POSTGRADUATE LAW COURSE

INTERNATIONAL INVESTMENT LAW – SUMMATIVE

ASSESSMENT

GENERAL & SECURITY EXCEPTION CLAUSES:

An Escape Tool or Permitted Derogations?

EXAM NUMBER: B B236260

COURSE CODE: 111131

QUESTION NUMBER: Q Q1

WORD COUNT: 4 4784

 TABLE OF CONTENTS
I. INTRODUCTION .................................................................................................................................... 1

II. UNDERSTANDING EXCEPTION CLAUSES................................................................................................. 2

A. DEFINING EXCEPTION CLAUSES .........................................................................................................................2

B. GENERAL EXCEPTIONS AND SECURITY EXCEPTIONS ...............................................................................................3
C. THE NEED FOR EXCEPTION CLAUSES ..................................................................................................................4

III. AN UNEASY BALANCE B/W STATE SOVEREIGNTY AND INVESTOR RIGHTS .............................................. 5

IV. ANALYTICAL CHARACTERISATION OF EXCEPTION CLAUSES .................................................................... 6

A. EXCEPTIONS: A PERMISSION OR A DEFENCE? .......................................................................................................6

B. CARVE OUTS V. EXCEPTION CLAUSES .................................................................................................................6
C. “NECESSITY” THE KEY TO INTERPRETATION ..........................................................................................................7

V. DEFENCES UNDER INVESTMENT TREATIES V/S CUSTOMARY INTERNATIONAL LAW ............................... 8

A. SCOPE OF DEFENCES ......................................................................................................................................9

B. ULTIMATE GOAL OF THE DEFENCES ...................................................................................................................9
C. SOURCE OF LAW ..........................................................................................................................................10

VI. STRUCTURE & FRAMEWORK OF EXCEPTION CLAUSES ......................................................................... 10

A. NEXUS REQUIREMENT ..................................................................................................................................11

B. PERMISSIBLE OBJECTIVES ..............................................................................................................................11

VII. CASE LAWS ANALYSIS: AS A TOOL FOR INTERPRETATION ................................................................ 11

VIII. IMPLICATIONS ................................................................................................................................ 13

A. NORMATIVE IMPLICATIONS OF “PERMISSION” V. “DEFENCE” DEBATE ......................................................................13

B. BURDEN OF PROOF ......................................................................................................................................14

IX. CONCLUSION ...................................................................................................................................... 15

X. BIBLIOGRAPHY ................................................................................................................................... 16

A. JOURNAL ARTICLES ......................................................................................................................................16

B. TREATIES ....................................................................................................................................................16
C. INTERNET SOURCES ......................................................................................................................................17
D. CASES .......................................................................................................................................................18
 Page 1 of 18

GENERAL & SECURITY EXCEPTION CLAUSES:

An Escape Tool or Permitted Derogations?

I. Introduction

One of the biggest complexities in international investment law has to be the attempt to
find a balance between the rights being offered to the foreign investors to safeguard their
investments in a foreign land, as against the host state’s autonomy to regulate and retain
sovereignty.1 One way the states address this issue is by including general and security
exception clauses in investment treaties, which leave room for the host states to regulate
and deviate from their substantive obligations therein, to account for future exigencies in
the interest of state or its public.2 Therefore, it is of utmost importance that these exception
clauses are very carefully interpreted.

In this paper, the author aims to delve into one such unique interpretations by Caroline
Henckels in her paper, where she attempts to interpret the analytical characteristics of
exception clauses by distinguishing them from carve outs.3 This argument triggers the
age-old debate of exception clauses operating as defences and not mere permissions.
While this paper agrees that interpretation of exception clauses as “permissions” or
“defences” have direct normative and practical implications on its usage4, distinguishing
carve outs from general exception clauses is not the way to establish it. General
exceptions are in fact open ended carve outs, and therefore this paper takes an
alternative approach which may be better suited to analyse the general and security
exception clauses – distinguishing between the scope of defences available to states
under customary international law and investment treaties, and its implications.

