of the State against a grave and imminent peril" and "did not seriously impair an essential interest of the State towards which the obligation existed." (12) Notwithstanding these two requirements, Article 33 precludes the invocation of necessity if a state either violates jus cogens, violates a treaty that excludes the possibility of invoking necessity, or contributes to the occurrence of the state of necessity. (13) The ICJ found an absence of "grave and imminent peril" in Hungary's concern that environmental damage may result from the flood control system on the Danube River that it had bound itself to operate through the Treaty on the Construction and Operation of the Gabcikovo-Nagymaros Barrage System of 1977. (14)

      In CMS, a case brought by a Michigan gas company against Argentina for its suspension of a dollar-based tariff adjustment formula, the tribunal applied both the preclusion of wrongfulness criteria from the Gabcikovo-Nagymaros Project case and the ILC Article 25 definition of necessity. (15) It found that the Argentine economic crisis did not give rise to a grave and imminent peril from which Argentina's emergency measures were the only means of safeguarding an essential interest. (16) The tribunal interpreted the phrase "only means" as turning on the existence of alternate means, regardless of their degree of effectiveness in safeguarding essential state interests and regardless of which means is least inconsistent with the state's international legal obligations. (17) Because Argentina could have subsidized its sectors affected by the crisis or dollarized its economy, the panel found that other means existed and limited its inquiry to this finding. (18) Moreover, the tribunal defended its holding by observing that the necessity defense is unavailable to states that contribute to the situation of necessity. (19)

      Taking an approach sharply inconsistent with that of CMS, the tribunal in LG&E Energy adopted the method of looking first to the necessity provision in the BIT between the United States and the Argentine Republic, (20) and only then looking to CIL as a second step. The U.S.-Argentine BIT states that the treaty does not preclude "measures necessary for the maintenance of public order, the fulfillment of [a party's] obligations with respect to the maintenance or restoration of international peace or security, or the Protection of its own essential security interests." (21)

      The LG&E Energy case arose after Argentina repealed the law pegging its currency to the U.S. dollar and compelled the gas distribution companies in which the claimant had invested to renegotiate their service contracts and receive Argentine pesos instead of U.S. dollars for any governmental debts. (22) The claimant alleged that this was a violation of the fair and equitable treatment provision in the BIT, among other claims. (23) The tribunal found that Argentina's economic crisis had given rise to a period of grave and imminent peril, that Argentina's measures were necessary under the BIT provision because they were the only means available to respond to the crisis, and that ILC Article 25 bolstered this analysis. (24) The tribunal found that Argentina's economic crisis "threatened" its "essential interests," that "[t]here is no serious evidence in the record that Argentina contributed to the crisis resulting in a state of necessity," and that "an economic recovery package was the only means to respond to the crisis." (25) Finally, the LG&E Energy tribunal held that "the damages suffered during the state of necessity should be borne by the investor." (26)

      While the language of the BIT provision and the GATT and General Agreement on Trade in Services (GATS) general exceptions differ considerably, what they have in common is that they present objective necessity standards. (27) In both CMS and LG&E Energy, the respective tribunals took the view that the necessity provision contained in Article XI of the treaty was not "self-judging"; that is, a state party to the treaty cannot invoke necessity based on its own legal opinion. (28)

      Beyond this similarity, however, CMS and LG&E Energy demonstrated uncertainty as to how future investor-state tribunals would analyze necessity defenses. The introductory note to LG&E Energy surmises that the award "will most likely become known as the 'dissent'"...

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