International Law and Justice
Working Papers

IILJ Working Paper 2008/5

THE ARGENTINE CRISIS AND FOREIGNINVESTORS: A GLIMPSE INTO THE HEART
OF THE INVESTMENT REGIMEJOSÉ E. ALVAREZ and KATHRYN KHAMSIColumbia Law School

Faculty Director: Benedict Kingsbury
Co-Directors: Philip Alston, Robert Howse and J.H.H. Weiler
Program Director: Angelina Fisher
Faculty Advisory Committee:
Philip Alston, Kevin Davis, David Golove, Robert Howse,
Benedict Kingsbury, Martti Koskenniemi, Mattias Kumm,
Linda Silberman, Richard Stewart, J.H.H. Weiler,
Katrina Wyman

Institute for International Law and Justice
New York University School of Law
40 Washington Square South, VH 314
New York, NY 10012
Website: www.iilj.org

All rights reserved.
No part of this paper may be reproduced in any form
without permission of the author.

ISSN: 1552-6275© JOSÉ E. ALVAREZ and KATHRYN KHAMSIWorking Papers are issued at the responsibility of their authors, and do notreflect views of NYU, the IILJ, or associated personnel.
New York University School of Law
New York, NY 10012
U.S.A.

Cite as:IILJ Working Paper 2008/5

Finalized 7/21/08(www.iilj.org)

Work in Progress. Draft of July 21, 2008. Please do not cite or quote from without permission of
the authors. Forthcoming in the inaugural issue of the Yearbook on International Investment Law& Policy (to be published by Oxford University Press in 2009).

The Argentine Crisis and Foreign Investors:
A Glimpse into the Heart of the Investment Regime *José E. Alvarez 1 and Kathryn Khamsi 2

Abstract:
This article re-examines interpretative questions raised in the course of four controversial
arbitral decisions issued against Argentina in response to claims brought by four U.S. investors
in public utilities in that country. All these claims arose under the U.S.-Argentina Bilateral
Investment Treaty and stem from measures taken by that state to handle that country’s
financial crisis in 2001. In all the cases, Argentina attempted to assert a defense of “necessity,”
based on its own national law, customary international law, as well as a clause in the treaty thatprovides that state parties are not precluded from taking “measures necessary for the
maintenance of public order” or to protect its “essential security interests.” All four of thedecisions yielded multimillion dollar judgments against Argentina, although one partly
accepted Argentina’s defense of necessity, and a fifth arbitral decision, by an ICSID
Annulment Committee, severely criticized but did not annul one of the previous arbitralawards. This article focuses on the interpretative questions raised by the defense of necessity
and uses them to shed light on the nature of the investment regime.

*

We wish to thank Benedict Kingsbury, Lucy Reed, Stephan Schill, Brigitte Stern, Thomas Wälde, Joseph Weiler,
students in NYU Law School’s International Legal Theory Colloquium and in Columbia Law School’s seminar on
foreign investment for their helpful comments and suggestions. All errors and omissions remain ours alone.
1
Hamilton Fish Professor of Law & Diplomacy, Columbia Law School. The author testified as an independent
legal expert hired by the respective investors in the four cases cited at infra note Error! Bookmark not defined.,and his views are cited in those arbitral decisions. He was not involved in any capacity in the CMS annulment
proceeding cited at infra note Error! Bookmark not defined. and is not involved in any pending investor-state
claim against Argentina. Although the author’s legal opinions in these cases, like other expert opinions filed inthese cases, have not been made public by the parties, the author remains free to express his personal views on thesematters. The author was also, from mid-1985 through the end of 1987, as an attorney-adviser in the Office of theLegal Adviser within the US Department of State, a principal negotiator for the United States for bilateral
investment treaties (BITs). The views expressed here do not necessarily represent the views of that Office or of theUnited States government.
2
A.B. (Harvard, 1995), LL.B. and BCL (McGill, 2000), LL.M. (Columbia, 2008).

Contents

I.

Overview..............................................................................................................................2II.

CMS, LG&E, Enron, and Sempra v. Argentina: An Overview of the Decisions................9
A. The Facts........................................................................................................................9
B. The Basic Claims .........................................................................................................11
C. The Decisions...............................................................................................................11
1) The Substantive Treaty Obligations.......................................................................13
2) Argentina’s Defense of Necessity..........................................................................15
3) Argentine Domestic Law .......................................................................................21
4) Remedies................................................................................................................23

III.

An Analysis of Article XI of the U.S.-Argentina BIT........................................................26
A. Object and Purpose of the U.S.-Argentina BIT............................................................27
B. Article XI is not “Self-Judging” or Subject to a “Good Faith” Standard of Review...34
C. What is “Necessary”? ..................................................................................................43
1) Article XI is not Lex Specialis, and Therefore Article 25 should Apply ..............43
2) Deploying a ‘least restrictive alternative’ test or a ‘margin of appreciation”
standard is inconsistent with Article XI.................................................................54
D. Necessary for what? .....................................................................................................62
E. And if necessary, what follows? ..................................................................................68

IV.

Conclusion .........................................................................................................................72

I.

Overview

Actions taken by the Argentine government in response to its 2001 economic andpolitical crisis have resulted in the greatest wave of claims by foreign investors against a single
host state in recent history. Of the over 40 claims filed to date against Argentina pursuant tobilateral investment agreements (BITs) in the wake of that crisis, a number of arbitral awards
have now been issued. These include four involving claims by U.S. investors in Argentina’s gas
transportation and distribution utilities – CMS, Enron, Sempra, and LG&E (henceforth the“Argentine Gas Sector Cases”). In all four cases, ad hoc tribunals established under the WorldBank’s International Centre for the Settlement of Investment Disputes’ (ICSID) rules have foundArgentina liable for its actions. 1 The damage awards, three of which exceeded $100 million,
have been among the highest ever rendered by an ICSID tribunal. 2 The damage award in the
CMS case was affirmed in an annulment proceeding. 3 A request for annulment of the Sempra
Award is pending. 4
Although all of these decisions interpret and apply the same treaty, the Treaty Between
the United State of America and the Argentine Republic Concerning the Reciprocal
Encouragement and Protection of Investment of 1991 (henceforth the “U.S.-Argentina BIT”), 5 toa strikingly similar set of facts, the five judgments issued to date differ on a number of points,
and in particular concerning the interpretation of that treaty’s “measures not precluded” (“NPM”)
clause (Article XI). 6 Specifically, while there is significant commonality between the CMS,
Enron and Sempra decisions (which is not surprising, given the overlap in arbitrators 7 ), the1

CMS Transmission Co. v. Argentine Republic, ICSID Case No. ARB/01/8, Award (May 12, 2005) [hereinafter
CMS Award], available at
http://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=showDoc&docId=DC504_En&c
aseId=C4; LG&E Energy Corp. v. Argentine Republic, ICSID Case No. Arb/02/1, Decision on Liability (Oct. 3,2006) [hereinafter LG&E Decision on Liability], available at
http://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=showDoc&docId=DC627_En&c
aseId=C208; Enron Corp., Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. Arb/01/3, Award (May22, 2007) [hereinafter Enron Award], available at http://ita.law.uvic.ca/documents/Enron-Award.pdf; Sempra
Energy Int’l v. Argentine Republic, ICSID Case No. Arb/02/16, Award, P 391, Sept. 28, 2007 [hereinafter Sempra
Award], available at http://ita.law.uvic.ca/documents/SempraAward.pdf.
Other pending claims, such as El Paso Energy v. Argentine Republic, ICSID Case No. ARB/03/13, appear
to raise comparable issues to those that are addressed here.
2
Ibid. See also LG&E Corp. and others v. Argentina, ICSID Case No. ARB/02/1, IIC 295 (2007), 25 July 2007,
available online at http://www.investmentclaims.com/IIC_295_(2007).pdf [hereinafter “LG&E Damages Award”].
3
CMS Transmission Co. v. Argentine Republic, ICSID Case No. Arb 01/08, Decision of the ad hoc Committee on
the Application for Annulment, Sept. 25, 2007 [hereinafter CMS Annulment Decision], available at
http://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=showDoc&docId=DC687_En&c
aseId=C4.
4
Filed Jan. 30, 2008, details available from http://icsid.worldbank.org/.
5
Signed November 14, 1991, entered into force October 20, 1994, available online at
http://www.unctad.org/sections/dite/iia/docs/bits/argentina_us.pdf.
6
For text of Article XI see infra note 8. As discussed below, at Part II(C)(4), the tribunals also differed in theirviews of various damages issues. In this regard, see generally Kathryn Khamsi, ___ (forthcoming).
7
Professor Francisco Orrego Vicuña served as President of the CMS, Enron and Sempra tribunals. The Honorable
Mark Lalonde, P.C., O.C., Q.C., was a member of both the CMS and Sempra tribunals. The remaining member of
the CMS tribunal was H.E. Judge Francisco Rezek, who also sat on the LG&E tribunal. The remaining member ofthe Enron tribunal was Professor Albert Jan van den Berg, who also sat on the LG&E tribunal. The president of theLG&E Decision on Liability and the CMS Annulment Award differ markedly from the otherdecisions in their treatment of Argentina’s central defense to the investors’ claims, namely thatits financial crisis excused it from compensating injured U.S. investors for breach of the U.S.Argentina BIT (Article XI). Only the LG&E panel accepted this defense and excused part ofArgentina’s liability on this basis. While the CMS Annulment Committee did not annul the
CMS liability decision, it severely criticized it in terms that suggested considerable sympathy
with the position taken by the LG&E arbitrators.
The U.S.-Argentina BIT is part of worldwide network of investment agreements. There
were 2,572 BITs in place at the end of 2006, concluded among 174 countries, and another 241
regional free trade agreements that include investment provisions (including the North American
Free Trade Agreement (NAFTA)), provide foreign investors with non-discrimination rights(namely rights to national treatment and to most-favored-nation (MFN) treatment) comparable tothose extended to traders of goods under the WTO. Most of these investment agreements,
including the NAFTA’s Chapter Eleven and the U.S.-Argentina BIT, go further than the WTO,
however. They provide foreign investors additional guarantees not based on the relative
treatment extended to national investors, such as absolute rights to “fair and equitable” treatment
under international law and to prompt, adequate and effective compensation upon expropriation. 8
In addition, unlike the WTO’s purely inter-state dispute settlement system, the U.S.-Argentina
BIT, like most other investment agreements, provides private foreign investors with direct accessto international dispute resolution -- namely arbitration under the rules of ICSID, ICSID’s
Additional Facility, or the UNCITRAL rules. Most international investment agreements thereby
empower foreign investors from the state parties – who are effectively the third party
beneficiaries of these inter-state compacts – to assume the role of private enforcers of theinvestment rights contained in such agreements. While negotiation of such investment
agreements began four decades ago, the vast bulk of these agreements have been negotiatedsince the end of the Cold War. The commitments in these agreements stand in stark contrast to
the principles advocated forward by, most prominently, developing countries at the UN General
Assembly, under the rubric of the ‘New International Economic Order’ (NIEO). 9
The Argentine Gas Sector Cases play into long-standing controversies between “capital
exporting” and “capital importing” states familiar to international lawyers and students of the
NIEO. They have served as a Rorschach test of attitudes toward the worldwide network ofinvestment treaties and have often been used as exhibit #1 in more recent critiques of theinvestment treaty regime. These contemporary critiques parallel those faced by otherinternational regimes or institutions. 10

LG&E tribunal was Dr. Tatiana B. de Maekelt. The remaining member of the Sempra tribunal was Dr. Sandra
Morelli Rico. The CMS Annulment Committee was composed of Judge Gilbert Guillaume as president, and Judge
Nabil Elaraby and Professor James R. Crawford.
8
See Articles II(2)(a) and IV(1), U.S.-Argentina BIT.
9
See in particular the Charter of Economic Rights and Duties of States, G.A. Res. 3281 (XXIX), UN Doc. A/9631(Dec. 12, 1974), reprinted in 14 I.L.M. 251 (1974); Declaration on the Establishment of a New International
Economic Order, G.A. Res. 3202 (S-VI), 6th Special Sess., Agenda Item 7, U.N. Doc. A/RES/3202 (S-VI) (1974).
For an authoritative account of the dramatically changing nature of international investment law given the rise ofinvestment treaties, see ANDREAS LOWENFELD, INTERNATIONAL ECONOMIC LAW at 391-493 (2002).
10
See, e.g., JOSÉ E. ALVAREZ, INTERNATIONAL ORGANIZATIONS AS LAW-MAKERS, at 630-45 (2005) (discussing“horizontal,” “vertical,” and “ideological” critiques of international organizations). See also WILLIAM GRIEDER,
ONE WORLD, READY OR NOT (1997), LLOYD GRUBER, RULING THE WORLD (2000); Susan Marks, Big Brother is
Bleeping Us – With the Message that Ideology Doesn’t Matter, 12 EJIL 109 (2001).

3

As with respect to some critiques against the WTO or the legal dimensions of the IMF’s
operations, some target the investment regime’s “democratic” deficits, that is, the alleged“vertical” disconnects between what states are required to do under investment agreements andwhat their legislatures or courts are charged with doing at the national level. Other criticisms of
the “one-sided” investment agreements are reminiscent of old UN debates over the NIEO. For
some investment agreements reward only capital exporting states and their investors, while
capital importing states, typically in the Global South, have no choice but to yield to the power
and wealth disparities that such agreements reflect and perpetuate. On this view, the investment
regime is built on “horizontal” disequilibria among states that are supposed to be sovereign
equals. It is but a short step from this view to the proposition that BITs are, accordingly,
contracts of adhesion that ought to be interpreted, whereby possible, against the interests of theirrich drafters. Other critiques suggest that the investment regime, and particularly the way
investment disputes are resolved, is ideologically skewed. Thus, some suggest that investor-state
arbitral outcomes are merely another manifestation of the “Washington Consensus model” ofgovernance. 11
The more specific charges made against the investment regime are that it is insensitive toconcerns other than those of free trade, that it wrongly trumps legitimate sovereign decisions,that it destabilizes the international legal system by empowering private non-state actors, and that
it applies inappropriate private or commercial dispute resolution methods to disputes implicating
the public interest. 12 All of these are manifest in the adverse reactions generated by theArgentine Gas Sector Cases.
The original CMS multi-million dollar award and the subsequent decisions in Enron and
Sempra are, to some, casebook examples of free traders’ insensitivity to legitimate (and vitallynecessary) forms of public regulation. Some deride those rulings as callous, one-sided failures torecognize the dire needs of the Argentine people during a “financial collapse of catastrophic
proportions.” 13 There is considerable sympathy for the outlier arbitral decision in LG&E, andfor the criticisms by the CMS Annulment Committee of that first ICSID decision against
Argentina. 14 LG&E’s finding that the Argentine Decree of Necessity and Emergency of Dec. 1,
2001 was necessary to “maintain order and control the civil unrest” and was therefore an“essential security interest” 15 appears eminently reasonable to many observers– as does that
arbitral tribunal’s finding that when a state’s economic foundations are “under siege, the severityof the problem can equal that of any military invasion.” 16 It seems self-evident to manyobservers, as it did to the arbitrators in LG&E, that Argentina had “no choice but to act,” 17 that11

See generally, Daniel Kalderimis, IMF Conditionality as Investment Regulation: A Theoretical Analysis, 13 SOC.
& LEG. STUD. 104 (2004).
12
Thus, Gus Van Harten begins his book-length critique of the investment regime, which embraces all of theseconcerns, by referring to the CMS v. Argentina arbitral award. GUS VAN HARTEN, INVESTMENT TREATY
ARBITRATION AND PUBLIC LAW, at 1-2 (2007).
13
See, e.g., Burke White and von Staden, Comment on Opinio Juris (originally at
http://opiniojuris.org/posts.12011555878.shtml).
14
Many have criticized the Annulment Committee for not going further than it did to annul the CMS decision itself,
particularly since it found “manifest error of law” in its interpretation of the Article XI of the U.S.-Argentina BIT.
CMS Annulment Decision, supra note 3, ¶ 130. The Annulment Committee also indicated that if it had been “acting
as a court of appeal, it would have to reconsider the Award on this ground.” Id., ¶ 135. It also indicated that the
CMS panel decision’s application of Article XI was not only “cryptic” but “defective.” Id., ¶ 136.
15
Id., ¶¶ 231, 235 and 237.
16
Id., ¶ 238.
17
Id., ¶ 239.

4

its enactment of its Emergency Law was a “necessary and legitimate measure,” 18 and that inthese circumstances Argentina’s liability must be “excused,” at least for the period that the crisis
lasted. 19
The Argentine Gas Sector Cases also appear symptomatic of the tendency for investorstate arbitrators to “second-guess” politically sensitive actions taken by sovereigns. Many are
astounded by the idea that three individuals, two of whom are party-appointed, in a case brought
by a single foreign investor, who is not entitled even to be considered part of the greater
democratic polity of a host state such as Argentina, can question how that government chooses to
respond to a serious crisis, especially since, as the LG&E arbitrators put it, international law
generally leaves such determinations to “the State’s subjective appreciation.” 20 There isconsiderable unease, including among U.S. observers, should investor-state dispute settlement
serve as a license permitting supranational adjudicators to intrude on fundamental questions of“sovereignty” or interfere with sacrosanct matters relating to ‘domestic jurisdiction.’ 21
The criticisms directed at the original CMS arbitral decision as well as those in Enron and
Sempra coincide with those who believe that the investment regime elevates one set of the values
over the competing values of the rest of international law. Human rights and environmental
NGOs and some academics argue that investment treaty obligations are destabilizing insofar as
the regime unduly empowers already powerful multinational corporations, while devaluingstates’ efforts to give effect to competing non-trade related goals at the national and sub-national
levels. Investor-state arbitrations compel governments to engage in protracted and expensive
litigation to defend regulatory actions that often could not be challenged under national law(including under the U.S. Constitution’s takings clause) or under pre-existing international law. 22
The Argentine Gas Sector Cases also resonate with those for whom these treaties accord ‘special
rights’ to those least deserving of them, while leaving without a comparable remedy multilateral18

Id., ¶¶ 240 and 242.
Id., ¶ 245.
20
Id., ¶ 248. See generally, Van Harten, supra note 12.
Critics of the investment regime point out that such supranational second-guessing of members’ measures
to protect their “essential security” is in fact quite unlikely under the WTO regime for a number of reasons,
including the fact that WTO dispute settlement, limited to states as claimants, is unlikely to present suchopportunities for judicial intervention. See, e.g., id., at 95-102 (enumerating the many features that make investorstate arbitration unique among contemporary forms of international dispute resolution).
21
Indeed, it is probable that some state judges in the United States, who have expressed surprise that their rulings
can now be questioned in the course of NAFTA investor-state dispute settlement, would sympathize with thepositions taken by the Argentine government in these cases, and especially its contention that only Argentine courts
ought to consider such critical questions of public policy. See, e.g., Henry Paul Monaghan, Article III andSupranational Judicial Review, 107 COLUMBIA L. REV. 833 (2007) (citing the “surprise” of the Chief Justice of the
Massachusetts Supreme Court that its judgments were subject to “review” under NAFTA investor-state disputesettlement). Controversy over the Argentina cases have even played a role in debates over the wisdom of free trade
agreements on the Presidential campaign trail in the United States. See, e.g., Alan Beattie, Concern grows overglobal trade regulation, FINANCIAL TIMES, Mar. 12, 2008.
22
See, e.g., Public Citizen, NAFTA Chapter 11 Investor-to-State Cases: Bankrupting Democracy (Sept. 2001); seealso Vicki Been, Does an International ‘Regulatory Takings’ Doctrine Make Sense? 11 N.Y. U. ENVIRON. L. J. 49(2002). Public Citizen, for example, has suggested that the mere threat of NAFTA investor-state suits comparable tothose brought by LG&E, CMS, Enron, and Sempra “chill” legitimate regulatory actions by government. See Public
Citizen, supra note 19. See also Santiago Montt, What International Investment Law and Latin America Can andshould Demand from Each Other. Updating the Bello Doctrine in the BIT Generation, 3 REVISTA ARGENTINA DELRÉGIMEN DE LA ADMINISTRACION PÚBLICA (2007); Van Harten, supra note 12.
195investors’ much less powerful consumers or employees who are injured by their actions. 23 Noneof this is a surprise, of course, for those who see BITs as asymmetrical bargains struck alongpredictable North/South lines. 24
Criticisms of the Argentine Gas Sector Cases dovetail with concerns about the underlying
private arbitral mechanisms used. For some, international arbitrations, long used to resolve
purely private commercial disputes (such as breaches of contract between two private parties),
are ill-suited to settling matters involving fundamental issues of public policy. 25 Public policy
issues of such magnitude cannot be settled legitimately, it is argued, through unpredictable,haphazard and potentially inconsistent decisions issued by ad hoc arbitrators drawn only fromnarrow specialties within international law but ought best be decided by national judges or atleast a permanent body of international judges whose independence and neutrality is assured bylengthy tenure in office. 26 Others worry about the potential for forum-shopping by investors, notonly because of the prospect that more than one BIT might be applicable or because of theopportunities accorded by the most-favored-nation clauses of such treaties, but also because
investor-state dispute settlement might be used by private investors to address trade issues that
ought to be handled by the WTO’s inter-state dispute settlement mechanism. 27 And worries
about the recourse to investor-state arbitration are not limited to scholarly circles. Thus, U.S.
television commentator Bill Moyers has criticized the NAFTA’s investor-state dispute settlement
system for relegating policy disputes to “unaccountable” supranational tribunals operating insecret and closed to other stakeholders. 28
For international lawyers the Argentine Gas Sector Cases are also illustrative of anarrower legitimacy concern: the risk that investor-state arbitrators will fail to produce consistentinternational investment law. This preoccupation reflects wider fears of the de-legitimizing
consequences of the “fragmentation” of public international law threatened by the growth of
discrete specialties within international law and the proliferation of international disputesettlers. 29 This emphasis on consistent law yields predictable prescriptions for reform, such as
proposals for generalizable principles of investment law or for greater recourse to common
23

See, e.g., Jose E. Alvarez, Critical Theory and the North American Free Trade Agreement’s Chapter Eleven, 28
INTER-AMERICAN LAW REVIEW 303 (Winter 1996-97); Jose E. Alvarez, Foreword: The Ripples of
NAFTA,Foreword to NAFTA INVESTMENT LAW AND ARBITRATION: PAST ISSUES, CURRENT PRACTICE, FUTURE
PROSPECTS xxi (Todd Weiler, ed. 2004); Van Harten, supra note 12, at 142.
24
Even before the onslaught of investor-claims a number of commentators had suggested that less wealthy
countries needful of foreign capital had been forced, individually, to consent to treaties that harm or impoverish
them as a group or that make it more difficult for them to fulfill other international commitments (as under theInternational Covenant on Economic, Social and Cultural Rights). See, e.g., Andrew T. Guzman, Why LDCs Sign
Treaties That Hurt Them: Explaining the Popularity of Bilateral Investment Treaties, 38 VA. J. INT’L L. 639(1998). More radical critics have suggested that these agreements are merely a more diplomatic version of colonialera capitulation treaties in which the metropole forced non-Western countries to “civilize” along Western models.
See generally, David P. Fidler, The Return of the Standard of Civilization, 2 CHI. J. INT’ L. 137 (2001). See
generally, WILLIAM GREIDER, ONE WORLD, READY OR NOT (1997).
25
See, e.g., Van Harten, supra note 12, passim. See generally, Saskia Sassen, De-Nationalized State Agendas andPrivatized Norm-Making,” in Karl-Heinz Ladeur, ed., PUBLIC GOVERNANCE IN THE AGE OF GLOBALIZATION (2004).
26
See, e.g., Van Harten, supra note 12, at 175-84.
27
See generally, Andrea K. Bjorklund, Private Rights and Public International Law: Why Competition Among
International Economic Law Tribunals is Not Working, 59 HASTINGS L. J. 241 (2007).
28
See Bill Moyer’s Frontline Report, Trading Democracy. See also Montt, supra note 24 (describing “BIT law” asa tool to undermine the domaine reservé of states and as forms of “global constitutional law” and “global
administrative law”).
29
See,e.g., ILC fragmentation project,

6

background legal principles. 30 For others, the same goal suggests the need for the establishmentof an Appellate Body or a “permanent court” for investment disputes. 31
For all these reasons, the decisions issued by the arbitrators in the CMS, Enron, andSempra cases may be intensifying a political backlash against not only the U.S.-Argentina BIT
but the entire investment regime. They make more understandable why some states appear to behesitating before committing themselves to more investment agreements or about undertaking
further legal reforms to implement the rights of foreign investors contained in their existing
agreements. They make also help to explain or at least put into context other signs of investment
regime backlash, such as Bolivia’s May 2007 notice to ICSID announcing its withdrawal fromthe ICSID Convention, 32 Venezuela’s own recent threats to limit ICSID jurisdiction, Ecuador’sequally recent denunciation of nine of its own BITs and indication that it will not recognize
ICSID jurisdiction over oil, gas and mining investment disputes, 33 as well as actions by theUnited States and Canada to limit the scope of investor rights in their future BITs and free trade
agreements. 34
Part II below examines the results reached in the five Argentina arbitral decisions. As
that Part will illustrate, Argentina’s defense of necessity in these cases raises a number ofinterpretative questions that go to the heart of the U.S.-Argentina BIT and the investment regime
more generally. These questions include: whether that treaty’s “measures not precluded” clausein Article XI was meant to be “self-judging” such that arbitrators have either no jurisdiction to
examine the merits of such a claim or can only examine that defense under an extremelydeferential standard of review; the interplay between Article XI and customary international law,
including the customary defense of necessity; and the meanings of “public order” or “essential
security.”
In Part III we attempt our own answers to these questions, consistent with the applicationof the traditional rules of treaty interpretation contained in the Vienna Convention on the Law ofTreaties 35 and focusing on issues posed by Argentina’s defense of necessity. Part III takes as its
point of departure a recent article by one of the experts who testified in some of these cases,
William W. Burke-White, and his co-author, Andreas von Staden. 36 Burke-White and vonStaden contend that the decision issued by the original CMS arbitral tribunal and by thearbitrators deciding the Enron and Sempra cases were insufficiently sensitive to the actual30

See infra at (conclusion).
See infra at (conclusion).
32
LIST OF CONTRACTING STATES AND OTHER SIGNATORIES OF THE CONVENTION (AS OF NOVEMBER 4, 2007),ICSID/3, available from: http://icsid.worldbank.org/.
33
Juliette Kerr, Ecuadorian Government Will Not Recognise Arbitration Rulings, World Markets Research Centre,
Global Insight, Dec. 14, 2007.
34
See Céline Lévesque, Influences on the Canadian FIPA Model and the US Model BIT: NAFTA Chapter 11 andBeyond, Annuaire Canadian de Droit International 2006, 249; Gilbert Gagné and Jean-Frédéric Morin, The Evolving
American Policy on Investment Protection: Evidence from Recent FTAs and the 2004 Model BIT, 9 J. Int’l Ec. L.
357 (2006); UNCTAD, De-Mystifying the 2004 United States Model BIT, Draft, Feb. 25, 2008. See also William
Burke-White and Andreas Von Staden, Reply to Prof. Franck, in Opinio Juris (originally at http://opiniojuris.org/);
José E. Alvarez, The Evolving Foreign Investment regime, ASIL IL Post, at
http://www.asil.org/ilpost/president/pres080229.html.
35
Adopted May 22nd 1969 and opened for signature May 23rd 1969, entry into force January 27th 1980 in accordancewith article 84(1), 1155 U.N.T.S. 331 [hereinafter Vienna Convention].
36
William W. Burke-White and Andreas Von Staden, Investment Protection in Extraordinary Times: The
Interpretation and Application of Non-Precluded Measures Provisions in Bilateral Investment Treaties, 48 VA. J.
INT’L L. 307 (2008).
31

7

bargain struck by the United States and Argentina in their treaty. More specifically, they argue
that NPM provisions such as Article XI of the U.S.-Argentina BIT are distinct from customary
defenses such as necessity and constitute lex specialis; 37 that the United States and Argentina
intended Article XI of their BIT to be “self-judging;” 38 that Article XI’s “essential security
interests” ordinarily include states’ economic interests and, consistent with notions of residual
sovereignty, merit “broad interpretation;”39 that non-self-judging NPM provisions ought to be
subject to deferential standards of review such as the European Court of Human Rights(ECtHR)’ “margin of appreciation;” 40 that “implicitly self-judging” NPM provisions, such as
Article XI of the U.S.-Argentina BIT, merit the most deferential standard of review – that is,merely consideration of whether the clause is invoked in “good faith;” 41 and that in most cases,
successful invocation of an NPM provision will absolve states of international responsibility
towards investors, since these provisions preclude the applicability of the entire treaty, meaning
liability can only arise for harm incurred after the underlying crisis has ceased. 42
Our conclusions in Part III are starkly different from those reached by Burke-White andvon Staden. Specifically, we conclude that Article XI of the U.S.-Argentina BIT: is not “selfjudging” or subject to a “good faith” standard of review (Part III(B)); should be interpreted inlight of the customary defense of necessity, meaning that the party invoking Article XI bears thedifficult burden of proving the elements of that affirmative defense (Part III(C)); should not be
presumed to apply to economic crises (Part III(D)); and does not ordinarily excuse the obligation
to provide reparation even when it is properly invoked (Part II(0)). Accordingly, we contend thatthe legal conclusions reached (if not the precise reasoning) by the original CMS panel and thearbitrators in Enron and Sempra are correct under the U.S.-Argentina BIT.
Part IV revisits some of the broader legitimacy concerns raised in this Overview in lightof our conclusions in Part III. We agree with those critics of the investment regime that theinterpretative questions raised by the Argentine Gas Sector Cases have a great deal to tell us
about what the investment regime is and about its relationship with the rest of international law.
But our analysis of those cases suggests that the legitimacy deficits of the investment regime
may be both easier and more difficult to ameliorate than its defenders and critics appear tobelieve. The regime’s legitimacy deficit may be easier to fix insofar as some of the underlying
concerns seem overstated. We suggest that this may be the case with respect to worries overinconsistent investment law or concerns that arbitral awards do not take any account of thelegitimate regulatory concerns of states. At the same time, we believe that the regime’s genuine
legitimacy concerns may require something more than finding more competent dispute settlers toapply common interpretive principles. Fixing the regime may require fixing the substantive lawthat it applies.

37

Id., at 322.
Id., at 338 and 381-386.
39
Id., at 314.
40
Id., at 368-370.
41
Id., at 376-381.
42
Id. at 386-389.
38

8

II.

CMS, LG&E, Enron, and Sempra v. Argentina: An Overview of the Decisions

A.

The Facts

The facts giving rise to these disputes were practically identical. 43
In the late 1980s, Argentina privatized a number of the country’s utilities, a process
initiated by its 1989 State Reform Law. 44 Argentina took these actions, as is further discussed
below, in the wake of a previous economic crisis and as part of its attempt to overcome thatcrisis. Other reforms included passage of the 1991 Convertibility Law, which provided for theconvertibility of the Argentine currency, pegged to the US dollar through an implementing
decree. 45 Among the entities privatized was Gas del Estado S.E., Argentina’s natural gas
transportation and distribution monopoly. Argentina’s 1992 Gas Law established the legal
framework for this privatization. 46 That law set out the regulatory structure of the newly
privatized sector, and created industry regulator Ente Nacional Regulador del Gas(“ENARGAS”). Gas del Estado S.E. was divided into two transportation companies and eight
distribution companies. Each of these companies was issued a license under the Gas Law. 47
Large percentages of the shares of these companies were then sold to consortia of private
investors. The claimants in all these cases eventually acquired shareholdings in these entities. 48
Under the Gas Law, ENARGAS was mandated to set transportation and distribution
tariffs at levels that were “fair and reasonable” but would still permit a “reasonable rate of
return.” 49 Under the law, its implementing regulations, 50 and the licenses, investors benefited
from a number of what the tribunals referred to as “stabilization” guarantees, measures, ormechanisms. Tariffs were to be set for five-year periods, at the end of which they would be
reviewed and adjusted. Investors had a right to calculate tariffs in U.S. dollars and then convert
them to Argentine pesos at the time of billing. 51 They had a right to a semi-annual tariff review
based on the U.S. Producer Price Index (“PPI”). 52 The Government could not rescind or modify
the licenses without the consent of the licensees. 53 The tariff system was not to be subject tofurther control, and in the event of such control, the Government was to compensate thelicensees fully for any resulting losses. 54
During the 1990s, the ten privatized natural gas transportation and distribution companies
made substantial investments in Argentina, and the tariff system operated smoothly. 55 By the43

See generally CMS Award, supra note ¶ 1, at 53-67; CMS Annulment Decision, supra note 3, at ¶¶ 30-40; LG&E
Decision on Liability, supra note 1 at ¶¶ 34-71; Enron Award, supra note 1 at ¶¶ 61-79; Sempra Award, supra note
1, at ¶¶ 82-92.
44
Reform of State Law No. 23.696 of August 1989.
45
Law No. 23.928 of March 1991; Decree No. 2128/91.
46
Ley del Gas, Law No. 24.076 of May 1992.
47
Basic Rules of the License were approved within a model license for natural gas transportation and distribution.
Reglas Básicas de la Licencia, adopted by Decree No. 2255/92 on 7 December 1992.
48
CMS Award, supra note 1, at ¶ 58; LG&E Decision on Liability, supra note 1 at ¶ 52; Enron Award, supra note 1,
at ¶¶ 47-54; Sempra Award, supra note 1, at ¶¶ 83 and 88-92.
49
CMS Award, supra note 1, at ¶ 132-133 and 179.
50
Adopted on 28 September 1992 by Decree No. 1738/92.
51
CMS Award, supra note 1, at ¶¶ 136-138 and 161.
52
CMS Award, supra note 1, at ¶ 144; LG&E Decision on Liability, supra note 1, at ¶ 53.
53
CMS Award, supra note 1, at ¶ 145; LG&E Decision on Liability, supra note 1, at ¶ 41.
54
CMS Award, supra note 1, at ¶ 145; LG&E Decision on Liability, supra note 1, at ¶ 53.
55
LG&E Decision on Liability, supra note 1, at ¶ 52; Enron Award, supra note 1, at ¶¶ 58-59; Sempra Award, supranote 1, at ¶ 100.

9late 1990s, however, a new economic crisis had begun to develop. Thanks to deflation in
Argentina, coupled with inflation in the US, absent agreement on a new arrangement between
Argentina and the relevant foreign investors, the PPI adjustments originally contemplated would
have translated into significantly increased rates for consumers. As a result, the Argentine
government met with the licensees to discuss a postponement of the adjustment and the parties
eventually agreed to a six-month postponement of the scheduled PPI adjustment in January
2000. 56 By July of that year they agreed to a further two-year postponement. 57 In the wake of aruling by an Argentine Court of Appeal enjoining further tariff adjustments, ENARGAS
announced in November 2001 that no further adjustments to tariffs would be made. 58
Argentina’s crisis deepened in late 2001. Poverty and unemployment increased
dramatically, creating social unrest. By the end of 2001, the government was experiencing
difficulties repaying its foreign debt. As Argentines feared default and immobilization of bankdeposits, they were making massive withdrawals from their accounts. In response, in December
2001, the government issued a decree known as the “Corralito,” restricting bank withdrawals andprohibiting international currency transfers. 59 Ensuing violent public demonstrations led to theresignation of President De la Rúa and his Cabinet at the end of December 2001 and a successionof four other presidents followed within two weeks. 60
Argentina passed an “Emergency Law” in January 2002. 61 This law abolished thecurrency board that pegged the Argentine peso to the dollar under the 1991 Convertibility Law,
which resulted in a severe devaluation of the peso. 62 It also terminated the right of licensees ofpublic utilities, including gas distribution and transportation, to tariffs calculated in dollars andaccording to the US PPI. Tariffs were also redenominated in pesos at the rate of one peso to thedollar. 63 The Emergency Law required renegotiation of agreements to adapt them to the new
exchange system. 64 The government ordered ENARGAS in March 2002 to discontinue all tariff
reviews and to refrain from adjusting tariffs in any respect. 65
Dr. Néstor Kirchner took office as President on 25 May 2003. 66 Since then, Argentina’s
economy has grown steadily. 67 As of mid-2007, the licenses of the respective claimants in thesecases had not been successfully renegotiated. 68 Although the Argentine executive and the56

CMS Award, supra note 1, at ¶ 60; Enron Award, supra note 1, at ¶ 64; Sempra Award, supra note 1, at ¶ 101.
Agreement embodied in Decree No. 669/00 of 17 June 2000. CMS Award, supra note 1, at ¶ 61.
58
CMS Award, supra note 1, at ¶¶ 62-63; LG&E Decision on Liability, supra note 1, at ¶¶ 61-62; Enron Award,
supra note 1, at ¶¶ 67-68; Sempra Award, supra note 1, at ¶¶ 102-03.
59
Decree No. 1570/01, Dec. 1, 2001.
60
See generally, LG&E Decision on Liability, supra note 1, at ¶ 63.
61
Public Emergency and Foreign Exchange System Reform Law, Law No. 25.561, enacted 6 January, 2002.
62
CMS Award, supra note 1, at ¶ 65.
63
Id. According to the LG&E Decision on Liability, this was effected by Presidential Decree No. 214 of 3 February
2002, not the Emergency Law. LG&E Decision on Liability, supra note 1, at ¶¶ 66-67.
64
CMS Award, supra note 1, at ¶ 66. The modalities for this renegotiation were set out in Decree No. 293/02, Feb.
14, 2002. LG&E Decision on Liability, supra note 1, ¶ 66.
65
Resolution No. 38/02, issued on 9 March 2002.
66
LG&E Decision on Liability, supra note 1, at ¶ 70.
67
Enron Award, supra note 1, at ¶ 222.
68
The Enron tribunal observed that:
The renegotiation process has succeeded in respect of a number of public utility contracts and sectors3,
notably among them the gas producers, but has not made much progress in the gas transportation anddistribution industry, except for one contract with a gas provider (GASBAN), signed in July 2005.
(Enron Award, supra note 1, at ¶ 74.)57

10

licensees launched various attempts to implement an increase in natural gas and electricity
tariffs, these initiatives were challenged by consumer groups and others and have been blocked
by injunctions issued by Argentine courts. 69

B.

