By Diego Gosis, Ignacio Torterola and Quinn Smith

Law360 (March 24, 2020, 3:53 PM EDT) --

Diego Gosis

Ignacio Torterola

Quinn Smith

As governments across the world adapt to the spread of the coronavirus, they face difficult choices involving regulation. Invariably, there will be winners and losers from the decisions made, and while many governments may not want to think of the impact on foreign investors, investment treaties and customary international law can play a surprising role. In 2001, Argentina faced its own conflagration of an economic, social and political crisis that convulsed all aspects of the country at once. The lessons from that era should inform the decisions made today, while also pointing a better way forward.

When a country faces an emergency, international law is supposed to provide for protection, similar to a force majeure clause in a contract. Under the "doctrine of necessity," a country does not have to comply with its international obligations during the emergency, which can leave it free to take the steps necessary to ensure the production of goods, provide for health and safety, and respond with drastic measures. In the Argentine financial crisis of 2001, the doctrine of necessity was tested, and the results are both instructive and discomfiting.

In 2001, there were only a handful of cases against countries under investment treaties, and precious little definition to the doctrine of necessity. Argentina was forced to remove its fixed rate of three pesos per U.S. dollar, causing the economy to plummet. The state responded with measures to stabilize the economy and quell rising protests. Those measures led to over 40 cases filed under numerous investment law treaties, and although Argentina prevailed in some cases and settled others, it still had to pay millions. The core justification was that Argentina had failed to show it had properly invoked the doctrine of necessity.

Argentina's experience has not left many tools for countries to avoid liability. There is the doctrine of necessity, but its application is so narrow that it can hardly apply — the state must show that it took the only measure available to it. In one formulation, if the house is on fire and there are two closed doors, the firefighters (i.e., the country) must show that the only option was the door they broke down, not that it was the best option. This is plainly insufficient.

For the present moment, the best response for policymakers is to reaffirm that any steps taken are general measures adopted for the protection of the population as a whole. States should not leave the impression that they are abandoning their international commitments. In issuing new laws or decrees, every measure must be taken to preserve the health and security. Government leaders should avoid targeting specific regions or nationalities — this can give rise to a claim that the state is favoring domestic investors over foreign investors.

These general pronouncements may not be enough. Now is the time for the international community to define new guidelines for emergencies. Right now, governments have the discretion to decide when a taking or expropriation is for a public purpose, but they lack this deference when announcing a state of necessity. When lawmakers have to make quick decisions, they should not have to think about which door to knock down. The standard should be that the state adopted the best way, not the only way, to respond to the crisis. Of course, states cannot cause an emergency and then invoke a state of necessity, and clarifying this standard will deal with any bad actors.

Fixing the parameters of the state of necessity is a good first start, although changes are necessary to ensure that governments can adequately respond. With the many treaties already signed, governments are not immune to the claims that may arise.

Update: This article has been updated to identify author Diego Brian Gosis as a partner and foreign legal consultant at the firm and to identify author Quinn Smith as a managing partner at the firm.

---

Diego Brian Gosis is a partner and foreign legal consultant, Ignacio Torterola is a partner and Quinn Smith is a managing partner at GST LLP.

Disclosure: GST represented Argentina during the 2001 financial crisis.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

For a reprint of this article, please contact reprints@law360.com.