Legal Conundrum: The Dilemma of Incorporating General Exceptions in Investment Agreements

By Sandun Batagoda

The entry into force of International Investment Agreements (IIA), to some extent, was conducted with little or no thought of the associated consequences. States realised that IIA encompassed a series of tangible and enforceable obligations, that fettered the State’s regulatory policy space. The reaction of some States was to gradually withdraw from the International Investment Treaty regime, whilst others, somewhat bluntly, resorted to importing the General Exceptions provided in the General Agreement on Tariffs and Trade 1994 (GATT Article XX) and General Agreement on Trade in Services (GATS Article XIV). The process of incorporating diverse language and structures into different treaties serves a common purpose – to strengthen the authority of host States in regulating matters that serve the public interest. Such an objective is evident in recent treaties where the focus is on empowering States to exercise effective regulation for the public interest of their citizens. This blog will first offer an overview on the drawbacks of IIAs and how States have consequently reacted, and will secondly, assess the effects of incorporating GATT/GATS-styled exceptions into investment agreements.

The concern raised against IIAs which hinder a State’s regulatory policy space in different sectors – be it human rights, labour, public health and the preservation of the environment – is not new. In 2008 for example, Professor John Ruggie, the Special Representative of the United Nations Secretary-General, noted that while IIAs “has encouraged investment and trade flows, it has also created instances of imbalances between firms and States that may be detrimental to human rights.” This, together with the concerns raised in regard to the quality and predictability of the awards issued by tribunals, resulted in the IIA regime being questioned on its “legal security, coherence and predictability”. Most importantly, as the world strives to meet sustainable development in the 21^st century, the call to reform IIA and the related dispute settlement mechanisms have been consistent.

Until such a feasible mechanism is implemented, however, States have adopted alternative practices. On the one hand, some States have chosen to challenge awards in the International Centre for Settlement of Investment Disputes (ICSID) annulment committees. While some States have chosen to issue joint interpretations of IIA obligations in relation to their scope or have either developed their own model of IIA identifying its scope clearly (Ex: USA, Canada and Norway). In other words, a considerable number of countries have withdrawn from the International Investment Treaty regime.  

One interesting trend that States have started adopting has been the integration of GATT and GATS styled exceptions. GATT Article XX consists of subparagraphs (a) to (j) which list specific instances that justify a State from implementing a measure which would otherwise be inconsistent with GATT. Such justifications include measures that are necessary to protect public morals, humans, animals or plant life or health, measures necessary to comply with customs regulations, and measures relating to the conservation of exhaustible natural resources. Similar provisions are present under the general exceptions listed under GATS Article XIV. While the exceptions are ideally meant to be in the best interests of the general population, the haphazard incorporation of GATT or GATS-styled General Exceptions presents unique problems to host States.

For example, the direct incorporation of GATT-styled exceptions is implausible, since IIA relates to unique areas of concern. Consider Article XX(g) of the GATT regarding the conservation of exhaustible natural resources. Incorporating this exception to an IIA may result in a conflict of interpretation considering that most international investments by Multi-National Companies are aimed at the appropriation of exhaustible natural resources and the objective of IIAs is to protect such investments. Therefore, certain IIA had deliberately omitted the incorporation of equivalent to Article XX(g) of GATT regarding the conservation of exhaustible natural resources.

Moreover, certain IIAs such as the Agreement between Japan and the Islamic Republic of Iran on Reciprocal Promotion and Protection of Investment signed in 2016 do not clarify the regulatory space provided by the exceptions. This is problematic since a clear bright line cannot be drawn between the legitimate exercise of the State’s police powers and regulatory expropriation of an investment. The significance of this difference is that the legitimate exercise of the State’s police powers may be non-compensatable, however, regulatory expropriation may be compensatable thereby granting investor protection. Although, there is a wide consensus that legitimate regulatory measures are outside the scope of indirect expropriation and that a too far-reaching protection against expropriation should not serve as a de facto substitute for investment insurance, still some opine that any substantial deprivation of the value of an investment operation, regardless of its purposes should be considered expropriatory. Consider the Arbitral Tribunal’s opinion in the case of Saluka Investments BV (The Netherlands) v The Czech Republic, where the Tribunal stated;

“International law has yet to identify in a comprehensive and definitive fashion precisely what regulations are considered ‘permissible’ and ‘commonly accepted’ as falling within the police or regulatory power of States and, thus, non-compensable.”

As a consequence, this would muddle the interpretation of GATT-style exceptions in IIAs since in WTO jurisprudence a successful GATT XX or GATS XIV is a defence. Moreover, a Complainant WTO Member is not entitled to compensation or in the language of the WTO, to the “suspension of concession” and to take retaliatory measures. In short, the nature of the subject matter dealt with by the two areas are distinct, although each can inform and guide the other, the jurisprudence cannot be superimposed. Therefore, the direct importation of GATT-styled exceptions to IIAs might end up being a can of worms than a solution to the regulatory problem in the International Investment Law regime.

The views and opinions expressed in articles submitted to the Comparative Advantage Blog are those of the author and do not necessarily reflect the views of The Moot Court Bench.