Problem with Interpretative Methodology Tidarat Sinlapapiromsuk in International Investment Arbitration:

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ปัญหาว่าด้วยวิธีการตีความหลักเหตุจ�าเป็น (Necessity Defense) ในกฎหมายการลงทุนระหว่างประเทศ: กรณีศึกษาประเทศอาร์เจนตินา ภายใต้ปัญหาวิกฤติทางเศรษฐกิจ Problem with Interpretative Methodology in International Investment Arbitration: A Case Study of Argentina’s Economic Necessity Defense.

Tidarat Sinlapapiromsuk

Abstract

In light of financial crisis between 2001-2002, the Argentine government enacted allegedly ‘necessary’ measures, known collectively as ‘capital control regimes’, which had a grave impact on foreign direct investment in Argentina, leading to a greatest number of investor–state claims brought against a single state in history. As a consequence, several ICSID tribunals were confronted with the question of how to interpret ‘the non-precluded measure (NPM) clause’ (i.e. the treaty-based defense of necessity) contained in the relevant Bilateral Investment Treaty (BIT), particularly under Article XI of the US-Argentina BIT. A more recent decision in Continental Casualty v. Argentina added even further confusion, interpreting such treaty-based exceptions in the light of the WTO jurisprudence relating to necessity defense, specifically under GATT Article XX. By analyzing various interpretative methodologies advanced by different investor-state tribunals, this research paper will ultimately propose that the tribunals should not resort to the WTO jurisprudence in the course of interpreting the NPM clause under the US-Argentina BIT without adequately justifying its interpretative methodology in adopting such jurisprudence. This is because such inadequacy will potentially render the tribunal’s interpretative methodology inconsistent with the principles of treaty interpretation under the Vienna Convention on the Law of Treaties (VCLT) and the doctrine of lex specialis, given, inter alia,

I would like to thank Professor Peter Day (Adjunct faculty at University of Washington School of Law) for useful comments and support.

the textual discrepancies between the GATT and the BIT provisions relating to necessity defense. This can deteriorate the judicial consistency, certainty, and predictability of the jurisprudential regimes in the area of international investment law even further. These rationales should override the desire to harmonize the two diverse regimes, namely the international trade law regime and international investment law regime, considered part of fragmentation of international law concerns. As such, the interpretative methodology of importing WTO jurisprudence into the interpretation of Art XI under the US-Argentina BIT advanced by the tribunal in Continental Casualty v Argentina should be treated with caution. This research paper consists of three main parts. The paper will begin in Part One by examining the divergent interpretative approaches advanced by different tribunals in light of some selected early cases of the Argentina disputes, concerning specifically the relationship between the treaty-based exception (Article XI of the US-Argentina BIT) and the customary law defense of necessity (Article 25 of the ILC Draft Articles on State Responsibility), where the critiques of the tribunals’ approaches will also be presented. Subsequently, in Part Two, the interpretative approach, as well as the justifications for such an approach, advanced by the tribunal in Continental, whereby the GATT/WTO jurisprudence was imported into the course of treaty interpretation, will be examined and discussed. In response to these methodological problems of treaty interpretation by different tribunals of the treaty-based defense of necessity set out in the previous parts, this paper will finally provide in Part Three the overall analysis and recommendations for these problematic methodologies, including some concluding remarks as a matter of law and policy.

INTRODUCTION

The most well-known examples of the necessity defense debate in international investment law in the area of Investor-State Disputes (ISD) are cases involving Argentina’s emergency measures, especially where the investor-state arbitral tribunals were confronted with the task of determining the applicability of the Article XI non-precluded measures (NPM) clause contained in the 1991 US-Argentina bilateral investment treaty (BIT).1 So far, the tribunals’ approaches, especially in terms of interpretative methodology, to the necessity defense analysis have created jurisprudential inconsistency.

1 Treaty Between the United States of American 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 Article XI

ปัญหาว่าด้วยวิธีการตีความหลักเหตุจ�าเป็น (Necessity Defense) ในกฎหมายการลงทุนระหว่างประเทศ: กรณีศึกษาประเทศอาร์เจนตินาภายใต้ปัญหาวิกฤติทางเศรษฐกิจ

Different methodologies of treaty interpretation employed by these international tribunals can potentially dictate the outcome of the case. In view of the ‘cherry-picking’ phenomenon, there is a growing concern, particularly among developing countries, that ICSID regime is largely biased towards the interest of foreign investors over the host States.2 The recent withdrawals of Bolivia, Ecuador, and Venezuela from the ICSID Convention, as well as the possible withdrawals threatened by Nicaragua, Cuba, and Argentina can well validate such a concern. As such, there is a need for a greater level of judicial consistency, specifically in terms of interpretative methodology, in order to establish a systematic approach of treaty interpretation, and to strike a proper and fair balance between investor rights and the host States’ sovereign rights to regulate for public interest in time of economic crisis. When Argentina experienced a major economic crisis during 2001-2002, President Duhalde ended the Convertibility Law with the enactment of the Emergency Law in January of 2002.3 The Emergency Law abolished the peso-dollar convertibility. Argentina also put a freeze on Producer Price Index (“PPI”) adjustments that were linked to the U.S. dollar. With these allegedly “necessary” measures, foreign investors found that the law had unilaterally changed and substantially devalued their contracts.

As a consequence, there was a flood of requests for arbitration at ICSID at the World Bank in Washington, D.C. by U.S. investors, alleging that their rights under the U.S.-Argentina BIT had been violated.

As of February 2010, there have been 49 ICSID claims lodged against Argentina.6 The requests filed by foreign investors seeking to recover under their respective country’s BIT with Argentina, were predominately under the US-Argentina BIT, and some under the UK –Argentina BIT.

See Karsten Nowrot et al., Once and Forever? The Legal Effects of a Denunciation of ICSID, Transnational Economic Law Research Center, Mar. 2008, for a discussion on this perceived bias toward investors. 3 See William W. Burke-White, The Argentine Financial Crisis: State Liability Under BITs and the Legitimacy of the ICSID System, 3 Asian J. WTO & Int’l Health L. & Pol’y 199, 205 (2008); see also See David Sahargun, Investor-State Arbitration And Argentina: A State Of Necessity At The International Centre For The Settlement Of Investment Disputes; see also G.A. Res. 174 II, (Nov. 21, 1947)

4 See Id.

See Id. 6 See also 2013 Investment Climate Statement Bureau of Economic and Business Affairs February 2013, US Department of State, available at: http://www.state.gov/e/eb/rls/othr/ics/2013/204592.htm (“There were 25 pending cases against Argentina before ICSID tribunals at the end of December 2012. Eight of these pending ICSID cases were filed under the U.S.-Argentina BIT. A number of the pending cases have reached their final stages”)

In general, the claims against Argentina include lost profits and other financial losses resulting from the suspension of tariff adjustments linked to the PPI; the forced conversion of all dollar-denominated accounts into pesos at a rate of 1:1 through the “pesificación” of tariffs; and the devaluation of the peso.7 In Continental Casualty v Argentina, 8 for instance, the claim was based on losses suffered from the freeze on bank deposits, foreign exchange controls, the “pesificasión” and other measures taken by the government in response to the crisis.

The legal basis for the claims based on Argentina’s violation of its obligations under the BITs.10 The key investor protections in the BITs impose on the governments a duty, among other things, to provide “fair and equitable treatment” standards in relation to the notion of ‘investors’ legitimate expectation; as well as the protections against unlawful expropriations.

Article XI, or the so called “non-precluded measures (NPM) clause” of the U.S.-Argentina BIT (hereafter “Article XI”), provides for the “treaty-based exception” for the host state government to enact measures “necessary” for the maintenance of “public order” or the “protection of its own essential security interests.”

Accordingly, among other defenses, Argentina invoked Article XI to deny its liability for a series of legislated economic measures imposed during the Argentine financial crisis from 2000–2002. Article XI, in its entirety, states: “This Treaty shall not preclude the application by either Party of measures necessary for the maintenance of public order, the fulfillment of its obligations with respect to maintenance or restoration of international peace or security, or the Protection of its own essential security interests” [emphasis added].13

As a consequence, several treaty-based tribunals14 were confronted with the question of how to interpret the treaty-based exception (or the so-called “NPM” clause) contained in the relevant BIT. Unfortunately, several investor-state tribunals have failed to properly interpret this clause; instead, a number of the tribunals have conflated the clause with the customary international law “state of necessity” defense, including the awards rendered by

7 Sahargun, supra note 3, at 219-220.

8 Continental Casualty Corp. v. Argentina, ICSID Case No. ARB/03/09, Award, Sept. 5, 2008.

9 Ibid.

Bilateral Investment Treaties (BITs) are legal instruments negotiated between governments for the purpose of encouraging bilateral trade, promoting economic ties between participating countries, and protecting each party’s investors by providing them specific rights under the treaty.

