I. Definition and effect
Treaty exclusions (also known as treaty exceptions or escape clauses) are one of the most evolving features of international investment treaties. Pursuant to Article 1.7.1 in the Guide to Practice on R to Treaties adopted by the International Law Commission in 2011, in order to achieve results comparable to those affected by reservations, States and International Organizations may also have recourse to alternative procedures such as “a) the insertion in the treaty of a clause purporting to limit its scope or application”.
Exception clauses are designed to permit a treaty party to lawfully perform its regulatory and legislative functions by taking measures directed towards a specific regulatory purpose, policy, industry or sector that might be conflicting with the interests of foreign investors. Exceptions could be viewed as an insurance policy against the potential of a tribunal making comprehensive interpretations of BIT obligations, by assuring potential claimants and arbitrators that the objective and purpose of the treaty was not merely to protect foreign investments at the expense of the right of the host State to perform its public policy objectives. In short, if a measure falls under exceptions, a State shall be exempt from liability, as they are the ultimate flexibility mechanism or escape clauses for States.
Exceptions have become an increasingly prevalent mechanism in investment treaties appearing progressively in most of the investment treaties concluded between 2011 and 2019. This change in the design of treaties has had an impact on the use of precedents in investment arbitration and eliminated the formal rule of precedents therein.
II. Rationale and aim of treaty exceptions
The rationale behind designing treaty exceptions was to exempt host States from liability towards foreign investors for justifiable measures seeking public welfare objectives on the one hand, while on the other hand, to exclude certain types of measures and/or sectors from the scope of the treaty.
Several States took early measures to make treaty exceptions for the following reasons:
III. Articulating the different forms of exceptions
The clauses usually include the following elements:
ASEAN Comprehensive Investment Agreement, 26 February 2009, Article 17(1)(a); Free Trade Agreement between the Government of New Zealand and the Government of the People's Republic of China, 7 April 2008, Article 11; Croatia - India BIT (2001), 4 May 2001, entered into force on 19 January 2002, Article 12(2); Investment Agreement For the COMESA Common Investment Area, 23 May 2007, Article 22(1); Comprehensive Economic and Trade Agreement between Canada and the European Union, 30 October 2016, Article 28(3); Comprehensive Economic Partnership Agreement between Japan and the Republic of India, 16 February 2011, Article 11(2); Canada - Latvia BIT (2009), 5 May 2009, Article XVII(3).
CC/Devas (Mauritius) Ltd., Devas Employees Mauritius Private Limited, and Telcom Devas Mauritius Limited v. Republic of India, PCA Case No. 2013-09, Award on Jurisdiction and Merits, 25 July 2016, paras. 293, 352-354; Deutsche Telekom v. India, PCA Case No. 2014-10, Interim Award, 13 December 2017, paras. 281, 286, 288, 291; Sempra Energy International v. Argentine Republic, ICSID Case No. ARB/02/16, Decision on the Argentine Republic's Application for Annulment of the Award, 29 June 2010, paras. 187, 204.
Agreement between Japan and the State of Israel for the liberalization, promotion and protection of investments, 1 February 2017, Article 15(2); Chile - Hong Kong, China SAR Investment Agreement, 18 November 2016, Article 6; Canada - Kuwait BIT (2011), 26 September 2011, Article 4; Free Trade Agreement between India and Malaysia, 18 February 2011, Article 12(2), Annexes 12(1-2); Comprehensive Economic Partnership Agreement between Japan and the Republic of India, 16 February 2011, Articles 11, 96; Treaty between the United States of America and the Government of Romania concerning the Reciprocal Encouragement and Protection of Investment, 28 May 1992, Article X.
Mesa Power Group LLC v. Government of Canada, PCA Case No. 2012-17, Award, 24 March 2016, paras. 396-397; InfraRed Environmental Infrastructure GP Limited and others v. Kingdom of Spain, ICSID Case No. ARB/14/12, Award, 2 August 2019, para. 309; Burlington Resources, Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Jurisdiction, 2 June 2010, paras. 205-215, 248-249; RWE Innogy GmbH and RWE Innogy Aersa S.A.U. v. Kingdom of Spain, ICSID Case No. ARB/14/34, Decision on Jurisdiction, Liability, and Certain Issues of Quantum, 30 December 2019, paras. 388-393.
The Energy Charter Treaty, 17 December 1994, Article 21(1); China - Colombia BIT (2008), 22 November 2008, Article 14(3); Comprehensive Economic Partnership Agreement between Japan and the Republic of India, 16 February 2011, Articles 10; Agreement between the Government of Canada and the Government of Burkina Faso for the Promotion and Protection of Investments, 20 April 2015, Articles 14, 17, Annexes (II-III).
Agreement Between Canada and the Czech Republic for the Promotion and Protection of Investments, 6 May 2009, Articles II(3), X(4); Free Trade Agreement between the Eurasian Economic Union and its Member States, of the One Part, and the Socialist Republic of Viet Nam, of the Other Part, 29 May 2015, Articles 8.22(3), 8.33(2).
