This document discusses emergency exceptions under international investment law, including necessity and force majeure defenses. It summarizes the International Law Commission's articles on state responsibility regarding necessity and force majeure. It also summarizes two international arbitration cases, CMS Gas Transmission Company v. Argentina and LG&E Energy Corp v. Argentina, where the tribunals considered and analyzed necessity defenses raised by Argentina. The document also summarizes a case involving National Oil Company v. Libyan Sun Oil Company where the tribunal analyzed a force majeure defense regarding contractual obligations.

1. EMERGENCY EXCEPTIONS UNDER
INTERNATIONAL INVESTMENT LAW
By
Vikram Jeet Singh

2. CONTENT
• Introduction
• ILC articles of State responsibility
– Necessity
– Force Majeure
• Case laws

3. ILC ARTICLES OF STATE RESPONSIBILITY
• It discusses in detail the elements of a necessity (Art
25) defence primarily
• It examines the possibility of States' raising treaty-
based defences on the grounds of ‘essential security
interests’ or maintaining ‘public order’.
• It details the elements of a force majeure defence
(Art 23).
• This article explores the effects of a successful
invocation of a necessity or force majeure defence,
including whether compensation is due in the event
of a successful plea.
• A concluding section assesses the state of the
jurisprudence and outlines some of the open
questions future tribunals will confront in necessity
and force majeure cases.

4. CERTAIN CIRCUMSTANCES WHICH ARE
CONSIDERED TO BE STATE OF EMERGENCY
Generally accepted requirements in Article 25 of draft articles on
responsibilities of state for internationally wrongful acts elaborated by ILC are:
• The measure taken are the only way for the state to safeguard an essential
interest against a grave and imminent peril.
• The act does not impair an essential interest of state(s) towards which the
obligation exists

5. NECESSITY CASES
• CMS Gas Transmission company v. Republic of Argentina (ICSID Case No.
ARB/01/8)
• FACTS: CMS, a US corporation, acquired in 1995 – the course of privatisation of the
gas sector in Argentina – a 30% share of TGN, an Argentinean gas transportation
company. As part of its energy privatisation incentives, Argentina granted TGN the right
to calculate tariffs in US dollars and then convert them to pesos at the prevailing
exchange rate, and to adjust tariffs every six months to reflect changes in inflation.
• These rights were enshrined in the Argentinean law and in the License granted to TNG
for the period of 35 years (until 2027). Against the background of a serious economic
crisis that began to unfold in Argentina in late 1990-s, in December 1999 Argentina and
the gas companies entered into a 6- month agreement for the temporary suspension of
the inflation adjustments, with the understanding that this suspension would not be
permanent.
• However, in August 2000, it became apparent that the temporary suspension would
not be lifted.
• Furthermore, in January 2002, under the so-called Emergency Law, Argentina
unilaterally terminated both TGN’s right to calculate tariffs in US dollars and its right to
make inflation adjustments. The peso was devalued with the effective rate being 3.6
peso for one dollar, whereas respective tariffs were redenominated at a rate of one
peso to the dollar. What started as a temporary suspension under the 1999 agreement,
later became a permanent measure.

6. • CMS brought a dispute before the ICSID Tribunal
claiming that the measure at issue was in violation of
several of Argentina’s obligations under the
Argentina-US BIT:
– 1) Expropriation without compensation;
– 2) Fair and equitable treatment
– 3) Arbitrary and discriminatory measures;
– 4) Umbrella clause (a provision obliging each BIT party to
respect “any obligation it may have entered into with
regard to investments”).
• CMS requested compensation in the amount of US$
261 million which represented the decreased value
of its shares in TGN plus interest and costs. Argentina
rejected all claims.

7. ARGENTINA DEFNESE (Defence of
Necessity)
• Argentina relied on Article 25 of the ILC Articles on State
Responsibility in arguing that its measures were adopted
to safeguard essential economic interests.
• Argentina further invoked Article XI of the BIT
(“Emergency Clause”) that allowed measures “necessary
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.”