11 See generally U.S.- Argentina BIT, supra note 1.

12 Ibid at Art. XI.

13 Ibid

14 Most of them are ICSID Tribunals.

the tribunals in CMS Gas Transmission Company v. Argentine Republicc (2005),

15 Enron

Corporation Ponderosa Assets L.P. v. Argentine Republic (2007),16

and Sempra Energy International v. Argentine Republic (2007). 17 By contrast, in Continental Casualty v Argentina (2008), the tribunal imported the GATT/WTO jurisprudence into the course of interpreting the same clause under the US-Argentina BIT.

This paper will examine and analyze the problems in interpretative methodology employed by different investment arbitral tribunals in light of the Argentine economic necessity defense. This paper consists of three main parts. Part One examines the divergent interpretative approaches advanced by different tribunals in light of some selected early cases of the Argentina disputes, concerning specifically the relationship between the treaty-based exception (Article XI of the US-Argentina BIT) and the customary law defense of necessity or Article 25 of the ILC Draft Articles on State Responsibility (hereafter “Article 25”), critiques of the tribunals’ approaches will also be presented. Part Two the interpretative approach, as well as the justifications for such an approach, advanced by the tribunal in Continental, in which the GATT/WTO jurisprudence was imported into the course of treaty interpretation, will be examined and discussed. In response to these methodological problems of treaty interpretation by different tribunals of the treaty-based defense of necessity set out in the previous parts, this paper will provide in Part Three the overall analysis and recommendations for these problematic methodologies, including some concluding remarks on matters of law and policy.

PART ONE: THE INTERPRETATIVE METHODOLOGY IN LIGHT OF CUSTOMARY INTERNATIONAL LAW DEFENSE OF NECESSITY

I. An Overview of Customary International Law Defense of Necessity under the ILC’s

Draft Articles on State Responsibility, Article 25

The International Law Commission (“ILC”), a body of the United Nations has codified the “state of necessity” defense in Article 25 of its Articles on State Responsibility. 18 The

15 CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/8, Award, 12 May 2005, 44 ILM 1205 (2005) [hereinafter CMS] 16 Enron Corporation Ponderosa Assets L.P. v. Argentine Republic, ICSID Case No.ARB/01/3, Award, May 22, 2007 [hereinafter Enron]

Sempra Energy International v. Argentine Republic, ICSID Case No.ARB/02/16, Award, Sept. 28, 2007 [hereinafter Sempra] 18 U.N. Int’l Law Comm’n, Draft Articles on the Responsibility of States for Internationally Wrongful Acts with Commentaries, Reprinted in Report of the International Law Commission, at 201-02, U.N. Doc. A/56/10 (2001) [hereinafter ILC Draft Articles on State Responsibility].

International Court of Justice (“ICJ”), in both the Gabcikovo-Nagymaros Judgment (1997),19 and the Security Wall Advisory Opinion (2004) has affirmed the ILC’s provision on “state of necessity” as representing customary international law,20 and the UN General Assembly has also approved the article.21 In addition, the defense has been recognized as reflecting customary international law by various ICSID tribunals, including various cases brought against Argentina which will be discussed below. As indicated in the legal text of Article 25, in order to invoke the customary law defense of necessity under this Article a state must demonstrate first, that it is safeguarding “an essential interest against a grave and imminent peril.”22 Historically, like other customary international law defenses, such as distress and force majeure, 23 this requirement addresses particular government actions taken in exceptional or rare emergencies and not necessarily available for all measures taken to promote the public welfare in any areas, as is affirmed from the original LG&E decisions.24 Second, the state claiming necessity must show that its response or selected measure is the “only way” to safeguard its essential interests.25 As such, the government’s measures will not satisfy this criterion if alternatives exist and, hence, these alternative measures must be used instead “even if they may be more costly or less convenient” to the state.26 Third, the defense of necessity is not applicable where the international obligation in question precludes it or the state has contributed to the situation of necessity.27 Nevertheless, as suggested in the ILC’s Commentary, and as confirmed by the original CMS, Enron, Sempra, and LG&E tribunals, invocation of this defense remains possible when the state has not “substantially” contributed to the peril that it faces.28

19 GabcikovoNagymaros Project (Hungary v Slovakia) [1997] ICJ Rep. 7. See also; Sahargun, supra note 3, at 219-222.

See Michael Waibel, Two Worlds of Necessity in ICSID Arbitration: CMS vs. LG&E, 20 LEIDEN J. INT’L L. 637, 640 (2007); see also Sahargn, supra note 3, at 219-223.

21 G.A. Res. 174 II, (Nov. 21, 1947); see also http://www.un.org/law/ilc/.

Ibid. at Article 25(1)(a) 23 the defenses of distress and force majeure, address situations that lie beyond a state’s control altogether, such as a natural disaster in the case of distress (see Article 4, Articles of State Responsibility) or, as with force majeure, responds to the “occurrence of an irresistible force or an unforeseen event, beyond the control of the state, making it materially impossible in the circumstances to perform the obligation” (see Article 123 Articles of State Responsibility)

24 LG&E Energy Corp. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability (Oct. 3, 2006).

ILC Draft Articles on State Responsibility, supra note 18 , at Article 25 (a). 26 Commentary to Art. 25, ILC Articles, International Law Commission, Draft Articles on the Responsibility of States for Internationally Wrongful Acts with Commentaries, UN GA Doc A/56/10 (2001) , at 83. 27 Article 25 (2), International Law Commission, Draft Articles on the Responsibility of States for Internationally Wrongful Acts with Commentaries, UN GA Doc A/56/10 (2001). 28 Commentary to Article 25, International Law Commission, Draft Articles on the Responsibility of States for Internationally Wrongful Acts with Commentaries, UN GA Doc A/56/10 (2001), at 84.

Arguably, regarding the state’s own “contribution” in light of economic crisis, if the investor-state tribunals decide to apply this prong of the customary law defense of necessity-being an element which is not explicitly required under the wording of the NPM clause of the BIT itself--they are likely to be faced with the highly technically complicated issue of expert evidence in order to determine, for instance, whether or not a certain government economic policy or measures taken has led to such a peril of the country. A multi-disciplinary approach, essentially the macro-economic doctrines, would also be needed. More importantly, to rely on the necessity defense test under Article 25 of the ICL Draft Articles would also mean to impose a higher threshold on the host State. Clearly, the fact that Article 25 was formed in negative language29 demonstrates its extremely limited use, since, historically, the Article was written and has been interpreted in the manner to prevent the abuse by states.30 Equally, the use of this defense does not allow the subjective determination of the invoking state as to whether a certain measure should be considered necessary; rather the criterion to be used is an objective test, as was clarified by the ICJ in the GabcikovoNagymaros Judgment.31

II. Interpretative approaches advanced by the international tribunals in light of the relationship between treaty-based defense of necessity and customary law defense of necessity’

A series of disputes have been brought against Argentina alleging violation of its obligations under the BIT, including, inter alia, the duties to provide fair and equitable treatment32

29 CMS Gas Transmission Company v. The Argentine Republic, ICSID Case No. ARB/01/8, Decisions of the Ad Hoc Committee on the Application for Annulment of the Argentine Republic (Sept. 25, 2007); at para 129. 30 See Sloane, Robert D., On the Use and Abuse of Necessity in the Law of State Responsibility (March 28, 2011) at p 16; see also Draft Articles on the Responsibility of States for Internationally Wrongful Acts, in Report of the International Law Commission on the Work of its Fifty-third Session Article 25, U.N. GAOR, 56th Sess., Supp. No. 10, at 43, U.N. Doc. A/56/10 (2001), annexed to G.A. Res. 56/83 (Dec. 12, 2001), reprinted in JAMES CRAWFORD, THE INTERNATIONAL LAW COMMISSION’S ARTICLES ON STATE RESPONSIBILITY: INTRODUCTION, TEXT AND COMMENTARIES 61 (2002). 31 International Court of Justice, Case Concerning The Gabcikovo-Nagymaros Project (Hungary/Slovakia), Judgment of 25 September 1997 IC.J. Reports 1997, p 7. [Hereinafter Gabcikovo-Nagymaros]. (“The dispute arose from a joint project between Hungary and Czechoslovakia to build a system of locks on the Danube River for the purpose of energy generation, improvement of navigation, and prevention of flooding. At a time when the works in Czechoslovakia were well advanced, Hungary stopped work on its territory due to its environmental concerns, which led the former to carry out an alternative project that Hungary considered to have adversely affected its access to the river “; see also; Alvarez-Jimenez, Alberto, New Approaches to the State of Necessity 23. Investor—State Arbitration Symposium: Perspectives on Legitimacy and Practice, 22. see also Sahargun, supra note 3, at 219-220. 32 See U.S.- Argentina BIT, supra note 1, at Article II (2)( a) (“ Investment shall at all times be accorded fair and equitable treatment, shall enjoy full protection and security and shall in no case be accorded treatment less than that required by international law.”)

and the violation of umbrella clauses in particular.33 The following are selected cases illustrating the different approaches advanced by the investor-state tribunals involving the relationship between Article XI of the US –Argentina BIT (or the NPM clause) and the customary law defense of necessity under Article 25 of the ILC Draft Articles on State Responsibility.