The Basic Claims

CMS, LG &E, Enron and Sempra, all U.S. corporations, brought claims against
Argentina pursuant to the U.S.-Argentina BIT. All four claimed that they had been given binding
assurances by the Argentine government that tariffs would be calculated in US dollars, that semiannual adjustments in accordance with the variation of the US PPI and review of tariffs every
five years would occur, and that their licenses would not be rescinded or modified without theirrespective consents. 70 All four maintained that the measures taken by Argentina violated thesecommitments, and therefore constituted violations of the following BIT provisions: Article
II(2)(a) (guaranteeing “fair and equitable treatment,” “full protection and security” and treatment
no “less than that required by international law”); Article II(2)(b) (barring “arbitrary” or“discriminatory” measures); Article II(2)(c) (the “umbrella clause” providing a guarantee by thestate that it would “observe any obligation it may have entered into with regard to investments”);
and Article IV(1) (ensuring compensation for direct or indirect expropriations or measures“tantamount” to expropriation). 71
In all four cases, Argentina responded that the applicable governing law under the ISCID
Convention was its own, not international law. 72 Argentina also disputed that it had given theinvestors the specific assurances that they each claimed. It argued that the legal and regulatory
framework governing the gas licenses guaranteed only a fair and reasonable tariff, and the otherguarantees claimed by the investors were in fact contingent on the Convertibility Law remaining
in force. 73 Argentina therefore denied breaching any provisions of the U.S.-Argentina BIT, andargued that, in any case, its responsibility for any such breach was precluded on the basis ofnecessity, under Argentine law, customary international law, and Article XI of the U.S.Argentina BIT. 74

C.

The Decisions

The four tribunals diverged with respect to the question of governing law. Three of thefour arbitral tribunals (CMS, Enron, and Sempra) ruled that under the ICSID Convention the

After the Enron Award, on April 26, 2007, two of the gas distribution companies of which Sempra was ashareholder signed a Memorandum of Understanding for the Adjustment of License Agreement for Distribution of
Natural Gas with Argentina. This agreement requires abandonment of claims by the companies and theirshareholders, and Sempra refused to do so. (Sempra Award, supra note 1, at ¶¶ 452-458.)
69
LG&E Decision on Liability, supra note 1, at ¶ 69; CMS Award, supra note 1, at ¶ 66; Enron Award, supra note
1, at ¶ 76.
70
CMS Award, supra note 1, at ¶¶ 85-86; LG&E Decision on Liability, supra note 1, at ¶¶ 41; Enron Award, supranote 1, at 88; Sempra Award, supra note 1, at ¶ 85.
71
CMS Award, supra note 1, at ¶ 88; LG&E Decision on Liability, supra note 1, at ¶ 72; Enron Award, supra note
1, at ¶ 87; Sempra Award, supra note 1, at ¶ 94.
72
CMS Award, supra note 1, at ¶¶ ___; LG&E Decision on Liability, supra note 1, at ¶¶ ___; Enron Award, supranote 1, at ¶¶ 203-204; Sempra Award at ¶¶ ___.
73
CMS Award, supra note 1, at ¶ 91; Enron Award, supra note 1, at ¶ 90; Sempra Award, supra note 1, at ¶ 96.
74
CMS Award, supra note 1, at ¶ 99; Enron Award, supra note 1, at ¶ 93; Sempra Award, supra note 1, ` at ¶ 98.

11

dispute was governed by both Argentine and international law. 75 Those tribunals therefore went
on to analyze, in significant detail, why Argentina’s actions breached Argentine law. Those
three tribunals canvassed and rejected legal defenses to Argentina’s actions based on Argentine
law of necessity or force majeure, before they considered the alleged violations under the BIT. 76
The fourth, LG&E, did not consider Argentine law with respect to these issues. 77
As is discussed in greater detail below, there was very little divergence among the four,
however, with respect to the interpretation of the substantive guarantees provided in the BIT asapplied to these facts. All four arbitral panels found that the claimant investors had benefited
from the above noted “stabilization” guarantees and that these had been breached by theArgentine measures. As further discussed below (Part II(C)(1)), all four panels found thatArgentina had breached Article II(2)(a) by failing to accord claimants “fair and equitable
treatment.” 78 All four found that the Argentine measures violated Article II(2)(c)’s umbrellaclause. 79 And all four ruled, explicitly or implicitly, against the claimants’ other BIT claims. 80
For its part, the CMS annulment decision did not disturb the substantive findings of breach foundby the original CMS award except with respect to that panel’s finding of violation of theumbrella clause. 81
A significant source of disagreement among these tribunals was with respect to thetreatment of Argentina’s claimed defense under Article XI of the BIT or under the doctrine ofnecessity under customary international law. Article XI of the U.S.-Argentina BIT provides asfollows:
This Treaty shall not preclude the application by either Party of measuresnecessary for the maintenance of public order, 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.
Article 25 of the Draft Articles on the Responsibility of States for Internationally Wrongful Acts,
adopted by the International Law Commission in 2001 and subsequently adopted by the UN
General Assembly (the “ILC Articles”), 82 which Argentina and the claimants agreed reflected therelevant rule of customary international law, provides:
1. Necessity may not be invoked by a State as a ground for precluding thewrongfulness of an act not in conformity with an international obligation ofthat State unless the act:(a) is the only way for the State to safeguard an essential interest against agrave and imminent peril; and75

See infra at
See infra at
77
See infra at
78
See infra at
79
See infra at
80
See infra at
81
See infra at
82
International Law Commission, Draft Articles on the Responsibility of States for Internationally Wrongful Acts
with Commentaries, U.N. G.A. DOC. A/56/10, CHAPTER V (2001).
76

12

(b) does not seriously impair an essential interest of the State or States
towards which the obligation exists, or of the international community as awhole;
2. In any case, necessity may not be invoked by a State as a ground forprecluding wrongfulness if:(a) the international obligation in question excludes the possibility of invoking
necessity; or(b) the State has contributed to the situation of necessity.”
As is further addressed below, there was considerable disagreement among the arbitrators about
whether the measures adopted by the Argentine government could be defended as a response to
the crisis faced by that country under Article XI of the BIT or under the customary doctrine ofnecessity.
The LG&E tribunal ruled that Argentina could legitimately rely on Article XI of the BIT
and that Article 25 of the ILC Articles “support[ed]” this conclusion. 83 It found, as a result, thatArgentina did not owe claimants any compensation for the period of the crisis.
The CMS, Enron and Sempra tribunals ruled, on the other hand, that Argentina could not
rely on either Article XI or the customary defense of necessity codified in Article 25 to excuse
itself from liability, even for the period of its crisis. Further, while the Enron and Sempra
decisions were virtually identical in their rationales, those tribunals’ interpretations of Article XI
and its relationship with the customary international law defense of necessity diverged from theoriginal CMS tribunal on a number of points and were also at odds with the award in LG&E andwith the opinions expressed by the CMS Annulment Committee. That Committee severely
criticized (but did not annul) the original CMS tribunal on this question and offered, in dicta, adifferent interpretation of Article XI from that found in any of the four arbitral tribunals.
That said, it does not appear that these substantive differences with respect to the defenseof necessity explain the differing damages ultimately awarded to the respective claimants. Whilethe damages awarded by the CMS, Enron and Sempra tribunals were, as might be expected,
significantly larger than those awarded to LG&E, it appears that much of the difference was due
to differing findings among the tribunals with respect to whether to award lost future profits andnot due to their differing conclusions on the viability of Argentina’s defense of necessity.
The decisions are addressed in more detail below.
1)

The Substantive Treaty Obligations

All four tribunals were in agreement that the measures taken by Argentina breached thefair and equitable treatment standard set out at Article II(2)(a) of the U.S.-Argentina BIT.
Relying, among other things, on the language in the preamble to the U.S.-Argentina BIT, thetribunals generally agreed that a “stable legal and business environment” was an essential
element of “fair and equitable treatment” 84 and that the Argentine measures entirely transformed
and altered the legal and business environment under which the investments were made. 85 All

83

LG&E Decision on Liability, supra note 1, at ¶ 245.
CMS Award, supra note 1, at ¶ 274; LG&E Decision on Liability, supra note 1, at ¶ 124; Enron Award, supranote 1, at ¶ 260; Sempra Award, supra note 1, at ¶ 303.
85
See, e.g., CMS Award, supra note 1, at ¶ 275.
84

13

the tribunals also affirmed that that standard seeks to protect the investor’s legitimate or fair
expectations and that these expectations were breached. 86
The tribunals also agreed that Argentina had breached the requirement under Article
II(2)(c) of the U.S.-Argentina BIT to “observe any obligation it may have entered into withregard to investments.” 87 The CMS tribunal found that while “purely commercial” aspects of acontract would not be protected by this umbrella clause, 88 none of the measures complained ofqualified as such, since these “all related to government decisions.” 89 It pointed, in particular, tothe breach of the stabilization clauses in the license. 90 The CMS Annulment Committee
criticized the tribunal with respect to this conclusion because it had failed to address how CMS, aminority shareholder of licensee TGN, could enforce the latter’s contractual entitlements under
the license. The CMS Annulment Committee therefore annulled that tribunal’s finding ofumbrella clause breach. 91 By contrast to the CMS Award, the LG&E, Enron and Sempra awards
did not ground their respective findings of breach of the umbrella clause on Argentina’s breachof the investors’ licenses. Those tribunals found, instead, that the guarantees made to theclaimants, including under the Gas Law, its regulations, and the licenses, constituted “obligations
with regard to investments,” despite the lack of privity, because the investors had been induced
to make their investments by such assurances. 92
All four tribunals rejected allegations that the measures taken by the Argentine
government constituted measures “tantamount to expropriation” under Article IV (1) on the basisthat the claimants had failed to prove that they had suffered “substantial deprivation.” 93 The
allegation of direct expropriation, made by Enron and Sempra but not by CMS and LG&E, wasalso rejected on the basis that there had been no permanent transfer of property. 94
The four tribunals all dismissed claimants’ allegations of arbitrary treatment within themeaning of Article II(2)(b) of the U.S.-Argentina BIT, and all but the LG&E tribunal dismissed
allegations of discrimination within the meaning of that article. The CMS tribunal found that thetreaty’s protections against discrimination and arbitrary action related to fair and equitable
treatment but only to the extent the Argentine measures continued beyond the period of thecrisis; it did not address these as distinct standards. 95 The LG&E tribunal opined that
discriminatory treatment could be shown by either discriminatory intent or effects against
foreigners but that “arbitrary” measures required a showing of “willful disregard of due process
86

CMS Award, supra note 1, at ¶ 281; CMS Annulment Decision, supra note 3, at ¶ 85; LG&E Decision on
Liability, supra note ¶ 1, at ¶¶ 130 & 132-138; Enron Award, supra note 1, at ¶¶ 267-268; Sempra Award, supra,note 1, at ¶¶ 303-304.
87
CMS Award, supra note 1, at ¶ 303; LG & E Decision on Liability, supra note 1, at ¶ 175; Enron Award, supranote 1, at ¶ 277; Sempra Award, supra note 1, at ¶ 314.
88
CMS Award, supra note 1, at ¶ 299.
89
CMS Award, supra note 1, at ¶ 301.
90
CMS Award, supra note 1, at ¶ 302.
91
CMS Annulment Decision, supra note 3, at ¶¶ 89-97.
92
LG&E Decision on Liability, supra note 1, at ¶ 175; Enron Award, supra note 1, at ¶¶ 275-277; Sempra Award,
supra note 1, at ¶¶ 310-314.
93
CMS Award, supra note 1, at ¶¶ 262-264; LG&E Decision on Liability, supra note 1, at ¶ 200; Enron Award,
supra note 1, at ¶¶ 245-246; Sempra Award, supra note 1, at ¶¶ 283-284.
94
Enron Award, supra note 1, at ¶ 243; Sempra Award, supra note 1, at ¶¶ 280-282.
95
CMS Award, supra note 1, at ¶¶ 290-95. Interestingly, the CMS tribunal contemplated the possibility that to theextent the Argentine measures extend beyond the period of the crisis and continues to differentiate between gas
producers and other public utilities, that differentiation could sustain a finding of discrimination. CMS Award,
supra note 1, at ¶¶ 293-94.

14

of law.” 96 Although it found that claimants had proven discrimination against the gas sector
contrary to Article II(2)(b), 97 it concluded that Argentina’s measures had not been shown to havebeen taken in “simple disregard of the law” and were therefore not arbitrary. 98 The Enron and
Sempra tribunals found that “discrimination” required a showing of “capricious, irrational or
absurd differentiation in the treatment accorded to the claimants as compared to other entities or
sectors” and this had not been shown. 99 They ruled that the Argentine measures were not“arbitrary” since it was not proven that some measure of “impropriety” was manifest and,further, that the measures were not arbitrary insofar as “the Government believed and understood[them to be] the best response to the unfolding crisis.” 100 Allegations made by the claimants in
CMS and LG&E that Argentina applied the measures in a discriminatory fashion contrary to adifferent guarantee in the BIT, Article IV(3), were also rejected. 101
Article II(2)(a)’s guarantee of full protection and security was addressed only in theEnron and Sempra awards. Both found that lack of protection had not been established by theclaimant. 102 None of the tribunals addressed whether the distinct guarantee of “treatment noless than that required by international law,” contained in Article II(2)(a) of the U.S.-Argentina
BIT, or the guarantee at Article X entitling investors to any better rights secured by “international
legal obligations” or national law, was breached.
2)

Argentina’s Defense of Necessity

All the arbitrators appeared to agree on at least four points: that Article XI was not “selfjudging” but required the tribunal itself to determine whether the clause could be invoked; 103 that“essential security” under that BIT clause could include “major economic crises” or “major
economic emergencies;” 104 that Article 25 of the Articles of State Responsibility reflected therelevant rules under customary law; 105 and that a separate necessity defense benefiting Argentina
could not be read into Article IV(3). 106 They differed on many other interpretative questions
concerning the scope of Argentina’s claimed defense, however.

96

LG&E Decision on Liability, supra note 1, at ¶¶ 146 & 157.
LG&E Decision on Liability, supra note 1, at ¶¶ 147-48 and 267. See also LG&E Damages Award, supra note 2,
at ____.
98
LG&E Decision on Liability, at ¶ 162.
99
Enron Award, supra note 1, at ¶ 283; Sempra Award, supra note 1, at ¶ 319.
100
CMS Award, supra note 1, at ¶¶ 290-95; LG&E Decision on Liability, supra note 1, at ¶¶ 147-48, 158, 161 and
267; Enron Award, supra note 1, at ¶¶ 281 & 283; Sempra Award, supra note 1, at ¶¶ 318-320.
101
CMS Award, supra note 1, at ¶¶ 375-376; LG&E Decision on Liability, supra note 1, at ¶ 244.
102
Enron Award, supra note 1, at ¶ 287; Sempra Award, supra note 1, at ¶ 324.
103
CMS Award, supra note 1, at ¶ 373; LG&E Decision on Liability, supra note 1, at ¶ 212; Enron Award, supranote 1, at ¶ 332; Sempra Award, supra note 1, at ¶ 385.
104
CMS Award, supra note 1, at ¶¶ 359-360; LG&E Decision on Liability, supra note 1, at ¶¶ 237-238; EnronAward, supra note 1, at ¶ 332; Sempra Award, supra note 1, at ¶ 374.
105
CMS Award, supra note 1, at ¶ 315, 317; CMS Annulment Decision, supra note 3, at ¶ 121; LG&E Decision on
Liability, supra note 1, at ¶ 245; Enron Award, supra note 1, at ¶ 303; Sempra Award, supra note 1, at ¶ 344.
106
Article IV(3) provides:
Nationals of companies of either Party whose investments suffer losses in the territory of the other Party
owing to war or other armed conflict, revolution, state of national emergency, insurrection, civil
disturbance or other similar events shall be accorded treatment by such other Party no less favorable thanthat accorded to its own nationals or companies or to nationals of companies of any third country,
whichever is the more favorable treatment, as regards any measures it adopts in relation to such losses.
9715

First, the CMS, Enron and Sempra tribunals essentially equated Article XI with thecustomary international law defense of necessity. The LG&E tribunal appeared to treat them as
distinct defenses but found that the latter supported its conclusion that Article XI excusedArgentina’s liability. 107 The CMS Annulment Committee treated them as distinct defenses. 108
Second, while all the tribunals agreed that the customary rule on necessity was accurately
set out in Article 25 of ILC Articles, they differed in how they applied that rule. The LG&E
tribunal was significantly more deferential to Argentina’s claimed defense than the other threetribunals and was the sole tribunal to uphold Argentina’s defense under both Article XI of the
BIT and customary international law. 109
Third, the decisions differed in their understanding of the effect of a successful
invocation of either Article XI or the customary defense of necessity. The LG&E tribunal foundthat successful invocation of the defense meant that Argentina was not liable for damages
suffered by the investor during the period of the crisis. The CMS Annulment Committee, in
dicta, appeared to agree. The CMS, Enron and Sempra tribunals all indicated, on the other hand,that they still would have required Argentina to compensate the claimants, even had they
accepted Argentina’s defense. 110
The tribunals’ treatment of Argentina’s “emergency” defense under its own national law
is further described below.
(a)

The relationship between Article XI and the defense ofnecessity under customary international law

The CMS tribunal stated that the defenses under customary international law and thetreaty were “one fundamental issue.” 111 Although it did not explicitly state that Article XI of thetreaty incorporates customary international law requirements, this appeared to have been its view
– for instance, it addressed two of the requirements in Article 25 of the ILC Articles – thatnecessity not be precluded by the obligation in question, and that there be no serious impairmentof the essential interest of another state – in the context of its treaty discussion. 112 This was also
the Annulment Committee’s reading of the decision. 113
Although the Annulment Committee did not annul the CMS Award on this finding, it
noted two “errors of law.” The Committee indicated the CMS arbitrators had erred in failing todistinguish between Article XI and the defense of necessity under customary international law,indicating that the first was a rule of primary obligation whereas the second, at least in the view
Only the Enron and Sempra tribunals explicitly addressed this claim. See Enron Award, supra note 1, at ¶ 320(“only meaning of Article IV(3) is to provide a minimum treatment to foreign investments suffering losses in thehost country”) & 321 (“would not allow derogation from rights under the Treaty … Even less so can it be read as a
general escape clause”); Sempra Award, supra note 1, at ¶ 362 (“only purpose of Article IV(3) is to provide aminimum level of treatment to foreign investments suffering losses in the host country… only in respect of measures
which the State ‘adopts in relation to such losses’”) and ¶ 363 (does not allow derogation from Treaty rights and“Even less so can it be read as a general escape clause”).
107
LG & E Decision on Liability, supra note 1, at ¶ 245 and see infra at part.
108
CMS Annulment Award, supra note 3, ¶¶ 129-35 and see infra at part III(C)(2)(a).
109
See infra at part II(C)(2)(b).
110
See infra at part II(C)(2)(c).
111
CMS Award, supra note 3, at ¶ 308.
112
Id., at ¶¶ 353-358.
113
CMS Annulment Decision, supra note 3, at ¶¶ 124 and 127.

16

of the ILC, was a secondary obligation. “Article XI is a threshold requirement,” noted theAnnulment Committee, “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 hasotherwise been a breach of those substantive obligations.” 114 Further, the Annulment Committee
found that the two defenses are “substantively different” and merit separate treatment. While
Article XI covers “necessary” measures without qualification, the customary international law
defense is subject to four explicit conditions. 115
Second, the Annulment Committee found that, however the state of necessity isunderstood, the arbitrators should not have avoided considering, as a distinct question, themeaning and consequence of Article XI on its own terms. The Annulment Committee argued
that if necessity is understood to mean that its invocation results in there being no prima facie
breach, it would be a primary rule of international law. Since Article XI is also a primary rule ofinternational law, the customary defense of necessity would be overridden by Article XI as lex
specialis. If, on the other hand, the state of necessity at customary international law isunderstood to address only responsibility, as it was understood by the ILC, it is a secondary ruleof international law. On such an understanding, according to the Committee, the tribunal should
first have addressed whether Argentina’s actions were excused under Article XI. It argued that
only if the tribunal had first concluded that there was a breach of the primary rules of obligation
because Argentina’s measures were not within Article XI and were otherwise in violation of the
BIT, should it have considered necessity as a secondary rule possibly excusing Argentina’s
wrongful act. 116
Like the Annulment Committee, the LG&E tribunal also appeared to treat Article XI andthe customary defense of necessity as distinct defenses but since it decided that the evidence
indicated that Argentina’s conduct was excused under both, the distinction was not particularly
significant. That tribunal rejected the argument that Article XI required proof that the Argentine
measures were the “only means” to respond to the crisis. 117 At the same time, it also found that
Article XI “refers to situations in which a State has no choice but to act,” but in which the state“may have several responses at its disposal to maintain public order or protect its essential
security interest,” and found that the provisions in Argentina’s Emergency Law that adversely
affected the claimants were “a legitimate way of protecting its social and economic system.” 118
That tribunal determined that Argentina’s enactment of its Emergency Law “was a necessary andlegitimate measure” 119 and that “Claimants have not provided any reason as to why suchmeasure would not provide immediate relief from the crisis.” 120 But the LG & E tribunal also
recognized that the customary defense of necessity, codified in Article 25 of the ILC’s Articles
of State Responsibility, requires a demonstration that the state’s measures are the “only way” torespond to a crisis but found that Argentina’s economic recovery package was “the only means
to respond to the crisis.” 121
The Enron and Sempra Awards come to the same result as the CMS Award, but by amore explicit route. The Enron Award found that, since Article XI does not define essential
114

Id., at ¶ 129.
Id., at ¶ 130.
116
Id., at ¶¶ 133-134.
117
LG&E Decision on Liability, supra note 3, at ¶ 239.
118
Id., at ¶ 239.
119
Id., at ¶ 240.
120
Id., at ¶ 242.
121
Id., at ¶¶ 250 and 257.
115

17

security, it is “necessary to rely on the requirements of state of necessity under customaryinternational law,” as outlined in Article 25, and thus the treaty “becomes inseparable from thecustomary international law standard insofar as the conditions for the operation of the state ofnecessity.” 122 Similarly, the Sempra Award found Article XI to be “inseparable from the CIL
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.” 123 Both decisions
specifically reject the argument that Article XI is lex specialis because the treaty does not clearly
indicate this was its intent. 124(b)

The application of the requirements for necessity undercustomary international law

The CMS, Enron and Sempra tribunals all found that the cumulative requirements of thecustomary necessity defense, reflected in Article 25 of the ILC Articles, had not been satisfied. 125
While the LG&E tribunal was more generous to Argentina in its application of the criteria fornecessity under customary international law, it is unclear whether those arbitrators would havefound Argentina’s breaches excused on customary grounds alone. 126
The tribunals differed on the question of whether an “essential interest” of Argentina wasat stake or whether that state faced a need to safeguard itself against a “grave and imminent
peril.” The Enron and Sempra tribunals required that the crisis compromise “the very existenceof the State and its independence so as to qualify as an essential interest.” 127 They found that thecrisis, albeit severe, did not meet this standard since “[q]uestions of public order and social
unrest could be handled as in fact they were … under the constitutional arrangements inforce.” 128 With respect to “grave and imminent peril,” they found that “[w]hile the government
had the duty to prevent the worsening of the situation and could not simply leave events tofollow their own course, there is no convincing evidence that the events were out of control or
had become unmanageable.” 129
The LG&E tribunal appeared to take a somewhat different interpretation of therequirements of the defense of necessity under customary law. It found that “economic, financial
or those interests related to the protection of the State against any danger seriously compromising
its internal or external situation, are also considered essential interests.” 130 A threat to the state’s
essential interest, according to the LG&E tribunal, means less than a threat to the state’s
existence, as the latter is protected by self-defense. 131 It found on the facts presented to it thatArgentina’s essential interests had been threatened by a “serious and imminent danger”
established on the basis of objective evidence. 132

122

Enron Award, supra note 1, at ¶¶ 333-334.
Sempra Award, supra note 1, at ¶¶ 375-376.
124
Enron Award, supra note 1, at ¶ 334; Sempra Award at ¶ 378.
125
CMS Award, supra note 1, at ¶ 331; Enron Award, supra note 1, at ¶ 313; Sempra Award, supra note 1, at ¶ 346,
and see also at ¶ 355.
126
LG&E Decision on Liability, supra note 1, at ¶¶ 245, 258 & 262.
127
Enron Award, supra note 1, at ¶ 306; Sempra Award, supra note 1, at ¶ 348.
128
Enron Award, supra note 1, at ¶ 306; Sempra Award, supra note 1, at ¶ 348.
129
Enron Award, supra note 1, at ¶ 307; Sempra Award, supra note 1, at ¶ 349.
130
LG&E Decision on Liability, supra note 1, at ¶ 251.
131
Id., at ¶ 252.
132
Id., at ¶¶ 253, 257.
123

18

It is unclear what standard the CMS tribunal applied, or indeed whether it found that an“essential interest” of Argentina had been threatened. It stated that “the issue is to determine thegravity of the crisis.” 133 It found “the crisis was indeed severe,” but not that “wrongfulness
should be precluded as a matter of course under the circumstances.” 134 The CMS tribunal was
equally cryptic on the question of whether the crisis constituted a “grave and imminent peril.” Itfound that, while the “situation was difficult enough to justify the government taking action toprevent a worsening of the situation and the danger of total economic collapse,” “neither does therelative effect of the crisis allow here for a finding in terms of preclusion of wrongfulness.” 135
The CMS, Enron and Sempra tribunals all interpreted the “only means” requirement at
Article 25(1)(a) as excluding the defense of necessity if any other means were available to thegovernment. Engaging in an inquiry into the specific measures adopted, all three found thatArgentina’s response to the crisis failed to meet this standard. None, however, identified theother means that would have been available, the Enron and Sempra tribunals expressly declining
a request to do so as inappropriate. 136 The LG&E tribunal, by contrast, assessed the measures
Argentina had taken generally, in their totality. As noted, it indicated that “an economic
recovery package was the only means to respond to the crisis,” and that an “across the board
response was necessary, and the tariffs on public utilities had to be addressed.” Assessing thesemeasures as a package, it found that Argentina had satisfied the ‘only means’ requirement. 137
The CMS, Enron, and Sempra tribunals all found that no essential interest of theinternational community as a whole was impaired, the Enron and Sempra tribunals further
specifying that the international community’s interest in the matter was of a general kind. 138 The
LG&E decision did not address whether the interests of the international community would be
impaired.
The CMS, Enron and Sempra tribunals found that the question of whether the essential
interest of another state (here, the United States) would be impaired should be assessed in thecontext of its consideration of Article XI of the BIT, since the interest in question arose from the
BIT. All three determined in that context that the essential interest of the United States would
not be impaired. The reasoning in this regard rested on the United States’ evolving views on
whether essential security should be self-judging – explicitly in the Enron and Sempra Awards,
and implicitly in the CMS Award. 139 The LG&E tribunal also found that no other state’s
essential interest was impaired. 140
The CMS, Enron and Sempra tribunals addressed a further consideration in relation to
Article 25(1)(b) not stemming from its text – namely, the interests of the investor. All threefound that while the essential interests of investors are affected by the invocation of Article XI,
the necessity plea was “not precluded on this count.” 141 The relevance of the essential interest of
the investors was not addressed in the LG&E decision.
133

Id., at ¶ 319.
Id., at ¶ 320.
135
Id., at ¶ 322.
136
CMS Award, supra note 1, at ¶¶ 323-324; Enron Award, supra note 1, at ¶ 308; Sempra Award, supra note 1, at¶ 350.
137
LG&E Decision on Liability, supra note 1, at ¶ 257.
138
CMS Award, supra note 1, at ¶ 325; Enron Award, supra note 1, at ¶ 310; Sempra Award, supra note 1, at ¶ 352.
139
CMS Award, supra note 1, at ¶¶ 357-358; Enron Award, supra note 1, at ¶ 341; Sempra Award, supra note 1, at¶ 390.
140
LG&E Decision on Liability, supra note 1, at ¶ 257.
141
CMS Award, supra note 1, at ¶ 358; Enron Award, supra note 1, at ¶ 342; Sempra Award, supra note 1, at ¶ 391.
134

19

In relation to the requirement at Article 25(2)(a) that the international obligation inquestion not preclude the use of the defense, the LG&E tribunal found that the “inclusion of anarticle authorizing the state of necessity in a BIT constitutes the acceptance … of the possibility
that one of them may invoke the state of necessity.” 142 While the CMS, Enron and Sempra
tribunals said they would address this requirement in their discussion of Article XI, 143 they did
not explicitly return to this point. In their later discussion of Article XI, however, they bothfound that, given that the object and purpose of the treaty is to be applicable in situations of
economic difficulty, that exception should be read restrictively. 144 The CMS Award implicitly
found that the object and purpose of the treaty did not preclude necessity, although necessity was
precluded in the case before it: “A severe crisis cannot necessarily be equated with a situation of
total collapse. And in the absence of such profoundly serious conditions it is plainly clear that
the Treaty will prevail over any plea of necessity.” 145 The CMS Annulment Decision did not
address this specific finding. 146
In relation to the requirement at Article 25(2)(b) that the state not have contributed to thesituation of necessity, once again the LG&E tribunal differed from the others. The LG&E
decision, in finding this requirement satisfied, made two findings – that the claimants had notproven that Argentina has contributed to the state of necessity, and that the “attitude adopted by
the Argentine Government has shown a desire to slow down by all the means available theseverity of the crisis.” 147 The CMS, Enron and Sempra tribunals, by contrast, all found that thecrisis was not due to exogenous factors alone and that there had been a “substantial contribution”
by various Argentine administrations to the situation of necessity. 148(c)

The effect of establishing the defense of necessity

All tribunals were in agreement with the principle that the defense of necessity operates
only to preclude wrongfulness as long as the situation persists, as is contemplated at Article 27(a)of the ILC Articles. 149 They differed, however, on the effects this principle has on the obligation
to provide compensation for loss. All four tribunals turned for guidance to Article 27(b) of the
Articles of State Responsibility, which provides that the invocation of necessity is “without
prejudice to … [t]he question of compensation for any material loss caused by the act inquestion.”
The CMS Award held that “necessity may preclude the wrongfulness of an act, but it
does not exclude the duty to compensate the owner of the right which had to be sacrificed,”relying on, among other things, Article 27. 150 The Enron and Sempra Awards take essentiallythe same position. 151 In all three, this aspect of the award was obiter dicta, given that the
142

LG&E Decision on Liability, supra note 1, at ¶ 255.
Enron Award, supra note 1, at ¶ 310; Sempra Award, supra note 1, at ¶ 352.
144
Enron Award, supra note 1, at ¶ 331; Sempra Award, supra note 1, at ¶ 373.
145
CMS Award, supra note 1, at ¶ 354.
146
CMS Annulment Decision, supra note 3, at ¶ 133.
147
LG&E Decision on Liability, supra note 1, at ¶¶ 256- 257.
148
CMS Award, supra note 1, at ¶ 329 (finding that Argentine government policies and their “shortcomings
significantly contributed to the crisis and the emergency”); Enron Award, supra note 1, at ¶ 312; Sempra Award,
supra note 1, at ¶ 354.
149
CMS Award, supra note 1, at ¶¶ 379-382; LG&E Decision on Liability, supra note 1, at ¶ 261; see also ¶¶ 230,
261, 263 and 265; Enron Award, supra note 1, at ¶ 343; Sempra Award, supra note 1, at ¶ 392.
150
CMS Award, supra note 1, at ¶ 388; see also at ¶¶ 390 and 392.
151
Enron Award, supra note 1, at ¶ 345; Sempra Award, supra note 1, at ¶ 394.
143

20

tribunals had not found the conditions of necessity or of Article XI to have been satisfied. The
CMS and Sempra tribunals also indicated that the crisis Argentina faced would, nonetheless, beconsidered in the quantification of damages and, while it did not say it would do the same, theEnron tribunal appeared to take the crisis into account in its calculation of damages. 152
The Annulment Committee also criticized the “obiter dicta” of the CMS tribunal. 153 It
noted that Article 27 was not relevant to the question of whether compensation is due when
Article XI applies, as the principle in Article 27 only “covers cases in which the state ofnecessity precludes wrongfulness under customary international law.” 154 Given that the tribunal
had not found a state of necessity, Article 27, in its view, should never have come into play.
Rather, the tribunal “should have considered what would have been the possibility ofcompensation under the BIT if the measures taken by Argentina had been covered by Article
XI.” It found the answer to that question “clear enough”: “Article XI, for so long as it applied,
excluded the operation of the substantive provisions of the BIT. That being so, there could be no
possibility of compensation being payable during that period.” 155
The CMS Annulment Committee also noted that “Article 27 itself is a ‘without prejudice’
clause, not a stipulation” of damages, 156 the suggestion being that the tribunal should not haverelied on Article 27 as in any way determinative on the question of whether damages were owed
even where necessity comes into play to preclude wrongfulness.
This was also the position of the LG&E tribunal. 157 It found that Argentina was“excused under Article XI from liability for any breaches,” 158 and that while the “protections
afforded by Article XI have been triggered in this case, and are sufficient to excuse Argentina’s
liability . . . satisfaction of the state of necessity standard … supports the Tribunal’s
conclusion.” 159 As such, it found that “damages suffered during the state of necessity should beborne by the investor.” 160 However, that tribunal did find Argentina liable for damages causedby the treaty violations that were not attributable to the period of the crisis. It also ruled that theend of the Argentine crisis was not to be determined by the repeal of the Emergency Law, which
had yet to occur at the time of award (and indeed still has yet to occur 161 ), but when Dr. Kirchnerassumed office. 162
3)

Argentine Domestic Law

All of the awards, and the CMS Annulment Committee, consider Argentine law –notably, the various tariff stabilization guarantees – as a matter of fact relevant to the question of152

CMS Award, supra note 1, at ¶ 356; Sempra Award, supra note 1, at ¶ 346 and see Enron Award, supra note 1,
at ¶¶ 407 and 414. See also discussion below at 0(C)(4).
153
CMS Annulment Decision, supra note 3, at ¶ 145.
154
Id.
155
Id., ¶ 146.
156
Id., ¶ 147.
157
LG&E Decision on Liability, supra note 1, at ¶ 260 (stating that Article 27 “does not attempt to specify in whatcircumstances compensation would be payable. … the Tribunal’s interpretation of Article XI … provides theanswer”).
158
Id., ¶ 229; see also Id., ¶ 261.
159
Id., ¶ 245.
160
Id., ¶ 264.
161
In December 2007, the Argentine Senate passed a seventh extension of the law through 2008. (Argentine senate
extends economic emergency rule, REUTERS NEWS, December 13, 2007.)
162
LG&E Decision on Liability, supra note 1, at ¶ 227-230.

21

whether treaty standards were breached. While the CMS, Enron and Sempra tribunals also
analyzed separately and in significant detail why Argentina was in breach of its domestic
legislation, and why domestic defenses such as necessity were not available, 163 the LG&E
tribunal did not.
The CMS, Enron, and Sempra tribunals all canvassed a number of potential excuses andother legal mechanisms that might be engaged by the crisis under Argentine domestic law, but
rejected the applicability of all of them. These included the concepts of necessity andimprévision, as well as force majeure 164 and unjust enrichment. 165
All three tribunals considered the defense under domestic law arising from a “state of
emergency” or “necessity” against the principles articulated in a 2003 Argentine Supreme Court
decision. 166 According to that Court, an emergency measure must meet three requirements inorder to provide a defense. It must be limited in duration, provide a remedy and not permanently
mutate contractual rights, and be reasonable. The Enron and Sempra awards canvassed all ofthese requisites and determined that none of them were met. 167 The CMS rejected the claim as
well, but appeared to have addressed explicitly only the second requirement. 168
All three tribunals were prepared to consider, as a matter of law, that the events might fallwithin one or more of the provisions of the Argentine Civil Code, including the concept ofimprévision, under which there judicial intervention is permissible to re-equilibrate investment
terms despite the various stabilization guarantees. 169 The three tribunals eventually rejected theapplicability of these concepts as a matter of fact, though, given the history behind thestabilization guarantees and the BIT.
The CMS tribunal found that the measures in the Emergency Law failed to meet an“essential condition” of imprévision – namely, that they have been taken to address a situationthat was not foreseeable. Argentina had argued that the tariff charged reflected both devaluationand country risks, thereby admitting that the risk of currency devaluation “was foreseeable andactually foreseen.” 170 The Enron tribunal was influenced by similar considerations:… if the major features of the whole regulatory regime put in place under theprivatization were based on taking cover against all kind of risks inspired by the
economic history of the country and the instability of the 1980s, including country
risk and devaluation, it is in itself indicating that the parties were quite aware of
the dangers ahead. 171
That tribunal concluded that: “It would then make no sense if when the dangers materialized, as
they did, the protection envisaged would not operate.” 172
163

CMS Award, supra note 1, at ¶¶ 200-246; Enron Award, supra note 1, at ¶¶ 127-167 & ¶¶ 210-232; Sempra
Award, supra note 1, at ¶¶ 100-196.
164
CMS Award, supra note 1, at ¶ 227; Enron Award, supra note 1, at ¶ 218; Sempra Award, supra note 1, at ¶ 246.
165
CMS Award, supra note 1, at ¶ 220.
166
Provincia de San Luis c. P. E. N. – Ley 25561, Dto. 1570/01 y 214/02 s/ amparo, Judgment, Argentine Supreme
Court, March 5, 2003.
167
Enron Award, supra note 1, at ¶¶ 218-225 & 293; Sempra Award, supra note 1, at ¶¶ 247-256 & 330.
168
CMS Award, supra note 1, at ¶ 217.
169
See e.g. Enron Award, supra note 1, at ¶ 214.
170
CMS Award, supra note 1, at ¶ 225. See also Id. at ¶¶ 134 and 137.
171
Enron Award, supra note 1, at ¶ 216.
172
Id.