1
Robert Brew, “Exception Clauses in International Investment Agreements as a Tool for Appropriately
Balancing the Right to Regulate with Investment Protection” (2019) 25 CLR 205.
2
Ibid.
3
Caroline Henckels, “Permission to Act: The Legal Character of General and Security Exceptions in
International Trade and Investment Law” (2020) 69 British Institute of International and Comparative Law
557.
4
Ibid.
 Page 2 of 18

By delving into this analysis, the paper intends to establish (i) whether exception clauses
operate as permissions in favour of the host state and enable deviation from the
obligations set in the investment treaties, or act as defences that allow the states to
undertake any measure in contradiction with the investment treaty without any regulatory
authorisation, which may then be approved ex post facto by the courts5; and (ii) the
normative and practical implications of such characterisation on their interpretation.

II. Understanding Exception Clauses

A. Defining Exception Clauses

An exception clause is a formulation of two main elements: (i) existence of an obligation;

and (ii) a derogation from such obligation in specific circumstances.6 General exception
clauses were not commonly used in investment treaties, in fact the draft discussion paper
prepared for the 8th WTO Annual Conference identifies that “of more than 2800
International Investment Agreements, perhaps only 25 – 30 contain general exception
clauses similar to that of GATT.”7 However, this is not to say that investment treaties don’t
contain exceptions, almost all investment treaties include security exceptions, and their
right to regulate for the benefit of public order, taxation purposes, etc.8 These clauses
seem to be more specific in comparison to those under GATT. Interpretation of general
exception clauses in investment treaties is therefore a cumbersome process, firstly,
because the clauses are inconsistent across states, secondly, while the language seems
to be inspired from international customary law, it needs to be considered in isolation, and
lastly, exception clauses in investment treaties have become popular only recently,
therefore the jurisprudence around them is still evolving, and exception clauses in
investment treaties have relatively larger impacts on both the host state as well as the
foreign investors.9

5
Caroline Henckels, “Scope Limitation or Affirmative Defence? The Purpose and Role of Investment Treaty
Exception Clauses” (2020) in Lorand Bartels, and Federica Paddeu (eds), Exceptions in International Law
(Oxford Online edition Oxford Academic, 20 August 2020).
6
Henckels, “Permission to Act” (n 3)
7
Andrew Newcombe, “General Exceptions in International Investment Agreements” (2008) (Draft
Discussion Paper, BIICL Eighth Annual WTO Conference)
https://www.biicl.org/files/3866_andrew_newcombe.pdf accessed on 7th January 2024.
8
Ibid.
9
Ibid.
 Page 3 of 18

B. General Exceptions and Security Exceptions

Even within the ambit of exception clauses, general exception clauses differ from security
exception clauses. Due to the extreme nature in which the latter is invoked, security
exceptions offer greater discretion to the states when compared to general exceptions.10
Security exceptions are often characterised as self-judging clauses that either include
explicit wording such as “it considers necessary”11 or implied language such as – “This
Treaty shall not preclude the application by either Party of measures necessary for…...
the Protection of its own essential security interests”.12

On the other hand, general exception clauses are usually drafted as non-obstante
clauses.13 These restrictions require the state to have a nexus between the measure
undertaken by them and the permissible object in the relevant clause. For instance, the
Canada – Slovakia Republic Bilateral Investment Treaty (BIT) states that “Subject to the
requirement that such measures are not applied in a manner that would constitute
arbitrary or unjustifiable discrimination … nothing in this Agreement shall be construed to
prevent a Contracting Party from adopting or enforcing measures necessary…to (i)
protect human, animal or plant life or health; (b) to ensure compliance with laws and
regulations that are not inconsistent with the provisions of this Agreement; or (c) for the
conservation of living or non-living exhaustible natural resources”.14