A. The conflation methodology : the CMS, Sempra, and Enron tribunals

The tribunal in CMS began its interpretative methodology by examination of the defense under customary international law (Article 25), before holding that, in the context of the Argentine crisis, some of the Article 25 elements were “partially present here and there but when the various elements, conditions and limits are examined as a whole it cannot be concluded that all such elements meet the cumulative test.”

Apparently, the Tribunal did, however, not cite any legal authority or interpretive basis for using the elements set forth under Article 25 to interpret “essential security interest” and the structural design of the U.S. - Argentina BIT.

The tribunal in Sempra, and similarly in Enron, held that the Treaty provision is inseparable from the customary law standard insofar as the definition of necessity and the conditions for its operation are concerned, given that it is under customary law that such elements have been defined.

The Tribunal also rejected Argentina‘s invocation of the defense of necessity under customary international law, questioning the alleged existence of a grave and imminent peril that could threaten an essential interest. Accordingly, the Tribunal ordered Argentina to compensate Sempra. Interestingly, although the Tribunal viewed the treaty regime as lex specialis prevailing over general customary international law, the Tribunal concluded that the absence of specified legal elements within the text of the Article XI justify the infusion of the legal elements provided under Article 25.37 In other words, the Tribunal reasoned that since the

33 See U.S.- Argentina BIT, supra note 1, at Article II(2)c) c) (“ Each Party shall observe any obligation it may have entered into with regard to investments.”) 34 See CMS, supre note 15, at para 331 (where the tribunal referred to the ILC momentary that in order to satisfy the necessity test under Article 25, the State invoking necessity must satisfy all the elements cumulatively). 35 See CMS, supra note 15 ; see also Diane A. Desierto, Necessity and Supplementary Means of Interpretation for NonPrecluded Measures in Bilateral Investment Treaties , 31 J. Int’l L. 827 (2014). 36 See Sempra, supra note 17, at para 376; and Enron supra note 16, at para 334. See also Continental, supra 8, at para 176 (“the Tribunal does not share the opinion that “the treaty thus becomes inseparable from the customary law standard insofar as to the conditions for the operation of the state of necessity are concerned”, as stated in the Enron Case and submitted also by the Claimant.”)

37 See Desierto, supra note 35, at p 844.

BIT itself did not deal with the legal elements necessary for the legitimate invocation of a state of necessity, the criteria found in customary international law had to be applied as a consequence. 38 Most importantly, the Tribunal made no reference to the interpretive system of Article 31 of the Vienna Convention on the Law of Treaties (VCLT) 1969, much less on the interpretative rules on the use of supplementary means under Article 32 of the VCLT.

B. The lex specialis approach: the LG&E Tribunal

The LG&E tribunal, on the other hand, implicitly based its determination of the issue on the lex specilis approach. The rationale is that the (more specific) special rule (i.e. Article XI) is considered as modifying, overruling or setting aside the general rule (i.e. the customary law defense of necessity).

Interestingly, while the tribunal still proceeded to refer to the customary law doctrine of necessity represented by Article 25 in a “supportive” sense, the tribunal still appeared to treat Article XI as a distinct defense before concluding that Argentina satisfied its requirements and hence was allowed to rely on Article XI.

Consequently, Argentina was excused from liability for harm caused to the foreign investor during the period of economic crisis.

In addition, the tribunal did not cite any legal authority to support its interpretation, nor did it provide a legal standard for the effect of the applicability of Article XI, apart from the tribunal’s own conclusion that this “excused” Argentina from liability for breaches under the Treaty.

To sum up, the CMS, the Sempra and Enron tribunals, all of which are based on “conflation methodology”, similarly concluded that Article XI ‘reflected’ Article 25, and hence in order for Argentina to invoke the defense successfully, all the elements under Article 25 have to be satisfied. Ultimately, all these tribunals viewed that Argentina failed to do so. In contrast, the LG & E tribunal seems to treat Article XI as a distinct and separate defense or a ‘lex specialis’ law, leaving the role of international customary law defense of necessity under Article 25 to merely have a supplementary or supportive role, before ruling in favor

38 Sempra, supra note 17, para 375-388.

See Sempra, supra note 17, see also Desierto, supra note 35 , at p 844. 40 See LG& E, supra note 24 , para 88; see also ILC, Fragmentation of International Law: Difficulties arising from the Diversification and Expansion of International Law, Report of the Study Group of the ILC, UN Doc. A/CN4/L.682 (Apr. 13, 2006). 41 See LG & E, supra note 24, See J.E. Alvarez; T. Brink; “Revisiting the Necessity Defense: Continental Casualty v. Argentina” TDM 3 (2012), at page 6; see also See Desierto, supra note 35.

Ibid. 43 Ibid. Alvarez and Brink suggested that this conclusion does not seem to appear within the text of Article XI, or within the rest of the provisions contained in the U.S.-Argentina BIT either explicitly or even implicitly. ( see Alvarez and Brink, supra note 41).

of Argentina on the issue by concluding that Argentina satisfied the defense and was excused from liability for harms caused during the crisis.

III. Critiques of conflation methodology advanced by the CMS, Sempra, and Enron tribunals

There are both conceptual and methodological problems in using the customary norm of necessity as a supplementary means of interpreting the lex specialis treaty term of “essential security interests,” whether to confirm a meaning finally reached under the rules of treaty interpretation contained in Article 31 of the VCLT, or to itself provide basis to determine treaty meaning by the virtue of Article 32 of the VCLT.

A. “Conceptual” Problem

The content of “necessity” as a norm precluding wrongfulness under customary international law differs substantially from the content of “essential security interests” as lex specialis in Article XI. Although some analogous language is used in Article XI and in Article 25,

the language of the treaty-based exception set forth under Article XI, unlike Article 25, contain only the elements requiring that the measures taken by the host State must be: (1) necessary, and (2) sufficiently related to the permissible objective provided for in the NPM clause.46 More precisely, the NPM clause under Article XI does not explicitly (or even implicitly) require the measures taken by the host State government to be the “only way”, or require that for a successful plea of necessity under this Article, the host State must not strictly contribute to such situation or peril. As observed by the ICSID Annulment Committee for Sempra.

“More importantly, Article 25 is concerned with the invocation by a State Party of necessity “as a ground for precluding the wrongfulness of an act not in conformity with an international obligation of that State”. Article 25 presupposes that an act has been committed that is incompatible with the State’s international obligations and is therefore “wrongful.” Article XI, on the other hand, provides that “This Treaty shall not preclude” certain measures so that, where Article XI applies, the taking of such measures is not incompatible with the State international obligations and is not therefore “wrongful.” Article 25 and Article XI therefore deal with quite different situations. Article 25 cannot therefore be assumed to “define necessity and the conditions for its operation” for the

44 See generally Desierto, supra note 35.

45 As observed by the CMS Annulment Committee in para 129 (See CMS Annulment Decision, supra note 29, at para 129).

46 See US- Argentina BIT, supra note 1, at Article XI; See Sahargun, supra note 3 , at page 222.

purposes of interpreting Article XI, still less to do so as a mandatory norm of international law. …”

Since the legal consequences under each type of norm, if successfully pleaded by the invoking state, are also separate and distinct, the conflation of the two can lead to uncertainty of the consequence, as well as can have a decisive impact on the operative part of the Award.