22

The CMS, Enron and Sempra tribunals were all prepared to accept that Argentina needed
to take measures in order to respond to the crisis but concluded that Argentina had failed toadhere to the contractual adjustment mechanism to which it had agreed but had instead acted
unilaterally. The CMS tribunal canvassed at some length the “pertinent mechanisms” foraddressing the crisis in the license and under Argentine law, concluding that, as the “necessary
adjustments could be accommodated within the structure of the guarantees” made to CMS,
unilateral action by Argentina was “unnecessary.” 173 The Enron Tribunal acknowledged that thedramatic change to economic conditions that occurred in Argentina could have “a profoundeffect on the economic balance of contracts and licenses,” 174 accepted that adjustment might beappropriate as a consequence, 175 but noted that “the real problem underlying the claims” was thatArgentina had acted unilaterally. 176 It found that under the regulatory framework “if tariffs
ceased to be fair and reasonable, the regulatory framework provided for specific adjustment
mechanisms, tariff reviews on periodic basis and even the possibility of an extraordinary
review.” 177 The Sempra Tribunal even appears to have been prepared, if the implementation of
the contractual review mechanism would have taken some time, to accept that the government
might have taken unilateral measures “pursuant to a limited time schedule while reviews werecarried out.” 178
None of these decisions specifically addressed Article X of the BIT, which affirms
investors’ protections under existing national law and gives them the benefit of those protections
to the extent greater than the BIT itself. 179 As all three tribunals determined that Argentina had
no valid excuse under both national law and the BIT, presumably the arbitrators believed suchdiscussion was unnecessary.
4)

Remedies

The CMS, Enron, and Sempra tribunals all went on to determine the amounts owed by
Argentina to the claimants by virtue of the breaches found, whereas the LG&E tribunal left thisto be determined in a next phase of proceedings. 180 The approach taken to the determination ofArgentina’s liability in the CMS, Enron and Sempra tribunals was essentially the same. The
LG&E tribunal, once again, differed substantially – not only in its approach to the measure ofcompensation, but also in its rejection of lost future profits as too uncertain to compensate.
All four tribunals agreed that the applicable standard for reparation was that set out in the
Chorzow Factory Case 181 and codified at Article 31 of the ILC Articles, 182 namely that173

CMS Award, supra note 1, at ¶¶ 228-38.
Enron Award, supra note 1, at ¶ 143.
175
Id. at ¶ 104.
176
Id. ¶ 144.
177
Id. at ¶ 143. See also CMS Award, supra note 1, at ¶¶ 228-238; Sempra Award, supra note 1, at ¶¶ 259-260.
178
Sempra Award, supra note 1, at ¶ 261.
179
But as discussed above at II (C)(3), the CMS, Enron, and Sempra decisions on applicable choice of law led those
three tribunals to extensive discussions of Argentina national law, particularly with respect to Argentina’s defense ofnecessity.
180
LG&E Decision on Liability, supra note 1, at ¶ 267(e); LG&E Damages Award, supra note 2.
181
Case Concerning Certain German Interests in Polish Upper Silesia (Germany v. Poland), Permanent Court ofInternational Justice Proceeding, Merits 1928, P.C.I.J. Series A. No. 17, at 47 (“Chorzow Factory”). See, e.g., CMSAward, supra note 1, at ¶ 400 (citing Chorzow Factory case).
182
Article 31 provides:
174

23compensation must “wipe out the consequences” of the illegal act and, therefore, the standard ofcompensation is measured by the “loss suffered.” 183
All four tribunals noted that the U.S.-Argentina BIT, which specifically refers to fairmarket value as the measure of compensation in cases of expropriation, does not prescribe ameasure of compensation where other guarantees within that treaty are breached. 184 The CMS,
Enron and Sempra tribunals nonetheless determined that fair market value was the appropriate
measure to be applied in the case before them, given the “cumulative nature” of the breaches(CMS and Enron tribunals), the “important long-term losses” (CMS tribunal) or the similarity
between a breach of the fair and equitable treatment standard and indirect expropriation (Enronand Sempra tribunals). 185 As such, these three tribunals decided that the loss to be compensated
was the difference between the fair market value of claimants’ shareholdings assuming
Argentina had not taken its offending measures compared to their value after the offending
measures. Argentina sought annulment of the CMS Award’s application of the fair market value
measure, arguing that it was contradictory for the tribunal to have found no expropriation and yet
apply the expropriation standard. 186 The CMS Annulment Committee rejected this argument andappeared to agree with the CMS tribunal’s rationale for opting for fair market value. 187
The LG&E tribunal, on the other hand, rejected the fair market value measure. 188 It did
so for various reasons, including because, in its view, the measure of damages for wrongful actsshould be different from that for compensation for lawful expropriation. 189 Instead, the LG&E
tribunal indicated that the appropriate measure of damage was the “actual loss” incurred by theinvestors “as a result” of Argentina’s wrongful acts, and determined that this damage could bemeasured by the loss of dividends. 190
In order to calculate the fair market value measure, the CMS, Enron and Sempra tribunals
all applied the discounted cash flow (“DCF”) method. 191 However, the the three tribunals
adjusted the amounts of the various variables used by the respective claimants in their respective
DCF calculations, and therefore came to different views on the quantum of damages owed ascompared to those put forward by the respective claimants. 192 All three tribunals also come to
1. The responsible State is under an obligation to make full reparation for the injury caused by theinternationally wrongful act.
2. Injury includes any damage, whether material or moral, caused by the internationally wrongful act of aState.
183
CMS Award, supra note 1, at ¶ 402; LG&E Damages Award, supra note 1, at ¶ 45; Enron Award, supra note 1,
at ¶¶ 359 and 379; Sempra Award, supra note 1, at ¶¶ 400-401.
184
CMS Award, supra note 1, at ¶ 409; LG&E Damages Award, supra note 2, at ¶ 30; Enron Award, supra note 1,
at ¶ 359; Sempra Award, supra note 1, at ¶ 403.
185
CMS Award, supra note 1, at ¶¶ 409-410; Enron Award, supra note 1, at ¶¶ 359-363; Sempra Award, supra note
1, at ¶¶ 403-404.
186
CMS Annulment Decision, supra note 3, at ¶ 152.
187
CMS Annulment Decision, supra note 3, at ¶ 154.
188
LG&E Damages Award, supra note 2, at ¶ 32.
189
Id. at ¶ 38.
190
Id. at ¶ 45.
191
CMS Award, supra note 1, at ¶¶ 411, 416 & 421; Enron Award, supra note 1, at ¶¶ 385 & 389; Sempra Award,
supra note 1, at ¶ 416. That said, the Enron Award used the actual price paid in a sale by the claimant of its sharesrather than the DCF approximation in determining the actual fair market value of its shareholdings (at ¶ 389).
Similarly, the Sempra Award used the terms of an MOU signed by licensees and Argentina in determining the actual
fair market value (at ¶¶ 452-458).
192
See generally CMS Award, supra note 1, at ¶¶ 444-446 (regarding demand for gas), 447 and 456-457 (regarding
future tariffs), 449 (regarding the exchange rate), 450 (regarding equity discount rates) and 458-462 (regarding24different views on the quantum of damages owed as compared to those put forward by therespective claimants. 193 Most notably, for present purposes, the CMS, Enron and Sempra
tribunals found that certain of the variables that the claimants had used in their calculation ofwhat might have been the value of their holdings absent the offending measures did notadequately take into account the effect that the crisis would have had on the value of theirholdings. For instance, both the CMS and Sempra tribunals found that the claimants had not
sufficiently factored into their DCF calculation the decrease in demand for gas that would haveresulted from the crisis. 194 For its part, the Enron tribunal found that the assumptions as to tariffadjustments made by claimants in their calculations were “not a realistic scenario in a crisis
context” and therefore modified these assumptions. 195 That tribunal also appeared to modify thetariff base and the cost of capital assumptions for the same reason. 196 In these respects, theeconomic impact of the Argentine crisis on the investors was taken into consideration in
determining the damages actually caused by the treaty breaches, and therefore in determining
compensation, even though those tribunals refused to find that this crisis constituted an excuse
under the U.S.-Argentina BIT’s Article XI.
The LG&E tribunal, in applying the lost dividends measure of damages, imposed a highstandard of proof on the investors, insisting that they needed to prove future losses with“certainty.” 197 That tribunal ultimately found that the future loss to LG&E was speculative. 198 It
set the date of February 28, 2005, the last date of hearings and evidence in the proceeding, as thedate beyond which lost dividends had not been proved, and therefore awarded no damages for
projected lost dividends after this date. However, that tribunal left the door open for LG&E tobring further damage claims based on Argentina’s continuing breaches 199 and a “Supplementary
Decision Proceeding,” registered by LG&E on September 24, 2007, remains pending at thiswriting. 200 Also, as contemplated in the LG&E Decision on Liability (discussed above at
II(C)(2)(c)), no compensation was awarded for damages (including lost dividends) attributable tothe period of necessity, 201 which the tribunal had determined began on December 1, 2001 andended with the election of President Kirchner on April 26, 2003. 202

operations and maintenance expenditures); Enron Award, supra note 1, at ¶¶ 408-410 (regarding tariff base) and
411-413 (regarding the cost of capital); Sempra Award, supra note 1, at ¶¶ 418-428 (regarding the asset base), 429437 (regarding the and discount rate), 438-45 (regarding tariff increases) and 446-449 (regarding consumption
effect).
193
See generally CMS Award, supra note 1, at ¶¶ 444-446 (regarding demand for gas), 447 and 456-457 (regarding
future tariffs), 449 (regarding the exchange rate), 450 (regarding equity discount rates) and 458-462 (regarding
operations and maintenance expenditures); Enron Award, supra note 1, at ¶¶ 408-410 (regarding tariff base) and
411-413 (regarding the cost of capital); Sempra Award, supra note 1, at ¶¶ 418-428 (regarding the asset base), 429437 (regarding the and discount rate), 438-45 (regarding tariff increases) and 446-449 (regarding consumption
effect).
194
CMS Award, supra note 1, at ¶¶ 444-446; Sempra Award, supra note 1, at ¶¶ 446-449.
195
Enron Award, supra note 1, at ¶ 414.
196
Id., ¶ 406-407.
197
LG&E Damages Award, supra note 2, at ¶¶ 51 and 89.
198
LG&E Damages Award, supra note 2, at ¶ 90.
199
The tribunal agreed with LG&E as to the “continuing nature” of Argentina’s breach (id., at ¶¶ 65 and 88), and did
not discount the possibility, referred to by LG&E, that it might seek “periodic and additional relief” to remedy thiscontinuing breach (id., at ¶ 66).
200
ICSID website at http://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=ListPending
201
LG&E Damages Award, supra note 2, at ¶ 61.
202
LG&E Decision on Liability, supra note 1, ¶ 230.

25

In the end, CMS was awarded $133.2 million in compensation, rather than the $261.1
million it had claimed, 203 a determination that was not affected by the Annulment Decision. 204
Enron was awarded $106.2 million, rather than the amounts it had claimed, or rather the
spectrum of possible such amounts, which appear from the award to have ranged from$278,722,689 to $543,809,030 based on different valuation methods and dates. 205 Sempra wasawarded $128,250,462 rather than the $209.38 million it had claimed. 206 LG&E has been
awarded $57.4 million to date, 207 rather than the $248 million originally claimed (excludinginterest and costs). 208
What is striking is that by far the greater part of the difference between amounts claimed
and awarded in LG&E as compared to the much larger sums awarded in CMS, Enron, andSempra is attributable to the LG & E tribunal’s decisions on the relevant measure and valuationof damages, rather than its finding on the applicability of Article XI or the defense of necessity.
Based on the LG&E tribunal’s calculations, the quantum of lost profits attributable to the periodof emergency, that is, for the period between December 1, 2001 and Apr. 26, 2003, not awarded
to LG&E, was only $28.8 million. 209
II.

An Analysis of Article XI of the U.S.-Argentina BIT

Customary international law, as set out in article 31 of the Vienna Convention on the Law
of Treaties, requires that treaty provisions be interpreted “in good faith in accordance with theordinary meaning to be given to the terms of the treaty in their context and in the light of its
object and purpose.” 210 That article also permits treaty interpreters to have recourse to among
other things, “any relevant rules of international law applicable in the relations between theparties.” 211 “Recourse may be had to supplementary means of interpretation,” according toarticle 32 of the Vienna Convention, “including the preparatory work of the treaty and thecircumstances of its conclusion,” only in order to “confirm” this interpretation, or to determine
the meaning of a provision if the ordinary tools of interpretation yield a meaning that is obscureor a “manifestly absurd or unreasonable” result. 212 Before moving to an analysis of various
aspects of Article XI, therefore, Part III(A) below will review the object and purpose of the U.S.Argentina BIT, as well as the circumstances of its conclusion.
The U.S.-Argentina BIT needs to be understood in light of the history of both of its
parties. The treaty itself, whose text is, except for its Protocol, identical to that of the 1987 U.S.
Model BIT Text, needs to be understood in light of the origins of that Model and the history of203

CMS Award, supra note 1, at ¶¶ 468 and 396, respectively.
CMS Annulment Decision, supra note 3, at ¶ 160.
205
Enron Award, supra note 1, at ¶¶ 450 and 351, respectively.
206
Sempra Award, supra note 1, at ¶¶ 482 and 406, respectively.
207
LG&E Damages Award, supra note 2, at ¶ 108.
208
LG&E Decision on Liability, supra note 1, at ¶ 74; LG&E Damages Award, supra note 2, at ¶ 15. This was thefigure put forward on the discounted cash flow calculation of fair market value. It is somewhat unclear what
LG&E’s submissions were in regard to loss amounts on the lost dividends measure. At one point in the award, afigure of $271 million is given, whereas in another part of the award, figures totaling $265.2 million are given. Id.,at ¶¶ 70 and 18, respectively.
209
LG&E Damages Award, supra note 2, at ¶ 108.
210
Vienna Convention, supra note 35, Article 31(1).
211Vienna Convention, supra note 35, Article 31(3)(c)212
Vienna Convention, supra note 35, Article 32.
20426

the BIT program of the United States. The U.S.-Argentina BIT was negotiated against the
backdrop of well-known public positions taken by the United States with respect to the meaningof its 1987 Model Text, its prior BITs, and Friendship, Commerce and Navigation Treaties(FCNs) previously concluded by the United States. It was also concluded in light of high profile
public positions taken by Argentina’s leaders shortly before and after concluding the U.S.Argentina BIT in reaction to Argentina’s checkered history with respect to the treatment offoreign investors. As discussed below, the publicly available evidence strongly indicates that, atthe time the U.S.-Argentina BIT was concluded, both parties to that treaty sought to affirm
through ratification well-known understandings of the extensive investor protections provided
under the 1987 U.S. Model Text. The evidence also indicates that by ratifying that treaty
Argentina was, in conformity with established U.S. BIT policy, attempting to send a clear signal
to both existing and prospective investors from the United States that it was renouncing its
former practices with respect to their treatment, including its former refusal to countenanceinternational arbitration and espousal of the Calvo Doctrine. This account strongly supports the
proposition that the U.S.-Argentina BIT was intended to forestall exactly the type of necessity
defense raised by Argentina in these cases.
A.

The Object and Purpose of the U.S.-Argentina BIT

The principle that aliens and their property were “generally subject to at least equality oftreatment with nationals of the taking state” was unchallenged for centuries. 213 Since most states
protected private property for aliens and for their nationals equally under their own law, it was
generally assumed that alien property was inviolable and subject to fair compensation underinternational law no less than the property of nationals. 214 This notion began to be seriously
challenged in the 20th century in the wake of political, economic and other crises, and evenrevolutions, in places such as Russia and Mexico.
As is well known, Western states never formally accepted the legality of Russian
revolutionary decrees which repudiated contracts with foreign investors, nationalized alien
properties, and refused payment of public debt. And while the United States came relatively lateto the negotiation of BITs, it took the lead in attempting to protect the rights of foreign investors.
The origins of the U.S. BIT program, launched in the late 1970s, were laid in diplomatic
exchanges between the United States and Mexico much earlier in the century. From 1910, in thewake of serious political and economic turmoil in that country, Mexico began taking actions thatadversely affected the properties of, among others, U.S. investors. These actions, which
included de facto expropriations of agrarian land, were taken in the midst of a series of politicalcrises of the first magnitude, and indeed often over periods in which it was difficult to tell which
Mexican governmental authorities were in charge. Yet the Mexican measures were the subjectof famous diplomatic exchanges between then United States Secretary of State Hull and thegovernment of Mexico in 1938. This diplomatic correspondence included, of course, Hull’sfamous proclamation that international law had long provided for the payment of prompt,
adequate and effective compensation in cases of expropriation of alien property – a formulawhich the United States has affirmed as a principle of customary international law on every
occasion since. In defense of its measures, Mexico invoked the writings of 19th Century
Argentine jurist Carlos Calvo, who had argued that alien investors could enjoy no greater rights
213
214

Lowenfeld, supra note 9, at 392.
Id.

27

than those of nationals where they had invested. Mexico argued that its measures (thesuspension of its agrarian debt) affected Mexicans and aliens equally and was notdiscriminatory. 215 Further, the Mexican foreign minister argued to Hull that the “political,
social, and economic stability and the peace of Mexico” had required it to take its measuresagainst US investors, 216 that these measures had been “necessary,” and had been inspired by“legitimate causes and the aspirations of social justice.” 217 Hull rejected all of these contentions,noting that it was incompatible with international law to assert that governments are relieved of
their international obligations because of “contradictory municipal legislation” or because “itsfinancial or economic situation makes compliance . . . difficult.” 218
In the wake of Mexico’s and others’ challenges to what the United States regarded as
established principles of state responsibility to aliens, the United States revised its model FCN
treaty. 219 The U.S. had concluded FCN treaties since its earliest days as a nation. After WWII,
however, the United States revised these agreements to more clearly provide for the rights ofinvestors and not merely traders of goods. Accordingly, the new FCNs explicitly included
provisions reflecting U.S. views of what it believed were traditional customary norms protecting
aliens’ rights to contract sanctity and property. 220 The United States, like other Westerncountries that turned their attention to better forms of protection for their investors abroad in thewake of WWII, was well aware that such treaty guarantees were most needed during periods ofcrisis, and even violence, in the states hosting foreign investors. The new investment protections
included in the United States’ post-WWII, or “modern,” FCN treaty were intended to enable
treaty-based claims for redress which, like those during the Mexican revolution, often arose in
the most acute form in the course of interstate and civil conflicts, including economic upheaval
or revolution. Like later attempts by the United States to affirm via treaty what it considered to
be customary doctrines of state responsibility vis-à-vis aliens (including under its BITs), these
efforts were motivated by the many expropriations and other contract breaches of the 20th
century that had generated the most resistance to traditional legal liability, namely harms toaliens occasioned in the context of often momentous political struggles for self-determinationand occurring either immediately preceding or shortly after these nations achieved
independence. 221
215

Id. at 400.
Id. at 399.
217
Id. at 401.
218
Id.
219
As this history suggests, the United States and its FCN treaty parties have never considered the inclusion of rights
enjoyed by aliens under customary international law in a treaty a superfluous act. While it is true that in theory
customary international law would be sufficient to protect the interests of U.S. aliens abroad, it appears that theUnited States believed that concluding a treaty that so provides was in and of itself useful, not only as an explicit
affirmation by both states of what the law requires but because a treaty, including the FCNs’ state-to-state disputesettlement clause, provides at least one forum in which such disputes can be resolved.
220
See e.g. Lowenfeld, supra note 9, id. at 391, who suggests that Western nations’ views of the duty to compensate
aliens upon expropriation was derived from a “general principle of law – for instance, the 1789 Declaration of theRights of Man and the Citizen.” Article 17 of that Declaration provides: “Property being an inviolable and sacred
right, no one may be deprived of his property except when public necessity, lawfully established, so requires, and on
condition of just and prior compensation.”221
Of course, investor-state disputes arising from severe economic or political crises have also emerged long after astate has achieved independence. This is certainly the context in which many investor claims arose in the wake of
the Iranian revolution, for example. Many of these claims were ultimately settled, including by applying the USIran FCN, in the Iran-US Claims Tribunal. See also Himpurna California Energy Ltd. v. PT. (Pesaro) Persuahaan
216

28

The U.S. BIT program, which began with negotiations with Singapore in the late 1970s,
was built on the provisions of its post-WWII FCNs. The United States’ modern FCN – drafted,
as noted, to deal with contentions raised by “revolutionary” regimes such as Mexico and Soviet
Union – included precursors to all the substantive guarantees contained in the U.S.-Argentina
BIT, namely investor rights to national and MFN treatment, requirements for “equitable”
treatment and treatment no less favorable than that provided by international law, rights tocompensation upon expropriation, and guarantees precluding currency restrictions that would
impede the free transfer of capital. As is further discussed below, the U.S. also choose to include
in its new BITs a version of the “measures not precluded” clause originally contained in its FCNs
but narrowed in scope to suit its new treaty’s investment protection goal. The U.S. also added tofamiliar FCN provisions other guarantees for its investors drawn from bilateral investment
protection agreements (BIPAs) that had been concluded by a number of European states,
particularly Germany and Switzerland, since the late 1950s. 222 Most significantly, the UnitedStates took a significant step to enhance the rights of alien investors by adding a crucial
enforcement device made possible by developments such as the emergence of the ICSID
Convention. It incorporated a treaty-based guarantee to enable foreign investors to have directaccess to international arbitration against the host state for any violation of the BIT. The first
U.S. Model BIT made public, in the early 1980s, was therefore, like the U.S.-Argentina BIT, anamalgamation of provisions drawn from prior U.S. FCN practice as well as “improvements”
drawn from European BIPAs.
Like the original FCN text on which it was based, the new model BIT agreement
intentionally and deliberately relied upon what the United States argued to the world was binding
customary international law. As is further discussed below, the U.S. model was replete withreferences to customary international law (as well as other sources of investor protections such as
those stemming from a host state’s law or the investor’s contract with the host state). These
references served two principal purposes: (1) to affirm the United States’ view of whatcustomary international law required and (2) to permit investors to assert these traditional rights,
along with new rights under the BIT, in investor-state dispute settlement. Accordingly, theUnited States did not see these provisions as superfluous, especially since by inserting customarynorms into a BIT the United States was ensuring that foreign investors from both states would
now have a forum to assert their rights. To this end, the U.S. Model treaty, including the U.S.Argentina BIT, recognized that investor-state dispute settlement would extend not only toinvestor rights “created” by the BIT but also to those the treaty “conferred” on investors (such as
those under customary international law). 223 It was also the hope of the United States that theresulting applications of BIT guarantees, including those affirming customary law, would overtime provide the evidence of state practice that would serve to reinforce U.S. views of customaryinternational law rights applicable to alien investors.
As the chief architects of the U.S. model BIT text upon which the U.S.-Argentina BIT
was built have indicated in their accounts of the history of the program, and as the United States
repeatedly indicated to the Senate throughout the 1980s when submitting these treaties for its
Listruik Negara, Final Award (May 4, 1999)(claims arising from government measures taken in the context of theeconomic crisis leading to dramatic devaluations of the Indonesian rupiah which began in the second half of 1997).
222
KENNETH VANDEVELDE, UNITED STATES INVESTMENT TREATIES: POLICY AND PRACTICE at 29 (1992). As
Vandevelde indicates the U.S. was a relative late-comer to negotiating bilateral investment agreements since
between 1962 and 1972, the Federal Republic of Germany had negotiated 46 BIPAs while Switzerland had enteredinto 27. Id., at 19.
223
See U.S.-Argentina BIT, art. II (1).

29consent to ratification, and, as the text of that treaty itself confirms, the object and purpose of
U.S. Model BITs of this period was to protect the rights of foreign investors as well as to affirm
customary international law obligations relating to such protection which had, at least since theclaims of the Mexicans and the Russians at the turn of the century, been questioned. 224 The
United States opted for a specific investment protection treaty in the early 1980s because of a felt
need to buttress the law, after nearly years of attacks, particularly in forums as the UN General
Assembly. 225
As Kenneth Vandevelde, one of the early U.S. BIT negotiators, would later explain, U.S.
BIT negotiators took a relatively “uncompromising stance” at least during this period withrespect to BIT negotiations. 226 Accordingly, the United States was candid with its prospective
BIT parties that concluding a U.S. BIT would not guarantee an increase in incoming FDI flows
or necessarily produce tangible benefits such as higher employment. 227 U.S. negotiators werequite clear that the U.S. BIT was not designed to promote economic development or employment
as such but was intended to achieve one clear purpose: to protect foreign investment. 228 Thus,
while the preamble of the U.S.-Argentina BIT identifies the hoped for goals of increased
investment flows and economic development, nothing in it or in the rest of the treaty suggeststhat the investor rights conferred were conditioned on the emergence of such benefits. The
relatively narrow object and purpose of the U.S. BIT was also made clear by what that treaty did
not contain. As Vandelvelde has indicated, at least during the 1980s, U.S. BIT negotiators
resisted including in its BIT investment promotion devices (such as mutual guarantees of tax
holidays) sometimes sought by treaty partners. 229 The U.S. model treaty was built on thepremise that the guarantees given in that treaty with respect to investors of either state party – theessence of a treaty whose text belied its title by stressing the “protection” of foreign investment
over its explicit “promotion” -- were indispensable “minimum standards” for countries thatsought to commit themselves to a stable investment environment, the rule of law, and genuine
liberalization of investment flows. 230 The U.S. position, publicly affirmed to prospective treaty
224

See, e.g., Vandelvelde, supra note 224, at 7-22; Hearing before the Committee on Foreign Relations, UnitedStates Senate, First Session, Sept. 10, 1993 (S.Hrg. 103-292)(BITs with Argentina, Armenia, Bulgaria, Ecuador,
Kazakhstan, Kyrgyzstan, Moldova, and Romania), at 6 and 21; Hearing of Aug. 4, 1992 at 15-17.
225
Vandelvelde, supra note 224, at 7-22.
226
See, e.g., id., at 25 and 31-35.
227See, e.g., id., at 32. Indeed, as the U.S. State Department put it in the Senate hearing addressing the Argentina
BIT, the United States was “careful to point out that the existence of a BIT alone will not guarantee increased
investment.” Hearing of Sept. 10, 1993, supra note 224, at p. 22.
228
See, e.g., Hearing of Sept. 10, 1993, supra note 224, at 6-7.
229
Indeed, the State Department letter submitting the U.S.-Argentina BIT to the Senate indicated that while“conclusion of a BIT with the United States is an important and favorable factor . . . [it] does not in and of itself
result in immediate increase in US investment flows.” Message from the President of the United States
Transmitting the Treaty Between the United States of America and the Argentine Republic Concerning theReciprocal Encouragement and Protection of Investment, with Protocol, Signed at Washington on November 14,
1991; and an Amendment to the Protocol Effected by Exchange of Notes at Buenos Aires on August 24 andNovember 6, 1992, 103rd Congress 1st Session Treaty Doc. 103-2, available at:
http://www.bilaterals.org/IMG/html/US-AR_BIT.html [hereinafter Letter of Submittal].
230
See e.g. Kenneth J. Vandevelde, Investment Liberalization and Economic Development: The Role of Bilateral
Investment Treaties, 36 COLUMB. J. TRANSNAT’L L. 501 (1998). As Vandevelde also indicates, U.S. negotiators of
BITs during this period also did not generally use the prospect of negotiations as a prod to induce prospective BIT
parties to change their domestic legislation. As he indicates, the United States believed that a treaty “which was the
product of pressure or inducements in other areas could be one to which the BIT partner would be unwilling or
unable to adhere in the long run, and thus would not serve the goal of establishing a stable and predictable minimum

30

partners, was that concluding a BIT was mutually beneficial to both parties because it affirmed
specific protections for investors that had become threatened both by the practice of some states(e.g., a wave of expropriations in the 1960s and 70s) and their rhetoric (as in the UN General
Assembly or in UNCTAD).
At the same time, as the world’s leading capital exporter and the most ardent defender ofcustomary international law protections for investors, the United States argued to its prospective
treaty parties throughout the 1980s that adherence to the U.S. BIT was the clearest signal any
country could send about its commitment to protect foreign investors since the U.S. Model BIT
was a more potent protector of investor rights than the weaker European BIPAs. Indeed, thetypical State Department letter to the U.S. President, replicated in the submittal of the U.S.Argentina BIT to the U.S. Senate, recognizes that “Argentina has signed BITs with several
European countries, including France, as well as Canada and Chile” but stresses that the U.S.Argentina BIT is “more comprehensive than these other BITs.” 231 Thus, in BIT hearings during
this period, the United States repeatedly stressed, as it did to its European allies, that the U.S.
Model BIT was “more demanding” and the “most rigorous” in the world because its guarantees
for investors “generally exceed those of European countries.” 232
Over the course of the early years of the U.S. BIT program, the United States made small
but significant changes in what it regarded as the world’s most investor-protective treaty
designed to make its Model BIT an even stronger tool to achieve investment protection. Justprior to beginning negotiations with Argentina for a BIT, the United States released what
remains today its most investor-protective model text, the 1987 Model Draft.233
As is strongly suggested by the fact that the text of the U.S.-Argentina BIT is (but for its
short and unexceptional Protocol) identical to the 1987 U.S. Model, it would appear that the
U.S.-Argentine negotiations with respect to that treaty adhered to the pattern described byVandevelde’s history discussed above. Like other U.S. BIT parties during this period, Argentina
accepted the U.S. Model (and presumably U.S. standard explanations for what it meant). As
comparison of the U.S. 1987 Model BIT used to negotiate the U.S.-Argentina BIT with the actual
text of that 1991 treaty indicates, the United States was not willing to make any concessions withrespect to the basic provisions of its model, except with respect to those anticipated in the model
itself (e.g., with respect to permitting states to indicate mutually acceptable specific sectors thatwould not be subject to non-discrimination guarantees). The United States resisted making
concessions in the context of its negotiations with Argentina, as with others during this period,
not only because these could later be cited as precedents and force it to retreat on investment
protections in other treaty negotiations, but also because, as indicated, the U.S. negotiators
argued that many of the U.S. BIT provisions affirmed their oft-stated understandings ofstandard of protection. For these reasons, the United States did not offer to make concessions in noninvestmentareas to entice a country to sign a BIT.” Vandevelde, United States Investment Treaties, supra note 224, at 31-32.
The goal of establishing uniform standards led U.S. negotiators during this period to resist making concessions in
any BIT. Id., at 32-34.
231
Letter of Submittal, supra note 231.
232
See, e.g., Hearing of Aug. 4, 1992, at 3, 5, and 22; Hearing of Sept. 10, 1993, supra note 224, at 6-7.
233
Vandevelde, supra note 224, at 42-43. The most significant change made, vis-à-vis earlier US models, was withrespect to the investors’ rights to seek arbitration. The 1987 model provides, unlike earlier US model texts, thatinvestors are not bound by any prior contractual commitments in which they agreed to submit their disputes to hoststates’ courts. Under the 1987 model, as under the U.S.-Argentina BIT, investors are free to seek international
arbitration of any disputes that they have not voluntarily submitted elsewhere. They are not obligated by priordispute settlement clauses contained in their agreements with the host state. U.S.-Argentina BIT, article VII (2).

31

customary international law – a position that the United States was simultaneously asserting insuch other forums as the United Nations. 234 The “uncompromising” posture of the United Stateswith respect to BIT negotiations during this period means that, absent contrary evidence, thedrafting intent of the United States and the history of its BIT program is highly relevant to theinterpretation of this treaty.
For the United States, a country that had attempted (with only partial success) to get the
UN General Assembly to affirm in 1962 that customary international law (and not only nationallaw) governed the treatment foreign investors received, especially but not only when they wereexpropriated, and that national courts needed to give way to international arbitration wheninvestors sought that more neutral forum, the negotiation of a BIT afforded it an opportunity tosecure, at least bilaterally, such absolute guarantees. As U.S. BIT negotiators in this period haverepeatedly indicated, the United States was not about to negotiate these away via treaty or to“balance” investors’ rights vis-à-vis the rights of sovereigns, as urged by advocates of the NIEO
or the concept of “permanent sovereignty over national resources.” 235
The Sempra and Enron tribunals found that “the object and purpose of the Treaty is, as a
general proposition, for it to be applicable in situations of economic difficulty and hardship that
require the protection of the internationally guaranteed rights of its beneficiaries.” 236 This
interpretation appears particularly appropriate to the U.S.-Argentina BIT, which was concludedin the wake of what the U.S. Court of Appeals for the Second Circuit called Argentina’s centuryold “diplomacy of default.” – a repeated reliance on proclamations by its government of“emergency” in order to get out of international commitments:
We note that Argentina has made many contributions to the law of foreign
insolvency through its numerous defaults on its sovereign obligations, as well as
through what we might term a diplomacy of default. Argentina’s history ofdefaulting on, or requiring restructuring of, its sovereign obligations has produced
a rich literature. After selling bonds on the London stock exchange in the earlypart of the 1820s, Argentina defaulted on its debt in 1827 (at roughly the sametime that other Latin American nations defaulted on their foreign debt), and did
not reach a settlement with creditors on the debt until 1857. Argentina again
defaulted on its debts in 1890, causing a financial panic in England as Argentina’s
primary creditor, the London merchant bank Baring Brothers, experienced aliquidity crisis upon Argentina’s default. In 1956, Argentina's threatened default
led to the creation of the Club of Paris, an international organization established“for the purpose of settling controversies concerning debts that were guaranteedor owed by LDC [Less Developed Country] governments to creditor
governments.” In 1982, Argentina, along with other Latin American nations,experienced a financial crisis that led it to suspend interest payments on foreign
debt and to engage in difficult negotiations with foreign and multilateral lenders.
According to one commentator, as the Argentinian debt crisis developed between
1983 and 1985, “Argentina emerged as the single most resistant debtor ininternational finance.” Then, in December 2001, Argentina announced that it234

See e.g. Vandelvelde, supra note 230, at 32.
See Vandevelde, supra note 230, at 7-35.
236
Sempra Award, supra note 1, at ¶373; Enron Award, supra note 1, at ¶ 331. See also CMS Award, supra note 1,
at ¶ 354.
235

32

would impose a moratorium on public sector debt payments-causing the largest
default of a foreign state in history. 237
Argentina concluded its 1991 BIT with the United States shortly after what was thenconsidered the worst economic crisis in its history. That period included hyperinflation, defaults,
and forced re-negotiations with foreign investors. As the U.S. State Department pointed out
when it submitted this treaty to the U.S. Senate, this particular BIT marked an important“milestone” in the U.S. BIT program not only because it marked the repudiation of the Calvo
Doctrine by the country that had given birth to it but also because, prior to concluding its BIT
with the United States, Argentina had “engaged in the most comprehensive privatization
program in its history” and was “implementing other wide-ranging, market-oriented reforms”
and the BIT would help secure such efforts. 238
As evidence presented to the ICSID tribunals makes clear, the United States andArgentina entered into their BIT on the understanding that their compact would mark the end of
Argentina’s historic penchant for declaring national emergencies, with dire consequences for its
adherence to its obligations to alien investors. The United States considered the Argentina BIT asignificant step towards eliminating the need for US officials to intercede on behalf of US
nationals in that country faced with adverse action taken in the wake of yet another proclamationof emergency. As the U.S. executive branch indicated to the U.S. Senate at the time of U.S.
ratification, the U.S.-Argentina BIT would avoid the need for such diplomatic interventions sincein the future such disputes would be resolved before ICSID. 239
As numerous statements from high Argentine officials confirm, the intention thatadherence to the U.S. BIT would mark a permanent end to the adverse treatment of investors
resulting from Argentina’s cyclical economic crises and former adherence to the Calvo Clause
was shared. 240 As Carlos Menem’s formal statement to his Parliament introducing the U.S.Argentina BIT affirmed, the “principal object” of the treaty was to promote genuine andproductive investment by accepting certain norms for the treatment of investment that would
remain “unalterable” while the treaty was in effect and that would establish a climate of237

EM Ltd. et al. v. Republic of Argentina, 473 F.3d 463; 2007 U.S. App. LEXIS 382 (2nd Circ., 2007), cert. denied
2007 U.S. LEXIS 10238 (U.S., Oct. 1, 2007) at 466, footnote 2 (citations omitted).
238
Hearing, Sept. 10, 1993, supra note 224, at 8 (Statement by Deniel K. Tarullo, Assistant Sec. of State for
Economic and Business Affairs).
239
Indeed, the Senate hearing on the Argentina treaty was replete with references to the “precedent” set by
Argentina’s repudiation of the Calvo Doctrine and embrace of an “absolute” right to international arbitration forinvestors, see id., at 8, 17, 21, 31-32.
240See, e.g,. Hearing of Sept. 10, 1993, supra note 224, at 15 (statement by the President of the National Associationof Manufacturers). Such views were also affirmed by Argentine officials. Thus, the Argentine Minister of the
Economy Domingo F. Cavallo repeatedly affirmed, as in March and September 1992, that Argentine devaluations of
its currency were now “impossible” thanks to changes in the law. See, e.g., Cavllo evalúa su plan, CLARÍN, Mar. 29,
1992, at 1 and Duras acusaciones disparó Cavallo contra los dirigentes empresarios, CLARÍN, Sept. 16, 1992, at 18.
Another minister, Luis Maria Riccheri, was quoted in the press as indicating that by ratifying the U.S. BIT, alongwith investment treaties with other countries, Argentina was seeking to create an environment of “stability andconfidence” and that by agreeing to investor-state dispute settlement, Argentina was signaling “a break with the
Calvo Doctrine, which governed in the country for more than a hundred years and required recourse to Argentine
courts.” No se esperan grandes anuncios económicos, LA NACIÓN, Nov. 12, 1991. For his part, then Argentine
President Carlos Menem proclaimed that Argentina would “never” give up its current economic model and the“structural transformations” produced in its wake. See, e.g., Menem: el plan económico se mantendrá a rejatable,
LA NACIÓN, Sept. 3, 1992, at 1.

