tutorial video tutorial video Discover the Wiki Notes in 3 minutes

Author

Dr Fan Yang

Deputy Director - Cyberspace International Law Center (Xiamen University Law School)

Author

Ms Zhiyuan Wen

PhD Candidate - Xiamen University

Editors
See all

Emergency Clauses in BIT

I. Definition

1.

Carved in American BITs from the 1980s1 for the purposes of maintaining treaty legality in exceptional situations and permitting the State to modify treaty compliance during such emergencies, most emergency clauses (also known as national security clauses or essential security exception clauses) provide that the BIT shall not “preclude” the application by either Party of “measures” (or “act”) “necessary” for the “maintenance” (or e.g. “protection”, “fulfilment”, “restoration”) of “essential security interests” (or e.g. “essential interest”, “national security”) or in circumstances of “extreme emergency.” In addition to this treaty-based defence, States may also find defences to their international investment obligations of investment treaties from customary international law, i.e. the doctrines of necessity and force majeure. Both are included in the International Law Commission’s Articles on State Responsibility as circumstances precluding wrongfulness.2 The necessity doctrine has figured prominently in the treaty-based cases brought in the aftermath of the Argentine financial crisis, while force majeure has not played a role in recent investor-State disputes.3

II. General treaty practice

2.

Since 1995, about 19% of IIAs signed include emergency clauses.4 Most BITs under which the United States is a party have vague emergency clauses.5 6

III. Distinction with other related clauses

3.

Emergency clauses should not be confused with denial of benefits, financial prudential carve-out, scheduling and reservations clauses, and other exception clauses for cultural heritage, for example.

IV. Material scope

4.

Emergency clauses are typically applied in two ways. The first category is general exception clauses.7 The second pertains to particular treaty obligations,8 such as expropriation or nationalization,9 non-discrimination,10 and transfer of funds.11

V. Effect

5.

The effect of emergency clauses on State responsibility remains debated. Two main interpretations have emerged in investment arbitration practice:

  1. Limitation of the scope of obligations, where the substantive obligations under the BIT do not apply;12 and
  2. Justification, where the wrongfulness of the measure is precluded.13

VI. Self-judging

6.

As to the question of who determines whether the essential security interests of the State are at stake, a number of agreements, including multilateral agreements and OECD investment instruments, explicitly give this role to the State itself.14 This may not be the case with certain bilateral investment treaties which do not include explicit self-judging language (e.g. “that the state considers necessary”). For example, the CMS, LG&E, Enron, and Sempra tribunals concluded that Article XI of the US-Argentina BIT was not self-judging,15 but different language in other treaties certainly could lead to a different conclusion.

VII. Interpretation

7.

In order to interpret the vague content of emergency clauses, two questions arise:

  1. To what extent can “essential security interests” be distinguished from any other governmental interest, such as monetary and fiscal policymaking?16 The conditions of invoking emergency clauses are vague in BITs.17 For example, the LG&E tribunal noted that economic, financial or interests related to the protection of the State against any danger seriously compromising its internal or external situation, are also considered essential interests.18 However, the Enron tribunal held that the argument that such a situation compromised the very existence of the State and its independence so as to qualify as involving an essential interest of the State is not convincing.19
  2. To what extent can Article 25 of the Articles of State Responsibility apply when interpreting emergency clauses in BITs?20 Arbitral tribunals and scholars remain divided on whether the strict conditions (e.g. “the only way”, “the State has not contributed to the situation”) of Article 25 of the Articles of State Responsibility can apply. For example, the CMS, Enron, and Sempra tribunals infused Article 25 of the Articles of States Responsibility into the interpretation of Article XI of the Argentina-US BIT, while the CMS, Enron and Sempra Annulment Committees rejected the customary law of necessity in favour of an exclusive treaty interpretation of Article XI of the Argentina-US BIT.21

VIII. Compensation

8.

Most emergency clauses do not state any consequences of its application.22 As a result, the State’s duty to compensate depends on the interpretation of the provision:

  1. If interpreted as limiting the scope of obligations, no duty to compensate arises.23
  2. If interpreted as a circumstance precluding wrongfulness of the measure, the duty to compensate remains debated.24 Some tribunals held that there is no duty to compensate.25
9.

Other tribunals concluded that the duty to compensate still remains and that preclusion of wrongfulness does not prejudice the duty to compensate material loss.26

Bibliography

Select a key word :
1 /

Instantly access the most relevant case law, treaties and doctrine.

Start your Free Trial

Already registered ?