B. “Methodological” Problem

Necessity” under customary international law also involves a more restrictive range of state action than “essential security interests” in the lex specialis provision of Article XI. Therefore, by jumping straight into the application of customary law defense, the conflation methodology can be unjustifiable without strictly following the general rules of treaty interpretation under the VCLT and/or the ‘lex specialis’ principles as will be discussed in more details below in Part TWO and Part THREE.

IV. The influential turning point in interpretative methodology: the primary-secondary rule distinction approach advanced by the CMS Annulment Committee.

While the tribunals’ rulings of the three earlier cases (CMS, Enron, and Sempra) found against Argentina,49 the CMS Annulment decision50 has marked the turning point in interpretive methodology by suggesting the ‘primary-secondary rule’ distinction approach,

51 and was

similarly followed by the tribunal in Continental52

and the Annulment Decision in Sempra, 53 all of which found in favor of Argentina on this issue. By the virtue of Pacta sunt servanda, it is arguable that customary international law defense of necessity under Article 25 provides

47 Sempra Energy Int’l v. Argentine Republic, ICSID (W. Bank) Case No. ARB/02/16, Decision on Argentine Republic’s Request for Annulment of the Award (June 29, 2010) (the “Sempra Annulment Decision”) Para 200; see also CMS Annulment Decision, supra note 29, at para 129 (“Moreover, Article XI is a threshold requirement: if it applies, the substantive obligations under the Treaty do not apply. By contrast, Article 25 is an excuse which is only relevant once it has been decided that there has otherwise been a breach of those substantive obligations.”) 48 See CMS Annulment Decision, supra note 29, at para 135; see also Id. at para 137 for the Committee’s discussion on Temporary Character of Necessity and Consequences for Compensation, regarding the different consequences on compensation under each regime, in light of Article 27 of the ICL Draft Articles on State Responsibility.

49 Where the LG&E ruling found partially in favor of Argentina.

50 see CMS Annulment decision, supra note 29, at para 129-136.

To a large extent, this approach is very similar to the interpretative approach offered by the LG&E tribunal, namely the lexspecilis approach.

52 Continental, supra note 8, para 166.

53 Sempra Annulment Decision, supra note 47, para 209.

a “far more rigorous standard”

than what Argentina had agreed to at the time of the conclusion of the BIT. As such, such higher threshold imposed by the customary law defense of necessity might not have been within Argentina’s reasonable contemplation at the time of the conclusion of the BIT. Consequently, the approach in resorting to this customary law defense may create an unfair result in terms of the State Parties’ legitimate expectation in concluding the BIT itself. Not unexpectedly, Argentina subsequently applied for the ICSID annulment proceedings challenging the arbitral awards rendered by the original CMS tribunal, among other thing, on the ground of “manifest excess of power”

Although, the CMS Annulment Committee declined to annul the monetary award affirmed in the original CMS tribunal due to the limited power of the ICSID Annulment Committee,56 the Annulment Committee heavily criticized the inadequacy of the interpretative approach taken by the original CMS tribunal on the issue of Article, given the discrepancies between the two regimes, stating as follows:

“Those two texts having a different operation and content, it was necessary for the Tribunal to take a position on their relationship and to decide whether they were both applicable in the present case. The Tribunal did not enter into such an analysis, simply assuming that Article XI and Article 25 are on the same footing.” [emphasis added]

Here, the Committee59 disagreed with the original CMS tribunal (and also the Enron and the Sempra tribunals), suggesting, instead, that when interpreting the treaty-based exception clause, such as Article XI, the tribunals should not heavily rely on the international customary law defense of necessity. Rather, the Article XI exception provided under the treaty should

54 A term used by an expert representing Argentina : see: Kevin Rubino, Investors Beware: Enron and Sempra Annulment Decisions Bolster the State Necessity Defense While Sowing New Uncertainty Regarding the Finality of ICSID Arbitral Awards, August 9, 2010.

Notably, Argentina also applied for the ICSID annulment proceedings against the decisions of the original the Enron and Sempra tribunals. 56 See CMS Annulment Decision, supra note 29, at para 136 (“The Committee recalls, once more, that it has only a limited jurisdiction under Article 52 of the ICSID Convention. In the circumstances, the Committee cannot simply substitute its own view of the law and its own appreciation of the facts for those of the Tribunal. Notwithstanding the identified errors and lacunas in the Award, it is the case in the end that the Tribunal applied Article XI of the Treaty. Although applying it cryptically and defectively, it applied it. There is accordingly no manifest excess of powers.”) 57 Noted also, however, the difference between the ‘appellate system’ and the ICSID annulment system where the powers of the Annulment Committee and particularly the grounds for annulment are specifically limited.

58 CMS Annulment decision, supra note 29, at para 131

Interestingly, consists of Professor James Crawfords (University of Cambridge), who took a leading role in the work of the ILC ‘s draft Articles on State Responsibility himself.

be considered as a distinct treaty defense, suggesting a primary-secondary rule distinction for the tribunal interpretative methodology as follows:

“In this case, the Tribunal would have been under an obligation to consider first whether there had been any breach of the BIT and whether such a breach was excluded by Article XI. Only if it concluded that there was conduct not in conformity with the Treaty (first) would it have had to consider whether Argentina’s responsibility could be precluded in whole or in part under customary international law60.… [T]he Tribunal should have applied Article XI as the lex specialis governing the matter and not Article 25.”[emphasis added]

Accordingly, the ‘conflation’ approach appears to be methodologically wrong in using a stricter test prescribed under the customary law defense of necessity as a primary rule without providing adequate analysis and justification of the importation of such rule, bypassing the language contained in the Article XI of the US – Argentina BIT.

PART TWO: THE INTERPRETATIVE MATHODOLOGY IN LIGHT OF THE GATT/WTO JURISPRUDENCE: THE CONTINENTAL CASUATY APPROACH

I. The interpretative methodology under the Award of Continental Casualty v Argentina: the adoption of the WTPO/GATT jurisprudence.

The issue of interpreting necessity defense was also confronted by the ICSID tribunal in Continental. In interpreting the scope of “essential security interests” contained in the NPM clause, and relying partly on the CMS Annulment Committee’s opinion, the Continental tribunal did not resort to the customary law doctrine of necessity, as codified in Article 25. Instead, the Tribunal explored GATT and WTO case law to determine the scope of “essential security interests” as stipulated in the U.S.-Argentina BIT.

A. The tribunal’s justification for adopting the WTO/GATT jurisprudence in the course of interpretation of ‘essential security interest’.

The Tribunal disagreed with the opinion that “the treaty thus becomes inseparable from the customary law standard insofar as to the conditions for the operation of the state of necessity are concerned.”62 Rather, after pointing out that the text of Article XI derives

60 CMS Annulment Decision, supra note 29, at para 134.

61 Id. at para 133.

Sempra Award, supra note 17, at para 376. This approach is also adopted by the Enron Tribunal. See Enron Award, supra note16 , at para 333.

from the parallel model clause of the U.S.’s Friendship, Commerce, and Navigation (FCN) treaties and that treaties in turn reflect the formulation of Article XX of GATT 1947 (or GATT Article XX),63 the Tribunal held that it is more appropriate to refer to the GATT and WTO case law which has extensively dealt with the concept and requirements of necessity in the context of economic measures, rather than to refer to the requirement of necessity under customary international law regime.64 The Tribunal then cited GATT and WTO case law for interpreting “necessary measures” under Article XI of the U.S.-Argentina BIT.

B. WTO/GATT’s jurisprudence on ‘Necessity test’ and the least restrictive alternative approach

Articles XX and XXI of the GATT provide States with defenses, according to Continental Tribunal, very similar to those found in treaty-based exception or the NPM clauses of various BITs.

Similarly, Article XXI provides that nothing in the GATT agreement “shall be construed . . . to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests .. . .” [emphasis added].

In addressing these exceptions, GATT and WTO panels have developed a relatively more consistent jurisprudence that asks whether the state has taken the least restrictive measure reasonably available that meets its permissible objective under GATT Articles XX or XXI. Unlike the ‘only means available’ test under the customary law defense of necessity adopted by the previous ICSID tribunals in CMS, Sempra, and Enron to render awards against Argentina, this least restrictive alternative test under the WTO jurisprudence is a public law approach that attempts to balance the otherwise irreconcilable rights of the parties.67

See Continental Casualty Company v Argentina ( para 192). 64 See. Continental Award, at para 163 and footnote 234 (characterizing this branch as “irrelevant in the context of the present arbitration”). Also, the later might seem traditionally to be dealing with the issue of self-defense and the use of force rather than the area of international trade and investment law.; see also ; Lauge Skovgaard Poulsen, “Investment Treaties and the Globalization of State Capitalism: Opportunities and Constraints for Host States” Forthcoming in: R. Echandi and P. Sauvé (eds.), Prospects in International Investment Law and Policy (Cambridge: Cambridge University Press, 2012), online: (May 2012) SSRN (Click here for online version). (at page 134-135) 65 See GATT, Art. XX (a)-(b). Specifically, GATT Article XX allows states to take measures consistent with the chapeau that are, for instances, “necessary to protect public morals” or “necessary to protect human, animal or plant life or health.”

