Exception clauses in international investment agreements as a tool for appropriately balancing the right to regulate with investment protection

AuthorRobert Brew
PositionDissertation submitted in accordance with the requirements of the Bachelor of Laws (Honours) degree at the University of Canterbury
R B *
Finding an appropriate equilibrium between investment protection and states
regulatory autonomy has long been a vexing problem in international investment
law. In light of genuine problems of uncertainty in international investment
arbitration and growing challenges to the legitimacy of international investment
agreements (IIAs), stakeholders have a mutual interest in ensuring that IIAs
not only full their purpose of protecting foreign investors to the greatest extent
possible, but also better clarify and secure states’ right to regulate for legitimate
objectives, even where this may inhibit investment protection. Appropriately
designed exception clauses allow these aims to be achieved simultaneously. is
paper develops a model exception clause un der which states may dene their policy
objectives and the extent to which they de sire to pursue them, and which precludes
tribunals from subjectively assessing these objectives’ importance during their
analysis. e clause permits states to contradict their substantive IIA obligations
while pursuing a particular objective to the desired extent, provided that they
act in the manner which is least inconsistent with these obligations. A ‘chapeau’
requires that states regulate with no motive of restricting foreign investment as
a goal in itself. e clause is of general application and subject to full tribunal
I. I
Where the ideal balance lies between the interests of investment
protection and states’ right to regulate has long been an intractable problem
in international investment law. Investors’ ability under many international
* Dissertation s ubmitted in accorda nce with the requ irements of the Bachelor of L aws
(Honours) degree at the Unive rsity of Canterbur y. is paper was the priz e-winning e ssay
for the Canterbur y Law Review prize for t he best piece of legal writin g by an undergraduate
student at the Universit y of Canterbury. I would like to express my sinc ere gratitude to Dr
Christia n Riel, who super vised my diss ertation and provide d insightfu l and immensely
helpful comments , ideas and feedba ck throughout the ent ire process of plan ning, draf ting
and writing t he paper.
206 Canterbury Law R eview [Vol 25, 2019]
invest ment ag reements (II As)1 to directly challenge states’ regulatory
measures, through investor-state dispute settlement (ISDS) mechanisms,
enables them to credibly enforce their rights under international investment
law. It also, however, undermines states’ right to regulate i n the public interest,
a fundamental facet of state sovereignty. e uncertainty and inconsistency
characterisi ng international investment jurisprudence have exac erbated states’
concerns about the international investment regime. IIAs appear to have lost
their lustre, with 2017 marking the rst year in which eective terminations
outnumbered new conclusions of IIAs.2 Certain states have voiced their
displeasure by withdrawing from IIAs or withdrawing their consent to
ISDS,3 while others have inserted provisions in II As which assert their right
to regulate. One approach is to include exception clauses within IIAs, often
taking inspiration from the exception clauses of the General Agreement on
Taris and Trade (GATT)4 and the General Agreement on Trade in Services
e function of exception clauses depends on their design and
interpretation, but this paper conceives ‘exception clauses’ as clauses whose
successful invocation precludes a public policy measure from constituting a
breach of a state’s IIA obligations.
Much of the literature on exception clauses in IIAs has concerned
their interpretation by tribunals, particularly in the context of a series of
cases6 relating to Argentina’s invocation of Article XI of the United States-
1 When this pa per refers to ‘IIAs’, this comprises b oth bilateral investment treat ies and other
treaties wit h investment provisions, such a s free trade agre ements with an investme nt chapter.
2 United Nations Conferenc e on Trade and Development World Investm ent Report 2018:
Investment and New Industrial Policies UNCDAT/WIR/2018 at 88.
3 Numerous countries, i ncluding South A frica, Indonesia a nd Ecuador, have termin ated
various of their I IAs, whi le Bolivia, Ecu ador and Venezuela have denounc ed the ICSID
Convention. See Tania Voon and Andre w D Mitchell “Denunciat ion, Termination and
Surviva l: e Interplay of Treaty Law and Internationa l Investment Law” (2016) 31 ICSID
Review 413 at 416–417 and 424– 426.
