The Market Mogul | 22 October 2017
Breaking down the security exception in the US-Argentina BIT
Like trade agreements, investment agreements sometimes contain some form of exception to certain obligations. States are concerned about retaining legal flexibility to deal with emergency situations and conflict without incurring liability. Therefore, they often negotiate security exceptions. One such exception is provided under Article XI of the 1991 U.S-Argentine Bilateral Investment Treaty (the BIT), which provides that:
“This Treaty shall not preclude the application by either Party of measures necessary for the maintenance of public order, the fulfilment of its obligations with respect to the maintenance or restoration of international peace or security, or the Protection of its own essential security interests.”
With the proliferation of investment claims against Argentina following the latter’s financial crisis at the beginning of the twenty-first century, this provision has been invoked in various disputes, such as one brought by CMS Gas Transmission Company and another by Continental Casualty Company. Noting the ad hoc nature of investment arbitration under the ICSID, it is not surprising that the two tribunals adopted different interpretations of the exception. We can compare and contrast the two decisions in sequence, and see which provide a better approach.
CMS Gas Transmission Company v Argentina
In the event the Tribunal found that it had violated its obligations under the BIT, Argentina pleaded that it was exempted under Article XI of the BIT because “there existed a state of necessity or state of emergency”. Further, it invoked the state of necessity under customary international law, particularly Article 25 of the International Law Commission Draft Articles on Responsibility of States for Internationally Wrongful Acts (Article 25). The latter provides the following in part: “Necessity may not be invoked by a State as a ground for precluding the wrongfulness of an act … unless the act: (a) is the only way for the State to safeguard an essential interest …” The Claimant objected to this defence and pleaded that Argentina had not met the strict requirements of Article 25.
The Tribunal commenced its analysis with the defence under Article 25. It noted that the first issue was whether essential interests of the state were involved, which went to the gravity of the financial crisis; and subsequently, whether it was a case of grave and imminent peril. It answered both of these questions in the affirmative. Second, the Tribunal evaluated whether the measures taken by the Argentine government were the only way to safeguard its security interests, in light of ILC’s commentary that a plea is excluded if there are alternatives to the state’s conduct, even if the latter are more costly and inconvenient. After evaluating the alternatives presented to it by economists, in addition to the role played by various Argentine administrations in contributing to the crisis, the Tribunal ruled that the Argentina had not satisfied the requirements of Article 25.
After that, the Tribunal considered the defence raised under Article XI of the BIT. It determined that while this provision did not explicitly include economic crises, customary international law and the purpose of the BIT did not exclude economic crises from the scope of Article XI. Further, after considering various decisions of the ICJ, the Tribunal concluded that this provision is not self-judging. Referring to its decisions in respect of Article 25, the Tribunal concluded that the defences raised by Argentina did not suffice.
Continental Casualty Company vs Argentina
As in the previous case, Argentina pleaded exception under both Article XI of the BIT and Article 25. The Tribunal, in this case, sequenced these defences, beginning with the treaty exception.
The Tribunal held that the economic crisis in Argentina fell within the scope of Article XI of the BIT in respect of public order and essential security interest. Further, after comparison of the wording of this provision vis-à-vis that in other security exceptions, the Tribunal concluded that the same is not self-judging. In assessing the necessity requirement, the Tribunal referred to GATT and WTO jurisprudence, which has interpreted the same under the general exceptions and identified the standard as for whether there exists a reasonably available alternative. The Tribunal assessed various measures complained about and measured them against alternatives presented, after which it held that Argentina met the requirement for necessity under Article XI of the BIT. This was not, in the Tribunal’s opinion, negated by Argentina’s responsibility for the policy decisions which contributed to the crisis. That said, the Tribunal did not proceed with an analysis under Article 25.
The defences pleaded by Argentina in both cases are different in content. Hence the application also differs. Under Article XI of the BIT, upon the fulfilment of the conditions therein, the substantive provisions of the BIT do not apply. In contrast, parties may only revert to Article 25 when a breach of the substantive provisions has been held. The Tribunal should, therefore, conduct its analysis in the following order: first, evaluate the obligations under the BIT and find a breach, then assess the exceptions provided under the BIT and find that they do not apply; after which it may evaluate the exception under Article 25. This is because Article 25 is applicable when a state is found to have wrongfully acted, a finding which is a result of the application of both the treaty obligation and the treaty exception.
The Tribunal in Continental Casualty Company v Argentina rightly contrasted the exception under Article XI of the BIT and that under Article 25 as being primary and secondary law respectively. Treaties are considered to be superior to custom, as they reflect the express agreements of states. It is therefore not only logical, but also expected under international law, that where treaty provisions govern the relations between states, the same should be considered before referring to secondary sources such as customary international law.
This order of analysis is further supported by the lex specialis rule, which requires that the more specific laws be analyzed before resorting to the more general provisions. In this case, Article XI of the BIT was specific to the relations agreed upon in the BIT, hence it should be evaluated before Article 25, which refers to general relations between states. The Tribunal in Continental Casualty Company v Argentina correctly pointed out that application of Article XI could render superfluous (as it did), a detailed examination of the defence under Article 25.
In light of the discussions above, we can conclude that the Tribunal in Continental Casualty Company v Argentina better assessed and applied Article XI of the BIT to the dispute. It clearly distinguished between the requirements of Art. XI and Article 25, and assessed them in an order that is both logical and consistent with rules of interpretation of international law.
The Tribunal in CMS Gas Transmission Company v Argentina, on the other hand, did not distinguish or explain the relationship between the two provisions. It treated them in equal footing and assessed the customary law defence before that provided by the treaty. This, in addition to its wanting analysis of the necessity requirement under Article XI of the BIT, undermines the quality of its award.
That said, the necessary analysis conducted in Continental Casualty Company v Argentina relies heavily on WTO jurisprudence on general exceptions. While this is beneficial since the latter is tested repeatedly, one should caution that the structure and requirements of exceptions under the BIT vis-à-vis Article XX of the GATT 1994 and Article XIV of the GATS are different. The WTO provisions contain a chapeau, which juridical bodies evaluate after the necessity analysis. Its purpose is to check for ‘misuse or abuse’ of the exceptions. The jurisprudence under Article 2.2 of the TBT Agreement has settled that even where there is no explicit discrimination, juridical bodies should assess measures for even-handedness in application in order to determine whether detrimental impact stems from a ‘legitimate regulatory distinction’. This test was developed to deal with the lack of a chapeau in the said provision. Tribunals interpreting Article XI of the U.S- Argentine BIT could, therefore, adopt this approach, and assess the even-handedness of application of the measures necessary to protect the objectives pleaded, and to ensure the exception is applied in good faith.