33

“stability and confidence” to attract investments. 241 His, along with other contemporaneousstatements by other Argentine officials, suggested that by entering into the U.S. and other BITs,
Argentina was seeking to reassure foreign investors that this time would be different and that therule of law, including under Argentine laws under which investors were assured respect for theirproperty and contracts notwithstanding claims of necessity or economic emergency, would now
be guaranteed at the international level. 242 To this end, Argentina officials asserted, including inconnection with their ratification of the U.S. BIT, that their intent in securing such agreements
was to mitigate foreign investors’ concerns over non-commercial “political risks.” 243
Neither the claimants nor Argentina in the Argentine Gas Sector Cases appear to haveintroduced any evidence contradicting the abundant public evidence in the record, including
statements made by U.S. executive branch before the U.S. Congress, about the meaning of the
U.S. BIT. Indeed, as is discussed below, even Argentina’s argument in these cases that thetreaty’s Article XI was intended to be self-judging were based on evidence stemming from U.S.
BIT practice and U.S. negotiating history. 244 It appears that all parties in these cases reliedheavily on evidence from the United States. This is not surprising since the United States was
the drafter of the model treaty on which that treaty was based. There was presumably nocontrary evidence of a distinct Argentine intent (which would presumably be easy for Argentina
to acquire) simply because no contrary evidence of intention or object and purpose exists.
B.

Article XI is not “Self-Judging” or Subject to a “Good Faith” Standard of
Review

Argentina argued that Article XI of the U.S.-Argentina BIT should be considered to be“self-judging” – that is, that the state parties should be deemed the sole judges of whether
measures could be taken under that clause that would otherwise be derogations of the treaty. As
is indicated by the Enron and Sempra decisions, which considered this claim at greatest length,
the argument is based on legal arguments made by the United States before the ICJ in 1984-86,
language contained in “measures not precluded” clauses in other U.S. investment agreements
concluded after the U.S.-Argentina BIT (including Chapter Eleven of the NAFTA and later U.S.
BITs), and statements made by the US executive branch before the US Congress with respect tosuch other agreements. It is not based on any evidence in the text or legislative history of the
U.S.-Argentina BIT itself. There was no evidence that the negotiators of the U.S.-Argentina BIT
consider its Article XI self-judging.
241

See Mensaje 204, Carlos Menem to Cámara de Diputados de la Nación, 30 Apr. 1992 (on file with Journal).
Much later, in the context of suspending the periodic tariff increases according to the U.S. Producer Price Index,
Argentine law itself recognized that “the privatization process and the resulting investments are protected in theapplicable legal framework and, specially, in the Agreements for the Reciprocal Protection of Investments
subscribed by the Argentine Republic.” Decree 669/00, Aug. 4, 2000.
242
See, e.g., the statement by Argentine Chancellor Guido Di Tella on the occasion of the signature of theArgentina-Germany BIT in April 1991, in Menem firma hoy en Bonn el régimen para inversiones, ÁMBITOFINANCIERO, Apr. 9, 1991 (“these agreements are signals that investors watch closely”); statement by Minister
Cavallo on the occasion of the signature of the Argentina-UK BIT in December 1990, in Firma Cavallo acuerdo en
Londres, ÁMBITO FIANCIERO, Dec. 11, 1990 (“being a bilateral agreement that can only be modified by the parties,
it provides more legal certainty and, on the other hand, it establishes a straightforward system of dispute
resolution”).
243
See, e.g., Informe by Carlos F. Ruckauf to Cámara de Diputados de la Nación, Apr. 30, 1992 (on file with
Journal).
244
See e.g. Enron Award, supra note 1 at ¶¶ 326 and 329.

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The self-judging interpretation is most elaborately argued by Burke-White and vonStaden. According to these authors, the United States always assumed that Article XI was to be
self-judging, made its position clear in 1986 when it argued to the International Court of Justice(“ICJ”) that a comparable “essential security” clause in the US-Nicaragua FCN ought to be soread, and has, ever since the ICJ rejected its claim in 1986, become “increasingly explicit” inaffirming this “special meaning.” 245 To these authors, Article XI is, according to this evidence,“implicitly” self-judging. 246
This argument, which was rejected in all the Argentina cases discussed here, 247 isuntenable on the basis of the text, the history of the U.S. BIT program, or the object and purposeof the U.S.-Argentina BIT. It is true that as early as the jurisdictional stage of the Nicaragua
Case, in 1984, U.S. litigators involved in that case attempted to get that case dismissed on
jurisdictional grounds, or at least declared inadmissible, on the basis that the U.S.-Nicaragua
FCN did not preclude measures “necessary to protect [state parties’] essential security
interests.” 248 But, as a veteran U.S. BIT negotiator has indicated in sworn testimony before
Congress, this ill-considered contention was only made in the heat of litigation, was made bylawyers not involved in the U.S. BIT program, and was inconsistent with established U.S.
government policy through that time. 249 The United States’ position in the Nitcaragua Case wasinconsistent, for example, with the position of U.S. lawyers, who, even while the Nicaragua
Case was being litigated, were relying on an FCN treaty with Iran, not unlike the one at issue in
the Nicaragua Case, a few blocks away from the ICJ before the Iran-US Claims Tribunal. In
that forum, as in all other contexts involving other FCNs, there was no suggestion made byanyone, least of all the United States, that the U.S.-Iran FCN was subject to a self-judging
essential security exception. 250
The United States’ position before the ICJ in the Nicaragua Case was, in any event,rejected by that Court at the merits stage of that case (in 1986). 251 The ICJ rejected the self245

Burke-White and von Staden, supra note 36, at 381-382.
Burke-White and von Staden, supra note 36, at 381-86.
247
See text and accompany note, supra note 103.
248
See Case Concerning Military and Paramilitary Activities in and Against Nicaragua (Nicaragua v. United States),
1984 ICJ 392 (Decision on Jurisdiction and Admissibility of Nov. 26), ¶ 83.
249
See e.g. Kenneth Vandevelde, Of Politics and Markets: The Shifting Ideology of the BITs, 11 INT’L TAX & BUS.
LAWYER 159, 172 (1993)(hereinafter Vandevelde, Of Politics and Markets). As he indicates, prior to the Nicaragua
Case, the United States had never taken the position that the essential security clause in its FCN treaties was selfjudging.
250
There are many reasons for this. Interpreting a treaty or a clause within it as “self-judging” threatens thefundamental rule that international legal obligations, as a matter of international law, prevail over state’s nationallaw. See Vienna Convention, supra note 35, Article 27. Attributing such an unusual special meaning to a treaty
also threatens the fundamental principle of nemo judex in sua causa. The principle that treaty obligations ought not
to be interpreted such as to permit their parties to be judges in their own cause has been repeatedly affirmed by boththe PCIJ and the ICJ. See, e.g., Advisory Op. 12 concerning Interpretation of the Treaty of Lausanne, PCIJ Rep.
Ser. B., No. 12 (1925); Advisory Opinion, South-West Africa Voting Procedure, ICJ Rep. 1955, at 68. Indeed,
several ICJ judges have suggested that even treaty clauses that are explicitly self-judging in terms of their text arelegally ineffective. See, e.g., Judge Spender and Judge Lauterpacht, in Interhandel (Preliminary Objections), ICJ
Rep. 1959, at 54-59 and 95-119. In addition, in the context of investor-state dispute settlement, interpreting an
investment agreement or a clause within it as self-judging appears to threaten how Article 42(1) of the ICSID
Convention has been traditionally interpreted, namely as “according supremacy to international law in the event of
any inconsistency with the host State’s domestic law.” See Compañia del Desarrollo de Santa Elena, S.A. v.
Republic of Costa Rica, Award of 17 Feb. 2000, I5 ICSID Rev. – FILJ 169, 191 (2000).
251
Case Concerning Military and Paramilitary Activities in and Against Nicaragua (Nicaragua v. United States),
1986 ICJ 14 (Judgment on the Merits of June 27), at 222 and 282 (hereinafter Nicaragua Case).
246

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judging claim in the Nicaragua Case for the same reasons that the arbitrators did so in theArgentina cases: because neither clause says explicitly that it is self-judging. Five years prior tothe conclusion of the U.S.-Argentina BIT, a majority of ICJ judges compared the FCN language
in its “essential security” clause to a comparable provision in the GATT, and noted that only thelatter, which permits a contracting party to take any action “which it considers necessary for theprotection of its security interests” (emphasis added), can be considered self-judging, since it
anticipates that each party can itself make this determination for itself. Article XI, like the FCN
clause that inspired it, also lacks the “which it considers” phrase which the ICJ determined madethat GATT clause arguably self-judging. Nor has this been the only instance in which the ICJ
rejected contentions that a clause with wording comparable to that in Article XI is “not purely aquestion for the subjective judgment of the party.” 252
The subsequent history of U.S. BIT practice that Burke-White and von Staden rely upon,
far from supporting the self-judging interpretation of Article XI, undermines it. As might be
expected, the 1986 Nicaragua Case did not avoid the notice of State Department lawyers or of
members of Congress. During subsequent hearings on the first set of U.S. BITs submitted for
Senate consideration, in August 1986, the State Department indicated that in light of thatdecision the United States was “considering whether any future procedural action is necessary”
to preserve US rights to protect its essential security. 253 Senator Christopher Dodd, in the courseof those hearings, asked whether the ten year termination clause in U.S. BITs needed to bemodified to allow parties to terminate the treaties “because of over-riding foreign policy
considerations or national security reasons.” 254 U.S. officials knew, however, that a self-judging“measures not precluded” clause could eviscerate the investor protections of U.S. BIT, alongwith its arbitral enforcement guarantee, and in the end, the United States opted to do nothing toalter the text of its “measures not precluded” clause in the 1987 Model BIT then underdevelopment. 255 All that emerged from that hearing (and the Nicaragua Case) was a Senate“understanding” (which may not have even been conveyed to the respective BIT parties),
attached to the first eight U.S. BITs then pending before Congress indicating that “either party
may take all measures necessary to deal with any unusual and extraordinary threat to its national
security.” 256 That understanding, ineffectual as it was, was not attached to subsequent U.S. BITs
and does not appear in the U.S.-Argentina BIT. These facts suggest, as Vandevelde indicates,
that, at least through the time the U.S.-Argentina BIT was concluded, the United States hadabandoned its ill-considered contention, only made in the “highly charged atmosphere of the252

See also Case Concerning Oil Platforms (Islamic Republic of Iran v. United States), Judgment on the Merits,
Nov. 6, 2003, 42 I.L.M. 1334, ¶ 43 [hereinafter Oil Platforms Case]; Case Concerning the Gabcikovo-Nagymaros
Project (Hungary/Slovakia), 7 ICJ Rep. (1997) at ¶ 51 [hereinafter Gabcikovo-Nagymaros Dam Case] (finding thata state is not the sole judge of the strictly defined conditions permitting invocation of a state of necessity underinternational law); Consequences of the Construction of a Wall in the Occupied Palestinian Territory, ICJ Advisory
Opinion, 2004 ICJ Rep. 131 at ¶ 140 (noting that the state is “not the sole judge” of whether the Article 25
conditions of necessity have been met).
253
Jose E. Alvarez, Political Protectionism and United States International Investment Obligations in Conflict: The
Hazards of Exon-Florio, 30 VA. J. INT’L L. 1, 38 (1989) [hereinafter Alvarez, Exon-Florio].
254
Id.
255
As Kenneth Vandevelde would later indicate to the U.S. Senate, a self-judging essential security clause in a BIT:
“potentially eviscerates the entire agreement. A treaty which permits a party to take any measure necessary to its
essential security interests and which permits that party to be the sole judge of what is necessary to such interests
arguably imposes merely illusory obligations on the party.” Hearing of Aug. 4, 1992, supra note 224, at 73.
256
S. Exec. Rep., No. 32, 100th Cong., 2d Sess. (1988)(Senate Foreign Relations Committee), at 9-11; see also
Alvarez, Exon-Florio, supra note 255, at 39.

36

Nicaragua Case,” that the ‘measures not precluded’ clauses in FCN treaties were selfjudging. 257 The facts indicate that even when alerted by the ICJ that such clauses would entail
the same kind of review as any other clause in the FCN, the United States did not, at least
through 1991, change the text of the substantially similar clause in its BIT.
Nothing in the plain meaning of the U.S.-Argentina BIT, its context or its object andpurpose supports the proposition that Article XI is self-judging. The text of Article XI does notdiffer in any way from the rest of that treaty. That provision is cast in the same objective manneras is the rest of the treaty. There is nothing in Article XI that states or implies that the mattersthat it addresses will not be, like everything else in the treaty, fully arbitrable as is anticipated by
the BIT’s investor-state dispute settlement clause and by the general principle that once parties
agree to settle their treaty disputes through arbitration, the arbitrators have general compétencede la compétence to decide all matters submitted to their jurisdiction. 258 Like every otherprovision in the BIT, Article XI presumes that its application and meaning will be subject toneutral third party scrutiny and is not subject to each party’s own subjective evaluation.
The need for special language to remove issues from arbitration or to subject them tosome special deferential standard not otherwise applicable to the rest of the treaty follows, ofcourse, from article 31(4) of the Vienna Convention on the Law of Treaties which provides that a“special meaning” shall be given to a treaty provision only “if it is established that the parties so
intended.” The need for such special evidence also follows from the rest of the U.S.-Argentina
BIT as well as from its object and purpose. 259 A self-judging ‘measures not precluded’ clause
would derogate from the stability of the investment legal environment, make enforcement of anyof its clauses derisible, would be inconsistent with the fundamental purposes of U.S. BITs of that
period, and undermine the goals of the U.S. BIT program as described above. As discussed inpart III(A), a particularly salient purpose of the U.S.-Argentina BIT was to end the Argentine
government’s long-standing attempts to be a judge in its own cause when it came to investment
disputes occasioned by emergency legislation. That treaty was designed to enable any suchprospective disputes to be heard by an impartial review panel that would apply the treaty’s own
guarantees, as well as those under international law standards and those assured to the investor
by the host state. As both state parties to it recognized, the U.S.-Argentina BIT constituted a
repudiation of the Calvo Clause, including Calvo’s notion that foreign investors remains subject
to the changing vicissitudes of national law as judged by national courts. Of course, aninterpretation that Article XI was (silently) self-judging would make the U.S.-Argentina BIT aless useful instrument of investor protection than the traditional customary international law rules
governing state responsibility for alien property which recognize no such open-ended discretionfor states.
The negotiating history of the U.S.-Argentina treaty also refutes the self-judging
interpretation. The State Department’s letter of submission to the Senate for this treaty uses thestandard descriptive language for that treaty as the United States had used with respect to its
1987 Model text and its earlier BITs. That letter argues that the agreement is “fully consistent
with U.S. policy toward international investment.” 260 To the extent that BIT varies from the257

Vandevelde, Of Politics and Markets, supra note 249, at 172.
For discussion of how international dispute settlers use their compétence de la compétence to develop the law,see Alvarez, supra note 10, at 499-502.
259
For comparable arguments made in connection with the Convention on Combating Bribery of Foreign Public
Officials in International Business Transactions, see Susan Rose-Ackerman and Benjamin Billa, Treaties andNational Security, 40 N.Y.Univ. J. Int’l L & Pol. 437, at 438-442 and 465 (2008).
260
Letter of Submittal, supra note 231.
258

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standards that U.S. BITs seek to accomplish, this was carefully noted by that letter and therelevant Senate hearings. 261 Nothing in that letter or in those hearings identified any departurefrom U.S. policy to make the investment protections contained in the U.S.-Argentina BIT fully
subject to arbitral review. Indeed, the negotiating history of that treaty suggests the opposite,namely that ratification of this particular U.S. BIT was worth commemorating as a special
breakthrough in the U.S. BIT program since it represented an “absolute” commitment toarbitration from the Latin American country that had previously most resisted it.262 Such astatement would not be a credible description of a treaty that was in fact subject to a sub silentio
understanding between the parties that either government could, merely by invoking Article XI,
eviscerate that treaty’s investor protections by stripping arbitrators of jurisdiction to consider
investor claims.
None of the evidence cited in the course of the Argentine Gas Sector Cases on this issue
involves the U.S.-Argentina BIT, its history, or the circumstances of its negotiation or
conclusion. There was no contrary evidence from the Argentine side that contradicts in any
respect the public statements made by the United States (including to its Senate) about the treaty
or the U.S. BIT program in general.
Burke-White and von Staden cite evidence that, in connection with other investment
agreements concluded after the U.S.-Argentina BIT, the United States has stated that some
aspects of its ‘measures not precluded’ clause should be seen as self-judging. The (unratified)
U.S.-Russia BIT of 1992, 263 for example, includes a protocol that explicitly provides that “theParties confirm their mutual understanding that whether a measure is undertaken by a Party toprotect its essential security interests is self-judging.” 264 And the most recent U.S. model BIT
text of 2004 has the following ‘measures not precluded’ clause in lieu of what was Article XI of
the U.S.-Argentina BIT:
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 measuresthat it considers necessary for the fulfillment of its obligations with respect to themaintenance or restoration of international peace or security, or the protection of
its own essential security interests. 265
Additional evidence cited in support of the self-judging interpretation includes the State
Department’s clause by clause explanation of the meaning of other U.S. BITs sent to the Senate
in August 1992, after conclusion of the U.S.-Argentina BIT. At that time the State Department
described its ‘measures not precluded’ clause as follows:
A Party’s essential security interests include actions taken in times of war or
national emergency, as well as other actions bearing a close and direct
relationship to the essential security interests of the Party concerned. Whether
261

For example, the Letter of Submittal explains that an extra provision was added to address cases of conflict
between the U.S.-Argentina BIT and the FCN between the two countries dating from 1854. Id.
262
Id.
263
Treaty Between the United States of America and the Russian Federation Concerning the Encouragement andReciprocal Protection of Investment, signed 17 June 1992, unratified by the Russian Federation.
264
Id., at Protocol, 8.
265
U.S. Model BIT of 2004, available online at http://www.state.gov/documents/organization/38710.pdf.

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these exceptions apply in a given situation is within each Party’s discretion. We
are careful to note, in each negotiation, the self-judging nature of the protection of
a Party’s essential security interests. 266
The short answer to all of this is that while nothing prevents the United States or any
country from changing its BIT policies or from changing the text of any particular treaty, eachtreaty must be interpreted based on its own text and negotiating history and there is no evidenceof any such understanding in connection with the U.S.-Argentina BIT and no evidence that theUnited States ever suggested in the course of the Argentine negotiations that Article XI was selfjudging. 267 The absence of such evidence is striking since Argentina presumably had access to
the government negotiators who negotiated its treaty as well as any relevant documents thatwould contradict the abundant public record in the United States. There was also evidence
presented in each of these tribunals that, contrary to the suggestion made by the State
Department’s clause by clause analysis in 1992 that such understandings were regularly
conveyed to prospective BIT partners, no such clarifications were actually made to prospective
U.S. BIT partners at least through 1987 (when the U.S.-Argentine negotiations were presumablyon the brink of commencing). 268 It was also clear from other evidence presented that the UnitedStates was no stranger to attempts, prior to conclusion of the U.S.-Argentina BIT, to make someof its other treaties (or clauses within them) self-judging but had done so through explicit
language, given the potentially eviscerating effects on dispute settlement. 269
The evidence presented in the Argentine Gas Sector Cases, far from leading to theconclusion that Article XI is self-judging, actually suggests that the United States knows how todraft a self-judging exception when it wants to do so, that the United States government had notyet decided to undermine its investors’ protections in this fashion at the time when the U.S.Argentina BIT was concluded, and that, consistent with the plain meaning, context, and object
and purpose of that particular treaty such an extraordinary interpretation could not be assumed.
That evidence also suggests the merits of the standard rule of treaty interpretation under which
266

Description of U.S. Model BIT, Aug. 4, 1992 Hearings, supra note 226, at 65.
Indeed, it does not appear that even Argentina consistently argued that the United States had always intended tomake the measures not precluded clause in either its FCNs or its BITs self-judging. As the arbitral decisions
indicate, Argentina appeared to make inconsistent arguments on this key question, at times suggesting that theUnited States always held this view, changed its mind about the meaning of this clause sometime before conclusionof the U.S.-Argentina BIT, or purposely engaged in a policy of “strategic ambiguity” on this key question. See, e.g.,
LG&E Decision on Liability, supra note 1, at 209 (discussing Argentina’s claim the United States purposely
engaged in a policy of “strategic ambiguity” with respect to whether Article XI was self judging).
268
That sworn testimony was presented by one of the authors of the present article based on his experience as a U.S.
BIT negotiator through the end of 1987. See also Vandevelde, Of Politics and Markets, supra note 250, at 173(indicating the absence of any public record of any U.S. BIT partners being so informed at least prior to thenegotiation of the U.S. BIT with Russia in 1992).
269
See, for example, the United States submission to the ICJ’s optional clause in 1946, which included a clauseprecluding that Court’s jurisdiction regarding “disputes with regard to matters which are essentially within thedomestic jurisdiction of the United States as determined by the United States of America.” Declaration of UnitedStates, August 14, 1946, 26 VIII 46 ( Emphasis added). Also, when the United States adhered to the Convention
Against Torture and Other Cruel, Inhuman or Degrading Treatment or Punishment in 1990, the Senate attached tothat treaty a proviso requiring the United States to notify all present and prospective parties to that Convention thatthe treaty would not require action prohibited by the United States Constitution “as interpreted by the UnitedStates.” U.S. Reservations, Understandings, and Declaration, Convention Against Torture, 136 CONG. REC.
S17486-01 (daily ed., Oct. 27, 1990). See also Rose-Ackerman and Billa, supra note 261, at 460-89 (surveying
different “national security” exceptions in various treaties).
267

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parties must establish such special meanings, “conclusively” and by “decisive proof.” 270 (Ofcourse, to the extent that what was demonstrated in these cases was that the United States, sinceconcluding the BIT with Argentina, has changed its mind about the meaning (or arbitrability) of
the some of the measures non precluded, it would be highly inappropriate to apply this change
retroactively to the U.S.-Argentina BIT. 271 )The evidence of subsequent efforts by the United States to make some of its later
investment treaties’ ‘measures not precluded’ clauses partly “self-judging,” undercuts
Argentina’s contention in these cases for a different reason. None of the evidence cited in thecourse of subsequent U.S. BITs treated a clause like that in Article XI as in its entirety selfjudging. Even after conclusion of the U.S.-Argentina BIT, the United States has never suggested
that measures necessary to “maintain public order” could ever be self-judging. Thus, even when
the United States has chosen, by explicit language, to provide for self-judgment of somemeasures under a BIT, it has simultaneously narrowed the scope of its ‘measures not precluded’clause to lessen the potential impact on the underlying investment rights. 272 All the evidence
presented indicates that when the United States sought to make measures non precluded clauses
in its other investment agreements self-judging, it only did so with respect to that portion of
Article XI dealing with the parties’ “essential security interests” and not with respect to the othertypes of measures covered by that provision.
Burke-White’s and von Staden’s contention that the United States had always assumed
that such clauses should be treated as self-judging in its BITs stands the history of U.S. efforts toprotect its investors abroad via customary and treaty law on its head. 273 Their ahistoricalcontention would mean that the United States intended that all of its prior FCNs with comparable
essential security clauses would also have had an implicit self-judging carve-out even though, as
discussed, the United States had insisted, at least since the time of claims by Mexico early in the20th century, that international law contained no such carve-out, whether in terms of thesubstantive guarantees owed to foreign investors or with respect to international arbitration. It
would mean that foreign investment scholars, former U.S. BIT negotiators who have provided
accounts of the development of the U.S. BIT program, and the U.S. executive branch officials
who described the U.S.-Argentina BIT to the US Senate, 274 all have been wrong in describing
those treaties’ impact on strengthening the protections accorded alien investors.

270

See [first name?] Waldock, Third Report on the Law of Treaties, [citation], at 57.
See Enron Award, supra note 1, para. 326; Sempra Award, supra note 1, para. 368. This would fail to respect theres inter alios acta character of treaties and would be inconsistent with the rules of treaty interpretation in the
Vienna Convention on the Law of Treaties. This would also appear to be especially inappropriate with respect to atreaty such as the U.S.-Argentina BIT which affirms its intention to protect the settled expectations of those who
invest pursuant to the guarantees provided in the original treaty. See Articles II(2)(1); XIV (3), U.S.-Argentina BIT.
Of course, the parties could seek to amend their treaty to provide for self-judgment but, subject to termination of theoriginal BIT in accordance with its terms, presumably such amendments would need to respect the rights of existing
investors.
272
See U.S. Model BIT of 2004, supra note 265 (dropping reference to “public order”).
273
The interpretation that Article XI is self-judging implies that, even though the United States used its BITs toaffirm the most investor-protective aspects of customary law, on this issue the United States was silently derogatingfrom the customary defense of necessity which, as indicated by the cases cited at note 247, is not subject to suchself-judgment. We refute the contention that Article XI is lex specialis in part III(C)(1).
274
For example, Assistant Secretary Tarullo indicated in the course of Senate hearings on the U.S.-Argentina BIT
that “U.S. BITs are the most rigorous in the world.” Sept. 10, 1993 Hearing, supra note 226, at .
271

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For these reasons, the contention that the United States made in the Nicaragua and Iran
Oil Platforms Cases proved, rightly, implausible to all the ICSID arbitrators in the Argentina
cases.
All the arbitrators, with the possible exception of those in LG&E, 275 also rightly rejecteda second contention, namely that even if Article XI does not serve to render a dispute nonjusticiable or inadmissible, its “implicit” self-judging nature permits arbitrators only to examine
whether the state party invoking that clause has done so in “good faith.” 276 Burke-White andvon Staden advocate this deferential standard of review based on (dissenting) Judge Schwebel’sview in the Nicaragua Case, where he suggested that even a self-judging treaty or clause issubject, consistent with the rules applicable to all treaty obligations, to examination that it isbeing applied in good faith.
Burke-White and von Staden acknowledge that a “workable standard of good faithreview has yet to be fully developed,” 277 and that the paucity of cases on point means that“arbitral tribunals will have to develop their own approaches to whether the good faithrequirement has been met.” 278 At the same time, Argentina’s claims before these tribunals attimes suggested that “good faith” review means minimal arbitral scrutiny over the state’s
decision or the jurisdictional equivalent of satisfying the ‘straight face’ test. The intended
standard appears to be a substantively more deferential one than is contained in Article 31 of theVienna Convention on the Law of Treaties – which anticipates the application of good faith onlyin the course of determining the plain objective meaning of the text and context of a treaty.
Accordingly, Argentina argued that the arbitrators in these cases could only examine whether
Argentine government officials could have concluded that they faced the kinds of threats
anticipated by Article XI but not whether any such threats actually existed or whether themeasures taken actually responded to the underlying threats. 279 Burke-White and von Staden
sometimes imply that they mean a comparably deferential standard, as when they contend that275

LG&E Decision on Liability, supra note 1, at ¶ 214 (suggesting that even if Article XI were self-judging it would
still be subject to “good faith” review).
276
Burke-White and von Staden are driven to this interpretation of what “self-judging” means because of the
difficulties with the original US position in the Nicaragua Case. As they acknowledge, self-judgment as meaninglack of jurisdiction or non-admissibility appears to resemble the US “political question” doctrine, a judicially createdrule of deference that has never been treated as an accepted general principle of international law or rule ofinternational procedure applicable within international tribunals. Burke-White and Von Staden, supra note 38, a
376-77. The United States has not had much success when it has tried to invoke such a doctrine before international
courts, including in the Nicaragua Case itself. Id., at 378. More fundamentally self-judgment as non-justificiability
appears incompatible with pacta sunt servanda altogether. The notion of absolute self-judgment on this (or perhaps
any other question of treaty interpretation) is also at odds with such generally accepted principles as arbitrators’compétence de la compétence or canons of interpretation that warn against enabling parties to be judges in their own
cause. It is also, as is further discussed below, radically at odds with the object and purpose of U.S. BITs, and inparticular the U.S.-Argentina BIT. The problem though is that to the extent Burke-White’s and von Staden’s
argument about the meaning of Article XI turns on the United States’ intentions and is grounded in what it did in1986 and since, it is inconsistent with that argument to propose that Article XI requires “good faith” review. The
United States did not make that argument in the Nicaragua Case; it argued that only it could judge what was in its
essential security interests not ICJ judges. To this day, it is not clear that when the US explicitly makes these orother treaty clauses “self judging,” it intends this to accord international adjudicators the discretion nonetheless to
examine whether the United States’ is invoking this in good faith.
277
Burke-White and Von Staden, supra note 36, at 378.
278
Id., at 378-79
279
Burke White and Von Staden suggest, for example, that it would not be in good faith for a state to claim asecurity threat from a “possible alien landing.” Id.at 380.

41

the good faith test “avoids a tribunal’s second-guessing of government policy choices for which
ad hoc tribunals may be poorly positioned.” 280 At other times, they suggest that good faithreview is analogous to ‘rational basis’ scrutiny applied by U.S. courts applying U.S.
constitutional law. 281
To the extent “good faith” review is conducted only with respect to clauses that are meant
to be self-judging, the conclusion reached above – that Article XI is not intended to be self
judging – necessarily involves rejecting this standard. This was implicit in the conclusions
reached by the CMS, Enron, and Sempra tribunals. Those tribunals appear to have rightly
determined that just as the traditional rules of treaty interpretation require special evidence tohave a treaty clause be interpreted as self-judging, those rules also insist on special evidence torender a treaty clause subject only to some substantively deferential “good faith” review.
The arbitral tribunals did not see the need to discuss the question of whether even if goodfaith review is not warranted by the text of the U.S.-Argentina BIT, this deferential review should
otherwise be applied because it is normatively desirable. While we also have no need to resolve
this question, it is not at all clear that, as Burke-White and von Staden claim, it would bedesirable for investment arbitrators to apply such a basis of review without explicit textual
warrant (and hopefully a clearer statement of the kind of deferential standard intended). We
question whether any special deferential standard of review with respect to the application of
Article XI actually corresponds to the expectations of either those governments who enter into
investment protection agreements or of those who invest in reliance on such treaty guarantees.
Given the uncertainties about what precisely is meant by a standard of only “good faith” review,
arbitrators who opt for it without explicit textual warrant are in uncharted waters and might beaccused, as by a subsequent ICSID annulment body, of exceeding their legal mandate.
Moreover, to the extent this standard of review examines only the ‘bona fides’ of government
officials, such review might be deemed more offensive than one that considers the good faith ofsovereigns only as one factor (along with other indicia) to give effect to what the treaty parties
sought to achieve (as does Article 31 of the Vienna Convention).
Finally, Burke-White and von Staden’s argument that good faith review is more
respectful of national institutions closer to the ground presumes that BITs, such as the U.S.Argentina BIT, sought to avoid supranational scrutiny of national institutions. As discussed, thehistory of the U.S. BIT program is very much about enabling denationalized dispute settlement
when investors demand it. As noted, that treaty explicitly enables investors to forego national
courts (or even previously agreed dispute settlement clauses) in favor of international arbitration
because of national courts have not always been unbiased in their treatment of foreign investor
claims. U.S. BITs circa 1991 do not subject this remedy to anything comparable to theInternational Criminal Court’s principle of complementarity or even the European Court of
Human Rights’ requirement of exhaustion of local remedies. Indeed, as noted the U.S.Argentina BIT goes one step further: it permits investors, at their option, to abrogate priorcommitments to go to local courts. Second-guessing national institutions when investors think
this is necessary to protect their rights is very much what such treaties are about. It would
certainly be odd for international investment adjudication to shy from such “second-guessing,”

280

Id., at 381.
Id., at 380 (“good faith review involves a determination of whether there was a rational basis for the state’s
invocation of the [measures not precluded] clause”). See also id., at 381 (suggesting that arbitrators can still review
the “honesty” and “reasonableness” of governmental action).
281

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especially when the ICJ has done exactly this in every case in which necessity has been raised
before it. 282
The next part refutes the contention that deferential standards of review are otherwise
justified because this is what “necessary for” in Article XI requires.
C.

What is “Necessary”?

As discussed in part II(C)(2), the arbitrators in the CMS, Enron, and Sempra cases turned
to customary international law, and specifically its defense of necessity codified by Article 25 of
the ILC Articles, to interpret what “necessary for” means in Article XI of the U.S.-Argentina BIT.
They therefore required Argentina to show that its measures were the “only means” available
and that it did not “substantially contribute” to the crisis which precipitated its measures. The
arbitrators in LG&E hedge on this question but the ICSID Annulment Committee in CMS, albeit
in dicta, contends that this was incorrect. The debate is essentially over whether Article XI
means to displace relevant customary international law or, in more formal terms, is meant to belex specialis.
Burke-White and von Staden refer to the approach of the arbitrators in the CMS, Enronand Sempra cases as the most restrictive interpretation of “necessary for.” Like all the arbitrators
who addressed these cases, they acknowledge that the restrictive interpretation applied in thosecases would have been proper if the customary law of necessity applied. 283 But Burke-Whiteand von Staden argue, as did Argentina, that customary law has been displaced by the lex
specialis of Article XI. They argue that a more proper inquiry would have been whether
Argentina’s measures were the “least restrictive alternative” (as is suggested by US
constitutional law or GATT practice) or whether Argentina’s measures were within its “marginof appreciation” (as would have been asked by the European Court of Human Rights).
As Burke-White and von Staden also appear to acknowledge, the terms of Article XI –notably, “necessary for,” “essential security,” and “public order” – do not define themselves andhave to be drawn from the application of the traditional rules of treaty interpretation, including
the wider context of the treaty and its object and purpose. 284 In this section we conclude that theefforts by the CMS, Enron and Sempra tribunals to read Article XI as consistent with thecustomary defense of necessity adhere to the text, object and purpose, and context of the U.S.Argentina BIT and are consistent with the history of the U.S. BIT program.
1)

Article XI is not Lex Specialis, and Therefore Article 25 should Apply

The contention that Articles XI of the U.S.-Argentina BIT and Article 25 of the ILC’s
Articles of State Responsibility mean different things or that the first necessarily displaces thesecond is premised on the difference in wording between those two provisions. It is true, as
282

See text and accompanying note, supra note 252. It is not even clear that the ostensibly “self-judging” essential
security exception in the GATT’s Article XXI is subject to the highly deferential “good faith” review that BurkeWhite and Von Staden appear to advocate. See Rose-Ackerman and Bella, supra note , at 462-468 (reviewing
GATT cases).
283
Burke-White and Von Staden also appear to acknowledge that a state like Argentina would find it exceedingly
difficult to surmount the high standards of the traditional necessity defense (or the equally insurmountable standardsof force majeure or distress). Burke-White and Von Staden, supra note 36, at 320-24.
284
As the Enron tribunal put it, the meaning of terms like “essential security” “must be searched for elsewhere.”
Enron, supra note 1, ¶ 333. See also Sempra, supra note 1, at ¶ 375.

