Invalidation of a Non-Precluded Measures Clause

1. Introduction to Non-Precluded Measures Provisions

Non-precluded measures provisions exempt measures adopted for the specified permissi-ble objectives in exceptional circumstances from some or all obligations under the BIT.²⁷⁷ Such objectives include security interests, international peace and security, public order, public health and public morality. Precluding the applicability of the specified obligations of the BIT to acts that fall within its scope, a non-precluded measures clause provides States with a legal mechanism to regulate and control the risk of investment tribunals re-viewing core State policies in exceptional circumstances and times of crisis.²⁷⁸ In case of lack of such legal mechanism in a treaty, States only have the option to refer to the neces-sity exception recognized under customary international law,²⁷⁹ which is subject to condi-tions not necessarily congruent with those established in a necessity clause included in a treaty.²⁸⁰ Apart from the varying conditions for the applicability of either an emergency

277 A prominent non-precluded measures clause is Article XXI (b) of the GATT, which provides that

“[n]othing in this 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.” The wording of the clause leaves no doubt that the state has the right to determine whether its essential security interests require pro-tection (WTO Commentary).

278 The term of essential security interests within the meaning of Article XI of the Argentina-United States BIT covers also economic emergencies (CMS v. Argentina, Award, 12 May 2005, ICSID Case No.

ARB/01/8, paras 359, 360; LG&E v. Argentina, Decision on Liability, 3 October 2006, ICSID Case No.

ARB/02/1, paras 226, 229). The applicability of the customary international law principle of necessity to extreme financial distress was not accepted in Enron v. Argentina, Award, 22 May 2007, ICSID Case No.

ARB/01/3, paras 341, 342.

279 Necessity has been recognized as part of customary international law in the Gabčíkovo-Nagymaros case (Judgment of 25 September 1997, ICJ Reports 1997, p. 40, para. 51), and in the Advisory Opinion on the legal consequences of the construction of a wall in the occupied palestinian territory (9 July 2004, ICJ Reports 2004, pp. 194, 195, para. 140). Article 25 of the ILC Articles on State Responsibility provides:

“(1) Necessity may not be invoked by a State as a ground for precluding the wrongfulness of an act not in conformity with an international obligation of that State unless the act: (a) ist he only means for the State to safeguard an essential interest against a grave and imminent peril; and (b) does not seriously impair an es-sential interest of the State or States towards which the obligation exists, or of the international community as a whole.

(2) In any case, necessity may not be invoked by a State as a ground for precluding wrongfulness if (a) the international obligation in question excludes the possibility of invoking necessity, or (b) the State has con-tributed to the situation of necessity.”

280 Such congruence was suggested in CMS v. Argentina, where the tribunal used the criteria of cus-tomary international law to decide on a violation of the emergency clause of the treaty (Award, 12 May 2005, ICSID Case No. ARB/01/8, paras 353, 357) and in Sempra v. Argentina, Award, 28 September 2007, ICSID Case No. ARB/02/16, para. 376. For the rejection of this position see CMS v. Argentina, Decision

clause or the customary international law necessity principle, the consequences as regards the payment of compensation are different. If emergency clauses such as Article XI of the United States-Argentina BIT, which as a primary rule of responsibility exclude the ap-plicability of substantive provisions of a BIT, are applicable, there is no violation of the treaty and therefore no right to compensation. In contrast, in case of necessity under cus-tomary international law, compensation is at least not excluded.²⁸¹ Thus, the existence of a non-precluded measures clause in a BIT can create less favourable conditions for the investor.

Moreover, among the BITs containing non-precluded measures clauses, there are differ-ences as to the question whether the clause is self-judging or not. While in the case of non-self-judging clauses, it is for tribunals to determine whether the conditions of the clause are fulfilled, in the case of self-judging clauses the question of whether the clause’s invocation is legally justified is removed from review by other treaty parties as well as third-party dispute settlers. In that case, the State’s independent and unilateral evaluation only remains subject to a good faith review²⁸², while the standard of review as regards non-self-judging non-precluded measures clauses is higher.²⁸³ As an example for a self-judging clause, the Protocol to the US-Russia BIT declares that the necessity clause of the BIT shall be considered self-judging.²⁸⁴ In contrast, the Argentina-U.S. BIT, which was at issue in the CMS case, contains a non-self-judging non-precluded measures clause in Ar-ticle XI.²⁸⁵

on Annulment, 25 September 2007, ICSID Case No. ARB/01/8 (Annulment Proceedings), paras 128-135.

The tribunal referred to the emergency clause in Article XI of the Argentina-US BIT, which it distinguished from the customary law principle inter alia on the ground that necessity under customary international law as described by ILC Article 25 was not a primary but a secondary rule of responsibility and which it regard-ed as lex specialis to the customary international law necessity principle. For the distinction between prima-ry and secondaprima-ry rules of responsibility see the Gabčíkovo-Nagymaros case, Judgment of 25 September 1997, ICJ Reports 1997, pp. 38, 39, para. 47.

281 See Article 27 of the ILC Draft Articles on State Responsibility.

282 Burke-White/ von Staden, Investment Protection in Extraordinary Times, pp. 376-381.

283 For the suggestion to adopt the margin of appreciation doctrine from the ECtHR, Burke-White/

von Staden, Investment Protection in Extraordinary Times, pp. 370-376.

284 The Protocol to the US-Russia BIT, para. 8 provides: With respect to Article X, paragraph 1, the Parties confirm their mutual understanding that whether a measure is undertaken by a Party to protect its essential security interests is self-judging.

