A State of Necessity as an Economic Safeguard Clause under Investment Treaties: Limitations and implications as seen in the Argentine economic crisis

In the wake of its 2001 economic crisis, Argentina implemented a series of emergency measures. These measures - terminating the peso's peg to the U.S. dollar and freezing the gas tariff adjustment mechanism - seriously impaired the foreign investment, which had been lured to Argentina by the privatization of the gas industry, and other government measures promoting foreign investment in the 1990s. Injured foreign investors sought compensation through arbitration and filed claims for damages against the Republic of Argentina by referring to the relevant provisions under the bilateral investment treaties (BITs) between their respective home countries and Argentina.

In the series of arbitration cases, Argentina sought to justify the emergency steps it had taken in response to the economic crisis by invoking the doctrine of state of necessity under customary international law and the security interest clause under the relevant BIT. Arbitral tribunals were split in their decisions on such claims. Some tribunals dismissed them, while others accepted or suggested the possibility of accepting Argentina's defenses. The 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.

Such confusion among arbitration decisions is attributable to the fact that the quoted exception/exemption provisions are extremely generally termed, and that these provisions are, in principle, intended for situations constituting grave and imminent peril in political or military terms and do not necessarily apply in the case of economic difficulties. As evidenced by the series of Argentine cases, such shortcomings of the aforesaid general exception/exemption provisions as 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. Furthermore, the legitimacy of the arbitral tribunals interpreting and applying the exception/exemption provisions - or even the entire investment arbitration system - could be seriously undermined.

In order to solve these problems, future investment treaties should include an economic safeguard clause that is viable in light of the recognition that an investment treaty plays a crucial role in protecting investments, particularly in developing countries whose economic bases remain vulnerable. Such a clause has already been included in the draft text of the Multilateral Agreement on Investment (MAI) negotiated by the Organization for Economic Cooperation and Development, as well as in some progressive and recent BITs. However, it is necessary to create a more comprehensive institutional mechanism capable of efficiently responding to economic crises by taking into consideration the implications of the Argentine incidents, as well as trade remedies under international trade law.