43

suggested by the CMS Annulment Committee, that Article 25, unlike Article XI, refers tosituations of “grave and imminent peril,” “essential interests” of states (and not “essential
security interests”), the essential interests of not only states but of the “international community
as a whole,” and most significantly includes preconditions to asserting the defense of necessity
not evident in the text of Article XI. The crucial question is what are we to make of thesedifferences. Our argument here is that interpreting Article XI as lex specialis is anarchronistic
insofar as it fails to consider carefully the history of both the ILC’s efforts and the concerns of
those who put this particular version of the measures not precluded clause into U.S. BITs.
At the outset, we reject the contention, suggested by some, that the U.S. BIT (or the U.S.Argentina BIT in particular) generally constitutes a lex specialis regime, at least if the intent is tosuggest that such treaties are self-contained and do not relate to the rest of public internationallaw. 285 As discussed in our part III (A), U.S. BITs, like the earlier FCNs, were drafted against
the backdrop of customary international law, including especially the rules of state responsibility
to aliens, and intentionally sought to incorporate and reaffirm that law. Nor is it the case thatgeneral international law, including general principles of law, has come to be relied upon in theinterpretation of investment agreements only when their texts specially incorporate such law by
their express terms (as occurs with respect to Articles II(2)(a) or X of the U.S.-Argentina
BIT). 286 As is made clear by our part III(A), the U.S.-Argentina BIT, like the United States’
earlier FCNs, was intended to be read, as both article 31(3)(c) of the Vienna Convention on the
Law of Treaties and article 42(1) of the ICSID Convention affirm, in light of relevant rules ofinternational law.
That the wording of Article XI of the U.S.-Argentina BIT is not identical to that of Article
25 of the ILC does not of itself indicate an intent to oust the applicability of the underlying
customary excuses of necessity, distress, or force majeure. It is important to keep in mind that,as discussed at part III(A) above, the text of Article XI, although contained in a 1991 treaty,
originated in clauses drafted as far back as FCNs of the post WWII period, long before the ILC
even set out to codify its rules on state responsibility. Arguments that rely on differences ofwording between the completed version of Article 25 circa 2001 and Article XI circa 1991 toconclude that the latter sought to displace relevant customary law ignore the uncodified state ofcustomary international law with respect to the relevant customary defenses at the time theoriginal NPM clause, identical to that in the U.S.-Argentina BIT, was initially inserted into the
U.S. BIT in the early 1980s. 287 At that time, the text that became Article 25 was still unfinished,remained in draft, and was lacking in completed commentaries.

285

Compare ADC and ADC and ADMC v. Hungary, ICSID/ARB/03/16, Award, 2 Oct. 2006, para. 481 (“there is
general authority for the view that a BIT can be considered as lex specialis”) to T. Gazzini, The Role of Customary
International Law in the Protection of Foreign Investment, 8 JOUR. WORLD INVESTMENT & TRADE 691(2007)(arguing that investment treaties and customary international law continuously and intensely interact).
286
See, e.g., AAPL v. Sri Lanka, (1990), 106 ILR, at 440, ¶ 41 (BITs have to be applied within the framework of“the various general rules and principles of international law not specifically referred to in the Treaty itself). See
also Campbell McLachlan QC, Investment Treaties and General International Law, 57 ICLQ 361, at 381 (2008)(discussing the interpretation by the Swiss Foreign Office that even BITS which do not have an express reference tothe international minimal standard of treatment of aliens are intended to incorporate that standard).
287
Cf. CMS Annulment Award, supra note 3, ¶¶ 129-130; McLachlan, supra note 287, at 390. Of course, the mere
failure to mention customary international law in Article XI is not probative of an intent to derogate from that law.
There is a plethora of investment arbitral decisions rendered to date where regular recourse is made to the backdrop
rules of general international law, including custom and general principles, as intended by articles 31(3)(c) of theVienna Convention on the Law of Treaties and Article 42(1) of the ICSID Convention.

44

In the early 1980s, when the U.S. BIT program began, the ILC was just releasing its setof draft articles on state responsibility, including a preliminary version of Article 25 (which
underwent modification as late as 1999 and 2001). The United States, like most states, could notassume that the ILC efforts to codify the rules governing state responsibility would be completed
any time soon or that the ILC’s precise black letter articulation of Article 25 would findacceptance. Indeed, at that time, and even much later when the ILC released its Draft Articles,
no one knew whether these rules would be submitted to an international conference of statescharged with hammering out a multilateral treaty on the subject – as had been the case for mostof the ILC’s prior codification efforts, including with respect to the law of treaties. As late as
1991 arbitral tribunals had expressed doubts about the reach of the “controversial” doctrine ofnecessity and the adequacy of the concrete proposals then pending before the ILC to codify it. 288
Article XI appears to be the United States’ attempt to include a general cross-reference tocustomary international law defenses, particularly necessity, which had been by the 1980s
articulated in a number of cases but not yet codified. 289 Indeed, there was evidence presented tothe tribunals in the Argentine Gas Sector Cases that U.S. BIT negotiators routinely told
prospective BIT partners familiar with European BIPOs that contained no NPM clause that theUnited States included such a clause out of an “excess of caution” in order to affirm customary
rights that it was confident all states, including Europeans, intended to protect and which it
assumed were also safeguarded under relevant national laws. 290
Prior to and even during the ILC’s lengthy codification efforts, states, academics, andarbitral tribunals routinely intermingled the customary defense of necessity, originated by
Grotius, with other doctrines intended to affirm the principle of the self-preservation of states,
such as self-defense and force majeure, or distress, which permits state action to save lives. 291
While today the distinctions among the customary defenses are precisely defined in the ILC’s
Articles 23 (force majeure), 24 (distress), and 25 (necessity), this was not always the case. As
Andrea Bjorklund indicates, force majeure was included along with necessity in the earliest ILC
drafts and even as late as 1979, force majeure and fortuitous event were often usedinterchangeably and were sometimes confused with the doctrine of necessity. 292
What has been clear, at least since 1958, when Professor Garcia Amador presented histhird report on State Responsibility to the ILC, was that necessity was potentially the broadest of
the traditional defenses since it permitted volitional action by a state (unlike force majeure) that
extended beyond the saving of lives (unlike distress) and precluded the wrongfulness of action
even though it was not in reaction to another state’s initial wrongful act (unlike self defense). 293
It was also clear, at least by that time, that necessity was a broader concept than self-preservation
288

See, e.g., Andrea J. Bjorklund, Emergency Exceptions: State of Necessity and Force Majeure, in Peter
Muchlinski, Federico Ortino and Christoph Schreuer, ed., OXFORD HANDBOOK OF INTERNATIONAL INVESTMENT
LAW, at 15, n. 92 (forthcoming 2008)(citing arbitral decisions in Lafico and Burundi and in the Rainbow Warrior).
289
Indeed, as acknowledged by the CMS Annulment Committee, both CMS and Argentina conflated Article XI andthe customary international law defense of necessity. CMS Annulment Committee, Award, ¶ 123. Interestingly,that Committee does not consider the evidence that may have led both sides to agree on this critical point.
290
Sworn testimony by Jose E. Alvarez. See also Vandevelde, supra note 224, at 222-27 (stating that the UnitedStates’ measures non precluded clause were intended to safeguard the United States’ abilities to protect public healthand safety as well as take measures in pursuit of its essential security interests, whether in war or in peace, as underthe International Economic Powers Act (IEEPA)).
291
Bjorklund, supra note 289, passim. See also Roberto Aguirre Luzi, BITs & Economic Crises: Do States havecarte blanche?, in T.J. GRIERSON WEILER, INVESTMENT TREATY ARBITRATION, at 166-69 (forthcoming 2008).
292
Bjorklund, supra note 288, at 12.
293
Bjorklund, supra note 27, at 7-8 (citing Amador’s Third Report).

45

and protected a broader set of a state’s “essential interests.” How broad those interests were,
however, were not clear. As that report indicates, the potential breath of the “essential interests”
that might be implicated by that defense necessitated its other requisites: namely that necessity
must respond to a “grave and imminent peril” that threatens a vital state interest, that the statemust not be able to counteract the peril by other means, and that the state must not havecontributed to the peril. 294 At the time the United States was developing its first model BIT,
state comments to the ILC were still dealing with the potentially expansive interpretation of what
constituted a state’s “essential interest” for purposes of codifying the defense. 295 Roberto Ago’s
Eighth Report to the ILC, completed on the brink of the United States initiation of its BIT
program in 1980, suggested some concern with the potentially overbroad nature of the “essential
State interest” implicated by necessity and to this end that report indicated that this must be avital interest such as political or economic survival. 296 At the same time, the 1980 version ofwhat would ultimately become the ILC’s definitive statement of the defense of necessity
indicated that a state invoking this exception needed to show that its act “is the only way for theState to safeguard an essential interest of the state against a grave and imminent peril” (emphasis
added). 297 The italicized qualifying words in what was then Article 33(1)(a) led to someambiguities: would necessity not be available to deal with grave and imminent threats to a state’s
nationals (and not merely the state itself)? 298 Also, would “essential interests” not include astate’s act taken to safeguard the essential interests of the international community as a wholeand in particular actions taken in accordance with Security Council decisions? 299
It is against this backdrop that we need to consider whether Article XI’s threefold
demarcation among measures to maintain public order, to protect essential security interests, andto restore international peace and security and its other textual distinctions from the ILC’s Article
25 were intended not only to articulate distinct preconditions to invoking the defense of necessity
but to oust the applicability of the customary necessity defense altogether. Our view is that theterms used by Article XI are consistent with the state of the still somewhat uncertain state of thelaw on the defense of necessity at least in 1980, and with an intent by the drafters of this NPM
clause to distill the holdings of cases that were inspiring the ILC itself in codifying the defense ofnecessity.
Viewed in an accurate historical context, the threefold division within Article XI is
consistent with the customary defenses of force majeure, distress, and particularly necessity.
That Article’s three triggering grounds were intended to address security threats posed by (1)internal outbreaks of disorder (that is a threat to “public order” posed by civil war or riots) (2)294

Id., at 8. Indeed, this respects Grotius’ original caution about the exceptional nature of this plea and the potential
for its abuse, as Grotius himself indicated that necessity must be restricted to instances involving an interest that was“essential” or “even vital” to a state. Id., at 5.
295
See, e.g., id., at 9 (noting state comments from 1982 to 1998).
296
Id., at 16.
297
Report of the International Law Commission on the Work of its thirty-second Session, UN GAOR Supp. No. 10,
reprinted in 2 Y.B. INT’L L. COMM’N 34, UN Doc. A/CN.4/SER.A/1980/Add. 1 (Part 2), art. 33 (1)(a).
298
The 1980 Commentaries suggested that such interests would be included since “the existence of grave andimminent danger to the State” encompassed dangers to “some of its nationals, or simply to human beings.” Id.,
Commentary, art. 33, para. 23. As indicated, this clarification had not, however, yet been made clear then Article 33
itself. Only later did the ILC drop the misleading qualifier “of the state” from the final version of Article 25(1)(a).
299
The ILC’s Commentaries much later made clear that Article 25(1)(a), like Article 25(1)(b), would encompass theinterests of “the international community as a whole.” Draft Articles on Responsibility of States for InternationallyWrongful Acts, in Report of the International Law Commission on the Work of its Fifty-third Session, UN GAOR,
56th Sess., Supp. No. 10 at 43, UN Doc. A/56/10 (2001), Commentary, art. 25, ¶ 2; art. 25, ¶ 15.

46

external security threats that could imperil the very existence of the state (“essential security
interests”), and (3) certain threats to the international community of states. As is further
explained in our Part D infra, the reference to “public order” makes clear that the defense ofnecessity applies (as does the defense of distress) in cases where a state needs to take action to
defend lives in the course of public disorders. The reference to “essential security interests”
seems intended to embrace those interests of states that pose a grave and imminent threat to its
existence, particularly external military threats posed by other states. 300 And Article XI’sreference to the need to fulfill “obligations with respect to the maintenance or restoration ofinternational peace or security” encompasses actions states must take in response to decisions by
the UN Security Council. 301 The need to clarify, through the reference to “public order,” that thedefense of necessity (and not only the defenses of distress or force majeure) permits action tosave lives makes sense at a time when, as noted above, there was some question about whether
the “essential interests” of states included such acts. Similarly an express reference to Security
Council measures to maintain and restore international peace and security makes sense at a time
when there was some doubt about whether the defense of necessity extended only to a state’s
own “essential interests” but not those owed to the international community under the UN
Charter. While, to be sure, the three prongs of Article XI appear to focus on physical threats tosecurity, and not, for example, the environmental threats that some judges or arbitrators haverecently suggested are also embraced by the defense of necessity, this was not an unusual
perspective given debates even in 1980 about what “essential interests” ought to be embraced by
the defense of necessity. 302
The fact that Article XI does not include some of the pre-conditions to using necessitythat would later be included in the final version of Article 25 (released in 2001) is not indicativeof an intent to derogate from defenses that all states assume usually apply to any treaty. It may
only indicate that the BIT’s drafters thought they need not spell out that measures are scarcely“necessary” if alternatives to them exist. They may also have thought that they need not spellout that a state that has contributed to the underlying crisis is not in a position to invoke thedefense of necessity – since this would have been the outcome of the application of the doctrineof estoppel or unclean hands in any case. And the other preconditions ultimately spelled out in
the ILC’s final Article 25 may scarcely have seemed relevant in the context of an investment
promotion treaty. 303 It is also anachronistic to assume, as the CMS Annulment Committee does,
304
that the negotiators of U.S. BITs (and prior FCNs with comparable NPM clauses) had, long
before the ILC completed and released its Articles of State Responsibility, not only readily300

See also Part III (D) infra.
As is affirmed in the Protocol to the U.S.-Argentina BIT, ¶ 6.
302
Whether a contemporary interpreter of a provision like Article XI would come to such a conclusion is not soclear. Consider the application of the ejusdem generis principle (a phrase in sequence should be read in context withthe phrases preceding it). It might be argued today that to the extent Article XI anticipates Security Council action
as permitting “measures” otherwise precluded by the treaty, it should be relevant that the Council has on occasion
ordered such actions to respond to threats posed by something other than a military threat posed by one state against
another, such as human rights violations. If the contemporary actions of the Security Council are considered aproper guide, Article XI’s scope might be considerably more expansive than perhaps originally intended by its
negotiators – whose view of the scope of Security Council actions (circa 1991) might have been considerably morecircumscribed.
303
Thus, Article 25 requires proof that a state’s action “does not seriously impair an essential interest of the State orStates toward which the obligation exists, or of the international community as a whole.” Not surprisingly, theEnron and Sempra tribunals found these pre-conditions scarcely relevant in the BIT context.
304
CMS Annulment Decision, supra note 3, ¶ ___.
301

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absorbed the implications of the ILC’s distinctions between “primary” or “secondary” rules ofinternational law but had sought to replicate these (sub silentio) in these treaties.
Of course, there is nothing in the text of Article XI that suggests that it was intended to beread as an exception to the ordinary rule of treaty interpretation requiring consideration of any
relevant rules of international law, including presumably the defense of necessity. 305
Interpreting Article XI in light of these customary rules is also consistent with the ILC’s own
Commentaries, which indicate that a mere difference in wording between a treaty clause and ageneral rule of international law does not in itself imply an intention to exclude the latter or makethe treaty rule lex specialis. 306 Moreover, the defense of necessity is surely one of thosefundamental rules of international law, such as exhaustion of local remedies, that requires very
specific evidence of derogation. 307
The lex specialis interpretation of Article XI is also belied by the object and purpose andcontext of that treaty. The U.S.-Argentina BIT, like prior US FCNs and other contemporaneous
U.S. BITs, is replete with explicit references to securing alien investors all the existing
protections of customary international law. It sought not to undermine customary internationallaw protections for alien investors but to reaffirm them, consistent with long-standing U.S. viewsof the rights traditionally accorded aliens under the law of state responsibility. The U.S.Argentina BIT’s references to or incorporation of customary international law also include
Article II(2)(a)’s guarantees of “fair and equitable treatment” and “full protection and security.”
As a number of tribunals have recognized, these references have given new life to hoaryprinciples of state responsibility to aliens such as “denial of justice” and the “international
minimum standard.” 308 Another BIT guarantee, the investors’ rights to “effective means ofasserting claims and enforcing rights” contained in Article II (6) of the U.S.-Argentina BIT, andthe investors’ right to “prompt review” of disputes involving expropriation (Article IV(2)), also
appear to be grounded in, and are likely to be interpreted in light of, customary principles such as
denial of justice and the international minimum standard. Scholars and arbitrators havesuggested that these treaties’ attempt to protect the ‘legitimate expectations’ of investors is itself
embedded in customary international standards as well as general principles of law. 309 Moreover,305

Further, much is made of the use of the term “shall not preclude the application of measures” in Article XI of the
U.S.-Argentina BIT, and whereas Article 25 of the ILC Articles is a “circumstance precluding wrongfulness.” Seee.g. Gabriel Bottini, Protection of Essential Interests in the BIT Era, in Weiler, supra note 291, at 148.Yet these
expressions have been used interchangeably in previous arbitral awards. For instance, in dicta of the Annulment
Committee in Patrick Mitchell v. Democratic Republic of Congo in relation to the measures not precluded clause in
the US-Zaire BIT, Decision on the Application for Annulment of the Award, ICSID Case No. ARB/99/7, 2006 WL
4491472 (APPAWD), 1 Nov. 2006, ____.
306
J. Crawford, THE INTERNATIONAL LAW COMMISSION’S ARTICLES ON STATE RESPONSIBILITY: INTRODUCTION,TEST AND COMMENTARIES (2002) [hereinafter “ILC Commentaries”], at 307, ¶ 4 (commentary to Article 55)(statingthat “For the lex specialis principle to apply it is not enough that the same subject matter is dealt with by two
provisions; there must be some actual inconsistency between them, or else a discernible intention that one provision
is to exclude the other.”)
307
Compare Loewen Group Inc. v. USA (Award), 7 ICSID Rep. 421 at 475 (2003)(incorporating a requirement toexhaust local remedies in the context of the NAFTA’s Investment Chapter, at least where the claim is based on
actions taken by local courts, even though that treaty otherwise renounces the requirement of exhaustion).
308
See OECD, Fair and Equitable Treatment Standard in International Investment Law, Working Papers on
International Investment, No. 2004/3 (Sept. 2004). See also J. PAULSSON, DENIAL OF JUSTICE IN INTERNATIONALLAW (2005); McLachlan, supra note 287, at 375-83.
309
See generally, OECD, Fair and Equitable Treatment Standard in International Investment Law, supra note 308.
See, e.g., SPP v. Egypt, ICSID Case No. ARB/84/3, 3 ICSID Rep. 189, 82-83 (award) (May 20, 1992)(“certain actsof Eyptian officials . . . created expectations protected by established principles of international law”).

48

at least some of the terms used to define investors’ rights to compensation upon expropriation in
Article IV(1), such as “public purpose” and “due process of law” are intended to be read with acustomary international gloss, as a number of arbitral tribunals have affirmed. 310
In addition, two BIT provisions affirm an important general principle underlying all theinvestor rights provided: namely that investors shall be entitled to, under the U.S. BIT, to thebetter of any rights to which they are entitled under customary international law, national law, or
the BIT itself. Thus, Article II(2)(a) of the U.S.-Argentina BIT provides that: “Investment …
shall in no case be accorded treatment less than that required by international law” and Article X
explicitly provides that the BIT shall not derogate from national law or international legal
obligations “that entitle investments or associated activities to treatment more favorable than that
accorded by [the BIT] in like situations.” It is no small irony then that the provision immediately
preceding Article XI expressly gives investors the benefit of the customary international law
defenses that some believe Article XI removes. Of course, there is nothing in the text of Article
XI that necessarily derogates from general international law – whether the customary defense ofnecessity, the general principle of law that parties cannot benefit from their own wrong, thegeneral principle codified in Article 27(b) of the ILC Articles of State Responsibility, or thegeneral principle that those who invoke an affirmative defense from a treaty obligation bear theburden of proof. It is also true, as was affirmed by the European Court of Human Rights in the
Neumeister case, that interpretations that a provision is lex specialis are heavily disfavored wheresuch an interpretation would be “incompatible with the aim and object of the treaty.” 311
Unfortunately, none of the tribunals involved in the Argentine Gas Sector cases considered theinterplay between Articles II(2)(a), X, and XI and the tribunal in LG & E as well as the CMS
Annulment Committee ignored the object and purpose of the U.S.-Argentina BIT altogether
when addressing the interpretation of Article XI.
Interpreting Article XI as a primary rule that effectively denies the application of any of
the investor rights in the rest of the U.S.-Argentina BIT (as is suggested by the CMS Annulment
Committee 312 ) would also create an absurdity of Article IV(3) of the BIT. Article IV(3) provides
investors with the better of national or most favored nation treatment should a state compensate
anyone for losses incurred “owing to war or other armed conflict, revolution, state of national
emergency, insurrection, civil disturbance or other similar events.” These are precisely the kindsof events that are most likely to trigger a state’s invocation of Article XI. If we were to take the
CMS Annulment Committee’s interpretation seriously and successful invocation of Article XI
trumps all the rights in the BIT, investors’ rights under Article IV(3), like all other BIT
guarantees, would be rendered inapplicable in the very circumstances in which they wereintended to arise.
If Article XI were a primary rule or lex specialis, it would also mean, as White-Burke andvon Staden acknowledge, that the nine out of ten investment agreements (of the thousands
concluded before and after the U.S.-Argentina BIT) that lack such a comparable clause (andwould therefore be subject to the customary defense of necessity) would be far more protectiveof investors’ rights than is the U.S. Model BIT of 1987. 313 If this view was correct, the310

See, e.g., McLachlan, supra note 287, at 381.
See ILC Commentaries, supra note 307 (citing Neumeiter case). Accordingly, in that instance, the Court took
into account the general rule under international law in applying the specific clause in the European Convention, as
did the CMS, Enron, and Sempra tribunals.
312
CMS Annulment Decision, supra note 3, at ¶ 129.
313
Compare BG Group plc v. Argentina, UNCITRAL Award, 24 Dec. 2007, at ¶¶ 367-412 (interpreting U.KArgentina BIT, which did not contain an “essential security” clause, as possibly incorporating customary defense of311

49

European BIPAs, dismissed as weaker vehicles for investor protection than the U.S. BIT even in
the State Department letter submitted to the Senate for the U.S.-Argentina BIT, were in fact muchstronger vehicles for investment protection than anyone, including the U.S. and Argentina,
investment scholars, and BIT negotiators from around the world, had ever assumed. 314 It would
mean that the principal advocate of strong protection for alien property, a country that engaged in“gunboat” diplomacy to protect its investors, affirmed the Hull Rule and customary law in
defense of investor compensation, and devised a more investor protective FCN in the wake of
20th century challenges, in fact changed its position when it was ostensibly turning to an even“stronger” vehicle for investor protection – namely, U.S. BITs. It would mean that Argentina’s
leaders, who looked to the U.S. BIT to reassure investors with respect to the political risks ofinvesting in their country and who were told that by ratifying the U.S. BIT they were sending thestrongest possible signal of a commitment to uphold investment rights, were wrong about whatthat treaty required of each party and about the stability of the investment climate thereby
produced by its ratification.
There was no evidence presented in the Argentine Gas Sector Cases to support thiscounter-narrative. On the contrary, there was evidence presented that, to the extent the meaningof clauses like Article XI was ever discussed among prospective U.S. treaty partners (at least
through 1987), U.S. negotiators suggested that the “measures not precluded” clause was inserted
into the earliest U.S. Model BITs out of an “excess of caution” and for the same reasons theUnited States had inserted other references to customary law throughout its BIT, namely toaffirm the applicability of assumed background principles, including in investor-state disputesettlement. 315
The CMS, Enron, and Sempra correctly drew upon the well-known canon ofinterpretation, recognized by numerous arbitral tribunals and the ICJ itself, that fundamental
rules of customary international – including defenses like force majeure, distress, or necessity –should not be presumed inapplicable unless the relevant treaty excludes their application by
explicit provision. 316 Those tribunals’ interpretation of “necessary,” which relies on the most
relevant rules of international law on point, is the most consistent with that treaty’s otherprovisions and the general principle of effectiveness (which encourages interpretations that best
advances the purpose of treaties). This interpretation is the least likely to inspire criticisms of
judicial activism, since any of the suggested alternatives, such as Burke-White and von Staden’s“least likely alternative” or “margin of appreciation,” have, as we discuss in the next section, no
demonstrable treaty basis and would involve a novel departure from established law. These
necessity but finding that Argentina could not successfully satisfy the requisites of that necessity defense). See also
Rose-Ackerman and Billa, supra note 261, at 443-51 (arguing that customary defenses such as necessity normally
apply when a treaty is silent).
314
See e.g. Jeswald W. Salacuse and Nicholas P. Sullivan, Do BITs really work: an evaluation of bilateral
investment treaties and their grand bargain, 46 HARVARD J. INT’L L. 67 (2005); see also supra at Part III(A).
315
See supra at Part III(A) and text and accompanying note 291.
316
See e.g. Sempra Award, supra note 1, at ¶ 378; Elettronica Sicula S.p.A. (U.S. v. Italy), 1989 ICJ 15 (July 20),
para. 112 (tacit repudiation of an “important principle of customary international law not favored; need words“making clear an intention to do so”). See also Amoco Int’l Finance Corp. v. Iran, July 14, 1987, Iran-United States
Claims Tribunal Rep. 189 (1987) para. 50; Legal Consequences for States of the Continued Presence of South Africa
in Namibia (South West Africa) Notwithstanding Security Council Resolution 276, (1971), Advisory Op., 1971 ICJ
16, 47 (June 21), para. 96; The Loewen Group, Inc. & Raymond L. Loewen v. United States, ICSID Case No.
ARB(AF)/98/3, June 26, 2003, 42 ILM 811 (2003), 7 ICSID Rep. 442 (2005), para. 160. Interestingly, the LG &E
Award did not disagree. It applied both Article XI and the customary defense of necessity without suggesting thatthe former was lex specialis.

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arbitrators’ reliance on the requirements of the customary necessity defense would not havesurprised the drafters of the U.S. Model BIT or presumably the negotiators of the U.S.-Argentina
BIT.
To be sure, some of the arbitrators, particularly in CMS, were less than clear in
articulating how they reached this interpretation. Most notably, and as discussed above, 317 the
CMS tribunal failed to explain why it was interpreting Article XI in light of customaryinternational law, stating merely that the defenses under customary international law and thetreaty were “one fundamental issue.” 318 What those arbitrators should have said was that they
were turning to the underlying customary necessity doctrine that inspired the ILC and explained
why this was appropriate in interpreting the laconic words in Article XI. The Enron and Sempra
arbitrators were a bit more precise in this respect. They were more careful about recognizingthat the starting point must, of course, be the text of Article XI. They specifically disagreed with
Argentina’s lex specialis interpretation and indicated that since Article XI did not define what it
meant by “necessary,” the customary international law defense of necessity was the “relevant
rule of international law.” 319
The CMS arbitrators’ failure to articulate their reasoning explains some of the underlying
criticisms of the CMS Annulment Committee. At the same time, that Annulment Committee,
which included one of the principal authors of the ILC’s final codification efforts, erred, with all
due respect, in relying on the false authoritativeness of those efforts. 320 In trying to interpret
whether Article XI was seeking to derogate from customary law, those Committee members
should have been more attentive to the uncodified state of the defense of necessity at the time the
U.S.-Argentina BIT was negotiated and not on the mere fact that the black letter formulation ofthat defense was not replicated word for word in Article XI. Instead, that Committee, appliedmechanically and anachronistically the black letter rules in the ILC’s Article 25 (released in2001), even though they were dealing with a treaty concluded in 1991 and, specifically, with a
NPM clause that was a part of the original 1982-83 U.S. Model BIT which was in turn inspiredby language in a “general exceptions” clause included in post-WWII U.S. FCNs.
Contrary to what the CMS Annulment Committee suggests, the arbitrators in the CMS
case (or in the later Enron or Sempra cases) did not commit a ‘mistake of law’ in interpreting“necessary” in light of the ancient equitable norms reflected in the traditional defense ofnecessity. The CMS, Enron and Sempra arbitrators correctly drew from the black letter of the
ILC’s Article 25 the essential elements of the relevant customary defenses that in all likelihood
inspired the drafters of what became Article XI of the U.S.-Argentina BIT. They also correctly
drew from the underlying rules of international law the proper burden of proof that applies tosuch affirmative defenses, concluding that the burden for proving such defenses rests on theparty that invokes them. 321 They correctly found that placing the burden on Argentina to make
317

Supra at text accompanying notes 111-113.
CMS Award, at ¶ 308.
319
Enron Award, supra note 1, at ¶¶ 333-334; Sempra Award, supra note 1, at ¶¶ 375-378.
320
To be sure, as David Caron has explained, the CMS arbitrators are hardly unique in accepting at face value the
ILC’s articles of state responsibility as authoritative. See David Caron, The ILC Articles on State Responsibility:
The Paradoxical Relationship Between Form and Authority, 96 AJIL 857 (2002).
321
On burden of proof, see, e.g., BIN CHENG, GENERAL PRINCIPLES OF LAW 326, 332 (1953); MOJTABA KAZAZI,BURDEN OF PROOF AND RELATED ISSUES: A STUDY ON EVIDENCE BEFORE INTERNATIONAL TRIBUNALS (1996). The
burden of proof regarding defenses such as necessity might also be drawn from pacta sunt servanda itself, that is, ageneral principle discouraging parties from derogating from their treaty obligations. To the extent the arbitrators in
LG & E imposed some or all of the burdens of proving necessity (or the requisites of Article XI), see part II(C)(b),318

51

the case for its defense of necessity was also practicable and fair since only Argentina, and not a
private investor, undertook the original decision to reject all other alternative courses of action,
had access to the data concerning the probable underlying causes for the economic crisis, andwas therefore in the position to satisfy the requisites of the defense of necessity.322
These arbitrators’ decisions on this point also respected other relevant international law
rules, consistent with the demands of article 31(3)(c) of the Vienna Convention on the Law ofTreaties. By imposing on Argentina the burden of proving that the measures that it took were the‘only way’ to deal with the underlying crisis, the arbitrators gave effect to the well-establishedprinciple of effectiveness whereby treaty interpreters are urged to interpret treaties wherever
possible in ways that give effect to their object and purpose and not frustrate that purpose. 323
They also used the requisites of the necessity defense to affirm the fundamental equitable rulethat parties should not be permitted to benefit from their own wrong – which is, after all, thebasis for the demand that those invoking necessity did not “substantially contribute” to theunderlying crisis. 324 It is not clear why, even assuming the CMS Annulment Committee werecorrect in saying that Article XI was intended to oust the applicability of the defense ofnecessity, that provision should be presumed to derogate from these other general principles oflaw. 325
Reliance on such international law principles to interpret what “necessary for” in Article
XI means is also consistent with relevant ICJ practice. In both the Nicaragua and the Oil
Platforms Cases, involving the comparable “essential security” clauses in FCN treaties thatinspired Article XI of the U.S.-Argentina BIT, the ICJ found that the requirement that measures
be “necessary” to protect a party’s essential security interests imposed a distinct and heavy
burden on the party seeking to rely on an “essential security” clause. In the Nicaragua Case, theCourt found US pronouncements of necessity to be insufficient. In the Oil Platforms Case, theCourt found that the United States had failed to sustain its burden of proof to show that it
satisfied the criteria of necessity and proportionality. 326
this would appear to be an error of law. Although some critics have taken the CMS, Enron, and Sempra tribunals totask for failing to elaborate precisely what alternative courses of action Argentina could have taken or for failing toindicate how precisely Argentine actions contributed to the underlying emergency, it is not clear that the tribunals
needed to say anything more than what they did say on these points: namely that considering the considerable expert
opinions offered by both sides, they were not convinced that Argentina had satisfied its burden of proof on theseissues.
322
Examples of prior arbitral decisions imposing the burden of proving an affirmative defense on the party that
asserts it are legion. See, for example, Loewen Award of 26 June 2003, supra note 307, at ¶¶ 213-217. Note thateven if one agrees with the CMS Annulment Committee that Article XI is lex specialis, that in and of itself is no
reason to presume that the burden of proving the requisites of Article XI is anything other than that which is
imposed on other affirmative defenses under customary international law. Article XI does not address which party
bears the burden of proof.
323
For discussion of the ICJ’s use of the principle of effectiveness in interpreting the UN Charter, see Alvarez, supranote 10, at 109-41 (2005).
324
On this issue alone, the public record of apparent admissions against interest made this hurdle a formidable one
for Argentina. Thus, Argentina’s then President wrote the following in the Financial Times of July 2, 2002: “In thecase of Argentina, no one bears more of the blame for the crisis than Argentina itself. We spent more than weearned; we failed to complete the full cycle of economic reforms; and we tied ourselves to the most productive
economy in the world without building our own productivity . . . Argentina’s crisis is largely home grown.”
Eduardo Duhalde, Argentina Regrets, FINANCIAL TIMES, July 2, 2002.
325
For an elaboration of the use of general principles of law in the interpretation of investment agreements, see
McLachlan, supra note 286, at 395-401.
326
Oil Platforms Case, supra note 252, ¶ ___.

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The ICJ arrived at this conclusion by importing customary international law notions – inthose cases, the principles relating to self-defense – in order to interpret the NPM clauses as
issue, 327 and specifically, the meaning of “necessary” in those clauses. 328 Thus, the ICJ in Oil
Platforms reasoned:… under the general rules of treaty interpretation, as reflected in the 1969 Vienna
Convention on the Law of Treaties, interpretation must take into account “anyrelevant rules of international law applicable in the relations between the parties"(Art. 31, 3(c)). The Court cannot accept that Article XX, paragraph 1(d), of the1955 Treaty was intended to operate wholly independently of the relevant rules ofinternational law on the use of force, so as to be capable of being successfully
invoked, even in the limited context of a claim for breach of the Treaty, in relation
to an unlawful use of force. The application of the relevant rules of internationallaw relating to this question thus forms an integral part of the task ofinterpretation entrusted to the Court by Article XXI, paragraph 2, of the 1955
Treaty. 329
Some authors suggest that the order in which the ICJ approached the questions that it
addressed in Oil Platforms shows that that Court treated the NPM clause in the FCN as a primaryrule overruling customary international law. 330 We disagree. It is true that the Court addressed
the question of the meaning of the NPM clause prior to the issue of whether a substantive breachof the FCN occurred. But, as indicated by the quotation from the ICJ presented above, thissuggested interpretation is inconsistent with what the Court said. Further, the ICJ explicitly
explained that it dealt with the matter of self-defense first because this was the central
preoccupation of the diplomatic exchanges and the subsequent pleadings between the parties. 331
The ICJ, which at no time categorized the NPM clause in the FCN as a “primary” rule, may also
have addressed that issue first because, as some of the judges indicated in their separate opinions,this ordering “pierc[ed] the veil” of the dispute and went to its “political relevance.” 332 It is alsoa bit misleading to rely on the precise order in which the Court dealt with this issue insofar asthat ordering was criticized in no fewer than five separate concurring opinions. 333
Burke-White and von Staden acknowledge that these ICJ decisions are consistent with
the CMS, Enron and Sempra interpretations of what “necessary for” means in Article XI, but
327

Nicaragua case, supra note 251, ___ Oil Platforms Case, supra note 252, at ¶ 40 (holding that: “when Article
XX, paragraph 1(d), is invoked to justify actions involving the use of armed force, allegedly in self-defence, theinterpretation and application of that Article will necessarily entai1 an assessment of the conditions of legitimate
self-defence under international law”).
328
Nicaragua case, supra note 251, ___, ___; Oil Platforms Case, supra note 252, at ¶¶ 73 and 76.
329
Oil Platforms Case, supra note 252, at ¶ 41.
330
Bottini, supra note 305, at 149; Tarcisio Gazzini, Necessity in International Investment Law: Some Critical
Remarks on CMS v Argentina, 28 J. ENERGY & NAT’L RESOURCES L. (2008, forthcoming) (arguing that “the ICJ
construed [the NPM clause] … as a primary rule”, citing 33, whereas the ICJ refers to the NMP as a “defense” at 33,
and states that the NPM clause “does not afford an objection to admissibility”).
331
Oil Platforms Case, supra note 252, at ¶¶ 37-38.
332
Oil Platforms Case, supra note 252, Declaration of Judge Ranjeva, at ¶ 3 (“la Cour a percé le voile du différend”)
and ¶ 4 (“percement du véritable cœur du différend”) and Separate Opinion of Judge Simma, at ¶ 3, respectively.
333
Oil Platforms Case, supra note 252, Separate Opinion of Judge Higgins, at ¶ 2; Separate Opinion of Judge ParraAranguren, at ¶ 13; Separate Opinion of Judge Kooijmans, at ¶ 3; Separate Opinion of Judge Buergenthal, at ¶¶ 5,
13 and 17; Separate Opinion of Judge Owada, at ¶¶ 5-16.