8. TRIBUNAL
• Tribunal noted that even if it accepted Argentina’s necessity
defence, this would not exclude the duty to compensate the
investor (with reference to Article 27 of the Articles on State
Responsibility).
• The Tribunal noted that under international law and the principles
governing most domestic legal systems, one party should not bear
entirely the cost of the plea of the essential interest of the other
party.

9. TRINUNAL CONCLUSION
• the Tribunal concludes that it does not have jurisdiction over
measures of general economic policy adopted by the Republic of
Argentina and cannot pass judgment on whether they are right
and wrong.
• Changing economic conditions are no defence here. State of
necessity/force majeure is not enough to justify infringement.
• Tribunal finds that there was nothing “tantamount to
expropriation” here.
• Tribunal finds that the umbrella clause has been breached.
ARGENTINA WAS HELD LIABLE TO PAY COMPENSATION
Claimed by investor261.10 mln USD
Awarded by tribunal133.20 mln USD

10. LG&E v. ARGENTINA (ICSID Case No.
ARB/02/1)
• Facts:
• The Claimants, three US investors – LG&E Energy Corp., LG&E Capital Corp. And
LG&E International Inc (collectively referred to as “LG&E”) – held equity
interest in three local Argentinean gas companies Distribuidora de Gas del
Centro (45.9%), Distribuidora de Gas Cuyana (14.4%) and Gas Natural BAN S.A.
(19.6%). These three Argentinean companies were created in the early 1990s
as a consequence of the privatization of Argentina’s national natural-gas
transport and distribution monopoly.
• As the Argentinean crisis deepened, on 1 December 2001 the Government
issued the so called “Corralito” Decree restricting bank withdrawals and
prohibiting any transfer of money abroad.
• Further, on 2 January 2002, the Government enacted the “Emergency Law”,
which abrogated the convertibility of pesos to the U.S. dollars and
consequently the right to calculate tariffs in dollars. The Law also definitively
abolished PPI adjustments.

11. Treaty Violations Found
• Before proceeding to the claims, the Tribunal found that Argentina’s
guarantees to investors included the following:
– The tariffs would be calculated in U.S. dollars before conversion into pesos;
– The tariffs would be subject to semi-annual adjustments according to the
PPI;
– The tariffs were to provide an income sufficient to cover all costs and
reasonable rate of return;
– The tariff system would not be subject to freezing without compensation.
• The Tribunal also found that the “Emergency Law”, which abolished both the
calculation of tariffs in U.S. dollars and the semi-annual adjustments of tariffs
according to PPI, seriously affected Claimants’ rate of return and Argentina
took no steps to compensate the Claimants, forcing them into renegotiation
instead

12. THE TRIBUNAL
• It applied a twofold analysis to establish:
– whether Argentina was in a state of necessity under Article XI. Firstly, it
analysed whether the conditions that existed in Argentina entitled it to
invoke the protections included in Article XI.
– Secondly, it determined whether the measures implemented by Argentina
were necessary to maintain public order or to protect its essential security
interests.
• The Tribunal rejected the notion that Article XI was only applicable in
circumstances amounting to military action and war, as argued by the Claimants,
and considered that “when a state’s economic foundation is under siege, the
severity of the problem can equal that of any military invasion”.
• It found that the measures were necessary to maintain public order and protect
Argentina’s essential security interests and met the requirements of Article XI.
• Amount of compensation
– Claimed by investor268.00 mln USD
– Awarded by tribunal57.40 mln USD

13. DIFFERENCE
CMS v ARGENTINA
Tribunal found that even if the plea
of necessity were accepted in this
case, compliance with obligation
would remerge as soon as the
circumstance precluding
wrongfulness no longer exist and it
is duty of tribunal to determine
compensation due.
LG&E v ARGENTINA
Damages suffered by the Argentina
during the state of necessity should
be borne by Investor and Argentina
could only be liable for those
measure which are adopted before
and after the occurrence of state of
necessity.