IV. A question of jurisdiction
Treaty exceptions confront tribunals with a substantive interpretive question if they should be treated as carving out certain State conduct from the scope of the treaty (a question of jurisdiction).14 Accordingly, exceptions determine whether or not a treaty applies as it limits the jurisdiction "ratione materiae" of arbitrators. Contrary to general and security exceptions, carve-outs operate more as jurisdictional matters due to their precise terms for the types of measures and/or industries they exclude from the scope of the treaty.
CMS Gas Transmission Company v. The Argentine Republic, ICSID Case No. ARB/01/8, Decision of the Ad hoc Committee on Argentina's application for annulment, 25 September 2007, para. 129; Continental Casualty Company v. Argentine Republic, ICSID Case No. ARB/03/9, Award, 5 September 2008, paras. 164, 168; Copper Mesa Mining Corporation v. Republic of Ecuador, PCA Case No. 2012-02, Award, 15 March 2016, para. 6.58; CC/Devas (Mauritius) Ltd., Devas Employees Mauritius Private Limited, and Telcom Devas Mauritius Limited v. Republic of India, PCA Case No. 2013-09, Award on Jurisdiction and Merits, 25 July 2016, para. 293.
V. A question of merits
Interpreting exceptions as an affirmative defense justifying prima facie unlawful State conduct (a question of merits). Thus a State relying on exceptions as a defense would be deemed conceding that it had failed to comply with its treaty obligations, but would seek to justify the consequences of its actions by proving that its conduct was permissible within the scope of the exception clause.
Characterizing exceptions as a limitation on the scope of the treaty’s substantive obligations would limit the competence of an arbitral tribunal but would presumably be reviewable under the ICSID or New York Conventions.17 Alternatively, if exceptions are characterized as an affirmative defense on the merits, they would then inevitably fall outside the limited grounds for subsequent annulment or domestic court proceedings.
VI. Interpreting exceptions as an invocation of customary international law
A. Necessity defense (Article 25 ILC)
Lacking a clear definition for the term “Essential Security Exception”18 resulted in an approach of considering the exceptions connected to the state of necessity in customary international law. This approach allowed arbitrators to examine the facts of a dispute in light of the requirements provided in Article 25 ILC.19 Alternatively, another approach abandoning that understanding found that although they share the same purpose and practical effects, exception clauses under BITs cannot however be equated with the state of necessity, on the grounds that they are both different in scope, requirements and legal nature.20
CMS Gas Transmission Company v. The Argentine Republic, ICSID Case No. ARB/01/8, Award, 12 May 2005, paras. 320–324, 329, 355–356, 374; Enron Creditors Recovery Corporation (formerly Enron Corporation) and Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Award, 22 May 2007, paras. 334, 339; Sempra Energy International v. Argentine Republic, ICSID Case No. ARB/02/16, Award, 28 September 2007, paras. 376, 388.
CMS Gas Transmission Company v. The Argentine Republic, ICSID Case No. ARB/01/8, Decision of the Ad hoc Committee on Argentina's application for annulment, 25 September 2007, paras. 129-131; Continental Casualty Company v. Argentine Republic, ICSID Case No. ARB/03/9, Award, 5 September 2008, paras. 164-165, 168; Mobil Exploration and Development Inc. Suc. Argentina and Mobil Argentina S.A. v. Argentine Republic, ICSID Case No. ARB/04/16, Decision on Jurisdiction and Liability, 10 April 2013, para. 1024; CC/Devas (Mauritius) Ltd., Devas Employees Mauritius Private Limited, and Telcom Devas Mauritius Limited v. Republic of India, PCA Case No. 2013-09, Award on Jurisdiction and Merits, 25 July 2016, paras. 228-229, 255-256.
B. Exceptions as "lex specialis" to the state of necessity
Tribunals adopted another similar approach based on considering exceptions as a lex specialis expression of the necessity defense, thus characterizing an exception as an agreement between treaty parties to modify the defense of necessity, allowing the special norm (exceptions) to override the other lex generalis norm (plea of necessity).21
C. Police powers
A similar approach of invoking customary international law in connection with exceptions was adopted by respondent States, arguing that its measures fell within its police powers and under the treaty’s general exceptions. Tribunals reacted differently to such defense by considering general exceptions and police powers as separate defenses.22 Alternatively, general exceptions were considered to exclude the application of police powers (lex specialis).23
Alschner, W. and Hui, K., Missing in Action: General Public Policy Exceptions in Investment Treaties, in Sachs, L., Coleman, J., Johnson L. (eds.), Yearbook on International Investment Law and Policy, Oxford University Press, 2018.
Henckels, C., Scope Limitation or Affirmative Defense? The Purpose and Role of Investment Treaty Exception Clauses, in Paddeu, F. & Bartels, L. (eds.), Exceptions and Defenses in International Law; Society of International Economic Law, 2018.
Newcombe, A., General Exceptions in International Investment Agreements, in Cordonier Segger, M.C., Gehring M.W. and Newcombe, A. (eds.), Sustainable Development in World Investment Law, Alphen Aan Den Rijn, 2011.