53

they attempt to distinguish them on the basis that they involve the use of force. This is not asatisfactory answer for three reasons. First, in neither instance did the ICJ suggest a clear
distinction between the necessity defense under the essential security clause of the FCN and thecustomary rules applicable to self-defense or base its ruling exclusively on the latter. Second,
the basis of the Court’s jurisdiction, at least in the Oil Platforms Case, was only the U.S.-Iran
FCN treaty, and therefore, as a matter of jurisdiction, the Court in that case could only have been
applying the “essential security” clause in that treaty. 334 Finally, as the ILC Commentaries to
Article 25 indicate, the origins of the rules applicable to self-defense first articulated in the
Caroline incident of 1837 “really involved the plea of necessity at a time when the law
concerning the use of force had a quite different basis than it now has.” 335 Even assuming the
ICJ cases on point were principally about the use of force and not about the meaning of abilateral “essential security” clause, they are hardly inapposite to determining the meaning of thevery doctrine – necessity – that gave rise to relevant restrictions on both the resort to the use offorce and the necessity defense.
2)

Deploying a “least restrictive alternative” or “margin of appreciation”
standard is inconsistent with Article XI

Burke-White and von Staden argue that the “least restrictive alternative approachdeveloped by the GATT and WTO panels offers perhaps the best middle ground for balancing
the legitimate expectations of both states and investors.” 336 They note that this test also “stems… from U.S. constitutional practice.” 337 Even assuming both of these statements are correct,
imposing such an interpretation gloss on Article XI requires something more than analogies toeither U.S. constitutional law or the use of such a standard by WTO dispute settlers – especiallysince the “least restrictive alternative” rule is not connected to any principle of international lawthat is relevant to interpreting the U.S.-Argentina BIT.
To the extent we are correct in concluding that Article XI needs to be read in light of thecustomary international law defense of necessity and is not lex specialis, it is evident that there is
no room for an alternative test of necessity, such as the least restrictive alternative. But eventhose who reject our contention in part III(C)(1) above, need to explain why measures taken thatare only the ‘least restrictive’ of a number of possible alternatives, are, under the plain terms of
Article XI, really “necessary” to deal with the types of crises enumerated by that Article.
To assume that Article XI ought to be read as consistent with any of the levels of scrutiny
familiar to U.S. constitutional law – from ‘rational basis,’ ‘intermediate,’ or ‘strict’ levels of
scrutiny – requires doctrinal and conceptual leaps that are unjustified by the strict terms of
Article XI (quite apart from the customary international law gloss that we believe that clause
merits). There is simply no evidence in the text of the U.S.-Argentina BIT or the history of thattreaty or of the U.S. BIT program generally to suggest an intent to import such a U.S.-centric
concept into an international compact intended for reciprocal application. And while drawing
from WTO practice at least has the merits of using a standard that is in use internationally, rather
334

Oil Platforms Case, supra note 252, ¶ ___.
ILC Commentaries, supra note 307, at 196. See also Ian Johnstone, The Plea of “Necessity” in International
Legal Discourse: Humanitarian Intervention and Counter-Terrrorism, 43 COL. J. TRANSNAT’L L. 337, at 344(2005)(noting that the Caroline principle “may be rooted more firmly in the doctrine of necessity than in selfdefense and citing D.W. GRIEG, INTERNATIONAL LAW 886 (1976).
336
Burke-White and Von Staden, supra note 36, at 348.
337
Id., at 346.
335

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than the law of only one of the BIT parties, there is no particular reason to assume that thedrafters of the U.S.-Argentina BIT (or U.S. BITs generally) intended to make such a connection
to modern WTO law, particularly when the NPM clause was first inserted into the U.S. Model
BIT in the early 1980s.
There are also distinctions between the relevant BIT and GATT clauses that should give
us pause about the effort to import a GATT-type least restrictive alternative standard into Article
XI. As the ICJ noted in the Nicaragua Case, there are significant differences between Article
XXI of the GATT and the measures not precluded clause in FCNs that inspired Article XI.
Article XXI includes the “which it considers” language that arguably renders Article XXI selfjudging. This language, crucially absent from Article XI of the U.S.-Argentina BIT, affects not
only how that clause is interpreted and by whom but its substantive content. A self-judging
measures not precluded clause like that of the GATT has a different, and far more sovereigntyprotective content than that of Article XI (or the customary rule of necessity).
Further, the famous preambular injunction contained in Article XX, conditioning certain
claims of exceptions to the GATT Covered Agreements which members may claim are“necessary” to protect certain regulatory interests is absent from the U.S.-Argentina BIT. Thispreambular language has dramatically affected the degree of deference WTO dispute settlers
accord to GATT Contracting Parties under that clause and in all likelihood has subtly affected
what those dispute settlers consider to be “necessary.” That preamble insists that any suchmeasures not be applied in a manner that would constitute “arbitrary or unjustifiable
discrimination” or be a “disguised restriction on international trade.” When GATT cases suggestthat the word “necessary” in Article XX needs to be read as part of a continuum extending from“indispensable” at one end to “making a contribution to” at the other, 338 this has surely
something to do with the fact that that provision anticipates a continuum among regulatory
measures requiring a judgment as to the degree to which a measure might be a form of tradeprotectionism.
Article XX of the GATT is grounded in a balancing test that is absent from the text of the
U.S.-Argentina BIT’s Article XI. Article XI suggests an on/off switch; either a measure is“necessary” for the stipulated reasons or it is not. Nothing in it suggests the balancing test
implied in the preamble of the GATT’s Article XX, in the self-judging nature of the GATT’s
Article XXI, or in the lengthy laundry list of exceptions contained in the rest of Article XX(which presumably extend beyond the usual customary law defenses). The other WTO
analogies made by Burke-White and von Staden are similarly inapposite. 339
Burke-White’s and von Staden’s alternative interpretation, that the European Court of
Human Right’s “margin of appreciation” doctrine should be imported as a “template” to be used
in NPM cases, is equally untenable.
The ECtHR’s “margin of appreciation” is a standard of supervisory review that, in thewords of R. St. J. Macdonald, contains a “context dependent” spectrum of intensity with respect
338

See, e.g., Korea-Measures Affecting Imports of Fresh, Chilled and Frozen Beef, WT-DS161/AB/R,
WT/DS169/AB/R, Report of the Appellate Body (Dec. 11, 2000), ¶ 161.
339
Consider Article 2(2) of the SPS Agreement and its interpretation which they cite as support for the “likely
bargain states would have struck between the protection of investment and the protection of the health of theircitizens.” Burke-White and Von Staden, supra note 36, at 363. That provision stipulates that “[m]embers shallensure that any sanitary or physosanitary measure is applied only to the extent necessary to protect human, animal orplant life or health, is based on scientific principles and is not maintained without sufficient scientific evidence . . .
.”339 (Emphasis added.) This provision also anticipates a balancing between competing interests not contemplatedby the text of Article XI.

55

to judicial scrutiny, ranging from “total deference (amounting to unreviewability at one extreme)
through less deferential standards to the most stringent standard of justification at the other.” 340
The textual basis for the “margin of appreciation” rests on a number of provisions in theEuropean Convention for the Protection of Human Rights and Fundamental Freedoms that
permit state restrictions on some rights to the extent these are “necessary in a democraticsociety,” 341 and if the actions are taken, for example, “in the interests of national security,
territorial integrity or public safety, for the prevention of disorder or crime, for the protection ofhealth or morals, for the protection of the reputation or rights of others, for preventing thedisclosure of information received in confidence, or for maintaining the authority andimpartiality of the judiciary.” 342
Burke-White and von Staden argue that this doctrine should be used in NPM cases, suchthat the “principal task” of the tribunal should be “to determine the appropriate boundaries of themargin of appreciation and, hence, respondent state’s freedom of action.” 343 The margin of
appreciation is, it appears, presented by these authors both as a substantive standard and aprocedural one. It is a procedural standard in that it is a standard of review. 344 It is also, andperhaps more importantly, a substantive standard, in that it is to be used as an alternative to,among other possible standards, the far less deferential customary international law requisites forthe defense of necessity. 345 (Burke-White and von Staden are not suggesting that comparable
deference is owed to states in determining the applicability of the customary defense ofnecessity.) As with respect to their proposal that Article XI triggers “good faith” review, BurkeWhite and von Staden are less than clear in articulating what substantively their proposed“margin of appreciation” standard would entail. 346
The ICJ has rejected the argument that a margin of appreciation, or deference of the typeadvocated by Burke-White and von Staden, should be afforded in evaluating claims of necessity,
both in the context of FCN treaties and BITs. 347 But quite apart from adherence to ICJ
340

R.St. J. Macdonald, The Margin of Appreciation, in R. St. J. Macdonald, et al, ed., THE EUROPEAN SYSTEM FOR

THE PROTECTION OF HUMAN RIGHTS, at 84 (1993).
341

See European Convention on Human Rights and Fundamental Freedoms, Articles 8 (right to respect for privacy
and family life), 9 (freedom of thought, conscience, and religion), 10 (freedom of expression), 11 (assembly andassociation); Protocol I, art. 1 (protection of property).
342
See id., Art. 10(2).
343Burke-White and Von Staden, supra note 36, at 374.
344
Id., at 368-376.
345
Id., at 343-348.
346
The factors relevant to the breadth of this margin are variously identified by those authors as being the“language employed in defining the nexus requirement,” id., at 371, the “character of the permissible objectives
asserted,” id, at 375, and the “level of state interference with investor rights.” Id.. They argue that assessing thecharacter of permissible objectives would mean the highest deference for determinations in relation to such
subjective determinations as those relating to “public morality,” the lowest deference for such “technical” or“objective” determinations as those relating to “public health,” and in between for determinations relating to“security.” Id., at 375 and 404-05. Why public morality is more subjective than security is not explained or
supported. They do not discuss how the other factors would apply or how the laconic text of Article XI leads tosuch conclusions. Nor do they discuss how their analysis would apply to the U.S.-Argentina BIT, or the interferencewith investor rights found in the Argentine cases. They do, though, state that the LG&E Tribunal, in suggesting thatits review of Argentina’s measure “does not significantly differ” from a good faith review, “takes an approachsomewhat closer to the margin of appreciation doctrine.” Id., at 397.
347
See Oil Platforms Case, supra note 252, at ¶ 73 (stating that “the requirement of international law that measurestaken avowedly in self-defense must have been necessary for that purpose is strict and objective, leaving no room
for a ‘measure of discretion’”) and ¶ 76 (referring to the fact that there was no evidence that the U.S. complained to56

precedent, there are solid reasons why importing this standard into Article XI is inappropriate.
These, discussed below, (1) relate to possible problems with the margin of discretion doctrine
itself, (2) stem from the different goals of the two treaty regimes at issue, and (3) risk duplicatingother forms of “balancing” that are already emerging in the interpretation of the substantive
investment rights.
The margin of appreciation doctrine has drawn considerable criticism. Because it
accords judges considerable discretion and has sometimes led to differing results in comparable
factual situations, some have contended that the doctrine threatens the rule of law because of (1)its lack of clarity in what adjudicators are entitled to consider relevant, (2) its unpredictability inapplication, and (3) its uneven and inconsistent treatment of comparably situated states. Jeffrey
Brauch, for instance, argues that the doctrine as used by the ECtHR violates many of Lon
Fuller’s key elements of the rule of law, undermines the principal functions of human rights law
by failing to limit executive power, deploys “slippery” variables (e.g., “acceptable,” “goodfaith,” “legitimate aims”) that are never adequately defined and change from case to case, issubject to (sub silentio) modifications over time that come without warning, and lead toseemingly random or standard-less decisions. He concludes that its use makes it difficult forpeople to plan their affairs, encourages the view that the European Court is a “black box”
“unshackled” by law, and is often a “substitute for coherent legal analysis of the issues atstake.” 348 Eyal Benvenisti suggests that the margin of appreciation suggests a “moral relativism”
that is simply at odds with the notions that human rights are universal, encourages national
institutions to resist external review, and “reverts difficult policy questions back to national
institutions, in complete disregard for their weaknesses.”349
Whether or not these criticisms are warranted in the context of the European humanrights regime, they serve notice that use of this doctrine in the context of the U.S.-Argentina BIT
may be inconsistent with many of that treaty’s goals, namely to protect the legitimate
expectations of investors, uphold predictable and stable rules of law, and add greater precision to
Iran of the military activities on the platforms, among other things, in finding that the acts were not “necessary”);
Id., Separate Opinion of Judge Higgins, at ¶ 48 (stating that the “Court should next have examined – without any
need to afford a ‘margin of appreciation’ – the meaning of ‘necessary’”); Separate Opinion of Judge Simma, at ¶ 11(“the requirement of international law that action taken avowedly in self-defence must have been necessary for that
purpose, is strict and objective, leaving no room for any ‘measure of discretion’”). Siemens A.G. v. The Argentine
Republic, Award, Feb. 6, 2007, ICSID Case No. ARB/02/8, available at: http://ita.law.uvic.ca/documents/SiemensArgentina-Award.pdf), at ¶ 354 (stating, in the context of its damages discussion, that “Article I of the First Protocol
to the European Convention on Human Rights permits a margin of appreciation not found in customary internationallaw or the Treaty.”)
Yuval Shany argues, based on the statement of the ICJ in the Gabcikovo-Nagymaros Dam Case that the
respondent “is not the sole judge of whether [the necessity] conditions have been met,” that the ICJ “accepted thetheory that the state concerned retains some degree of judgment – though certainly not exclusive judgment – overthe question of whether the conditions of necessity have been met,” and thereby “[b]y implication” espoused themargin of appreciation. Toward a General Margin of Appreciation Doctrine in International Law?, 16(5) EUR.
J.INT’L. L. 907, 934 (2005). Leaving aside the question of whether this implication is correct, it is clear that the ICJ
did not adopt the margin of appreciation in the substantive sense argued by Burke-White and von Staden. As isclear from the passage relied upon by Shany, the ICJ was applying the requirements of necessity at customaryinternational law – those set out in the precursor to Article 25 of the ILC Draft Articles. Gabcikovo-Nagymaros
Dam Case, supra note 252, ¶ 51.
348
Jeffrey A. Brauch, The Margin of Appreciation and the Jurisprudence of the European Court of Human Rights:
Threat to the Rule of Law, 11 COLUM. J. EUR. L. 113 (2004-2005).
349
Eyal Benvenisti, Margin of Appreciation, Consensus, and Universal Standards, 31 N.Y.U.J. INT’L L. & POL. 843,
853 (1999).

57

the some of vague guarantees contained in relevant customary international law. Thesecriticisms also suggest that importing the margin of appreciation would not, as argued by BurkeWhite and von Staden, have the “benefit of helping structure the expectations of all actors in theinternational investment system.” 350
There are also significant differences between the European human rights regime and the
U.S.-Argentina BIT. As with Burke-White’s and von Staden’s attempts to draw analogies to
WTO law, their resort to the margin of appreciation doctrine loses sight of these distinctions. 351
The textual trigger for the margin of appreciation doctrine, namely a demand that
European judges consider what is “necessary in a democratic society,” hints at one crucial
distinction. As both defenders and critics of the margin of appreciation acknowledge, that
doctrine responds to what binds the European members of this regime, namely their common
democratic systems of government. 352 Accordingly, the doctrine achieves two distinct goals of
the European human rights system: first, finding and applying standards that the European
nations have in common with one another, and second, finding and applying standards that
democratic nations, particularly in Europe, share. These goals respond to a central purpose of
the European Convention of Human Rights: to consolidate democracy within Europe by locking
in certain substantive rights and to use the advance of human rights to promote European
unity. 353
As is well known, probably the most important aspect of the margin of appreciation is thedetermination of whether there is a “consensus” among the democracies of Europe about aparticular practice. This consensus test is applied to determine whether (or how) particularly(but not exclusively 354 ) European democracies would balance the respective rights that havebeen abrogated in the same way as the state under review. The test may also be applied todetermine whether there is a European consensus with respect to the substance of the rights
under review. Determining whether there is a European democratic consensus may also proverelevant to determining the relative weights of the rights being balanced. 355 The margin of
appreciation doctrine is arguably justified then because the European Convention demands thatits judges determine “what is necessary in a democratic society” and this requires them to
examine how other European democracies would handle the same question. Deploying themargin of appreciation in the course of deciding human rights disputes is characteristic of the
ECtHR and few (if any) other human rights bodies. 356

350

Burke-White and Von Staden, supra note 36, at 405.
For a general discussion of how many scholars ignore the institutional differences among various venues foraddressing investment disputes, see Steven R. Ratner, Regulatory Takings in International Law: An Institutional
Approach (forthcoming AJIL). Ratner comes to many of the same conclusions about the applicability tointernational investment arbitration of the European human rights regime as we do here.
352
This is also highlighted by the Preamble of the European Convention on Human Rights, which reminds us that“the governments of European countries which are like-minded and have a common heritage of political traditions,
ideals, freedom and the rule of law.” Preambles of investment agreements, of course, contain no such reminders.
353
See, e.g., Andrew Moravscik, The Origins of Human Rights Regimes: Democratic Delegation in Postwar
Europe, 56 INT. ORG. 217 (2000).
354
But, as Brauch points out, in a few cases the ECtHR has also inquired as to the practices of other democracies
outside Europe. Brauch, supra note 349, at .
355
As the Court put it in Muller v. Switzerland, for example, it was relevant to consider that “freedom of expression
constitutes one of the essential foundations of a democratic society . . .” Cited in Brauch, supra note 349, at 134.
356
As Benvenisti indicates, few other dispute settlers, even among those applying human rights norms, haveresorted to this doctrine. Benvenisti, supra note 349, at 844. There is therefore little prospect that anyone can claim
351

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Secondly, the European margin of appreciation doctrine is premised on specific notionsof European federalism and subsidiarity that are absent from the U.S.-Argentina BIT or mostinvestment treaties. As both critics and defenders of the margin of appreciation doctrine point
out, deference to sovereign powers relies at least in part on these common democratic values.
The European Convention’s requirement that national remedies first be exhausted before state
action can be challenged before the European Court also reflects the values of federalism anddeference to democratic national polities. Such deference is absent from other regimes that
apply to states with vastly differing political systems (e.g. that apply to both democracies andnon-democracies), and that do not have broader integrative goals of bringing the states’
respective political systems closer together. The notions of deference to sovereign authority andsubsidiarity that Burke-White and von Staten find so attractive in the margin of appreciation
appear as inextricably connected to that regime’s common democratic membership andintegrative ethos as is that regime’s requirement of exhaustion of local remedies. 357
The notions of subsidiarity that underlie the margin of appreciation are harder to imply in
the BIT context. The U.S.-Argentina BIT, as noted, contains no exhaustion of local remedies
requirement and indicates, to the contrary, that national law and national remedies need to give
way, at the option of the investor, to international guarantees and to an international arbitral
forum. Neither that treaty as a whole nor its Article XI is premised on an assumption thatnational governmental authorities are in a better position to protect the rights that it enshrines. 358
Indeed, a major goal of this treaty is to enable alien investors to avoid, at their option,
presumptively biased national courts.
The other rationales that underlie the European margin of appreciation doctrine are alsoarguably more difficult to apply in the U.S. BIT context. U.S. BITs intentionally avoid assuming
anything about the governmental attributes of prospective treaty parties. 359 These treatiesemphasize the free market and the protection of a select class of individuals and entities, alieninvestors. Although both U.S. BITs and the European Convention attempt to correct for some ofthe systemic deficiencies of national government by permitting recourse to supranational
adjudication, the similarities between the two regimes end there. U.S. BITs operate on theassumption that alien investors, who are by definition not part of national political processes tothe same extent as voting members of the national policy, need international protection fromprotectionist governments, who are apt to act against their interests in part because of this verylack of political access. 360 U.S. BITs are narrow tools to correct one particular problem, namely
the inability or unwillingness of some states to protect aliens’ rights to their property and tocontract. The European human rights system addresses more general deficiencies of democracies
and not the rights of alien investors nor the risks of political protectionism as such. 361

that the margin of appreciation is some kind of general principle of law or a general principle of common
international procedure available to investor-state arbitrators.
357
See Ratner, supra note 351, at ____. As Ratner indicates, it may be that a “key purpose of the European
Convention was to consolidate democracy in Europe.” Id., at (citing Andrew Moravscik).
358
Compare Handyside v. United Kingdom, 24 Eur. Ct. H. R. (ser. A), at 22, ¶ 48 (determining that it is for thenational authorities to make the “initial assessment” of the reality of “pressing social needs”).
359
Compare text and accompanying note 352.
360
They share that assumption with the WTO regime.
361
Indeed, Ratner argues that the European Convention “is not a treaty on the protection of property specifically –let along alien property – at all.” Id., at (citing Protocol I, art. I’s hedged language with respect to entitlement to“peaceful enjoyment of . . . possessions”).

59

A treaty like the U.S.-Argentina BIT does not confer on its dispute settlers a generallicense to consider the rights of fellow democracies. It is not premised on finding a “consensus”
among a particular set of like-minded states, either with respect to how they define investor
rights or how they “balance” the rights of investors vis-à-vis the needs of the sovereign.
Although, as is discussed below, the BIT’s substantive guarantees may require arbitrators toattempt to balance in some respects the rights of investors vis-a-vis the regulatory prerogatives of
the host states in which they invest, this is a far cry from suggesting that the European margin of
appreciation should be imported into this interpretation of Article XI. There is no evidence thatwith respect to investment treaties, or at least the U.S.-Argentina BIT, the parties agreed thatinvestor-state arbitrators were entitled to engage in a margin of appreciation inquiry with respect
to the application of the NPM clause.
There is yet another reason to be cautious about importing a margin of appreciation
standard when applying Article XI: the European Court of Human Rights applies its margin of
appreciated in the course of determining whether a state has engaged in a substantive breach of
the European Convention. In the European Convention, as noted, rights are defined in ways that
require weighing distinct individual rights vis-à-vis one another and balancing those rights
against the rights of others and other state interests. Consider for example the text of its article 8:
1. Everyone has the right to respect for his private and family life, his home andhis correspondence.
2. There shall be no interference by a public authority with the exercise of thisright except such as is in accordance with the law and is necessary in a
democratic society in the interests of national security, public safety or the
economic well-being of the country, for the prevention of disorder or crime, or forthe protection of the rights and freedoms of others. (Emphasis added).
The substantive rights in the European Convention’s text anticipate that applying theserights will necessarily involve judges striking a balance among its substantive rights.
Accordingly, that Court’s judges have decided to focus their inquiries principally on how adiscrete group of states, namely European democracies, have struck such balances not only
because the text of the treaty suggests it but also to confine their judicial discretion withinmanageable bounds. The margin of appreciation is therefore necessarily part of thedetermination in that Court about whether a substantive breach of the European Convention has
occurred.
Burke-White’s and von Staden’s suggestion, by contrast, would have the margin of
appreciation apply in the course of deciding the applicability of the NPM clause, presumably
once a determination of substantive breach has been made. There is a serious question about
whether importing a margin of appreciation doctrine at this late stage -- by way of an excuse to
an investment treaty breach – is consistent either with what the European Court of Human Rights
does or more importantly, with what investment arbitrators are now doing.
Our arguments rejecting the European margin of appreciation doctrine for purposes ofinterpreting Article XI should not be understood as suggesting that other parts of the U.S.Argentina BIT do not require, as does the European Convention more explicitly, some degree ofbalancing between the regulatory interests of states and the rights of alien investors. In theArgentine Gas Sector rulings discussed here, the U.S.-Argentina BIT’s substantive guarantees
were interpreted to require consideration of proportionality or to otherwise require a balancing of60

the respective rights of sovereign and foreign investor – an analysis with some parallels to thatinvolved in the European margin of appreciation analysis although that standard is neveradopted. The Enron and Sempra tribunals’ rejections of investors’ claims that Argentina hadtaken “discriminatory” measures or actions “tantamount to expropriation” involved giving someweight to Argentina’s regulatory discretion. Those tribunals found that the measures taken werenot “arbitrary,” for example, because “the Government believed and understood [them to be] thebest response to the unfolding crisis.” 362 And while the LG&E tribunal weighed Argentina’s
interests differently and concluded that it had indeed engaged in discriminatory action, it
concluded, along with Enron and Sempra, that investors had not shown that Argentina had acted
arbitrarily. The LG&E tribunal also found that, in determining whether there had been an
indirect expropriation, it “must balance two competing interests: the degree of the measure’s
interference with the right of ownership and the power of the State to adopt its policies,” 363 andas noted above, struck that balance in favor the state. 364
The need to balancing the state’s versus the investors’ interests also appears to haveinformed these tribunals’ respective findings of fair and equitable treatment breach. As
discussed above (Part I(C)(3)), the CMS, Enron and Sempra tribunals all stated they wereprepared to accept that measures needed to be taken by the Argentine government, and objected
only to the fact that the measures taken were unilateral, rather than the negotiated measurescontemplated under the licenses and their governing regime. Similarly, the LG&E tribunal, in its
fair and equitable treatment analysis, after canvassing the actions of the Argentine government,
stated that it “nevertheless recognizes the economic hardships that occurred … and certain
political and social realities.” If found, though, that “Argentina went too far.” 365
The emerging investor-state caselaw is replete with other instances in which theregulatory interests of governments are weighed in some fashion vis-à-vis investor rights, as withrespect to national treatment, 366 fair and equitable treatment, 367 jurisdictional objections, 368 thescope attributed to MFN and umbrella clauses, 369 or the application of background principles,such as “reasonable” or “legitimate” expectations of the investor, 370 and determinations ofwhether there has been expropriation. 371 In these cases, such deference is arguably textually

362

Enron Award, supra note 1, at ¶ 281 and ¶ 283; Sempra Award, supra note 1, at ¶¶ 318-320.
LG&E Decision on Liability, supra note 1, at ¶189. See also Id., at ¶¶ 194-195.
364
Supra note 93 and accompanying text.
365
LG&E Decision on Liability, supra note 1, at ¶ 139.
366
See, e.g., Methanex v. United States, Final Award, Part III, Chapter B, 25-26, at ¶¶ 54, 57, Part II, Chapter D, 4 at
¶ 10, Part III, Chapter A (passim).
367
See Peter Muchlinski, ‘Caveat Investor’? The Relevance of the Conduct of the Investor under the Fair andEquitable Treatment Standard, 55 INT’L & COMP. L. Q. 527 (2006). See also McLachlan, supra note 287, at 382383 (arguing that the “inclusion of the reference to equitable treatment also provides a means by which an
appropriate balance may be struck between the protection of the investor and the public interest which the host State
may properly seek to protect in the light of the particular circumstances then prevailing.”)368
See e.g., The Loewen Group, Inc. and Raymond Loewen v. USA, ICSID Award Case No. ARB(AF)/98/3, June
26, 2003 (dismissing case by shareholder and company on jurisdictional grounds).
369
See, e.g., SGS Société Général de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/01/13,
Decision of the Tribunal on Objections to Jurisdiction of 6 Aug. 2003(refusing to interpret an umbrella clause asextending to a government contract because of, among other things, the “burdensome” consequences on thegovernment).
370
See, e.g., McLachlan, supra note 287, at 378.
371
Indeed, Yuval Shany argues that the following language relating to expropriation from the Award in S.D. Myers,
Inc. v. Canada is example of margin of appreciation-type reasoning:363

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legitimate – because such weighing of the respective interests of sovereign and investor are an
inescapable part of the substantive guarantees themselves and indeed is anticipated by theunderlying customary rules on state responsibility to aliens. 372
As the Argentine Gas Sector Cases suggest, a balancing of the respective interests ofinvestors and their host governments may also occur at the damages phase.373 Indeed, one
author argues that the ICJ used a “decision-making methodology compatible with the margin of
appreciation doctrine” in its discussion of remedies in the LaGrand and Avena Cases. 374
Either of these options would be more appropriate, given the existing principles ofcustomary international law relating to necessity as well as the laconic text of Article XI, thanundertaking this balancing (or affording a margin of appreciation) when assessing the whether astate is entitled to take measures not precluded under a provision like Article XI. Further, it is
not clear why balancing of such interests, if it occurs at the time of determination of substantive
breach or when calculating damages, should in addition occur when determining the applicabilityof Article XI. 375
D.

Necessary for what?

One of the most contentious issues in the Argentina cases was whether the conditions that
this country faced, particularly in 2001 when it proclaimed its Emergency Law, satisfy thepreconditions in Article XI, that is, were necessary either to “maintain public order” or to protect
Argentina’s “essential security interests.” 376
Argentina argued that “public order,” as used in the Spanish version of the treaty (whichby the terms of the treaty is equally authentic as is the English) is the equivalent of the broad
civil law concept of “orden público,” namely “the set of fundamental conditions of social life
instituted in a juristic community, which, due to the fact that they affect to the core its[A] breach of Article 1105 occurs only when it is shown that an investor has been treated in such an unjust
or arbitrary manner that the treatment rises to the level that is unacceptable from the international
perspective. That determination must be made in the light of the high measure of deference thatinternational law generally extends to the right of domestic authorities to regulate matters within their own
borders.
NAFTA Arb. Trib., Partial Award, Nov. 13, 2000, 40 I.L.M. 1408 (2001), quoted in Shany, supra note 347, at 930.
372
See, e.g., () Sohn and () Baxter, Responsibility of States for Injuries to the Economic Interests of
Aliens, 55 AJIL 561 (______); RESTATEMENT (THIRD) FOREIGN RELATIONS LAW OF THE UNITED STATES, § 712 (g)(1986).
373
See Part II(C)(4). See also Ioana Tudor, Balancing the breach of the FET standard, 4:6 TRANSNAT’L DISP.
MGMT. (2007).
374
Shany, supra note 347, at 935-936, citing Avena (Mexico v US), [2004] ICJ Rep and LaGrand (Germany v.
U.S.), [2001] ICJ Rep 466. Shany contrasts this approach with the “strict application of the Chorzow Factory
remedial formula” in the Wall Advisory Opinion. Id., at 938, citing Legal Consequences of the Construction of aWall in the Occupied Palestinian Territory, Opinion of 9 July 2004 [2004] ICJ Rep, 43 ILM (2004) 1009
375
Notably, in Siemens v. Argentina, the tribunal rejected Argentina’s argument, based (among other things) on
James v. UK, that its financial crisis had rendered it effectively bankrupt, and that something less than the fairmarket value measure should therefore be applied to determine compensation for the expropriation. It reasoned thata balancing of social and economic objectives against investment guarantees had already been undertaken in
determining whether an expropriation had occurred, and that it should not be repeated in the damages calculation.
Supra note 347, at ¶ 346 and ¶ 354.
376
No one contested that the other trigger in Article XI, to maintain or restore “international peace and security” wasintended to refer to measures authorized (presumably by the Security Council) under the UN Charter.

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organization must not be impaired by the will of individuals nor, as the case may be, theapplication of foreign rules.” 377 As this suggests, the civil law concept of ‘orden público’ isroughly equivalent to the common law concept of public policy. If interpreted this way, Article
XI could conceivably permit derogations from the BIT whenever a state finds it necessary toaddress any matter relating to public morals, health, safety, welfare or the like. 378 As thissuggests, Argentina’s interpretation of “public order” would essentially turn Article XI into a far
more general measures not precluded clause as contained in the GATT’s Article XX.
The U.S. investors argued, by contrast, that public order in Article XI referred to its
ordinary English meaning – that is, the absence of public disorder – and not to the civil law legal
term. 379 As the United States indicated to the Senate on a number of occasions, the phrase
covered “measures taken pursuant to a Party’s police powers to ensure public health andsafety.” 380
It would appear that even the arbitrators in LG&E accepted this second, more narrowinterpretation. Thus, even those arbitrators, who upheld Argentina’s invocation of Article XI,
did so on the premise that it was necessary to prove the “existence of serious publicdisorders.” 381 They found that Argentina had shown a need to “maintain order and control thecivil unrest.” 382
The arbitrators in these cases were correct to find that public order referred to states’
police power since the term, used in all prior U.S. BITs, was drafted by U.S. lawyers for use in avariety of contexts and was not intended to refer to the particular civil law concept of orden
público. In this instance, it was inappropriate to take at face value the Spanish language
reference to orden público, but to see it in the context of the rest of Article XI. Article XI refers
to the “maintenance” of public order. If orden público (or the French equivalent ordre public)
had been the intended meaning, one would have expected the English version of the treaty tohave referred to “public policy” instead, or at least to have referred to the “protection of” publicorder. Of course, the drafters of the U.S. BIT were familiar with far longer measures notprecluded clauses, as in the GATT, or indeed, the United States’ own FCNs, and theyspecifically did not include such a lengthy list, presumably out of concern with carving out too
many exceptions in the BIT. We therefore believe that the arbitrators were correct to understandpublic order as meaning measures to ward off disruption or to re-establish order that has been
disrupted.
What this means is that Argentina had to make a very difficult argument under the“public order” provision of Article XI: namely that it had no alternative but to refuse to adjust
the tariffs or to refuse to comply with its other assurances to the investors because otherwise
377

Argentina Rejoinder, LG&E Decision on Liability or Damages?, supra note 1, at ¶ 923.
Compare Black’s Law Dictionary definition of “public policy” which not surprisingly, does not define “publicorder” or “ordre public.”
379
LG&E Decision on Liability, supra note 1, at ¶ 221.
Claimants define public order measures as “actions taken pursuant to a state’s police powers, particularly inrespect of public health and safety”. Based on this definition, Claimants state that the measures in dispute inthis case were not aimed at bringing calmness to the collapse that was threatening the country.
Consequently, such measures cannot be deemed necessary to maintain public order.
380
See e.g. Message from the President of the United States Transmitting the Treaty Between the United States ofAmerica and Mongolia Concerning the Encouragement and Reciprocal Protection of Investment, with Annex andProtocol, Signed at Washington on October 6, 1994, 104th Congress, 1st Session, Senate, Treaty Doc. 104-10,
available at: http://www.sice.oas.org/investment/BITSbycountry/BITs/US_Mongolia.pdf, at XII.
381
LG &E Decision on Liability, supra note 1, at ¶ 228.
382
Id., at ¶ 237.
378

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public utility prices would have risen, prompting or exacerbating consumer riots in the streets. It
is not altogether clear whether Argentina even attempted to make such a claim in these cases but
if it had, it would have faced a high hurdle with respect to proving the causal links such anargument entails. Assuming “necessary” requires demonstration that the action taken was the“only means,” Argentina would also have needed to show that alternatives – such as providing
subsidies to consumers—would not have addressed the threat to public order.
There was more disagreement among the arbitral tribunals with respect to the meaning of“essential security interests,” or at least with respect to how to apply that phrase to the facts inArgentina. All of the arbitrators agreed that, at least in principle, that phrase did not exclude‘major economic crises.’ However, they disagreed about whether, in the context of the U.S.Argentina BIT and given that treaty’s object and purpose, economic crises pose an exceptionalburden of proof on the state invoking them to prove that these threaten its “essential security
interests.” The LG &E tribunal did not hesitate in finding that what it called “extremely severe
crises in the economic, political, and social sectors” which threatened the “total collapse of theGovernment and the Argentine State.” 383 The CMS, Enron, and Sempra tribunals, on the other
hand, examining the same set of underlying facts, did not find that Argentina’s “essential
security interests” were sufficiently threatened. All three suggested that the Argentina crisis,
while severe, did not result, in the words o the CMS tribunal, “in total economic and social
collapse.” 384
There are various ways to interpret the differing results. One possibility is that all four
tribunals interpreted “essential security interests” the same way – as requiring an exceptional
state of affairs tantamount to the collapse of a state even if originally stemming from economic
circumstances – but only differed in their respective factual assessments. This is possible since
while the legal contentions made in these cases were similar, each of these tribunals faced abattery of different experts, armed with differing data, and, of course, subject to different
credibility determinations. On the other hand, at least two of the tribunals, Enron and Sempra,
may have applied a different presumption or burden of proof. This is certainly suggested bythose tribunals’ pointed reminders that the:… object and purpose the Treaty is, as a general proposition, to apply in situationsof economic difficulty and hardship that require the protection of the international
guaranteed rights of its beneficiaries. To this extent, any interpretation resulting inan escape route from the obligations defined cannot be easily reconciled with that
object and purpose. Accordingly, a restrictive interpretation of any suchalternative is mandatory. 385
As is suggested by part III(A), the history of the U.S. BIT program and of the U.S.Argentina BIT in particular is consistent with the Enron and Sempra views expressed above.
U.S. BITs, like prior U.S. efforts to promote investment protections dating at least to the
Mexican revolution, were intended to address situations of economic crises, and sought toprotect investors particularly in such acute cases. Moreover, as even the LG&E tribunal pointed
out:

383

LG&E, supra note 1, at ¶ 231.
CMS Award, supra note 1, at ¶ 355.
385
Enron Award, supra note 1, at ¶ 331, Sempra Award, supra note 1, at ¶ 373.
384

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It should be borne in mind that Argentina declared its state of necessity and has
extended such state until the present. Indeed, the country has issued a record
number of decrees since 901, accounting for the fact that the emergency periodsin Argentina have been longer than the non-emergency periods. 386
As the legislative history of the U.S.-Argentina BIT suggests, both countries entered into thatagreement to provide foreign investors, including those then being recruited by Argentina to bid
on its newly privatized public utilities, with assurances that henceforth they would enjoy aninternational legal guarantee the next time Argentina was tempted to proclaim one of its
perennial “emergencies.” As noted, that treaty also provided specific assurances that investors
would be able to enforce existing Argentine laws that protected guarantees made to investors“with regard to” their investments. 387
Taking Article XI on its own terms, it is important to keep in mind that “essential security
interests” is not a particularly open-ended term. Article XI does not refer to “emergencies” assuch. “Security” normally refers to military or defense matters and “essential” means only themost important or serious. It seems doubtful that one could take that term to embrace “anypolicy interest of a certain intensity” 388 or a “function of contemporary sovereignty” demanding“deference to the government concerned in this regard.” 389 In any case, this is not how thedrafters of U.S. BITs defined the term. U.S. State Department officials both in connection with
BITs and prior FCNs, repeatedly used “essential security interests” to refer to fundamental
interests relating to defense or military concerns, usually involving exceptionally serious external
threats to the security of the United States. 390 It is also the meaning suggested by the ICJ’s
treatment of the same phrase (“essential security”) in connection with the FCNs relied upon in
the Nicaragua and Oil Platforms Cases. 391
Indeed, just four years prior to the signing of the U.S.-Argentina BIT, State Department
lawyers fended off attempts by the U.S. Congress to pass a statute that would have permitted thePresident to take divestment actions against foreign investors should these involve “essentialcommerce which affects national security.” 392 As the legislative history of that effort
demonstrates, this phrase was changed in the proposed legislation to “national security” in part
because the broader original phrasing might prompt breaches of existing U.S. FCNs and BITs
and provoke reciprocal actions against U.S. investors abroad. 393
Accordingly, while we do not take issue with the findings in the Argentine Gas Sector
Cases that in principle economic crises of a certain catastrophic dimension could pose the kindof internal (“public order”) or external threats to the state contemplated by Article XI, we agreewith the tribunals in Enron and Sempra that such an extreme economic crisis would be a rare
event and that, given the purposes of the U.S.-Argentina BIT, we should not presume that
economic crises as such would be embraced by Article XI. We also agree with the CMS, Enron
386