285 CMS v. Argentina, Award, 12 May 2005, ICSID Case No. ARB/01/8, para. 373; Sempra v. Argen-tina, Award, 28 September 2007, ICSID Case No. ARB/02/16, para. 374; Enron v. ArgenArgen-tina, Award, 22

75 2. Case Law

The issue of a non-precluded measures clause was dealt with in the case of CMS v. Argen-tina²⁸⁶, where the Tribunal was confronted with the question whether an MFN clause can serve to invalidate a necessity clause in the basic treaty which is disadvantageous for the investor. Article XI of the Argentina-U.S. investment treaty contained a necessity clause providing 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.”

The Claimant argued that since there were third-party BITs that were not subject to an emergency clause comparable to Article XI, the Claimant was entitled to the better treat-ment resulting from the absence of such provisions by operation of the MFN clauses in Articles II (1)²⁸⁷ and IV (3)²⁸⁸ of the BIT.Since the tribunal did not qualify the situation prevailing in Argentina between 2001 and 2003 as one envisaged under Article XI and rejected the claim of necessity²⁸⁹, the invocation of allegedly more favourable provisions

May 2007, ICSID Case No. ARB/01/3, para. 337; LG&E v. Argentina, Decision on Liability, 3 October 2006, ICSID Case No. ARB/02/1, para. 212.

286 In 2001 and 2002, Argentina adopted a series of emergency measures as a response to a severe economic crisis. CMS argued that it had suffered severe losses attributable to these actions of the Argentine government. The Tribunal dismissed the investor’s claim for expropriation. However, it affirmed a violation of the fair and equitable treatment standard, given that Argentina had frustrated the legitimate expectations of the investor and that it could not invoke the state of necessity. It awarded $ 133 million of compensation.

287 Art. II (1) of the United-States-Argentina BIT provides: “Each party shall permit and treat invest-ment, and activities associated therewith, on a basis no less favorable than that accorded in like situations to investment or associated activities of its own nationals or companies, or of nationals or companies of any third country, whichever is the more favorable […]”

288 Art. IV (3) of the United-States-Argentina BIT provides: “Nationals or companies of either party whose investments suffer losses in the territory of the other party owing to […] state of national emergency […] shall be accorded treatment by such other party no less favorable than that accorded to its own nation-als or companies or to nationnation-als or companies of any third country […].”

289 CMS v. Argentina, Award, 12 May 2005, ICSID Case No. ARB/01/8, para. 356. In contrast, the tribunal in LG&E v. Argentina affirmed that the situation in Argentina from 2001 to 2003 amounted to a state of necessity under customary international law and qualified it as an economic emergency under

Arti-from third-party BITs was not relevant. Nevertheless, the tribunal rejected the application of the most-favoured-nation clause on the ground that beneficiary silence in third-party treaties could not be invoked. It held:

“Although the MFNC contained in the treaty has also been invoked by the Claimant because other treaties done by Argentina do not contain a provision similar to that of Article XI, the Tribunal is not convinced that the clause has any role to play in this case. Thus, had other Article XI type clauses envisioned in those treaties a treatment more favorable to the investor, the argument about the operation of the MFNC might have been made. However, the mere absence of such provision in other treaties does not lend support to this argument, which would in any event fail under the ejusdem generis rule […]”.²⁹⁰

3. Assessment

The Tribunal accepted that the relevant MFN clause could in principle be applied to in-voke a more favourable substantive liability regime on condition that such regime was explicitly exposed in the third-party BIT. Yet it objected to the application of the clause to beneficiary silence in a third-party treaty, stating that the application of the MFN clause would fail under the ejusdem generis rule on account of the mere absence of a disadvan-tageous clause in third-party treaties. However, this reasoning is mistaken. The Tribunal required for the MFN clause a complete identity of subject-matters provided for in the basic treaty and in the third-party treaty, which means that the applicability of the most-favoured-nation principle is excluded in such cases where the third-party BIT does not contain a comparable provision.²⁹¹ Yet the ejusdem generis principle does not exert such complete identity of matters included in the basic treaty and in the third-party treaty. It is not necessary that the subject-matters dealt with in basic treaty correspond completely to the subject-matters dealt with in the third-party treaty. What is rather decisive is the

cle XI of the Argentina-US BIT (Decision on Liability, 3 October 2006, ICSID Case No. ARB/02/1, paras 226, 251, 257, 258).

290 CMS v. Argentina, Award, 12 May 2005, ICSID Case No. ARB/01/8, para. 377.

291 See also Labidi, Où va la clause de la nation la plus favorisée en droit international des investisse-menent?, in: Horchani (ed.), Où va le droit de l’investissement?, p. 43.

77 ject-matter of the relevant MFN clause, which means that MFN clauses can only import provisions relating to the same subject-matter as the MFN clause itself.²⁹² In the case of beneficiary silence in the third-party treaty, the right claimed under the most-favoured-nation clause relates to a subject-matter that is explicitly regulated in the basic treaty. The invocation of beneficiary silence is therefore not prevented by the application of the ejusdem generis principle.

The outcome of the case can be endorsed for a different reason, however, which is also based on the necessity clause in question. Notably, this clause limits the application of the entire BIT, including its MFN clause. Since the MFN clause is not applicable, it cannot be applied to invoke beneficiary provisions or absence of provisions in a third-party treaty.

The case thus illustrates that MFN clauses cannot abrogate clauses included in the basic treaty which acquit a party of the obligations under the entire treaty, since such clauses acquit the respective party of the most-favoured-nation obligation.

III. Incorporation of the Obligation to Grant Necessary Permits and of the Prohibition to