14. FORCE MAJEURE (Article 23)
• The wrongfulness of an act of a State not in conformity
with an international obligation of that State is
precluded if the act is due to force majeure, that is the
occurrence of an irresistible force or of an unforeseen
event, beyond the control of the State, making it
materially
• Paragraph 1 does not apply if:
(a) the situation of force majeure is due, either alone
or in combination with other factors, to the conduct of
the State invoking it; or
(b) the State has assumed the risk of that situation
occurring.

15. WHAT CAN NOT COME UNDER FORCE MAJEURE
• Lack of funds
• Insolvency
• Other forms of Political and economical crisis.

16. National Oil Company v. Libyan Sun oil (case no. 4462 of 1985)
• FACTS: On 20 November 1980, NOC - a Libyan State
enterprise - and Sun Oil signed an Exploration and
Production Sharing Agreement ("EPSA") under which Sun Oil
was to undertake, finance and carry out an oil exploration
program in Libya. In consideration therefore, Sun Oil was
entitled to receive a share of the petroleum production fixed
at 19% or 10% depending on the explored areas. The EPSA
became effective on 20 December 1980.
• The agreement was to be governed by and interpreted in
accordance with Libyan law, including the Libyan Petroleum
Law. It also contained an ICC arbitration clause.

17. • Exploration activities began in the first semester of 1981. With NOC's
consent, Sun Oil hired the US company Petty-Ray to carry out a seismic
survey of certain areas.
• On 18 December 1981, Sun Oil suspended performance, invoking the
force majeure provision in the EPSA. Sun Oil claimed that its personnel,
all of whom were US citizens, could not enter Libya after the US
Government instituted an order declaring that US passports were no
longer valid for travel to Libya. NOC disputed Sun Oil's claim and called
for the performance to be continued.
• In March 1982, importation into the US of Libyan oil was banned by the
Reagan administration, and export of goods and technical information
was subjected to obtaining a license.
• Sun Oil's application for a license to export oil technology was denied on
21 June 1982 on the ground that "implementation of the (contract)
program could result in the transfer of technical data having significant
strategic value to the ultimate consignee ."
• In late June 1982, Sun Oil notified NOC that it had no alternative but to
continue to invoke the force majeure provisions of Art. 2 of the EPSA. It
considered that the US passport and export regulations made it
impossible for it to fulfil its contractual obligations under the EPSA and
that, under these circumstances, it had terminated its contract with
Petty-Ray.

18. EPSA AGREEMENT
• Article 22 - Force Majeure
• 22.1. Excuse of Obligations
• Any failure or delay on the part of a Party in the
performance of its obligations or duties hereunder shall be
excused to the extent attributable to force majeure. Force
majeure shall include, without limitation: Acts of God,
insurrection, riots, war, and any unforeseen
circumstances and acts beyond the control of such Party.
• 22.2. Extension of Term; Termination
• If operations are delayed, curtailed or prevented by force
majeure, and the time for carrying out obligations under
this Agreement is thereby affected, the term of this
Agreement and all rights and obligations hereunder shall
be extended for a period equal to the period thus
involved

19. • First award on force majeure of 31 May 1985
Definition of Force Majeure
• "It is admitted by both Parties that the expression 'force majeure'
covers, under general Libyan law, a legal notion which is reflected in Art.
360 of the Libyan Civil Code. According to said article and to the
interpretation given thereof by the Supreme Court of Libya, the effect of
force majeure is to release the obligor from his obligation under the
agreement and force majeure is established when an event meeting the
three following conditions occurs:
– (i) being beyond the control of the parties,
– (ii) being unforeseeable at the time the agreement is entered into and
– (iii) rendering the performance of the obligation absolutely impossible.
• The Parties also acknowledge that Art. 360 of the Libyan Civil Code is
not a public order provision and that it is therefore possible to
contractually waive its provisions. It is admitted that contracting parties
are entirely free either to exclude force majeure or, on the contrary, to
make its conditions more flexible.

20. TRIBUNAL
• Final Judgment is hereby entered in favor of National Oil
Corporation and against Libyan Sun Oil Company in the amount of
Twenty Million United States Dollars ($20,000,000.00).
• Tribunal said that Libyan Sun oil company must have hired the
Non-US citizens for their work.