LG&E Decision on Liability, supra note 1, at ¶ 228.
U.S.-Argentina BIT, articles II(2)(c), II(6), and X.
388
Compare Burke-White and Von Staden, supra note 36, at 351, ftn. 195 (citing WTO commentators).
389
Compare Burke-White and Von Staden, supra note 36, at 352 and ftn. 199 (citing WTO commentators but
recognizing that “part” of this deference might stem from the “which it considers necessary” phrasing in GATT Art.
XXI).
390
See generally, Alvarez, Exon-Florio, supra note 255, passim.
391
Nicaragua Case, supra note 248, ¶ ___; Oil Platforms Case, supra note 252, ¶ ___.
392
See Alvarez, Exon-FLorio, supra note 253, at 76-77.
393
Id.
387

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and Sempra tribunals when they suggest that successfully invoking necessity with respect todecisions taken in the economic realm and in respect to what appears to be an economic crisis is
exceptionally difficult, if not impossible. Given the history of U.S. BITs and of the U.S.Argentina BIT in particular this is entirely consistent with what such treaties demand and this is
not merely because of the need to satisfy the “only means” test. It is because Article XI demands
a causal nexus between the actions that a state claims that it needs to take that would otherwise
be embraced by the BIT and threats encompassed by that Article.
On this interpretative issue, the customary exceptions to state responsibility are again
instructive. As noted in part III(C)(1), the triggers in Article XI and the traditional defenses of
distress and necessity interrelate. As with respect to necessary measures to maintain pubic order,
the defense of distress precludes state responsibility in cases where measures are taken tosafeguard lives, as in situations of hostilities or open riot. As the ILC recognized, state
responsibility is precluded “if the author of the act in question has no other reasonable way, in asituation of distress, of saving the author’s life or the lives of other persons entrusted to theauthor’s care.” 394 As would be the case under Article XI of the BIT, distress requires cases of“extreme urgency involving elementary humanitarian considerations” and does not apply if thesituation of distress “is due, either, alone in combination with other factors, to the conduct of theState invoking it.” 395 None of the cases involving “distress” cited in the ILC’s Commentaries
involve voluntary actions taken by a state in order to stabilize its economy. It is no surprise why
this is the case. It is difficult to see how distress, or the public order exception in Article XI, canbe applicable in cases of voluntary or discretionary state action directed at solving perceived
economic crises, typically emerging in circumstances implicating at least partly the conduct of
the state suffering the crisis. With respect to necessity, the Commentary to Article 25 of the
ILC’s Articles states that this defense normally “involves a threat to the very existence of thestate.” 396
The Enron and Sempra’s dicta on this issue are justified because it is difficult to evenconceive of an economic situation of such magnitude that would genuinely pose that kind of
threat to a state and that would also require preventing payment of compensation to a foreign
investor. Indeed, one of the prominent cases involving an attempt by a state to use necessity to
avoid paying an economic debt cited in the ILC’s Commentaries, the Russian Indemnity case,rejected the plea because the arbitrators found it implausible to conclude that the sums due“would have imperiled the existence of the Ottoman Empire or seriously endangered its internalor external situation.” 397
The quotation from the Russian Indemnity case raises doubts about the contrary rationale
offered by the LG&E tribunal. In that case, as in the other Argentina cases, Argentina was not
arguing that it could not afford to pay the alien investors due to its crisis, or that making suchpayments would endanger the Argentine state. Indeed, the LG & E tribunal had found that theArgentine crisis was over, at least by the time these decisions were rendered, and that theArgentina economy was growing at a steady clip. It does not appear that Argentina wassuggesting that it could not afford to pay at the time any of these liability judgments wererendered. Its actual plea, partly accepted by the LG&E tribunal but rejected by the others, wasthat its crisis starting in 2001 precluded payment years later. The LG&E tribunal accepted this394

ILC Commentaries, supra note 335, Art. 24, at 174.
ILC Commentaries, supra note 335, at 175.
396
ILC Commentaries, supra note 335, at 178.
397
ILC Commentaries, supra note 335, at 180.
395

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contention because it appeared to decide that Argentina’s general Emergency Law (which
included provisions that derogated from the assurances from the state benefiting the company inwhich LG&E had invested) was necessary to address, among other things, Argentina’s essential
interests. With all due respect, this was an inaccurate interpretation of the nexus demanded by
Article XI.
Even assuming that the Argentine crisis of 2001 threatened Argentina’s “essential
security interests,” what Article XI demands is a showing by the state that the specific measuresthat it takes which would otherwise violate the BIT are, at the time they are taken, necessary toaddress those interests. This demands a nexus between the threat posed to the state and theactual measures that violate investors’ rights under the treaty, and proof that those measures are
directed at (that is, were “for”) the threat.
The LG&E tribunal did not explain why Argentina’s the measures that it took that were
found to violate the BIT, that is, why those specific measures – including its elimination under
the Emergency Law of the right to calculate tariffs in US dollars or its adjustment of gas tariffs(which first occurred in early 2000) – were steps that were necessary to address a crisis that that
tribunal itself determines began in December 2001. Its analysis in this regard is limited to abroad statement to the effect that the “Emergency law – was a necessary and legitimate
measure.” 398 This finding not only does not satisfy the degree of specificity -- the nexus
between means adopted and crisis asserted -- required by Article XI, but also does not address allof the measures taken by Argentina that were being challenged in these cases. Indeed, that
tribunal never explained the precise causal connection between Argentina’s refusal to adjust
tariffs, for example, and the underlying threats faced by that country.
Finding an “irreconcilable conflict” 399 between a state’s essential security interests (or its
needs for public order) and its obligations to alien investors is also difficult where the state’s own
pre-existing law would not recognize that such a conflict exists or would not excuse performance
under the same facts. As discussed above (at part I(C)(3)), this is precisely what was found by
the CMS, Enron and Sempra tribunals, all of which carefully considered and rejected
Argentina’s defense of necessity under Argentine law. (It is interesting to note that the one
tribunal that did not consider whether Argentina’s necessity defense would be accepted under its
own law was LG&E.) Further, and also as discussed above (at part I(C)(3)), the CMS, Enron,and Sempra tribunals found that the licenses themselves provided a means for addressing thecrisis. The fact that Argentina opted for unilateral measures rather than this negotiated solution
clearly influenced their decisions as to the legality of Argentina’s measures under its own law.
It is striking then that under the substantive legal rulings of the CMS, Enron and Sempra
tribunals regarding Argentine law (which were left undisturbed by the CMS Annulment
Committee) the respective investors would have won their cases even if all that they had cited
was Article X of the BIT since that provision simply gives them the better of any rights accorded
under the treaty or national law. It would appear strange indeed to suggest that an arbitral bodyshould ignore this fact and apply a broader defense of necessity than is recognized in Argentina’s
own law because of Article XI. Quite apart from everything else, such a ruling would appear to
reward a party that was violating not only its specific assurances to investors, the investors’
settled expectations, but its own law.

398
399

LG&E Decision on Liability, supra note 1, at ¶ 240.
See e.g., ILC Commentaries, supra note 306, Art. 25, (quoted in Reisman casebook, at 1210).

67

E.

And if Necessary, What Follows?

The LG&E tribunal found that since Article XI, and possibly the customary defense ofnecessity, had been properly invoked, Argentina was excused from paying compensation to theinvestor for the period during which the crisis endured. It is clear from the subsequent Damages
Award that what the LG&E tribunal meant was that Argentina was permanently excused fromcompensating any injuries incurred during the crisis period, and not only that any obligation tocompensate would be suspended but would re-emerge, intact, at the end of the crisis. The CMS
Annulment Committee suggested that this was the proper interpretation of at least Article XI. As
it put it, the question of compensation under the BIT if the measures taken by Argentina had
been covered by Article XI was “clear enough: Article XI, if and for so long as it applied,
excluded the operation of the substantive provisions of the BIT. That being so, there could be no
possibility of compensation being payable during that period.” 400With all due respect, this conclusion is not ‘clear enough.’ Even assuming that Article XI
is, as the arbitrators in LG & E assumed, a clause that when properly invoked during a period ofcrisis excuses a state’s financial liability during that crisis, it is not at all clear why this result
follows when the clause is invoked by a state long after the crisis is over and there is no evidence
that the failure to pay compensation remains “necessary.” Neither LG &E nor the CMS
Annulment Committee clearly explains why the plain meaning of Article XI, not to mention therules of equity or fundamental fairness, leads to a conclusion that it remains “necessary” for astate not to pay compensation long after the end of the threat to its essential security.
But our argument here goes beyond the question of timing, that is, of when Article XI canbe properly invoked. We contend that the most plausible interpretation of Article XI is the
opposite of what the CMS Annulment Committee suggests: namely that neither that Article nor
the customary defenses which underlie it permanently excuse a state invoking this exception
from the duty to pay compensation that would otherwise be due under international law. 401 Thisis, of course, what the CMS, Enron and Sempra tribunals found. This interpretation is supportedby the text, object and purpose and context of the U.S.-Argentina BIT and is consistent withcustomary international law.
Article XI is a “measures not precluded” clause. It is not – either in terms of its text orby design – comparable in its application to the U.S.-Argentina BIT’s “denial of benefits” clauseat Article 1(2). The latter reserves the rights of treaty parties to deny the company of the otherParty advantages of the treaty because a non-national of a state party owns the company inquestion. Neither is Article XI a termination clause, as is Article XIV. And neither is Article XI
a clause setting out exceptions, as is contemplated by Article II, and effected in the Protocol to
the BIT. As all those other provisions indicate, the BIT uses explicit language to render its
benefits entirely inapplicable. The drafters of this treaty did not so the same when they came to400

CMS Annulment, supra note 3, at ¶ 146.
This view is supported by dicta of the Annulment Committee in Mitchell v. DRC, supra note 305, at ¶ 57 (“...
even if the Arbitral Tribunal has examined Article X(1) of the Treaty … and if it had concluded that they were notwrongful, this would not necessarily have had any impact … on the need for compensation; possibly, it could have
had an influence on the calculation of the amount of such compensation,” citing Article 27, among other things) and¶ 59 (“even if it were assumed that the Arbitral Tribunal had examined Article X(1) and had agreed that themeasures undertaken were not wrongful, this would not have ruled out the need for compensation”), as well as bydicta in BG Group v. Argentina, supra note 315, at ¶ 409 (stating that “assuming that necessity were to justify somefair and non-discriminatory measures by Argentina, an obligation to compensate would still obtain by virtue of theBIT”).
401

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Article XI. Article XI states merely that the BIT does not “preclude the application by either
Party of certain measures (emphasis added) or, in Spanish, “no impedirá la aplicación” (would
not impede the application). What this literally means is that when successfully invoked, thestate can take action, or would not be stopped from taking action, that would otherwise be
precluded by the BIT. It does not, unlike Article I(2), permit either party to “deny” benefits; nordoes it, unlike Article II, create an “exception” from application of the treaty; nor does it, unlike
Article XIV, allow a party to “terminate” the treaty’s benefits. 402 Seen in the context of the restof the BIT, successful invocation of Article XI provides a state with an excuse, without
proscribing the legal consequences of that excuse. Interpreting the clause as do the LG&E
tribunal and the CMS Annulment Committee eliminates the significance of the difference inwording between these clauses. Accordingly, the plain meaning of the U.S.-Argentina BIT does
not support the contention that Article XI is, as the CMS Annulment Committee, suggested in
dicta, a “primary” rule, or an excuse that precludes compensation.
The CMS Annulment Committee’s view of applicable compensation is also at odds withthe object of this agreement, namely to protect the legitimate interests of alien investors. Thereis nothing in the U.S.-Argentina BIT that suggests that contrary to its object and purpose, foreign
investors who cannot be blamed for the underlying economic crisis faced by the state should bear
the costs of measures that states need to take to handle a crisis that, on the interpretation of the
Article XI clause that the CMS Annulment Committee appears to favor, states themselves may
have helped to cause. The LG& E and CMS Annulment Committee interpretation as tocompensation is also at odds, more specifically, with the BIT’s intent, made manifest in Article
XIV(2) and (3), to protect the settled expectations of those who invest in reliance upon it.
Finally, such an interpretation undercuts the value of other provisions in the BIT, such as
Articles II(2)(a) and X, which specifically protect investors from violations of other rights,
including under their investment agreements, customary international law, or national law. 403
Of course, the CMS Annulment Committee’s interpretation of Article XI as a primaryrule that exempts a state from paying compensation since the investment rights of the BIT nolonger apply stems from that Committee’s erroneous view that Article XI is intended to derogate
from the ordinarily relevant customary international rules – and presumably from the ordinary
application of article 31(3)(c) of the Vienna Convention on the Law of Treaties which sanctions
reliance on such rules. 404 As a number of international tribunals have affirmed, the ordinary
application of the customary defense of necessity would not preclude payment ofcompensation. 405 This has been true from the first articulation of the notions of necessity and the402

Compare BG Group v. Argentina, supra note 315, at ¶ 315, n. 327 (noting that compensation is not payable to theextent an exculpatory BIT provision “exonerates a party from liability”).
403
As Kenneth Vandelvelde puts it, these clauses generally serve as an explicit choice of law clause in U.S. BITs
making clear that “international law provides the governing rules of decision, except where national law is morefavorable.” Vandelvelde, supra note 224, at 78.
404
For an argument that LG& E’s interpretation with respect to compensation itself ignores the traditional rule thatimportant principles of customary international law should not be ignored in the absence of express words doing so,
see Stephan W. Schill, International Investment Law and the Host State’s Power to Handle Economic Crises, 24 J.
INT’L ARB. 265, at 281-84 (2007).
405
See, e.g., The Gabcikovo-Nagymaros Dam Case, supra note 254, at ¶ 48 (“in any event, such state of necessity
would not exempt it from its duty to compensate its partner”) and ¶ 57 (interpreting Article 27 of the ILC Articles tomake it “clear that circumstances precluding wrongfulness do not as such affect the underlying obligation, so that if
the circumstance no longer exists the obligation regains full force and effect”).

69need for self-preservation by Grotius. 406 As is suggested by the arbitral award rendered in the
Russian Indemnity Case, one rationale for this rule may be that it is difficult to accept the
proposition that payment of a debt would itself imperil the existence of a state. 407 This was not,however, a question addressed by the LG & E arbitrators. They inexplicably treated the defenseof necessity as an exculpatory defense, even when applying it to an intrinsically transient or
temporary phenomenon that was, by that tribunal’s own admission, over at the time that tribunal
rendered its decision.
Nor is the case that the interpretation given by the LG & E tribunal or by the CMS
Annulment Committee is necessary to give Article XI meaning. There are many reasons – apartfrom depriving injured investors compensation to which they would otherwise be entitled – forthe United States to insert a measures non precluded clause that takes the form of Article XI.
First, such a clause permits state parties to distinguish legal from illegal actions. A statethat is able to invoke such a clause successfully – that can show for example, that it took the onlymeans necessary to respond to its essential security interest – would not have acted wrongfully.
Such a determination may prove important when it comes to determining liability, as is clear
from numerous cases addressing the measure of damages for legal versus illegal expropriations,for example. 408 Of course, comparable provisions that enable otherwise unlawful action to betaken, but that do not preclude the responsibility to pay compensation when such action is taken,
are not uncommon in either national or international law. 409 That possibility is foreseen by thecustomary defenses of force majeure, distress and necessity. Quite apart from the potential
impact on the measure of damages, making such distinctions may be otherwise important tostates since such determinations have expressive value and impact on their reputations foradhering to their promises. 410
Second, in particular in the context of a rare economic crisis that satisfies therequirements of Article 25 of the ILC Articles, a measures non precluded clause could permit astate facing a problem of liquidity to defer its financial obligations under the BIT, thereby
averting a worsening of the state’s financial situation without permanently depriving an investorof eventual compensation.
Third, as is suggested by the negotiating history of the U.S.-Argentina BIT itself as well
as relevant scholarship on the history of that the BIT’s NPM clause, Article XI was intended to,among other things, recognize the power of the U.S. executive to take action pursuant to such
406

Thus, Grotius wrote that “nothing short of extreme exigency can give one power a right over what belongs toanother no way involved in the war;,” that “even where the emergency can be plainly proved, nothing can justify . . .
taking or applying the property of [the neutral power], beyond the immediate demands of that emergency:” and thatwhen the emergency ceases, the property had to be returned to the neutral state and “full value should be paid.”Luzi, at 166 (quoting Gortius’ The Rights of War and Peace at 377).
407
See Russian Indemnity Case (Russ. v. Turk.), 11 R. INT’L ARB. AWARDS 421 (Perm. Ct. Arb. 1910).
408
See generally, R. DOAH BISHOP, JAMES CRAWFORD, AND W. MICHAEL REISMAN, FOREIGN INVESTMENTDISPUTES, at 1305-1325 (2005)(summarizing cases that distinguish legal from illegal takings for purposes ofcalculation of damages). See also Bjorklund, supra note 291, at 53. As noted above, supra at text accompanying
notes 188 to 189, the LG&E tribunal rejected the fair market value as the appropriate measure of compensation forbreach of the fair and equitable treatment standard and the umbrella clause, including because the measure ofdamages for wrongful acts should be different from that for compensation for lawful expropriation.
409
See e.g., Trevor Morrison, Suspension and the Extrajudicial Constitution, 107 Colum. L. Rev. 1533 (2007)(discussing the historical evidence supporting such a distinction in the context of action taken by Congress to strip
habeas protections).
410
See, e.g., Bjorklund, supra note 291, at 53 (pointing that determinations of wrongful behavior could also have an
impact on a state’s access to credit).

70

statutes as the International Emergency Economic Powers Act (the “IEEPA”), under which the
President can take certain economic actions for purposes of national security. 411
Fourth, on our interpretation a successful invocation of Article XI prevents treaty parties
from demanding that one of them take certain specific actions (such as the issuance of an export
license to an enemy state during wartime). On its terms, that Article precludes claims for
specific performance, and the issuance of the equivalent of interim protective measures orprovisional measures requiring the taking of certain forms of state action, but does not preclude
monetary liability that may otherwise arise under the BIT. While it is true that arbitral decisions
in investor-state disputes usually only concern claims for damages, the ISCID Convention itself
permits arbitrators to “recommend” provisional measures unless the parties indicate otherwise.412
Absent a clause like Article XI or other equivalent, there is no reason why an investor under a
BIT could not claim, in an appropriate context and depending on the arbitral rules that govern theproceeding, the equivalent of interim measures of protection.
It is also important to recall that Article XI is a general BIT provision. It applies to theentire treaty and not merely investor-state arbitration. Its preclusion of some kinds of relief
within its delimited scope may prove necessary should the BIT be invoked in national court orother national venues that may be otherwise empowered to issue injunctive relief against a state.
That clause may be invoked as well in the course of state-to-state dispute settlement anticipatedin Article VIII of the U.S.-Argentina BIT or in the less public, less formal diplomatic
representations that treaty parties may engage in as between themselves whenever a sufficiently
important treaty interpretation question arises. In all these contexts, it is important for BIT
parties to be able to rely on a clause that, while it does not permanently absolve a state offinancial liability to an injured investor that is otherwise due under the treaty, nonethelesspermits them to take emergency actions without protest or other attempts to stop state actions.
As all this suggests, a NPM clause such as Article XI whose application nonethelessprotects the vested financial rights of investors and does not provide a host state with a windfall
or unduly penalize foreign investors is not superfluous. On the contrary such a clause – that
affects whether an action is wrongful, may permit reasonable delay in the payment ofcompensation, gives effect to national law, and precludes claims for specific performance but
does not otherwise permanently deprive investors of their right to eventual compensation
especially after the state’s economic crisis is over – is most consistent with customaryinternational law, including but not only the traditional rules of state responsibility to aliens that
the U.S.-Argentina BIT intended to affirm and enforce. Just as Article XI ought not to be seen aslex specialis when it comes to the applicable customary law with respect to excuses from treaty

411

Article XI permits IEEPA actions to be taken despite the BIT. But IEEPA does not, by its terms, enable thePresident to violate with impunity the acquired rights of those injured by Presidential emergency action. As
suggested in a footnote in the Supreme Court’s Dames & Moore decision interpreting the President’s foreign affairs
and national security powers, it remains an open question, for example, whether Presidential action directed at
resolving something as grave as the Iran Hostage crisis could nonetheless trigger compensation under the US
Constitution’s takings clause. Dames & Moore v. Regan, 453 US 654, at 688-689, note 14 (expressing no opinion
about whether compelling the petitioners to go to the Iran-U.S. Claims Tribunal would constitute a “taking” ofproperty) (1981).
412
ICSID Convention, [cite], at art. 47. Precluding such measures against state action appears consistent with few
arbitral decisions that have addressed the point. See e.g., Bishop, et. al, supra note 408, at 389(excerpt from theHoliday Inn Case which relied on the ISCID Convention’s negotiating history for the conclusion that provisional
measures against a state require “compelling reaons” or an “exceptional case”).

71breach (see part III(C)(1) above), it ought not be seen as lex specialis when it comes to thecustomary law dealing with the consequences of treaty breach.
For these reasons, the CMS, Enron, and Sempra tribunals properly suggested, in dicta,that the traditional rule, codified at Article 27(b) of the ILC’s Articles on State Responsibility,
continues to apply. They were quite correct to suggest that any invocation of necessity (as well
as of force majeure and distress) whether under Article XI or customary law should be “without
prejudice to . . . the question of compensation for any material loss caused by the act inquestion.” 413
IV.

Conclusion: Do the Argentine Gas Sector Cases Suggest that the Investment Regime
Has No Soul?

We could not agree more with Burke-White and von Staden when they assert that theinterpretation of the U.S.-Argentina BIT and its Article XI must be faithful to the rules of treaty
interpretation contained in the Vienna Convention on the Law of Treaties, including therequirement that treaties be interpreted “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.” 414 As we argue
in Part III, we believe that the most faithful interpretation of the traditional rules of treaty
interpretation lead to the conclusions reached by the original CMS arbitral panel and the Enronand Sempra tribunals.
In Part III we argue that the text, object and purpose, context, and negotiating history ofthat treaty shows that the U.S.-Argentina BIT was intended by both parties to address investment
disputes that emerge most acutely in times of economic crises, when host governments are
tempted, for financial or political reasons, to disfavor the interests of foreign investors, includingby expropriating their assets or breaching contractual guarantees. The U.S.-Argentina BIT
should be interpreted in light of the well-known correlations between economic woes and theaccompanying potential threats to foreign investments that inspired the content of that agreement(and the 1987 Model BIT which it tracks). That treaty, like the Model BIT on which it was
based, is designed in part to remove the temptation to declare an economic emergency and takeadvantage of investors’ proprietary interests at a dire time. Consistent with that treaty’s plain
meaning and object and purpose and the contemporaneous statements of high Argentine and U.S.
government officials, it was this type of “political risk” that the treaty was intended to address,
the better to promote mutual flows of foreign investment. The U.S.-Argentina BIT contains arelinquishment by both sides of the ability to rectify their economic situation in times of trouble
by revoking the legal protections granted to foreign investors. By adhering to the BIT, Argentina
traded the right to use this tool in exchange for stability of investment expectations. This bargain
benefited Argentina by according to its government a potent legal excuse with which to deflect
political pressures – whether by domestic firms seeking protectionist measures or by the U.S.
government in espousing the claims of its investors. The stability which the treaty promised
was, in part, what brought investors such as LG&E, CMS, Enron, and Sempra to its shores.
As our overview of the relevant decisions in Part II indicates, most of the arbitrators in
the Argentine Gas Sector Cases rightly found that it would be a gross re-working of the bargain
struck in that treaty if Argentina were permitted to claim that it was “necessary” for it to derogate
from the rights it guaranteed foreign investors under its own law, customary international law,
413
414

CMS Award, supra note 1, at ¶ 383; Enron Award, supra note 1, at ¶ 344; Sempra Award, supra note 1, at ¶ 393.
See Vienna Convention, supra note 35, art. 31(1).

72and the BIT. Most of the arbitrators rightly found that Article XI, like every other provision of
the BIT, did not remove their competence to apply its terms but, on the contrary, anticipatedcareful scrutiny, by an impartial third party, to determine whether particular measures taken by
Argentina violated the treaty or were excused by necessity. All the arbitrators accordingly
rejected the claim that Article XI was “self-judging.” All of them, with the possible exception of
those hearing LG & E’s complaint, also properly rejected the contention that this provision was
otherwise subject to a special deferential standard and burden of proof never suggested by thetreaty itself. Most correctly found that the requisites of necessity, applicable under Article XI as
informed by customary law, were not satisfied and most therefore determined that Argentina
owed the investors damages, including for injuries suffered over the course of Argentina’s crisis.
The conclusions that we reach in Parts III(A), (B)(1) and (2), (C), and (D), each stand on
their own. While we believe that all derive from a proper application of the traditional rules oftreaty interpretation, those who disagree with some of our conclusions may still agree with thedecisions rendered in the CMS Award and in Enron and Sempra. Assuming Article XI is not
self-judging and someone other than an interested party is capable of interpreting its terms,
Argentina would not have been able to invoke the provisions of that Article to preclude its
liability under the U.S.-Argentina BIT (1) if Article XI is read as consistent with the customary
defense of necessity; (2) even assuming Article XI is a distinct lex specialis defense, if Argentina
nevertheless failed to prove that the measures that it took were “necessary” for dealing with its“essential security interests” or to maintain “public order” in accordance with Article XI; or (3)even if Argentina had successfully invoked either the customary defense of necessity or Article
XI, this does not absolve Argentina from compensating investors who prove a violation of theBIT under the normal operation of customary international law. 415 Further, even those who
agree with the proposition that a successful invocation of Article XI would have made theobligations of the BIT ineffective, may nonetheless disagree with the conclusion in LG & E that
Article XI still can be successfully invoked once a state is no longer faced with the threats
contemplated by that clause.
But our goals here are not limited to defending the particular outcome in these cases or
critiquing some of the contrary views expressed by the LG & E arbitrators and the CMS
Annulment Committee. As we indicate in our Overview in Part I, the Argentine Gas Sector
Cases feature prominently in broader on-going critiques of the investment regime. In theremaining part of this conclusion we question the merits of some of the suggestions now being
made for addressing these concerns as well as the underlying focus on establishing consistentinvestment law. Thereafter, we draw some tentative lessons about the investment regime’s moregenuine legitimacy deficits.
The criticisms of the investment regime canvassed in our Overview are often
provocatively made. It has been suggested: that recourse to investor-state arbitration, whether in
BITs or Chapter Eleven of the NAFTA, constitutes an “undemocratic delegation” of authority to“unaccountable” bodies, thereby trumping the freedom of action of national law-making
authorities; 416 that investor-state arbitration is displacing the gunboat diplomacy of old with
415

See, e.g., Schill, supra note 415, at 282 (arguing that even if Article XI and the customary defense of necessity
are distinct defenses as is suggested by the CMS Annulment Committee, the subsidiary application of customaryinternational law requiring payment of damages nonetheless applies).
416
See, e.g., Public Citizen, NAFTA’s Threat to Sovereignty and Democracy: The Record of NAFTA Chapter 11
Investor-State Cases 1994-2005, (Feb. 2005),
http://www.citizen.org/documents/Chapter%2011%20Report%20Final.pdf. See also Jeffrey Atik, Repenser NAFTA
Chapter 11: A Catalogue of Legitimacy Critiques, 3 ASPER REV. INT’ L BUS. & TRADE L. 215, at 218-220 (2003).

73

“gunboat-arbitration” 417 or that such arbitral tribunals are “businessmens’ courts;” 418 thatinternational investment law threatens to become “privilege law for foreigners;” 419 that thearbitral outcomes (such as those we defend in Part III) are “affronts to sovereignty” and threaten
the right of states to self-preservation; 420 that what investment treaties compel governments like
Argentina to do threatens their ability to protect their citizens’ rights to equality, life, liberty andsecurity of the person; 421 or that investment treaties, far from promoting the rule of law anddemocratic governance, create legal enclaves that discourage generalized rule of law reforms indeveloping countries and in fact “retard the development of certain regulatory initiatives that are
the hallmarks of the mature social welfare state. 422
We find it striking that given these provocations, most academic commentaries on theinvestment regime have chosen to focus on only the most lawyerly of concerns--- namely
whether the regime (or the Argentine Gas Sector Cases) threatens the uniformity of internationallaw or international investment law through the production of inconsistent arbitral decisions.
We draw very different lessons from the Argentine Gas Sector Cases. While we agree
that these cases trigger significant questions about the legitimacy of the investment regime, wequestion the prevailing remedies being urged to address this problem; indeed, we are not so surethat the risk of inconsistent arbitral awards is worth the attention now devoted to it.
Like many others, Burke-White and von Staden emphasize the inconsistency of therulings rendered in the course of the Argentine Gas Sector Cases. Their remedy is to suggest
common interpretative principles that would render the future interpretations of NPM clauses
more predictable and uniform. To this end, they draw connections among those investment
agreements that contain NPM clauses that they claim are similar to Article XI of the U.S.Argentina BIT.
Closer examination of the examples they cite reveals that relevant comparisons amongsuch clauses are dubious, however. Even those “measures not precluded” clauses that they
compare to Article XI, such as Article 3 of the Belgium-Luxembourg Economic Union, areactually starkly different. 423 Indeed, that provision lacks any language approximating the“measures not precluded” wording of Article XI. Some of the provisions that they cite are morecomparable to U.S. BIT provisions protecting parties from regulatory formalities that do not

417

See, e.g., Montt, supra note 24, at 80.
Van Harten, supra note 12, at 153 (title for his Chapter 7).
419
Montt, supra note 24, at 80.
420
Bottini, supra note 305, at 145. Also id., Panel Discussion at Chapter Nine, at 191.
421
See, e.g., Craig Forcese, Does the Sky Fall?: NAFTA Chapter 11 dispute Settlement and Democratic
Accountability, 14 MICH. ST. J. INT’L L. 315, at 321-22 (citing applicants in Council of Canadians v. Canada(Attorney General), [2005] O.J. No. 3422 (O.S.C.J. July 8, 2005)). See also suggestions to the same effect made by
the Office of the High Commissioner of Human Rights in Human Rights, Trade and Investment,
E/CN.4/Sub.2/2003/9 at 17 (2003).
422
Andrew Newcombe, Sustainable Development and Investment Treaty Law, J. World Investment & Trade, 357, at
394 (citing work by R. J. Daniels). See also Tom Ginsburg, International Substitutes for Domestic Institutions:Bilateral Investment Treaties and Governance, 25 INT’L REV. L. & ECON. 107 (2005) (arguing that the spread ofinvestment agreements permitting powerful players to bypass national courts may help to explain the intractabilityof LDC’s efforts to improve such courts).
423
Burke-White and Von Staden, supra note 36, at 328. Article 3 provides: “Except for measures required tomaintain public order, such investment shall enjoy continuous protection and security, i.e. excluding any unjustified
or discriminatory measure which could hinder, either in law or in practice, the management, maintenance, use,
possession or liquidation thereof.”418

74otherwise impair the investors’ protections. 424 Many of these clauses are subject to some othersubstantive provision of the relevant investment treaty before they can be invoked by a stateparty (and are therefore narrower than Article XI at least to this extent); some are cast only as
limitations on the meaning of MFN guarantees, while others indicate that even those measuresostensibly not precluded nonetheless need to be applied on a “non-discriminatory” basis. 425
Others include triggering mechanisms absent from Article XI, permitting states to take measures
because of a “national emergency” or to protect “public health” or “public morals.” 426 Somereplace the phrase “necessary for” with other looser formulations such as “directed to” or “in theinterests of.” 427 Of course, as even these authors acknowledge, common interpretative principles
of interpreting NPM clauses (even assuming these were possible) will not produce harmonious
results with respect to the nine out of ten investment agreements that contain no NPM clause atall. 428
Differences among the NPM clauses of even those investment agreements that have such
clauses, as well as differences in the agreements in which such clauses appear, render BurkeWhite’s and von Staden’s otherwise impressive prescriptive effort, which includes a flow chartof how NPM clauses ought to be interpreted, 429 a highly academic and impracticable exercise.
How should their common interpretative principles apply with respect to NPM clauses thatappear in investment agreements that, unlike the U.S.-Argentina BIT, do not include distinct“denial of benefits” or termination clauses that differ from the wording of their “measures notprecluded” clauses? How does one square their common principles with the undeniable fact thatinvestment treaties differ with respect to their respective negotiating histories or the respective
FDI-related histories of their respective parties? As the evidence presented in the Argentine Gas
Sector cases concerning the changes to the “measures not precluded” clauses made by the UnitedStates since conclusion of the U.S.-Argentina BIT indicate, even a single state’s view of what an
investment protection treaty means may evolve over time. (Of course such evolving views withrespect to other treaties with other treaty partners have no necessary bearing on the meaning of aparticular treaty when that agreement was concluded.) The differences among investment
agreements and with respect to the texts of their NPM clauses matter a great deal when it comesto interpreting treaties that are typically only between two parties, express a particular bargain
struck at a particular moment in time, are intended to benefit third party beneficiaries who are
induced to incur considerable sunk costs in reliance upon that bargain, and may, as the U.S.Argentina BIT does, preclude their respective signatories from undermining the rights of those
who relied on their agreement for as much as twenty years.430
For all these reasons, Burke-White’s and von Staden’s well-intentioned attempt to findcommon rules for disparate “NPM” clauses seeking different things within agreements that, at
424

Compare Articles III and V(3) of the U.S.-Argentina BIT to the NPM clause in the Belgium-Uganda BIT (citedby Burke-White and Von Staden, supra note 36, at 328): “Except for measures required to maintain public order,
such investments shall enjoy continuous protection and security, i.e. excluding any unjustified or discriminatory
measure which could hinder, either in law or in practice, the management, maintenance, use, possession or
liquidation thereof.” See also Rose-Ackerman and Billa, supra note 261, at 451-56 (surveying diverse treaty
exceptions and concluding that “there is simply no such thing as “the” national security exception”).
425
See clause in India-United Kingdom BIT, cited by Burke-White and Von Staden, id., at 328.
426
See clause in the 2004 Canadian Model BIT, cited at id., at 329.
427
See id., at 330.
428
Id., at 313 (estimating that of 2000 BITs in force, NPM clauses appear in some 200).
429
Burke-White and Von Staden, supra note 36, at 320-24.
430
See U.S.-Argentina BIT, Art. XIV (1) and (3).

