The concept of ‘necessity’ and non-precluded measures in international investment law: three lessons from WTO tribunals

The concept of ‘necessity’ is used in many legal systems - including international investment law, international trade law and human rights law - to delimit permissible measures from prohibited measures. Analysing a measure’s necessity entails determining whether other measures are available that would achieve the objective in question, yet impact less on the protected right or interest. The most well-known examples of necessity analysis in international investment law are cases involving Argentina’s emergency measures, where tribunals determined the applicability of the non-precluded measures clause of the Argentina-United States bilateral investment treaty. So far investment tribunals' approaches to necessity analysis have not delivered consistent and analytically robust results.

Analysing whether a measure is ‘necessary’ is by no means straightforward. In generating policy options and ranking them in terms of their efficacy at achieving the relevant objective and their effect on the foreign investor, tribunals cannot avoid passing judgment in relation to regulatory design, which they may not be well-positioned to do due to their institutional limitations and lack of expertise in relation to the policy area at issue. Investment tribunals have, in general, not paid adequate attention to these limitations and have adopted a relatively strict approach to the standard of review, such as by devising alternative measures without proper consideration of their feasibility or effectiveness. However, indications of a more structured and deferential approach are emerging. In Continental v. Argentina, the tribunal was strongly influenced by the World Trade Organization’s (WTO) approach to necessity analysis. The tribunal’s recourse to WTO jurisprudence deserves further exploration: WTO tribunals have developed relatively sophisticated methods for analysing a measure’s necessity that could assist in guiding investment tribunals.

  • WTO tribunals will not find a measure unlawful where the only available alternatives would impose an undue burden on the State in terms of cost or technical problems. Investment tribunals would do well to consider whether a host State could actually adopt a proposed alternative measure, taking into account the State’s resources, technical and institutional capabilities and other circumstances.
  • WTO tribunals also apply a more rigorous structure to their analysis: before identifying any alternative measures, WTO tribunals ensure that the challenged measure pursues a legitimate objective and is rationally connected to it. While assessing the legitimacy of a measure’s objective may be a matter of value judgment, to refrain from doing so risks the approval of measures with protectionist or other impermissible objectives. But tribunals should approach this question with a degree of deference, as WTO tribunals have done, so as to avoid undermining the right of States to determine their own legitimate policy goals.
  • WTO tribunals assess the extent to which a measure achieves or is capable of achieving its objective, in order to ensure that any approved measure is sufficiently connected to its stated purpose. They afford substantial deference in this analysis, particularly where a measure forms part of a suite of interrelated measures directed at achieving a particular objective.

WTO law provides a rich source of jurisprudence for guiding investment tribunals in their analysis of the concept of necessity. Investment tribunals’ consideration of the WTO approach to necessity analysis would go some way towards the development of an appropriate means of distinguishing lawful state conduct from breaches of investment treaty obligations, providing greater certainty for both host States and investors.

This discussion note is based on Andrew Mitchell and Caroline Henckels, "Variations on a Theme: Comparing the Concept of ‘Necessity’ In International Investment Law and WTO Law", Chicago Journal of International Law (forthcoming, 2013), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2157250.

See also IPFSD clauses:

5. Public Policy Exceptions

6.2. Investor-State Dispute Settlement

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There is much that is indeed insightful from WTO practices as they evolved from the interpretation of GATT Article XX and GATS Article XIV exceptions over the past decade. There are certainly policy reasons well worth considering for adopting evidentiary burdens as they are allocated in the interpretation of GATT Article XX and GATS Article XIV. But some recognition must also be had for the initial hurdles before a tribunal can afford to get to that line of analysis, and primarily this has to do with the arbitral function in international investment law. Unlike the judicial function of the WTO Appellate Body or the panels that are supposed to operate on the principle of non ultra petita, the treaty texts (e.g. GATT Article XX and GATS Article XIV, etc.) created gateways for the tribunals to innovate on interpretive methodologies. Can the same be said of investment arbitral tribunals with a limited remit under the terms of parties' consent under Article 25 of the ICSID Convention - even if Article 42(1) ICSID Convention makes international law applicable, does this translate to all related or similar norms to be used to interpret a treaty norm?) Does the normative prevalence and ubiquity of "necessity" automatically justify an arbitral tribunal's importation of all concepts and interpretations of "necessity" for an explicit treaty provision? It might be easier to incorporate WTO analysis when the norm sought to be established is custom, but I am hard put to accept that - absent a textual reference to WTO law - an investment treaty norm is intended to hearken to WTO interpretation in most cases.

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The concept of "necessity" is indeed well-established within the WTO legal framework. Through the application of Article XX of GATT and the necessity provisions of the SPS and TBT Agreements, WTO Members are allowed to set aside obligations when necessary to fulfil non-trade objectives, such as the protection of health and the environment, or other "legitimate "objectives. 50 years of GATT panels, reinforced with 15 years of institutionalized Appellate Body and panels jurisprudence assisted by institutionalized legal Secretariats, have contributed to the WTO's sophisticated and uniform approach to the so-called "necessity test" analysis.

Similarly, investment treaties include provisions that allow states to resort to public policy justifications for violating their treaty obligations. Unlike with the WTO though, those justifications are not uniformly codified. Like the WTO, investment tribunals often rely on the Vienna Convention on the Law of Treaties (VCLT) to interpret provisions contained in the treaties they apply. One could thus argue that the WTO's sophisticated and well-established approach to analysing the concept of necessity could be adopted by, or at least serve as guidance to investment tribunals.

One should however be prudent about pursuing this route. The "necessity" provisions under WTO, those in investment treaties and the necessity principle in general international law respond to different wordings, objectives, purposes and contexts. While there is a lack of specific public policy language in many bilateral investment treaties (calling on parties to refer to the necessity principle of general international law), the public policy exceptions are carefully regulated in the WTO Agreements and such language is often the basis for the textual interpretation by the Appellate Body and panels. For instance, the existence, in Article XX of the GATT, of a "chapeau" provision to ensure the good faith and coherence of the Member applying the "necessary measure", or the Preamble to the WTO Agreement further clarifying the interpretation of WTO necessity provisions by referring to the goal of sustainable development. To add to this, there are fundamental structural differences between the WTO dispute settlement system with an institutionalised two-tiered jurisprudential system and the disparate investment treaties' dispute settlement mechanisms which, after determining whether there is a treaty breach are also required to rule on the level and type of compensation dues. In sum, investment tribunals may gain from the WTO experience in the necessity test, but a mere transposition of the WTO's approach to the necessity analysis with the view of guiding investment tribunals should take into account the specificity investment treaties concerned.

Gabrielle Marceau
Counsellor, WTO Legal Affairs Division,
Associate Professor at the Faculty of Law University of Geneva,
Visiting Professor at the Graduate Institute (IHEID)

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