4 General A greement on Taris and Trade 1994 1867 UNTS 190 (signed 15 April 1994,
entered into force 1 Janua ry 1995) [GATT], art XX.
5 Genera l Agreement on Trade in Servic es 1869 UNTS 183 (signed 15 April 1994, entered into
force 1 Januar y 1995) [GATS], art XI V.
6 CMS Gas Transmissio n Co v Argentina (Award) IC SID ARB/01/8, 12 May 2005 [CMS
Award]; CMS Gas Transmission Co v Argentin a (Decision on Annulme nt) ICSID ARB/01/8,
25 September 2007[CMS Decisi on on Annulment]; LG&E Energ y Corp v Argentina (Decision
on Liability) ICSID A RB/02/1, 3 October 2006 [LG&E Decision on Liability]; Enron C orp v
Argentina (Award) IC SID ARB/01/3, 22 May 2007 [Enron Award]; E nron Corp v Argentina
(Decision on Annul ment) ICSID ARB/01/3, 30 July 2010 [Enron Decision on Annulment ];
Sempra Energ y Internationa l v Argentina (Award) ICSI D ARB/02/16, 28 September 20 07
[Sempra Award]; Sempra Energy In ternational v Arg entina (Decision on Ann ulment) ICSID
ARB/02/16, 29 June 2010 [Sempra Decision on Annulment]; and Continental Casualt y Co v
Argentina (Award) IC SID ARB/03/9, 5 September 2008 [Continental Casualty Award].
Exception Clauses in Inte rnational Investment Agreements as a Tool for 207
Appropriately Balancin g the Right to Regulate with Investment Protect ion
Argentina bilateral investment treat y (BIT) (US-Argentina BIT).7 is paper
seeks, however, to avoid leaving interpretive discretion to tribunals, which
are notorious for diering widely in their analyses. Instead, it examines how
exception clauses may be specically drafted so as to ensure an appropriate
balance between states’ right to regulate in the public interest with the
protection of i nvestors.
Part II considers the competing interests arising in relation to IIAs. It
examines the rationales for protecting foreign investors under IIAs, before
proceeding to examine how IIAs can threaten states’ sovereign right to
regulate in the public interest and discourage states from regulating towards
legitimate ends. It identies the uncertain parameters of the right to regulate
under international investment law as well as some tribunals’ tendency to
weigh and balance non-investment policy objectives against the objective
of investment protection as particular deciencies of the ‘right to regulate’
approaches currently undertaken by tribuna ls. It seeks overall to ascertain the
shared interest of all stakeholders under IIAs in preserving both investment
protection and states’ right to regulate to the greatest extent possible, and the
role which exception clauses can play in this respect.
Part III exami nes various elements of exception clauses whose formulation
aects the ultimate balance between investment protection and states’ right
to regulate in an IIA, with a view to combining this Part’s recommendations
regarding each separate characteristic into a model IIA exception clause. It
rst assesses the list of permissible policy objectives which measures may
pursue in order to be justied under the clause, considering whether this list
should be non-exhaustive and emphasising that any listed objectives should
be specically dened so a s to reduce tribunals’ leeway in interpreting their
meaning. It then examine s the ‘nexus’ requirement, which governs the required
relationship between a measure and a permissible objective in order for the
measure to fall within the clause’s coverage. In doing so, it seeks to dene
dierent nexus formulations so as to determine which should be used in an
IIA exception clause. It then considers whether the clause should include ‘self-
judging’ language, after examining the eect which the use of such language
may have on tribunals’ possible standard of review of an exception clause.
It then questions whether IIA exception clauses should contain a ‘chapeau’
imposing conditions on their use, focusing particularly on the chapeau’s role
in identifying ulterior protectionist motives underlying a measure. Finally, it
considers whether the clause should cover all, or only some, obligations under
an IIA. Par ticularly important considerations throughout this analy sis are the
need to ensure certainty in the clause’s application and to preclude tribunals
from weighing public policy interests against the interest of investment
7 Treaty be tween the United State s of America and t he Argentine Republ ic concerning the
Reciprocal Enc ouragement and Protection of Inves tment 31 ILM 124 (entered into force 20
October 1994) [US-A rgentina BIT].

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