On the Necessity of Necessity Measures: A Response to Alan O. Sykes

Abstract

This comment on Alan Skyes Article "Economic ‘Necessity in International Law" on AJIL UNBOUND discusses the application of necessity clauses from an economic perspective especially in light of the incentives of investors, who are the third party beneficiaries of the investment treaty/contract. It highlights the lack of expertise of arbitrators who are not well-positioned to make complex economic determinations and thus argues for a middle ground between full deference and strict scrutiny. It is submitted that a tribunal should apply a good faith standard or outsource the decision on economic measures to an expert body. Most importantly, there is reason to doubt the optimality of an across-the-board rule as is used currently, as opposed to a contextualized approach. The comment calls for differentiation based on the behavior of the investor and the further circumstances of the host state in order to avoid risks of moral hazard and spells out the relevant criteria for doing so.

Keywords: necessity clause, investment, behavioral economics, moral hazard, arbitrators, international law