It can be seen that both the clauses are contingent on necessity, however, even though
the general exception clause is significantly wider in scope, it is still subject to certain
restrictions. Security exception clause to the contrary is more open ended and defers
more discretion to the host state’s judgment. However, both general and security
exception clauses have the implication of limiting the scope of tribunals’ review.15

10
Henckels, “Permission to Act” (n 3).
11
Mohammad Ali Bahmaei and Habib Sabzevari, “Self-Judging Security Exception Clauses as a kind of
Carte Blanche in Investment Treaties: Nature, Effect and Proper Standard of Review” [2022] 13 AJIL, 97 –
123.
12
Treaty between the United States of America and the Argentine Republic concerning the Reciprocal
Encouragement and Protection of Investment (Argentina – United States) (adopted on 14 November 1991,
entered into force on 20 October 1994) Art XI.
13
Henckels, “Permission to Act” (n 3).
14
Agreement between Canada and The Slovak Republic for the Promotion and Protection of Investments
(Canada – Slovakia) (adopted on 20 July 2010, entered into force on 14 March 2012) Art IX.
15
Bahmaei and Sabzevari (n 11).
 Page 4 of 18

C. The Need for Exception Clauses

While looking at investment opportunities, foreign investors put in extensive efforts, time,
and capital. To ensure proportional returns on the investment, they consider multiple
factors before starting an investment in any foreign state. Factors such as changes in
governmental policies, political environment, change in law, etc., can leave the investment
subjected to extreme vulnerability. In order to mitigate these risks, parties enter into
investment agreements, wherein substantial obligations are imposed on the host states
that grant protection to the foreign investors.

The benefits of foreign investments are not one sided, states look forward to receiving
foreign investment as it has a positive impact on their economic growth and
globalisation.16 This incentivises the states to offer protections to the investors. However,
states are of course hesitant in these rights restricting their regulatory autonomy. To
balance out this position, parties include exception clauses to the obligations imposed on
states in the investment treaties for achieving legitimate objectives.17

Rules, and establishing exceptions to such rules are a customary practice in any field of
law, including international investment law.18 The purpose of including a general exception
and security clause in an investment treaty is mainly twofold: (i) exception clauses
account for unforeseeable future exigencies, wherein the host states are allowed to
deviate from obligations under special circumstances allowing regulatory flexibility for the
host states; and (ii) while open textured, these clauses dawn upon the parties a sense of
legal certainty as to the situations wherein such deviation may occur.19 Interpretation of
these exception clauses is of utmost importance to understand the true purpose, scope,

16
Gabriele Gagliani, “The Interpretation of General Exceptions in International Trade and Investment Law:
Is Sustainable Development Interpretive Approach Possible?” (2015) 43 DJILP 559.
17
Brew, (n 1)
18
Henckels, “Permission to Act” (n 3)
19
Levent Sabanogullari, “The Merits of General Exception Clauses in Contemporary Investment Treaty
Practice” (International Institute for Sustainable Development, 2015)
https://www.iisd.org/itn/en/2015/05/21/the-merits-and-limitations-of-general-exception-clauses-in-
contemporary-investment-treaty-
practice/#:~:text=The%20rationales%20for%20including%20general,international%20liability%20for%20t
heir%20actions accessed 31st December 2024.
 Page 5 of 18

and limitations of the relevant rule.20 Further, it is extremely important to interpret what
these “legitimate” or “necessary” circumstances are wherein the states can invoke these
exceptions.