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least to some extent, may be motivated by differing concerns, is likely to prove futile at best, andinappropriate and inconsistent with the Vienna Convention at worst. Consider, as an example,
Burke-White and Von Staden’s efforts to promote their “good faith” interpretative standard for
NPM clauses generally. One would think that this effort would prove most valuable with respect
to those treaties, such as some of those concluded by the United States after the conclusion of the
U.S.-Argentina BIT which contain the “which it considers” self-judging language. But the
problem is that, as the evidence presented in the Argentine Gas Sector Cases reveals, even the
United States appears not to have been consistent in how it has sought to make its NPM clauses“self-judging.” 431 Specific language in the United States-Peru Free Trade Agreement of 2006, tocite but one example, strongly suggests that the NPM clause in that treaty (but perhaps not other
U.S. investment agreements?) renders its invocation an entirely unreviewable matter not subject
to any ‘good faith’ gloss. 432 Under the circumstances it is difficult to see how meaningful
generalizations can be made about all the NPM clauses that appear even in a subset of the mostrecent U.S. investment agreements. 433
The Argentine Gas Sector Cases provide a lesson in the difficulties of attempting tolessen the internal fragmentation of investment law (or for that matter for lessening the divide
between that law and the rest of international law) in the absence of a single overarching
agreement governing all parties and a single unified dispute settlement system. The existence ofboth in the WTO regime, by contrast, makes such efforts more plausible for that regime. With
respect to the increasingly nuanced interpretative issues being presented in the over 200 on-goinginvestment disputes now being heard around the world – such as those in the Argentine Gas
Sector Cases -- there is no substitute for engaging in close textual analysis of the particularinvestment treaty at issue.
As indicated in Part III, general customary international law may often prove invaluable
to interpreting a particular BIT. It may also be appropriate to interpret a particular treaty, such as
the U.S.-Argentina BIT, by considering what we know of the Model BIT program that gave rise
to it. In some cases, these references may serve to promote more consistent interpretations ofsome investment agreements. We have argued here that it is entirely appropriate to interpret the
U.S.-Argentina BIT in light of the extensive public record about prior U.S. FCNs and theevolution of the U.S. BIT and the Model text replicated in the U.S.-Argentina BIT because thesematerials appear to reflect the mutual intentions of the United States and Argentina, as well as
the object and purpose of their treaty. We have also argued that it is fully consistent with what
we know of this treaty to read its terms in light of the customary international law that the parties
explicitly or implicitly intended to incorporate. But we have also argued that, in the end,references to such external sources must be earned -- in accordance with the traditional rules oftreaty interpretation and accepted canons of interpretation. They must be based on the plain
meaning of the particular investment agreement being relied upon: its text, its object andpurpose, its context, and its negotiating history.
431

See text and accompanying notes to 264-273 (discussing different NPM clauses in U.S. investment agreements).
The 2006 Peru-U.S. Free Trade Agreement includes a measures non precluded clause, Article 22.2, which is likethe one in the United States 2004 Model BIT (which makes a state’s invocation of “essential security interests” selfjudging). A footnote to that provision states: “[f]or greater certainty, if a Party invokes [the measures non precluded
clause] in an arbitral proceeding . . . the tribunal or panel hearing the matter shall find that the exception applies.”[Citation to US-Peru BIT]
433
Compare Burke-White and Von Staden, supra note 36, at 320-324. This renders these authors’ impressive
prescriptive efforts, such as a flow chart of how “NPM” clauses ought to be interpreted, highly academic and (sadly)impracticable. Id., at 65.
432

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Accordingly, we are not sanguine about the prospects that a second proposal for lessening
the investment regime’s fragmentation -- greater recourse to the background rules of public
international law – can actually accomplish its stated goal. Campbell McLachlan, among others,
is surely correct to suggest that one way of addressing the risk of inconsistent arbitral awards inthe investment regime is to turn to Article 31(3)(c) of the Vienna Convention on the Law ofTreaties. He argues that this provision, authorizing recourse to “relevant rules of internationallaw,” is a valuable tool of “systematic integration” for investment law. 434 We agree with himthat where there is universal agreement about the content of these “relevant rules,” as there
appears to be today with respect to the customary international law defense of necessity, relianceon such backdrop rules could lessen the inconsistencies among investment treaties and between
such treaties and other international law regimes. At the same time, as is suggested by thedifferent conclusions reached among the arbitrators considering the Argentine Gas Sector Cases,
international lawyers appear to disagree about when such rules are “relevant,” or when such rules
yield to lex specialis. 435 They may also disagree more often than they agree about whether such“rules” truly exist or, if they do, about the content of such rules. Most rules of custom or generalprinciples of law have not, after all, been codified in convenient black letter form – as have theArticles of State Responsibility. And MacLachlin’s tool of systematic integration will not be ofmuch use when confronted with obvious discrepancies among the texts of investment treaties,
including stark differences among their NPM clauses.
Other would-be reformers of the investment regime also appear to assume that thelegitimacy problems of the regime would dissipate if its arbitrators just managed to get the law
right; they just emphasize the need to get better arbitrators. Accordingly, some have argued thatwhat the regime needs most is a single Appellate Body along the model of the WTO’s Appellate
Body, consisting of a group of eminent permanent judges duly representative of the international
community that would make sense of the disparate rulings in the Argentine Gas Sector Cases andproduce consistent jurisprudence over time. 436 The assumption appears to be that the common
guarantees these agreements contain lack only a permanent body of diligent, objective judges toyield harmonious law and that such consistency will itself lend the regime the legitimacy andcoherence that it so far lacks. 437 It is argued that once such an appellate mechanism is in place, itwould be but a short step to the formulation of a ‘Statement of International Investment Law
Principles’ to rival those now being drafted by the American Law Institute (ALI) for the WTO
regime. 438
As our discussion of the differences among investment treaties implies, we are skepticalthat consistent rulings will emerge even with a single body of judges if these judges are applying
an array of treaties. Those who argue for an appellate mechanism for BITs, as under the auspicesof ICSID, need to temper their expectations of what that body can achieve. If the differenceswith respect to “measures not precluded” clauses are indicative of the subtle but crucial
differences in wording and intent among international investment agreements, even a single
Appellate Body will not achieve the harmonious body of law that some of its advocates expect.
434

See Campbell McLachlan, The Principle of Systematic Integration and Article 31(3)(c) of the Vienna
Convention, 54 ICLQ 279 (2005).
435
Compare our views here to those of Campbell McLachlan, supra note 287, at 385-91(arguing that Article XI of
the U.S.-Argentina BIT was clearly lex specialis).
436
See, e.g., Van Harten, supra note 12, at 180-84.
437
See e.g., Susan D. Francks, The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public
International Law Through Inconsistent Decisions, 73 FORDHAM L. REV. 1521 (2005).
438
See e.g., Thomas Wælde (latest draft for Alvarez/Sauvant book).

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In fact, it is unclear that there really is as great an inconsistency problem as somecontend, whether raised by the Argentine Gas Sector Cases or otherwise. Further, those who
seek consistency for its own sake need to be more precise about what it is that they are worried
about.
Despite the fact that investor-state arbitrators are reviewing different agreements and are
doing so under differing procedural rules or institutions (including ISCID, its Additional Facility
and UNCITRAL) and with differing mechanisms for annulment or review of initial awards, there
is a surprising degree of uniformity among the published decisions issued to date, including withrespect to the interpretation of such vague injunctions as those requiring “fair and equitable
treatment” or payment of compensation after an “indirect” expropriation. 439
Closer scrutiny of the Argentine Gas Sector Cases does not demonstrate that theinvestment regime really faces a grave legitimacy crisis because of inconsistent interpretations of
the same investment agreement. As our Part II makes clear, the Argentine Gas Sector Cases, forall their differences, reach many strikingly similar legal conclusions. All the decisions affirm
liability under the treaty’s assurance of “fair and equitable treatment.” All reject, on the basis ofsimilar rationales, most of the other claims that these investors asserted based on other provisions
in the BIT. And, for all the criticism of the CMS award by the CMS Annulment Committee,
those group of arbitrators left the bulk of the CMS rulings undisturbed. While there aredifferences among these tribunals on the meaning of the treaty’s umbrella clause and Article XI,
there is considerable common ground with respect to how even these contentions are addressed
and the underlying factors that need to be considered. And at least some of the differences in theremedies accorded in these cases, including with respect to the applicability of Argentina’s
defense of necessity and ultimate determination of damages, may turn on understandable
differences among these cases in terms of how the relevant facts were presented in each and bywhom. While the damages awarded to LG&E are substantially lower than those awarded to theother claimants, as noted above, that tribunal left open the possibility of claims for futuredamages (and such a claim is pending at this writing), which at least notionally could make up
the difference. 440 Further, and as also noted above, the difference of views on Article XI
accounted for a relatively small portion of the difference in compensation in the LG & E
award. 441 Of course, we should also acknowledge that there remain many pending cases against
Argentina yet to be decided, as well as pending claims for annulment in the Enron and Sempra
Cases. Under the circumstances, it seems premature to proclaim a legitimacy crisis on the basisof inconsistent legal outcomes in the Argentine Gas Sector Cases.
The relatively small relevant epistemic community that hears these disputes appears, inthe normal course, ready to consider the views of prior tribunals who have heard similar claims.
As in the WTO, there seems to be a remarkable degree of respect for prior precedent among
investor-state arbitrators, 442 even though they operate, unlike WTO adjudicators, largely withouta permanent legal secretariat to call attention to relevant prior case law or to assist them indrafting their opinions. 443

439

See generally, Ratner, supra note 351.
Supra at text accompanying note .
441
See supra at part II(C)(4).
442
The LG &E tribunal departed from this tradition by failing to cite, never mind distinguish, the prior CMS award.
443
This may yet change should, for example, ICSID alter its mode of operation and attempt to use its legal staff toassist investor-state arbitrators in more substantive ways than has occurred to date.
440

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Further, to the extent different results arising under comparable facts under comparable
treaties emerge within the investment regime, plausible explanations for these differences exist
precisely because the underlying dispute settlement mechanisms, rules, and processes involved
differ depending on whether the dispute was heard before ICSID, its Additional Facility, or
under the UNCITRAL rules. 444 As seems clear from the experience of international humanrights lawyers, the legitimacy of human rights law is not necessarily undermined merely because
differing regional courts or UN committees reach distinct rulings with respect to comparable
rights. International lawyers and states have long lived with differing results produced bybilateral treaties. That such results may also emerge, despite the operation and effects of mostfavored nation clauses, even within a network of similar, but far from identical, investment
agreements, should not be in itself a source of great concern.
More worrying is the prospect suggested by the Argentine Gas Sector Cases, namely thatthe same treaty (or the same underlying relevant rule of international law) might be the subject ofdiffering legal interpretations by different ad hoc tribunals, particularly when these decisions are
directed at the same state. It would be understandably politically difficult for Argentine
government officials to explain to the Argentine public why millions are owed to one public
utility owned by U.S. investors under international law but another utility, also owned by U.S.
investors and operating under the same law, is owed substantially less. Inconsistency becomes
more of a legitimacy concern when the same underlying obligations are being interpreted withdifferent results. To the extent that such inconsistent results are really a persistent problem under
the investment regime and not a rare event, it may indeed be proper to consider remedies, such as
those suggested by those urging generalizable principles of investment law (at least to the extent
consistent provisions in investment agreements exist), greater recourse to relevant backgroundprinciples of international law, or even establishment of an Appellate Body. (But we might also
consider other ways to ameliorate such problems, such as greater recourse to provisions likethose under the NAFTA’s Chapter Eleven enabling the state parties to issue binding joint
interpretations of their agreement or, as under the NAFTA, permitting arbitrators to consolidate anumber of claims directed at the same state party. 445 )Critics are nonetheless correct to express some concern about differences of legal
interpretation – as with respect to whether Article XI of the U.S.-Argentina BIT is or is not lex
specialis. The investment regime is not, after all, like the United States’ federal system in which
the experimentalism of lower federal and state courts is tempered by the prospect of resort to ahierarchically superior ultimate decider. Inconsistent or erroneous interpretations of the U.S.Argentina BIT are not self-correcting. The ICSID annulment system is not intended to be an

444

Ratner accounts for many of the apparent differences in the results reached by U.S. agencies under OPIC
insurance from those reached under ICSID dispute settlement on the basis of differences among those institutions
and their goals. Ratner, supra note 351, ___.
445
See NAFTA, article 1131(2)(providing that interpretations issued by the NAFTA parties acting as the Free Trade
Commission shall be binding for purposes of investor-state arbitrations); article 1126 (providing for the
consolidation of claims). Of course, other structural changes could lessen the chances of inconsistent awards by
reducing the numbers of published awards, as is likely under ICSID’s new rule permitting expedited dismissal ofclaims that are “manifestly without merit.” ICSID, ICSID Conventyion, Regulations and Rules: rules of Procedure
for Conciliation Proceedings, R. 41(5) (2006), available at http://www.worldbank.org/icsid/basicdoc/basicdoc.htm.
See also Jeswald W. Salacuse, Is There a Better Way? Alternative Methods of Treaty-Based, Investor-State Dispute
Resolution, 31 FORDHAM INT’L L. J. 138 (2007)(suggesting mediation in lieu of ligitation or arbitration).

79

appellate mechanism designed to correct mistakes of law. 446 (On the other hand, even the ICSID
annulment system can, as is suggested by the dicta by the CMS Annulment Committee, generateattempts (even if erroneous) to provide guidance to other arbitrators considering comparable
claims.) Yet the more general lesson of the Argentine Gas Sector Cases is that those who seek
legitimacy through consistency should focus, more particularly, not on consistency of result but
on consistency of reasoning. We should be seeking consistent reasoning for different results.
Our article, while limited to seeking the best interpretation of one clause in a particularinvestment agreement, is one such attempt.
At the same time, we are not convinced by those who suggest that neither structural nor
interpretative reforms may be needed. The eminent international lawyer Brigitte Stern suggeststhat the investment regime is merely suffering a “crise de croissance” (a “teenager’s crisis”) andthat over time, even in the absence of an appellate body or agreement on common interpretative
principles, its arbitrators will produce in the course of deciding ad hoc disputes an informal bodyof precedent grounded in viable “compromises between the divergent interests of the
stakeholders in the system.” 447 The implication is that arbitrators in investor-state cases will beable to interpret agreements such as the U.S.-Argentina BIT to strike a better balance between theneeds of the market and the needs of sovereigns to protect the rights of their peoples and promote“sustainable economic development” 448 --as did the WTO Appellate Body in its Shrimp-Turtle
decision. 449
The Argentine Gas Sector Cases suggest, on the one hand, that Stern’s optimism isunwarranted. Consider Stern’s reliance on the preamble to the U.S.-Argentina BIT. Stern citesthat treaty’s preamble in support of her argument that, over time, interpretations of this treaty
will yield interpretations that are more respectful of sovereign concerns than those issued to date.
She relies on the preamble’s references to “greater economic cooperation,” “economic
development,” “effective use of economic resources,” the “well-being of workers,” and “respect
for internationally respected recognized worker rights.” 450 She suggests that such language
could lead to interpretative presumptions reminiscent of those urged by Burke-White and vonStaden and their analogies to the WTO’s caselaw, namely interpretations that resolve ambiguity“in favor of state sovereignty.” 451
Stern’s arguments are hard to sustain with respect to the U.S.-Argentina BIT. All thephrases that Stern cites are not self-standing goals even in its preamble. On the contrary, all arestated as possible outcomes if the object and purpose of the treaty -- to protect foreign
investments -- is given effect. The preamble expresses the hope that the protection of foreign
investors will hopefully promote greater economic cooperation and economic development, giverise to effective use of economic resources, and contribute to the well-being of workers andrespect for worker rights. This cautious preamblar phrasing reflects how we have described thisparticular treaty was promoted and negotiated by the United States in Part III(A), i.e., not as a
446

Under the ICSID Convention, annulment committees can only consider whether the tribunal below was
improperly constituted, manifestly exceeded its powers, was corrupt, engaged in a serious departure fromfundamental rules of procedure, or failed to state the reasons for its award. ICSID Convention, art. 52(1).
447
Brigitte Stern, The Future of International Investment Law: a balance between the protection of investors and theStates’ capacity to regulate (draft).
448
Stern, supra note 447, ___.
449
Burke-White and Von Staden also rely on WTO caselaw to similar effect. See Burke-White and Von Staden,supra note 38, at 346-47, 361-63; 365-66.
450
Stern, supra note 447, ___.
451
Stern, supra note 447, ___.

80

guarantee that foreign investment will flow or that these outcomes will be achieved, but rather as
seeking only to establish and enforce minimum standards for protecting investors. There isnothing in this preamble (or in Article XI) that implies that the treaty’s investor guarantees areconditioned on achieving these desirable outcomes. What this means is that it may not be so easy
to outgrow the U.S.-Argentina BIT’s ‘adolescent’ preoccupation with protecting investors’ rights.
Protecting such rights is the sine qua non of that treaty.
On the other hand, the Argentine Gas Sector Cases provide some support for Stern’s
general conclusion -- namely that over time, interpretations of investment agreements, includingof the U.S.-Argentina BIT, will attempt to balance the needs of sovereigns and foreign investors.
The arbitral decisions issued in these cases suggest the need for caution with respect toconclusions that BITs are illegitimate because they utterly fail to balance the needs of sovereigns
with those of investors. As shown in part III (C)(2), we believe that even with respect to a BIT
as investor-protective as is the U.S.-Argentina BIT, such balancing has tended to occur where thetext of such agreements are open to this possibility – as in the course of applying these
agreements’ vague substantive guarantees and perhaps in the calculation of damages (which,except with respect to expropriation, are not spelled out in the text of that treaty at all). But we
do not believe that the traditional rules of treaty interpretation authorize or anticipate a freefloating interpretative gloss in favor of sovereignty (or the alleged principle of in dubio mitus)that can be applied to any clause of such treaties, including its NPM clause, irrespective of what
the actual object and purpose of such treaties is, what the particular NPM clause states, orwhether such balancing has already been taken into account in determining whether breach has
occurred or in awarding damages. 452
Nonetheless, we agree that the Argentine Gas Sector Cases raise highly charged politicalquestions about the legitimacy of the underlying investment regime. But most of those concerns– or the most serious of them – are directed at the substantive law contained in investment
agreements themselves and not merely the competency or unbiased nature of those who interpret
such agreements. Those worried about “democratic deficits” appear to be most worried about
whether it is right to accord foreign investors non-relative guarantees that go beyond nondiscrimination and to some extent, may differ or exceed the treatment accorded to national
investors. Those worried about the “horizontal” equities of the regime direct attention to whether
the requirements of some investment agreements (such as those that impose national treatment
on the entry of foreign investment and not merely post-entry treatment or that prohibit certain
performance requirements) hinder developing countries from adopting policies that other states
enjoyed at comparable stages of their development. Those who contend that arbitral mechanisms
are ideologically unbalanced are not necessarily questioning the bonafides of investment
arbitrators; they may be targeting, more fundamentally, the fact that most of the investment
agreements that those arbitrators are charged with interpreting do not contain provisions

452

See Rose-Ackerman and Billa, supra note 261, at 443-51 (arguing that there is no such thing as an “implicit”
national security exception). But see SIR ROBERT JENNINGS AND SIR ARTHUR WATTS, ED., OPPENHEIM’SINTERNATIONAL LAW, at 1278 (9th ed. 1992)(suggesting that the in dubio mitius principle applies in interpreting
treaties but that it must be applied with regard to the principle of effectiveness); C.H. Schreuer, The Interpretation ofTreaties by Domestic Courts, 45 BRIT. Y.B. INT’L L. 255, at 283-301 (1971)(discussing contrasting principles oftreaty interpretation deployed by national courts, including the principle of “restrictive interpretation” in deference
to sovereignty).

81

explicitly recognizing either the host state’s or the investors’ duties to protect the environment,labor rights, or human rights. 453
All of these critiques suggest that the substance of international investment law – and not
merely its procedures for resolving disputes or its interpretative methods – create tensions amonga state’s social contract with its citizens, its commercial contracts with investors, and its
sovereign arrangements with its ostensible sovereign equals. And all of these concerns cast
doubt, more fundamentally, on the very premises of the investment regime—namely, that treaties
designed principally to protect foreign entrepreneurs, even at the risk of according such investors
greater rights than nationals and even if this removes certain policy options for governments, is agood idea because it encourages greater flows of incoming capital and contributes to economic
development. Some of the most serious legitimacy challenges facing the investment regime are
driven by doubts about the benefits that investment agreements promise but some believe have
not yet delivered, such as the promise of the enhanced competitiveness of domestic firms, of
incentives given to promote the national rule of law, and of reforms and modernization ofnational institutions (including courts and administrative agencies).
At heart, doubts about the results in CMS, Enron, and Sempra suggest second thoughts
about the merits of the bargain struck in the U.S.-Argentina BIT: a more secure investment
environment for more foreign capital. If so, supporters of the investment regime ignore
skepticism about the relative costs and benefits of BITs at their peril. Renewed attention toproving, ideally with empirical evidence, that investment treaties deliver, at least over the longterm, on their promises 454 and that those real benefits exceed their costs, 455 will be crucial to thelong-term viability of the regime.
International lawyers also need to devote considerable more time to explaining why thesubstantive law applied in investment agreements – both the rights they provide as well as theirfailure to include provisions anticipating overlap with other international law regimes – continue
to make sense. This includes explaining to skeptical audiences (such as the citizens ofArgentina) why the backdrop rules of international law – so crucial to all sides in debates over
the Argentine Gas Sector Cases – should continue to apply.
Some might challenge the common starting point for all of us who have considered thesecases, including Burke-White and von Staden: the traditional rules of treaty interpretation.
Given what we indicate in Part III (A) about the evolution of the U.S. BIT program and the U.S.
negotiating stance at least through its conclusion of its early BITs, it is not unreasonable todescribe the U.S.-Argentina BIT as an internationalized ‘standard form’ contract. Indeed, giventhat the U.S. Model BIT was presented to Argentina by a party in a superior bargaining posture
on an essentially “take it or leave it” basis, some might describe the U.S.-Argentina BIT not as
453

Compare International Institute for Sustainable Development, Model International Agreement on Investment for
Sustainable Development, available at http://www.iisd.org/investment/model/.
454
To date, most of the scholarly attention has focused on investment agreements really have an impact on
incoming capital flows. See, e.g., Jeswald Salacuse and Nicolas Sullivan, Do BITs really work: an evaluation ofbilateral investment treaties and their grand bargain, 46 HARV. J. INT’L L. 70 (2005). Only some scholars haveconsidered the impact such treaties might have on host states’ economic development more generally, income orregional disparities, environmental or labor standards, or political stability. See, e.g., Ginsburg, supra note 422;
Rudolf Dolzer, Matthias Herdegen, and Bernhard Voget, ed., FOREIGN INVESTMENT ITS SIGNIFICANCE IN RELATION
TO THE FIGHT AGAINST POVERTY, ECONOMIC GROWTH AND LEGAL CULTURE (2006)(see in particular chapters on
China, Mexico, and India).
455
Compare Susan D. Franck, Empirically Evaluating Claims About Investment Treaty Arbitration, 86 NORTHCAROLINA L. REV. 1 (2007)(discussing what we know of one of these costs, namely the scope of damage awards
issued to date against host states).

82the prototypical treaty between sovereign equals presumed by the Vienna Convention on the
Law of Treaties but as a contract of adhesion. Those sensitive to horizontal critiques of theregime would add that if this is the case, that treaty should be subject to rescission or even be
rendered null and void on the basis of unconscionability or, at a minimum, should be interpreted
contra proferentem.
Such an argument has been advanced in relation to other treaties. Donald P. Harris
argues that the WTO’s TRIPs Agreement was in essence a contract of adhesion imposed bystronger states in a superior bargaining position on others who were effectively denied
meaningful choice on its terms. 456 After surveying relevant contract law in the United States, theUnited Kingdom, the European Union, Korea, Canada, China, and Japan, 457 Harris concludes
that there is “sufficient consensus” to show that “the contracts of adhesion doctrine” is anestablished general principle of law recognized by civilized nations that can and should beapplied at the international level to treaties such as the TRIPs. 458 Accordingly, Harris suggests a
number of ways that the TRIPs Agreement be interpreted contra proferentem, that is, “so as tobenefit developing countries.” 459
While full consideration of Harris’s contentions is outside the scope of this article, ourtentative answer is that characterizing the U.S.-Argentina BIT, even by way of analogy, as acontract of adhesion would do considerable violence to the circumstances of its conclusion andto U.S. BITs generally. Unlike the typical contract of adhesion, investment agreements,
including the U.S. BITs, are fully reciprocal in nature. Except for sectoral exceptions or otherspecial conditions undertaken to benefit only one party (typically included in a Protocol, as in the
U.S.-Argentina BIT), these treaties apply the same rules to both state parties. 460 As noted in Part
III(A), this accords with the underlying economic premise that both parties, no matter thecomparative flows of capital as between them, benefit from free flowing investment flows.
Further, as the Protocol of the U.S.-Argentina BIT demonstrates, unlike the typical contract ofadhesion, that treaty was the product of a genuine negotiation between the parties, albeit one
which, like all treaty negotiations, reflected differences in bargaining leverage between theparties. Unlike a contract of adhesion between a consumer and a business, both of the parties tothe U.S.-Argentina BIT were repeat players in the investment regime and both states had adheredpreviously to comparable investment agreements with others. It is doubtful that Argentina canbe described as a party lacking the negotiating power to reformulate the BIT’s terms or to decide
not to ratify a BIT that it decided was not in its long term interests. 461

456

Donald P. Harris, Carrying a Good Joke Too Far: TRIPs and Treaties of Adhesion, 27 U. PA. J. INT’L ECON. L.
681, at 724-38 (2006). Harris contends that the basic elements of TRIPs that make it a contract of adhesion are (1) it
was presented by parties in superior bargaining positions; (2) it consisted of a pre-formulated or form contract; (3) it
was presented on a take-it-or-leave-it terms, (4) the weaker party lacks the negotiating power to reformulate contract
terms, and (5) the terms of the contract are onerous or unfavorable or inconsistent with the reasonable expectationsof the weaker party and results in unfair surprise. Id., at 724.
457
Id., at 694-712.
458
Id., at 708, 724-38.
459
Id., at 739-45.
460
As noted in Part III(A), this is because such agreements are premised on the theory of comparative advantage,
including the premise that the free investment flows encouraged by such agreements benefit all states, irrespective ofstage of development.
461
Cf. Harris, supra note 456, at 724. This is also suggested by Harris’s own distinctions among the developing
states that negotiated the TRIPs Agreement. Thus, Harris argues that India, Brazil, and other “larger developing
countries not only participated in the negotiations but also are not in the “unequal bargaining position” that many83

Even in the case of relations between Argentina and the United States, there is need forsome caution about presuming that the investment regime consists of one-sided bilateral treaties
imposed on needy capital importers by greedy capital exporters. Both Argentina and the UnitedStates have been and continue to be capital importers as well as capital exporters. Both states
have reciprocal interests in protecting their investors abroad as well as making their own
respective internal legal regimes stable and attractive for foreign investors. 462 The fact that, as
between them, at the time the U.S.-Argentina BIT was concluded most of the flows of foreign
investment were going to Argentina from the United States and not the reverse, is subject tochange. Nor does that fact mean that Argentina was not receiving a benefit from the treaty orthat Argentina had no reciprocal interests in protecting its own foreign investors abroad –whether in the United States or elsewhere. By concluding a BIT with the United States with amost favored nation clause, Argentina was sending a message to many other nations about its
intentions to maintain a stable foreign investment environment, not only to protect the interestsof other foreign investors in Argentina, but also to ensure the mutual protection of Argentine
investors elsewhere.
Moreover, unlike the typical contract of adhesion where the party who proffers theallegedly onerous terms is also the ultimate beneficiary of those terms, the direct beneficiaries of
the U.S.-Argentina BIT (and of investment agreements generally) are third parties, namely
foreign investors. In the context of the Argentine Gas Sector Cases, the contra proferentem rulewould be applied against a non-party to those arbitrations while claimant investors would
necessarily bear the brunt of that rule. 463
Finally, unlike the typical contract of adhesion where an element of surprise attends theonerousness of the obligations, there is a great deal of transparency about the U.S.-Argentina BIT
and about the object and purpose of the U.S. BIT program generally. Indeed, our description of
the object and purpose of that treaty in Part III(A) relies on a substantial public record readily
accessible to both states. Contemporaneous statements by Argentine government officials
demonstrate that both parties to this treaty – as well as the foreign investors who testified onbehalf of the treaty before the U.S. Senate – were clear on what the U.S. Model BIT meant andthat it sought to protect U.S. investors from well understood “political risks.” The evidence
suggests that both states turned to this treaty in order to provide an international guarantee toback the national legal reforms undertaken by Argentina – and that such reforms (including
privatizations) were needed by Argentina to turn a new page with respect to its treatment offoreign investors.
For all of these reasons, it is not at all clear that the CMS, Enron, and Sempra
interpretations of Article XI were, in Harris’s terms, “onerous or unfavorable,” inconsistent withthe “reasonable expectations” of the parties, or “unfairly surprising.” 464
Of course, some might also find the suggestion that Argentina, home to one of the mostsophisticated legal systems in Latin America, ought to be treated as akin to an unsophisticatedconsumer who purchases a car from an automobile dealer who relies on a boiler plate standard
African nations are in” and accordingly should not have the contract of adhesion doctrine apply in their favor. Id., at754.
462
Indeed, the evolving views of the United States with respect to NPM clauses revealed in the course of these cases
is itself a testament to the fact that the United States now is the world’s largest foreign investor as well as theworld’s largest importer of foreign capital.
463
Moreover, many foreign investors face, once they have invested sunk costs in a foreign enterprise, an“obsolescing bargain” insofar as leverage over the conditions affecting that investment normally shifts to host states.
464
Cf. Harris, supra note 456, at 724.

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form contract and is unfairly surprised by its true contents, condescending, inappropriate, andoffensive. 465
Caution is also warranted with respect to treating other investment agreements as“contracts of adhesion.” The extensive network of investment agreements today is, particularly
but not only through the operation of these treaty’s most favored nation guarantees, global innature. The investment regime is not only about unidirectional investment flows flowing fromthe West to the South. It is inaccurate to suggest that all or most investment agreements consistof treaties by rich capital exporting states seeking to protect their investors in poor capital
importing states. Nearly one-third of the wide network of investment agreements now in place
are between lesser developing countries and many of the most prominent players in theinvestment regime, such as China and not only the United States, are both leading capital
importers as well as leading exporters of capital. 466 Further, as demonstrated by the Energy
Charter, the NAFTA, and free trade agreements between the U.S. and Australia, Chile, andSingapore respectively, investment agreements, containing many substantive guarantees
comparable to those in the U.S.-Argentina BIT, are now also concluded among developed
nations. 467
More important for our purposes is that, even if the U.S.-Argentina BIT or otherinvestment agreements can be analogized as a matter of fact to contracts of adhesion, it is unclearthat this would or could have any impact as a matter of currently applicable law.
International law, unlike many national laws relating to contract, does not have distinct
rules of interpretation for different types of treaties, whether bilateral or multilateral, however“unequal” the parties to them. It relies on the same rules of interpretation, namely those codified
at articles 31 and 32 of the Vienna Convention on the Law of Treaties, for all treaties irrespectiveof the negotiating leverage exercised by the respective parties. As is well known, while somestates argued for a doctrine of “unequal treaties” in the course of negotiating the Vienna
Convention on the Law of Treaties, and even suggested that “economic coercion” be recognized
as a legitimate basis for rendering such treaties either void or voidable, these possibilities were
rejected in favor of pacta sunt servanda. 468 While there is some authority for the proposition
that treaties are subject to the contra proferentem rule, 469 we are not sure that this remains the465

Perhaps this, as well as the disturbing message such a claim sends to other treaty partners, explains why thecontract of adhesion contention was not made by Argentina in any of the Argentine Gas Sector Cases.
466
See Lisa Sachs and Karl P. Sauvant, BITs, DTTs and FDI flows: an overview, in Karl P. Sauvant and Lisa Sachs,ed., THE IMPACT OF BILATERAL INVESTMENT TREATIES AND DOUBLE TAXATION TREATIES ON FOREIGN DIRECTINVESTMENT FLOWS (forthcoming ).
467
It is worth noting, however, that the Australia-United States Free Trade Agreement does not provide for investorstate dispute settlement. For analysis of the possible consequences for the investment regime, see William D.
Dodge, Investor-State Dispute Settlement Between Developed Countries: Reflections on the Australia-United States
Free Trade Agreement, 39 VAND. J. TRANSNAT’L L. 1 (2006).
468
See, e.g., Richard Kearney and Robert Dalton, The Treaty on Treaties, 64 AJIL 495, 533-535 (1970)(discussing
the rejection of proposals to include economic coercion among the permitted exceptions for invalidating,terminating, withdrawing from or suspending treaty obligations in the negotiations on the Vienna Convention on the
Law of Treaties).
469
See, e.g., Jennings and Watts, supra note 452, at 1279 (“[i]f two meanings are admissible, the provision should beinterpreted contra proferentem, ie that meaning which is least to the advantage of the party which prepared andproposed the provision, or for whose benefit it was inserted in the treaty, should be preferred,” citing international
decisions from the 1920s and 1930s); International Thunderbird Gaming Corporation v. The United Mexican States,Award, Jan. 26, 2006 (UNCITRAL), available at: http://ita.law.uvic.ca/documents/ThunderbirdAward.pdf , at ¶ 50
(referring to contra proferentem as the “traditional international law principle” and citing, among other things,
OPPENHEIM’S INTERNATIONAL LAW, 9th ed., 1279 (1992)).

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case after the conclusion of the Vienna Convention. 470 We are also skeptical of Harris’s
alternative claim that a single “contract of adhesion doctrine” (and specifically the contra
proferentem canon of construction) exists as a “general principle of law.” 471 Drawing analogies
from national contract law to agreements among sovereigns has always been a risky
enterprise. 472
Our arguments that existing international law does not appear to favor a finding that the
U.S.-Argentina BIT is a contract of adhesion do not address the more basic question of whether
the traditional rules of treaty interpretation, which do not specifically address treaties whose
purpose is to create third party beneficiaries, themselves merit re-examination. Nor do we
address here more general questions about whether other state-centric rules of international law
need to be re-considered in the context of investor-state disputes. Some might question why therules governing state responsibility, including the defense of necessity, remain appropriate whenit comes to determining the liability states owe not to one another but to private parties underinvestment agreements. 473 These questions, of potential interest to academics and the public
critics of the investment regime, were not considered by the arbitrators in the Argentine Gas
470

Articles 31-32 of the Vienna Convention make no mention of the possibilities of treaties as contracts of adhesion
or of the contra proferentem principle. The Vienna Convention rules of treaty interpretation would appear tocontemplate, on the contrary, that absent specific evidence, deference to the meaning intended by the drafter of atreaty or of the particular clause is appropriate if only because that party is likely to have made publicly available
greater material, including diplomatic exchanges, directly on point. Certainly that evidence, provided it wasavailable to the other party, might be part of the treaty’s negotiating history. Apart from the Vienna rules, it is also
not clear how the contra proferentem principle ought to apply to a treaty based on reciprocal application andpremised on reciprocal benefts, such as the U.S.-Argentina BIT. In principle, the benefits of Article XI are
applicable both to its drafter, the United States, and to Argentina.
471
Indeed, Harris’s own evidence with respect to national contract laws on point cast doubt on his conclusion that
there is “sufficient consensus” on what a contract of adhesion is or its consequences. Even Harris’s cursory surveyof national laws suggest differences with respect to, for example, whether national courts will enforce contracts ofadhesion at all, whether an offending clause is void or merely voidable, or the relevance of other factors to suchdeterminations (such as surprise, gross unfairness, undue oppression, unconscionability, or the “reasonable
expectations” of the weaker party). It is also not clear from Harris’s survey of national laws, why the contra
proferentem canon of interpretation is a general principle of law but not, for example, the principle often stated inmany of the same national laws that “unfair terms” are non-binding. See, e.g., Harris, supra note 456, at 698(discussing the European Union’s Unfair Terms Directive). Of course, there is nothing in the Vienna Convention
that permits a treaty to be rendered void or voidable because of inequality among its parties.
472
See, e.g., EVANGELOS RAFTOPOULOS, THE INADEQUACY OF THE CONTRACTUAL ANALOGY IN THE LAW OF
TREATIES (1990). Raftopoulos considers the many ways treaties which partake, in his view, of the “nature oflegislation,” differ from private contracts. Thus, Raftopoulos surveys many ways that the rules in the Vienna
Convention on the Law of Treaties reflect more general interests than those of the individual parties to a treaty,
including with respect to its rules for reservations, anticipated impact on third parties, jus cogens, and limits ontreaty formulation and termination.
473
See, e.g., Van Harten, supra note 14, at 106 (suggesting that the reciprocity of the rights and duties between
states reflected in the Articles of State Responsibility break down in teh adjudication of investor-state disputes). But
it is not clear which way such arguments cut. Van Harten appears to assume that the inapplicability of suchtraditional rules would benefit host states defending claims under investment agreements. This may not be so. See,e.g., BverfG [Federal Constitutional Court] July 5, 2007, 75/2007 Argentinien-Anleihen: Staatsnotstand berechtigt
nicht zur Zahlungsverweigerung gegenüber privaten Gläubigern (F.R.G.) (finding Argentina did not available theaffirmative defense of necessity vis-à-vis private parties). For a summary of the decision, see Stephen W. Schill,
German Constitutional Court Rules on Necessity in Argentine Bondholder Case, ASIL Insights, July 31, 2007,
http://asil.org/insights/2007/07/insights070731.html. See also BG Group v. Argentina, supra note 315, at ¶ 382(suggesting that the U.K.-Argentina BIT precludes by its terms the defense of necessity since it anticipates no
exception for a state’s unilateral revocation of vested rights under the BIT).

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Sector Cases. Their mandate was limited to examining and applying existing law. Accordingly,
we leave those issues – symptomatic of legitimacy concerns prompted by the substance of thelaw applied within the investment regime -- to another day.
But we cannot resist drawing one final lesson from the Argentine Gas Sector Cases.
Even if assume, contrary to what we argue here, that treaties such as the U.S.-Argentina BIT are
relatively “heartless” because they are “imbalanced” in terms of what they protect, one of theadvantages of a regime largely built on bilateral agreements is that exit remains more of an
option than under a multilateral regime such as the WTO. BIT parties can change the treatiesthat they ratify (as the United States itself has) to incorporate more sovereignty-protective
provisions. Changing the texts of future international investment agreements may indeed be agood idea to protect the regime as a whole from the political backlash now evident in countries
such as Ecuador and Bolivia. If states want their investment agreements to protect their‘sovereign’ prerogatives more than they now do or to accord them greater rein, their best route issurely to restrict the scope of investors’ rights or otherwise modify their agreements to so
provide – or, to the extent permitted by their terms, to amend their existing BITs. Demandingthat arbitrators recalibrate BITs by re-writing them for the state parties is not the best route tolegitimizing the investment regime.

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