See GATT, Art. XXI(b) 67 See MadsAndenas& Stefan Zleptnig, Proportionality and Balancing in WTO Law: A Comparative Perspective, 20 CAMBRIDGE REV. INT’L AFF. 71 (2007); and Thomas Sebastian, World Trade Organization Remedies and the Assessment of Proportionality: Equivalence and Appropriateness, 48 HARV. INT’L L.J. 337 (2007)

This approach can be illustrated in the 1990 Thailand Cigarettes GATT dispute, where Thailand banned foreign-produced cigarettes but allowed the sale of domestically produced cigarettes, justifying the measure based on Article XX (d) of GATT on the grounds that such restrictions were “necessary to protect human health.”68 The GATT panel, however, disagreed, finding that the import restrictions imposed by Thailand could be considered “necessary” in terms of Article XX(b) only if there were “no alternative measure consistent with the General Agreement, or less inconsistent with it, which Thailand could reasonably be expected to employ to achieve its health policy objectives.”

As such, Thailand’s actions could only be justified if they were the least restrictive means of achieving the legitimate policy objective.

In addition, the GATT Panel in United States—Section 337 of the Tariff Act of 1930 also approved the least restrictive alternative test as a test for interpreting the necessity defense in the context of GATT Article XX.

Notably, unlike a seemingly stricter approach taken by the customary law defense of necessity, the GATT Panel emphasized that the alternative measures must truly be “reasonably available” and that states are not expected under Article XX to undertake fundamental transformations of their economic policy.

The least restrictive alternative test developed by GATT and WTO panels operates as a three-prong test. First, the panel must determine if the measures taken by the state are in fact designed to protect or further a permissible objective under the relevant treaty.

Second, the panel must determine whether those measures are necessary.

74 Such determination of “necessity”, in turn, requires a balancing of three factors, including the (i.) interests asserted by the state taking the actions, (ii.) the “contribution of the measure to the realization

68 Report of the Panel, Thailand—Restrictions on Importation of and Internal Taxes on Cigarettes, ¶ 12, DS10/R (Oct. 5, 1990), GATT B.I.S.D. (37th Supp.) at 200, 203 (1990).

Ibid. At para 223. 70 In this case, a ban on all foreign cigarettes was not the least restrictive means available to protect public health and was deemed a breach of GATT obligations. See Id. 71 United States—Section 337 of the Tariff Act of 1930, ¶ 5.26, L/6439 (Jan. 16, 1989), GATT, B.I.S.D. (36th Supp.) at 345, 389-91 (1989) [hereinafter US—Section 337] “[A] contracting party cannot justify a measure inconsistent with another GATT provisions “necessary” in terms of Article XX(d) if an alternative measure which it could reasonably be expected to employ and which is not inconsistent with other GATT provisions is available to it. By the same token, in cases where a measure consistent with other GATT provisions is not reasonably available, a contracting party is bound to use, among the measures reasonably available to it, that which entails the least degree of inconsistency with other GATT provisions”

72 Ibid.

73 Ibid. at para 294.

74 Ibid.

of the ends pursued by it,” (where material contribution is required), and (iii.) the “restrictive impact of the measure on international commerce”75 (e.g. the interests of the state challenging the action). Third, the panel must undertake a “comparison between the challenged measure and possible alternatives.”76

In addition, regarding the burden of proof in this third step if the state invoking the exception makes a prima facie case that its measures were necessary, the burden shifts to the complaining state to show that another measure was reasonably available that would have been both less restrictive on international commerce and have been equally effective in achieving the state’s permissible objective.77 The GATT/WTO jurisprudence on necessity defense was adopted by the ICSID tribunal in Continental Casualty.

C. The application of the WTO jurisprudence: the Continental Casualty’s interpretative methodology.

After briefly providing the reason for importing the GATT/WTO jurisprudence, the ICSID Tribunal in Continenta Casualty simply proceeded to set out the GATT/WTO approach to the necessity test under GATT Article XX. Citing the necessity test Established by the WTO tribunal in Korea – Beef Case,78 this ICSID Tribunal stated that the term “necessary” referred to a range of degrees of connection, from “making a contribution” at the one end, to “indispensable,” at the other.79 In order to determine whether a measure which was not indispensable, may nonetheless be “necessary,” the tribunal identified the “weighing and balancing” exercise set out in Korea – Beef decision, requiring consideration of the relative importance of the end pursued, the contribution of the means to that end and the restrictive impact on international trade.80 Nevertheless, citing US – Gambling, the tribunal pointed out that a measure would not be necessary under GATT Article XX if a “less inconsistent alternative” was reasonably available.81

75 Ibid at para 306.

76 Ibid at para 307.

77 Ibid at para 308-310.

Appellate Body Report, Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef, WT/DS161/Appellate Body/R, WT/DS169/Appellate Body/R, adopted 10 January 2001.

79 Ibid at para 193.

80 See Continental, supra note 8, para 194.

“an alternative measure may be found not to be “reasonably available,” however, where it is merely theoretical in nature, for instance, where the Responding Member is not capable of taking it, or where the measure imposes an undue burden on that Member, such as prohibitive costs or substantial technical difficulties. Moreover a “reasonable available” alternative measure must be a measure that would preserve for the responding Member its right to achieve its desired level of protection with respect to the objective pursued under paragraph (a) of Article XIV.” at para 195

In applying the WTO approach to the facts in Continental Casualty, the tribunal subsequently considered whether Argentina’s measures made a “material or decisive contribution” to protect the essential security interests of Argentina, and it found that they did.

In the course of applying the WTO jurisprudence to determine the issue of “reasonably available alternative measures” in the context of Argentina economic crisis, two questions were examined by the tribunal: (1) whether there were alternative measures--that would have yielded equivalent results/relief but were not in breach of the US-Argentina BIT--that might have been available when the measures challenged were taken (thus from November 2001 onwards); and (2) whether Argentina could have adopted, at some earlier time, different policies that would have avoided or prevented the situation that brought about the adoption of the measures challenged.

Nevertheless, in examining these questions the tribunal interestingly stressed that its mandate was not to pass judgment on Argentina’s economic policy or its “sovereign choices”,

84 and ultimately ruled in favor of Argentina on the issue of necessity defense.

D. Critiques of the Continental Casualty tribunal’s Interpretative Methodology In

adopting WTO/GATT jurisprudence into the Investor-State Investment Arbitration. The Continental tribunal’s rationale for importing WTO jurisprudence consisted of a single sentence stating merely that Article XI derived from “the parallel model clause of the U.S. FCN treaties and these treaties in turn reflect the formulation of Article XX of GATT 1947”.

The tribunal did not explore this justification any further. This rationale based briefly on historical background of the treaties has been heavily criticized by Alvarez and Brink where they used the terms “bad history”.

Such severe criticism was based on the contention that there are fundamental, presumably intentional, differences among these provisions (FCN treaties, WTO GATT Agreements, and Article XI of

82 Ibid at 196 (“…in part inevitable, or unavoidable, in part indispensable and in any case material or decisive in order to react positively to the crisis, to prevent the complete breakdown of the financial system, the implosion of the economy and the growing threat to the fabric of Argentinean society and generally to assist in overcoming the crisis. In the Tribunal’s view, there was undoubtedly “a genuine relationship of end and means in this respect.”

83 Ibid at 198.

84 Id at 199.

85 See para. 192.

See Alvarez, J.E. & T. Brink. ‘Revisiting the Necessity Defense Continental Casualty v Argentina’. IILJ Working Paper 2010/3, page 23-32.

the US- Argentina BIT).87

They pointed out that the key difference between the “essential security” clauses contained in the FCN treaties and the GATT’s provision on necessity defense is that the latter contains the subjective test language, namely “which it considers necessary” (i.e. the so-called “self-judging” clause generally favoring the invoking states). By contrast, the ICJ has pointed out that the determination of “essential security” under the FCN treaties should employ the objective evaluation.

