The 'Necessity Defense' and the Emerging Arbitral Conflict in its Application to the U.S.-Argentina Bilateral Investment Treaty

22 Pages Posted: 12 Aug 2009

Date Written: Summer 2007


AT the turn of the twenty-first century, while the Internet boom was generating incredible wealth in developed countries, Argentina experienced one of the worst economic and fiscal crises in its history. Between 2001 and 2002, output fell 20 percent over three years, inflation reignited, the government defaulted on its debt, the banking system was largely paralyzed, and the Argentine peso reached lows of 3.90 pesos per U.S. dollar. In the context of other regional economic troubles, such as the Asian crisis of 1997-1998, the Brazilian devaluation in early 1999 and the steady appreciation of the dollar from 1998 to 2001, the overvaluation of the Argentine peso led to a structural crisis.

Although there are recurring themes in the analyses of the events leading up to the crisis, blame cannot be assigned to any one individual or entity. The government of Argentina is ultimately responsible for its own fiscal policies, including, among others, the privatization of public utilities. In retrospect, the International Monetary Fund (IMF) concluded that “the crisis . . . . was the result of economic forces that were difficult to reverse in the context of Argentina's existing vulnerabilities,” including unmanageable public debt, the fixed currency board, and structural weaknesses that had built up during the 1990s. By 2001, the IMF concluded almost no strategy would have succeeded absent sovereign debt restructuring of Argentina's public debt burden.

The IMF is not blameless either, having made mistakes both before and during the crisis. Although it expressed reservations at various times, the IMF backed Argentina throughout the 1990s, and in 1998, the IMF went so far as to say that Argentina's economic policy was ‘the best in the world,’ despite its deep depression. During the crisis, the IMF delayed its support, heightening foreign investors' perception of risk.

The international financial community also shares some of the blame. The favorable financial expectations promoted by institutions like the IMF created a tremendous flow of foreign capital into Argentina; its subsequent flight was one of the biggest contributing factors to the crisis. The United States was particularly indifferent to the crisis. The administration of President George W. Bush imposed high tariffs on Argentine exports and refused to adjust the tariffs during the crisis yet at the same time provided tremendous support to the government of Turkey, which was in a similar crisis but was strategically more important for the United States' own economic and political interests.

The crisis broke with the flight of private investment, which fell by more than $3.6 billion in the last two days of November 2001. On January 3, 2002, President Eduardo Duhalde, the fifth president in three weeks, confirmed a moratorium on Argentina's debts and announced he would negotiate with private creditors. Three days later, the government enacted the Public Emergency and Exchange Regime Reform Act (Reform Act), declaring a state of public emergency and delegating social, economic, administrative, and financial and exchange powers to the Executive. The Reform Act provided for the renegotiation of government contracts and established a commission to monitor the actions taken by the executive in accordance with the Act.

The Reform Act resulted in a flood of requests for arbitration at the International Centre for the Settlement of Investment Disputes (ICSID) at the World Bank in Washington, D.C. These requests were filed by foreign corporations seeking to recover for breach of contract under their respective country's bilateral investment treaty with Argentina. As of December 8, 2006, there were thirty-four cases currently pending against Argentina in ICSID. Eight have been resolved. Argentina invoked the controversial defense of necessity in two cases brought by United States corporations; one arbitral panel accepted the defense, and one did not. This article analyzes the cases to determine which panel was correct within the context of established customary law and state practice regarding the necessity defense or necessity doctrine.

Keywords: Argentina, economic crisis, fiscal crisis, International Monetary Fund, IMF, international financial community, tariffs, Eduardo Duhalde, Public Emergency and Exchange Regime Act, ICSID, International Centre for the Settlement of Investment Disputes, World Bank, bilateral investment treaty

JEL Classification: K19, K33, K39, K49

Suggested Citation

Rogerson, Sarah Hill, The 'Necessity Defense' and the Emerging Arbitral Conflict in its Application to the U.S.-Argentina Bilateral Investment Treaty (Summer 2007). NAFTA: Law and Business Review of the Americas, Vol. 13, No. 3, 2007, Available at SSRN: or

Sarah Hill Rogerson (Contact Author)

Albany Law School ( email )

80 New Scotland Avenue
Albany, NY 12208
United States

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