III. An Uneasy Balance b/w State Sovereignty and Investor Rights

Perhaps the complex relationship between state sovereignty and protection of foreign
investor rights can be best understood by briefly analysing a famous case involving a
similar dispute - Philip Morris Asia Limited v. The Commonwealth of Australia.21 In order
to implement tobacco control measures, Australia enacted the Tobacco Plain Packaging
Act in 2011 (TPPA), legislating the removal of brands from all cigarette packaging. Philips
Morris Asia Limited, one of the largest tobacco manufacturing companies, with a
subsidiary in Australia, immediately served a notice of arbitration against Australia under
the Hong Kong - Australia Bilateral Investment Treaty for claiming that removal of brand
names from cigarette packaging amounted to expropriation of their intellectual property
rights.22 Please note that the case dealt with various claims on expropriation,
restructuring, etc. However, the aim of citing this case in the current paper is to use it as
a case study of the difficulties arbitrators may face while deciding between a host states
regulatory autonomy as against the rights granted to foreign investors under investment
agreements. In the current case, Australia had to enact the TPPA as a public health safety
measure at the cost of such enactment impacting the foreign investment by Philip Morris.
After considering the arguments extended by both the parties on various grounds, the
tribunal ruled in favour of the state enactment, upholding the state’s right to regulate in
favour of public health, even if it meant negatively impacting the foreign investments and
deviation from their obligations towards the foreign investors. This is only one of the many
disputes that show the complexity of the relationship. It is very important for the states to
protect the inflow of foreign investments to ensure its economic growth. This can be done
by incentivising foreign investors by including solid and clear safeguarding mechanisms
in investment treaties. However, the need to attract foreign investment by offering

20
Henckels, “Permission to Act” (n 3).
21
Philip Morris Asia Limited v. The Commonwealth of Australia, PCA Case No. 2012-12, Award (17
December 2015).
22
Inaê Siqueira De Oliveira, “Corporate restructuring and abuse of rights: PCA tribunal deems Philip
Morris’s claims against Australia’s tobacco plain packaging rules inadmissible” (International Institute for
Sustainable Development, 2016) https://www.iisd.org/itn/en/2016/08/10/philip-morris-asia-limited-v-the-
commonwealth-of-australia-pca-case-no-2012-12/ accessed 31st December 2024.
 Page 6 of 18

investors substantial rights cannot override the host states right to tamper with or deviate
from the obligations for legitimate objectives.23

IV. Analytical Characterisation of Exception Clauses

A. Exceptions: A permission or a defence?

In order to analyse exception clauses analytically, it is important to theorise how one

perceives these clauses. One way to look at it would be by considering these clauses as
permissions, by virtue of which the exception clause limits the obligations of the host state
in the treaty by allowing deviations in legitimate circumstances. On the other hand, if an
exception clause is considered a ‘defence’, the interpretation would then suggest that the
state failed to comply with the treaty and is then justifying such failure ex – post facto and
would be deferring the judgment to the tribunals and courts for its legitimacy.24

B. Carve outs v. Exception Clauses

Carloine Henckles argues in her paper that it may be easier to discern the analytical
nature of exception clauses by differentiating them from carve outs, which are more
specific in nature. In later paragraphs she also acknowledges that the differentiation
between carve outs and exception clauses is in fact not always clear cut.25 This paper
agrees with the latter argument, considering that the ultimate aim of carve outs and
exception clauses is to set conditions which form exceptions to the established rules.
Exception clauses are simply carve-outs with a wider scope of discretion conferred on the
host states to ensure they retain their right to regulate under exceptional circumstances.
Instead, the analytical character of exception clauses should be determined by (i)
analysing factors that are important in establishing nexus between states measures and
permissible objectives – such as “necessity”; and (ii) distinguishing between the scope of
defences under customary international law and investment treaties.