As such, there is a clear difference between the “self-judging clause” (i.e. subjective nature) of the GATT essential security provision on the one hand and the objective nature of the essential security clause contained in both FCN and the US-Argentina BIT on the other hand. Thus, this crucial difference should have been taken into account by the Tribunal in Continental Casualty. 89 Other different aspects of the different necessity defense regimes and their implications on the interpretative methodologies are set out as follows:

(1) Differences in nature, object, and purposes between the treaties giving rise to the departure from the principles of treaty interpretation under Article 31 of the VCLT.

Given the substantial difference in the objects and purposes of the U.S.-Argentina BIT and GATT 1947, the Tribunal ought to have been constrained by the unitary system of treaty interpretation under Article 31 of the VCLT from using Article XX of GATT 1947 as an interpretive tool to define the substantive content of “essential security interests” and “necessary measures” in Article XI of the U.S.-Argentina BIT. The treaty structure, object and purpose, as well as the policy of the GATT substantially differ from that of the U.S.-Argentina BIT.

(2) The textual and structural discrepancies do exist between the two regimes

Not only the texts between the GATT Article XX and the Article XI are different, the structures between the two provisions are also not comparable. To illustrate, the two-tiered structure of GATT Article XX in its chapeau and the ten items set out from (a) to (j) are absent

87 See Ibid.at p. 24.

88 See Ibid. at p. 24-25

Ibid.at p.25. 90 See generally Diane A. Desierto, Necessity and Supplementary Means of Interpretation of on Precluded Measures in Bilateral Investment Treaties, 31 U. Penn. J. Int’l L.; see also Alvarez, J.E. & T. Brink. ‘Revisiting the Necessity Defense Continental Casualty v Argentina’. IILJ Working Paper 2010/3

from the actual wording of Article XI of the U.S.-Argentina BIT.

Hence, the two different necessity defense regimes should not be interpreted in the same way.

(3) A Lower-Threshold Problem created by importing WTO/GATTs necessity defense regime

Given the above discrepancies, the tribunals’ sudden importation of the “necessity” concepts from distinct GATT/WTO legal regimes, without providing sufficient justification can be criticized for employing the “cherry-picking” practice of interpretation in order to reach a lower threshold of necessity provided under the WTO Korea-Beef decision. Moreover, other WTO jurisprudence, including Brazil-Tyres (2007),92 confirmed that a measure taken under Article XX does not have to be the “ only means”, which are considered to be more favorable to the host State compared with the “necessity test” under Article 25. In this regard, Alvarez and Brink seem to argue that the consequences of applying the GATT/WTO approach to the interpretation of “necessity” in the investment treaty context can be greater than borrowing the GATT/WTO concepts for interpreting other parts of treaty provisions, such as “like product” under WTO and “like circumstances” under the BIT.93 This is because, unlike the case of adopting GATT/WTO concepts of necessity defense, merely adopting the concepts of “like product” would not directly amount to granting Respondent States a treaty-cased immunity against their alleged breach of treaty obligations. Therefore, a higher degree of caution should be exercised by the tribunals in making both the decision and the justification for importing a lower threshold test from another regime into the course of interpreting the BIT exception.

(4) GATT and WTO Law and Jurisprudence are in fact “remote” and not legally relevant in determining the substantive content of Article XI of the US-Argentina BIT

The sudden resort to GATT and WTO case law is unprecedented in the course of the interpretation of Article XI, i.e., not having been referred to at all by previous ICSID tribunals in the CMS, Sempra, Enron, or LG & E, cases, all of which were also interpreting the same clause under the same BIT. While there is no doctrine of stare decisis in the current

91 See Id. In addition, the chapeau (operates as a general requirement in addition to the specific requirements set out separately in each of the ten items under GATT, Article XX, the chapeau states that: “Subject to the requirement that such measures are not applied in a manner which would constitute means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade . . . .”)

92 Brazil – Measures affecting imports of retreated tyres, Report of the Appellate Body of 3 December 2007, WT/DS332/

AB/R

See Alvarez, J.E. & T. Brink. ‘Revisiting the Necessity Defense Continental Casualty v Argentina’. IILJ Working Paper 2010/3, at p. 17-52

ICSID regime, the prevalence of de facto adherence to stare decisis is a typical feature of international arbitration because this approach will promote jurisprudential consistency and uniformity in the treaty interpretation. Hence, without providing an adequate justification for this divergent approach of interpretation, such interpretive methodology adopted by the tribunal in Continental Casualty is potentially problematic, especially because Article XI only remotely derives from Article XX of GATT 1947 through the parallel model clause of the US FCN treaties.94

PART THREE: ANALYSIS AND RECOMMENDATIONS

I. Return to Rules of Treaty Interpretation under the VCLT.

It was methodologically inappropriate for the Continental Tribunal simply to import the necessity doctrine developed by the WTO Appellate Body in relation to Article XX of GATT 1947 in order to explain the substantive content of NPM clause under Article XI. In fact, neither CMS, Sempra, LG&E, CMS, nor Continental Casualty demonstrated adequate interpretive methodology within the framework of Articles 3195 and 3296 of the VCLT. While some

94 See Ibid.

Article 31 General rule of interpretation 1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. 2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes: (a) any agreement relating to the treaty which was made between all the parties in connection with the conclusion

of the treaty;

(b) any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty. 3. There shall be taken into account, together with the context: (a) any subsequent agreement between the parties regarding the interpretation of the treaty or the application of

its provisions;

(b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation; (c) any relevant rules of international law applicable in the relations between the parties. 4. A special meaning shall be given to a term if it is established that the parties so intended.

Article 32 Supplementary means of interpretation Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31: (a) leaves the meaning ambiguous or obscure; or (b) leads to a result which is manifestly absurd or unreasonable.

authors heavily criticized and attacked the interpretative approach taken by the Continental tribunal, advocating instead, to the application of the customary law defense of necessity,97 it is also doubtful if the relationship between Article 25 and Article XI of the BIT would pass the above VCLT threshold and be more compatible if the same level of scrutiny is to be applied (e.g. drafting history, textual, structural discrepancies, etc.). At least, the view of the ICSID Annulment Committees, particularly for the CMS and the Sempra Awards, seem to similarly criticize those original tribunals on the failure to adequately explain their interpretative methodology, jumping instead straight into the application of the customary law defense of necessity. Consequently, this could lead to the fear of the tribunal-bias as well as judicial inconsistency, given the lack of systematic interpretation within the international investment regime. Hence, the primary proposal of this paper (also linked to the next proposal; see below) is that the tribunals should return to the fundamental rules of treaty interpretation under the VCLT.

II. Observance of “Lex Specialis” doctrine

It is also important to consider that the provision of the U.S-Argentina BIT constitutes a “special regime” that is itself lex specialis, 98 Under the maxim lex specialis derogat lege generali, “whenever two or more norms deal with the same subject matter, priority should be given to the norm that is more specific”.

Therefore, regarding Article XI, the better advice is first to examine the entire text and structural design of the U.S.-Argentina BIT when determining or interpreting the meaning and legal consequences of Article XI, instead of immediately reaching for external sources ( such as the doctrine of “necessity” codified under Article 25, or, in the Continental Award, GATT/WTO jurisprudence relating to Article XX of GATT 1947). As the ILC in its report on the fragmentation of international law recently suggested, in determining whether to reach for other relevant rules of international law or whether to interpret a treaty provision as sui generis or lex specialis requires an in depth/precise examination of all the traditional rules of treaty interpretation, as well as a close attention

2010/3

97 See generally J.E. & T. Brink. ‘Revisiting the Necessity Defense Continental Casualty v Argentina’. IILJ Working Paper

98 As advocated by the ICSID Annulment Committees (CMS and Sempra) as well as the LG&E and the Continental tribunal (albeit with inadequate analysis being provided) 99 ILC, Fragmentation of International Law: Difficulties arising from the Diversification and Expansion of International Law, Report of the Study Group of the ILC, UN Doc. A/CN4/L.682 (Apr. 13, 2006), at para 5.

to treaty text viewed in good faith and consistent with the treaty’s object and purpose and its other provisions (i.e. context).100

III. The Adoption of Primary-Secondary Rule Distinction

The previous arbitral tribunals (including the Enron, CMS and Sempra) have conflated the relationship between necessity under customary international law (Article 25) and Article XI. Indeed, the Sempra award prioritized the customary right over Article XI.

101

On the other hand, the ILC clarified that applying the customary circumstance precluding wrongfulness when necessity is incorporated into the primary rule is not considered a correct approach.

