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

• Author: Robert Brew
• Position: Dissertation submitted in accordance with the requirements of the Bachelor of Laws (Honours) degree at the University of Canterbury
• Pages: 205-242

205

EXCEPTION CLAUSES IN INTERNATIONAL

INV ESTMENT AGREEMENTS AS A TOOL FOR

APPROPRIATELY BALANCING THE R IGHT TO

REGUL ATE WITH INV ESTMENT PROTECTION

R B *

A

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

review.

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

(GATS).5

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

protection.

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].