The economic impact of the coronavirus already appears likely to exceed anything we have experienced in our working lives, yet the events of the global financial crisis of 2008 provide us with some guidance on how events are likely to unfold. There will be an initial phase in which governments, businesses and individuals take steps to absorb the blows to the economy and maintain some kind of equilibrium – this, perhaps, is where most of us are now. And then, after a time, corporations will begin to study the ruins of their balance sheets, and start to consider how all those gaps in revenue might be filled. The larger part of this task will, naturally, consist of re-establishing businesses. But it will also involve considering what debts can be pursued and what claims can be made.
The coronavirus crisis is distinctive because widespread economic disruption has resulted from the actions and orders of executive governments. It’s inevitable, therefore, that at some stage in the next year or two, foreign investors who enjoy the benefits of investment treaty protections will begin to consider whether they have any recourse against host governments through investor-state dispute resolution mechanisms.
If that occurs, then the customary international law defence of necessity will assume an unprecedented importance in investor-state disputes. In very broad terms, the defence of necessity excuses a state from a breach of an international obligation in particular circumstances, though precisely what those circumstances are is the subject of extensive academic debate. The International Law Commission (“ILC”) has, in Article 25 of the Articles of State Responsibility (“ASR”), formulated the test that the defence of necessity could only be invoked when the act taken by the state was “the only way for the State to safeguard an essential interest against a grave and imminent peril”, and provided that the State itself had not contributed to the state of necessity.
Necessity has seldom been invoked as a defence in investor-state disputes, except that Argentina has made several attempts to argue that it was necessary for it to take certain steps in response to economic crises in those countries. CMS Gas Transmission Company v The Argentine Republic was a dispute that arose from an Emergency Law passed in Argentina regulating tariffs in the gas industry, which CMS claimed had deprived it of 75% of its domestic tariff revenue. Argentina argued that the Emergency Law was a necessary response to the country’s economic circumstances. The tribunal applied the standard in Article 25 of the ASR and found that the Emergency Law was not “the only way” in which the government could have approached the crisis – there were (as the ILC put it) “other (otherwise lawful) means available, even if they may be more costly or less convenient”.
There’s encouragement for states in the fact that tribunals have been generally receptive to the availability of necessity as a defence, at least as a matter of theory. Persuading tribunals that circumstances of necessity actually exist has been more difficult, however.
In the ICSID case, von Pezold v Republic of Zimbabwe, Zimbabwe sought to justify the acquisition of farms owned by German and Swiss investors, under its Land Reform Program, on the basis of necessity. It was common ground in that case that Article 25 of the ASR defined the applicable standards. In this case, the tribunal found that the “essential interest” protected by the Land Reform Program was “to ensure the survival of the incumbent Government and its President at a political level” – which was not “a threat to the State itself”.
These are only two examples, but they demonstrate how difficult it has been for states to shield behind a defence of necessity. In particular, the test proposed in Article 25 of the ASR is unrelentingly demanding, insisting that the action taken must have been “the only way” in which the state could have addressed its problem. States that are called upon to justify the measures they have taken against Covid-19 ought to have little trouble establishing that there was a “grave and imminent peril”; whether the steps that have been taken were the “only” available response may be fertile territory for future disputes.