102

Such an approach not only ignores that Article XI operates as a primary rule exception to liability under the BIT, but also ignores the fact that the customary international law defense of necessity , as a secondary rule, will only come into play should (a) there be a breach of a substantive BIT provision; and (b) the Article XI exception fails.103 Only if these two conditions are fulfilled, can the State’s act which is in dispute fall into the scope of customary law defense of necessity under Article 25. This is simply because in these treaty-based cases which are disputes between the investor and the host State, the BIT provision is indeed the primary rule governing the matter at dispute, including the alleged act in breach of the BIT committed by the host State like Argentina, and the plea of necessity. As such, it is methodically wrong for the tribunals to jump straight into the customary law defense of necessity without first satisfying these two conditions. The Sempra annulment decision is the third decision in a row that has confirmed the primary-secondary rule distinction approach (following the CMS Annulment, and Continental Casualty). The Sempra annulment committee has also viewed Article XI as the applicable legal norm of primary importance when examining the necessity defense. This approach of primary-secondary rule distinction is substantively persuasive since first, as suggested above, Article XI is the only rule which operates as a governing primary rule and it is one which operates in the specific treaty intended to govern the dispute. Secondly, this seems to be a correct interpretive methodology to be pursued by the tribunals,

100 Ibid.

101

See Sempra, supra note 17, at para. 388. 102 Articles on the Responsibility of States for Internationally Wrongful Acts, with Commentaries, p. 84 (para. (21) under Article 25). (“As embodied in article 25, the plea of necessity is not intended to cover conduct which is in principle regulated by the primary obligations”) available at : http://untreaty.un.org/ilc/texts/ instruments/english/commentaries/9_6_2001.pdf 103 See e.g. CMS Annulment Decision, supra note 29, at para 129, This analysis shared by a number of scholars , see e.g. Alvarez, J.E. & T. Brink. ‘Revisiting the Necessity Defense Continental Casualty v Argentina’. IILJ Working Paper 2010/3

whereas the conflation method adopted by previous tribunals did not allow a primary rule to be interpreted or even bypassed it, potentially creating an unfavorable “cherry-picking” opportunity for the tribunals deciding the case at dispute. This possibility of “cherry-picking” can be harmful not only in term of potential bias

104

but also in terms of certainty and predictability of jurisprudence on international investment law. This interpretative methodology of primary-secondary rule distinction is, therefore, more systematic and concise. By contrast, the conflation approach is methodologically incorrect, because it would allow the tribunals to jumps straight to any “relevant rules of international law” envisaged by Article 31(3)(c), bypassing the examinations of “ordinary meaning” and the “context” of the provisions of the BIT itself as required by Article 31(1) VCLT.105 Hence, the adoption of the primary-secondary rule distinction approach would enable the logical application of Article 31 VCLT allowing its step-by-step analysis. Although, the Sempra Annulment decision is, presumably, framed to attack the application of the customary law defense under the conflation approach taken by the original Sempra tribunal, the similar analysis, regarding the primary-secondary rules distinction advanced by this Annulment Committee, can also be usefully applied to the case of the relationship between the treaty based exception (Article XI) and the necessity test under the WTO jurisprudence. Without providing a sufficient justification for importation of the external rule on necessity defense, even when the external rule appears to be logically sound and persuasive, a good rule, no matter how good it is, would not, in itself, be a sufficient basis for justifying its importation into the course of interpretation of Article XI. IN these circumstances, any incorporations of the apparently “proper” external rule on necessity defense can potentially be invalidated and stuck down on the ground of interpretative methodology and the general principle of treaty interpretation. As such, the arbitral awards rendered under these circumstances can potentially be annulled under the annulment grounds contained in

104 For instance, if the rule of treaty interpretation and the primary-secondary rules distinction approach have not been strictly followed by the treaty-based tribunals, then the tribunal with pro investor-protection bias might jump straight into importing the customary law standard of necessity to be applied in the case at dispute without attempting to interpret the ‘ordinary meaning’ of the actual governing law contained in the primary rule ( i.e. the language of the treaty-based exception under Art. XI of US Argentina BIT). The similar conclusion, albeit in an opposite direction, can also be true for the case of ‘pro-host State right to regulate’ tribunals, where the test with a relatively lower threshold (such as the necessity test under WTO jurisprudence, or the margin of appreciation test adopted by the ECHR) might be prioritized over the primary rule, without providing a systematically and justifiably methodological explanation. 105 (i.) A treaty shall be interpreted in good faith (ii.) in accordance with the ordinary meaning to be given to the terms of the treaty in their context and (iii.) in the light of its object and purpose.

Article 52 of the ICSID Convention.106

More precisely, this can usually be the case where the tribunal found to be manifestly in excess their power by incorrectly applying the laws other than the governing law contained in the relevant treaty, and without stating the reason.

107

Specifically, a manifest excess of powers will be deemed to have been exercised, inter alia, when the tribunal “disregards the applicable law or bases the award on a law other than the applicable law under Art.42 ICSID Convention.”

108

Nevertheless, in order to annul the awards on this ground, the threshold is relatively high. Moreover, unlike the WTO Appellate Body, the ICSID Annulment Committee, without further reforms, is not functioning as the appellate court, leaving a limited power of judicial review in the hands of the Committee. Usually, the ICSID Annulment Committee will try to refrain themselves from being “reconstituted as an appellate proceeding”.109 For instance, regarding “failure to state the reason” ground under Article 52(1)(e), the ICSID Annulment Committee in Continental Casualty admitted that the Committee should not decide on “the correctness, adequacy or convincingness of the reasons but to simply verify that there has not been a clear failure by the tribunal to state any reasons for its decision on a particular question” and any contradictory reasons, if any, must be “obvious and not just arguable”.

110

The Continental Annulment Committee eventually dismissed in their entity the applications for annulment of Continental Casualty Company.

111

106 Article 52 (1) of the ICSID Convention provides as follows: (1) Either party may request annulment of the award by an application in writing addressed to the Secretary-General on one or more of the following grounds: (a) that the Tribunal was not properly constituted; (b) that the Tribunal has manifestly exceeded its powers; (c) that there was corruption on the part of a member of the Tribunal; (d) that there has been a serious departure from a fundamental rule of procedure; or (e) that the award has failed to state the reasons on which it is based. 107 In the Continental Casualty annulment proceedings, for instance, both parties invoke the grounds in Article 52(1)(b) (that the Tribunal has manifestly exceeded its powers) and (e) (that the award has failed to state the reasons on which it is based) in their applications. See Decision on the Application for Partial Annulment of Continental Casualty Company and the Application for Partial Annulment of the Argentine Republic, ICSID Case No. ARB/03/9), para 72. Available at https://icsid.worldbank.org/

108 See Ibid, at para 86.

109 See generally Id at para 90.

110 See Ibid at para 98-103.

111 See Ibid at page 114.

Last but not least, the primary-secondary rule distinction, allows a tribunal to, more or less, justifiably circumvent a relatively more complicated lex specialis analytical regime. The Sempra annulment committee proceeded to use Article 25 as a background interpretive tool to Article XI.112 This approach of background interpretive influence of the customary standard is better governed within the framework of Article 31 (3) (c) and the principle of ‘systemic integration’, rather than under a technically complicated framework under the lex specilis approach. To clarify, this, by no means, however, seeks to rule out the merits of the lex specialis rule. Rather, what has been suggested here is merely that in cases where the complicated nature of the lex specialis framework have to be avoided, it is advisable to substitute such an approach with the primary-secondary rule distinction approach, given its clarity, (i.e. a more simplified version of lex specialis approach), rather than relying on the conflation approach (e.g. Enron, CMS, and Sempra awards) as an excuse to avoid the complexity of interpretative methodology. Thus, the primary-secondary rule distinction approach can avoid a complicated question incurred under the lex specialis approach and, at the same time, is able to bring the tribunals’ interpretative methodology to be in line with the framework of principles of treaty interpretation under the VCLT.

113

CONCLUSION:

To answer the recently controversial question as to whether the investor state tribunals should resort to the GATT/WTO Jurisprudence in the Course of Interpreting Art XI of the US-Argentina BIT. The answer is “it depends.” As a matter of content or substance of the rules, the GATT/WTO approach to necessity defense seems to provide a better balance between the interest of the foreign investor and the host State’s right to regulate in the time of crisis. Similarly, in respect of the application of the rule on the burden of proof, the GATT/WTO jurisprudence also provides a more clarified, appropriate, and workable burden of proof, stipulating relatively clear elements needed to be proved, than under the customary international law defense of necessity set forth under Article 25.

112 Sempra Annulment Decision, supra note 47, para 197 (“ First … the Committee accepts, of course, that it may be appropriate to look at customary law as a guide to the interpretation of terms used in the BIT. It does not follow, however, that customary law (in Article 25 ILC Articles) establishes a peremptory “definition of necessity and the conditions for its operations“)

113 Singh, Sahib, Necessity in Investor-State Arbitration: The Sempra Annulment Decision (July 20, 2010). EJIL: Talk!, August

16, 2010

As a matter of interpretative methodology however, importing a certain jurisprudence which substantively appears to be sound in itself is not enough, and such rulings might not survive the legitimacy test without providing adequate justification for adopting or importing such an apparently substantively sound rule. The side effect can also be that this inadequacy might allow the “cherry-picking” practice among the arbitral tribunals given such an unlimited discretionary power in picking the rules they subjectively see fit, worsening the existing problem of judicial inconsistency even further. In light of the cost-benefit analysis, to import the good rule without justifying the ‘pathway’ for importing those rules into the course of investment treaty interpretation can be counter-productive. This proposition appears to be true even when the content of the rule itself seems to be fairer, or capable of striking a better balance between foreign investors’ interests and the host States’ sovereign right to regulate in the time of crisis and/or for other goals of particular essential public interests. Admittedly, while the analysis should generally be limited only to the current languages of the Article XI (i.e. NPM clause) contained in the 1991 US –Argentina BIT, the proposed recommendation that the investor-state tribunals should strictly follow the general principles of treaty interpretation--particularly those rules set forth under the VCTL as well as the lex specialis principle--will, nevertheless, remain advisable for any cases concerning investment treaty interpretation, so long as the international investment law regime still needs judicial consistency, accountable jurisprudence, and systematic interpretation of the International Investment Agreements (IIA)’s provisions. Although with the modified language of the treaty-based exception, as those adopted in the US Model BIT 2012, where the terms like “it considers necessary”, clearly suggesting “self-judging clause” nature, has been incorporated;114 the difficulty involving the tribunals’ interpretative methodology can be substantially diminished, albeit not completely removed. In any case, the tribunals should continue to observe the principles of treaty interpretation as far as possible.

114

Article 18 of the 2012 U.S. Model Bilateral Investment Treaty, regarding Essential Security, states in full as follows; Nothing in this Treaty shall be construed: 1. to require a Party to furnish or allow access to any information the disclosure of which it determines to be contrary to its essential security interests; or 2. to preclude a Party from applying measures that it considers necessary for the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.

On balance, no matter which rule is to be adopted and in relation to whichever parts of the BIT provisions, in the course of interpretation the same set of rules governing treaty interpretation should be strictly followed by the international tribunals in order to improve consistency, clarity, and predictability of the international investment law jurisprudence. As a matter of policy, there is an emerging trend of the so-called global administrative law,115 in parallel to the emerging trend of international investment policy framework towards a more responsible and sustainable development.116 This refers to the effort to initiate a more ‘symmetrical’ nature of the international investment agreements between the host State and the investor obligations. Accordingly, the issue of necessity defense itself is also inevitably passing through another evolving stage of law and policy of the international investment regime. Nevertheless, what should remain unchanged and should be taken into account by the tribunals is not only to “pick” the best rule to be applied but also to adequately justify the legitimacy of picking those rules currently available under other jurisprudential regimes in the course of their treaty interpretation. This should be so particularly within the regime where the Annulment Committee has been granted a very limited power of annulment, lacking the judicial review power unlike the one vested by the WTO Appellate Body or other domestic courts of Appeal in general. Without this feature, the problem of tribunal’s bias and/or judicial inconsistency, famously perceived as a “negative” image of the international investment law regime, would be extremely difficult, if not impossible, to be solved Last but not least, the problem of interpretative methodology can also become less severe if the BIT drafters correspondingly become relatively, but appropriately, more specific in the wording they incorporate into BIT provisions, particularly with regards to the NPM clauses. More precisely, the BIT language can be made relatively more specific, for example, by making an explicit reference to a certain necessity regime. To illustrate, the 2004 Canadian model BIT has included an exceptions clause that contains a greater resemblance to GATT Article XX (i.e. “a GATT Article XX-like general exception provision”) than that under

115

See Alvarez J. Khamsi K (2009) The Argentina crisis and foreign investors: a glimpse into the heart of the investor regime. Yearbook on International Law and Policy. 2008-2009 1, pp. 379-478. 116 See UNTAD World Investment Report 2012: Towards a New Generation of Investment Policies. Available at: http:// unctad.org/UNTAD’s initiation of policy options for design and use of International Investment Agreements (IIAs) has initiate several investors’ obligation to be includes in the IIAs/BITs in order to promote sustainable development, in many areas such as environmental concerns and other CRS’s values. For instance, regarding the issue of investor corruption, UNTAD’s report 2012 included in its Section 7 on Investor obligations and responsibilities, requiring that the sanction for non-compliance should be established in the IIAs so that the investment operating in violation of host State laws that reflect international legally binding obligations including, among other things, the anti-corruption regimes where investor should be denied treaty protection.

the US-Argentina BIT.117

This treaty-drafting approach would not only help to improve international investment agreement, it would also help to resolve significantly the interpretative methodological problem within international investment law, by reducing the tribunals’ task of justifying their interpretative methodology substantially. As a matter of treaty-drafting approach, a relatively more explicit drafting style should, therefore, help to reduce ambiguity and prevent the alleged ‘cherry-picking’ phenomenon in the course of BIT interpretation.

117 See Article 10 of Canada’s latest model BIT, available at http://italaw.com/documents/Canadian 2004-FIPA-model-en. pdf See also; Improving International Investment Agreements, edited by Armand De Mestral, Celine Levesque, published by Routledge-2013;EWING-CHOW, Michael & FISCHER, Geraldine R. “ASEAN IIAs: Conserving Regulatory Sovereignty while Promoting the Rule of Law?” Transnational Dispute Management (Dec 2011) | Vol. 8, Issue 5.

Problem with Interpretative Methodology Tidarat Sinlapapiromsuk in International Investment Arbitration:

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Victims of Human Trafficking in Thailand : Viraphong Boonyobhas A Study of Women and Children

Tidarat Sinlapapiromsuk

Abstract

INTRODUCTION

PART ONE: THE INTERPRETATIVE METHODOLOGY IN LIGHT OF CUSTOMARY INTERNATIONAL LAW DEFENSE OF NECESSITY

I. An Overview of Customary International Law Defense of Necessity under the ILC’s

Draft Articles on State Responsibility, Article 25

II. Interpretative approaches advanced by the international tribunals in light of the relationship between treaty-based defense of necessity and customary law defense of necessity’

B. The lex specialis approach: the LG&E Tribunal

III. Critiques of conflation methodology advanced by the CMS, Sempra, and Enron tribunals

A. “Conceptual” Problem

B. “Methodological” Problem

IV. The influential turning point in interpretative methodology: the primary-secondary rule distinction approach advanced by the CMS Annulment Committee.

PART TWO: THE INTERPRETATIVE MATHODOLOGY IN LIGHT OF THE GATT/WTO JURISPRUDENCE: THE CONTINENTAL CASUATY APPROACH

I. The interpretative methodology under the Award of Continental Casualty v Argentina: the adoption of the WTPO/GATT jurisprudence.

A. The tribunal’s justification for adopting the WTO/GATT jurisprudence in the course of interpretation of ‘essential security interest’.

B. WTO/GATT’s jurisprudence on ‘Necessity test’ and the least restrictive alternative approach

C. The application of the WTO jurisprudence: the Continental Casualty’s interpretative methodology.

D. Critiques of the Continental Casualty tribunal’s Interpretative Methodology In

(1) Differences in nature, object, and purposes between the treaties giving rise to the departure from the principles of treaty interpretation under Article 31 of the VCLT.

(2) The textual and structural discrepancies do exist between the two regimes

(3) A Lower-Threshold Problem created by importing WTO/GATTs necessity defense regime

(4) GATT and WTO Law and Jurisprudence are in fact “remote” and not legally relevant in determining the substantive content of Article XI of the US-Argentina BIT

PART THREE: ANALYSIS AND RECOMMENDATIONS

I. Return to Rules of Treaty Interpretation under the VCLT.

II. Observance of “Lex Specialis” doctrine

III. The Adoption of Primary-Secondary Rule Distinction

CONCLUSION:

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Victims of Human Trafficking in Thailand : Viraphong Boonyobhas A Study of Women and Children

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