23
Brew, (n 1).
24
Henckels, (n 3).
25
Ibid.
 Page 7 of 18

C. “Necessity” the key to interpretation

Exception clauses usually contain the term “necessary” or similar language that creates
a nexus requirement between the measures undertaken by the state and the permissible
objectives set out in the relevant clause. However, investment agreements and treaties
rarely go into defining the scope of the term “necessary”, leaving it very open textured
and subject to multiple interpretations. Some tribunals have therefore referred to the
customary international law and the WTO law to support their holdings.26

International Law Commissions Draft Articles define “necessity” as follows:

“1. Necessity may not be invoked by a State as a ground for precluding the wrongfulness
of an act not in conformity with an international obligation of that State unless the act:
(a) is the only way for the State to safeguard an essential interest against a grave and
imminent peril; and
(b) does not seriously impair an essential interest of the State or States towards which
the obligation exists, or of the international community as a whole.
2. In any case, necessity may not be invoked by a State as a ground for precluding
wrongfulness if:
(a) the international obligation in question excludes the possibility of invoking necessity;
or
(b) the State has contributed to the situation of necessity.”27

The commentary of the draft articles tries to clarify it further by explaining that “the term
“necessity” is used to denote those exceptional cases where the only way a State can
safeguard an essential interest threatened by a grave and imminent peril is, for the time
being, not to perform some other international obligation of lesser weight or urgency.
Under conditions narrowly defined in article 25, such a plea is recognized as a
circumstance precluding wrongfulness.”28

26
Brew, (n 1).
27
Draft Articles on Responsibility of States for Internationally Wrongful Acts, with commentaries (adopted
in 2001) ILC Art 25
28
Ibid Art 25, commentary (1)
 Page 8 of 18

However, even in the current definition, the only factor that helps in removing the
subjectivity around the term “necessary” is probably the inclusion of the words “only way”,
which I believe may be rather unhelpful, considering that the states may be restricted from
taking more adept measures and would be forced into undertaking measures that are
probably “lawful” but have a much lesser impact. Even the annulment committee in one
of the cases expressed the problem with “only way” being interpreted strictly, and that it
may prohibit a state from adopting an unlawful measure likely to achieve an objective
where it could adopt a lawful measure with a significantly lower likelihood, but still some
prospect, of doing so.29

It is however pertinent to note that many tribunals have identified the need to separate
the scope of defences under international customary law and the investment treaties30.
The defences under customary international law are there for the states to invoke
irrespective of their inclusion in the investment treaties. The very fact that they have been
included in the treaties would imply that the courts and tribunals are to interpret the clause
along with the main objective of the investment treaty.

Therefore, to establish certainty, it becomes important to analyse how the tribunals have
interpreted necessity and other relevant factors in cases of investor-state disputes.
Please refer to Part VI of this paper for a detailed analysis on this.

V. Defences under Investment Treaties v/s Customary International

Law

Instead of distinguishing carve outs from general and security exception clauses to
interpret their analytical character, this paper uses an alternative approach of drawing a
line of distinction between the scope of defences available to the states under
international customary law as against the investment treaties. Both these sources of law
have one common ground – by the invocation of the available defences, the states

29
Enron Corp v Argentina, ICSID ARB/01/3 (Award on 22 May 2007)
30
Continental Casualty Company v The Argentina Republic, ICSID Case No. ARB/03/9 (Award on 5
September 2008)
 Page 9 of 18

preclude wrongfulness and avoid liability in certain circumstances.31 It is important to

understand the difference between these defences to analyse the scope of their
application.

A. Scope of Defences

It is important to note that the defences available to states under customary international
law are applicable to all states and are not structured to suit any particular host state.
Therefore, while the defences that can be invoked are open textured, the number of
defences available under the customary international law are limited and act as ex post
facto defences for any state action. To the contrary, states enter into investment treaties
with the aim of protecting foreign investments, and exception clauses act as a protective
mechanism in favour of the state by enabling them to deviate from their identified
obligations under the treaty in certain circumstances. Exception clauses here in fact seem
like “permissions” to derogate from their obligations in circumstances identified under the
relevant clause and agreed to by the parties.

B. Ultimate Goal of the Defences

It is also pertinent to understand what the defences under both these sources are aimed
at achieving. For instance, defences under customary law act as the ultimate layer of
defence available to the states to protect their interest in exceptional circumstances and
can be justified by the state post commission of an act, as long as they fall within the
ambit of those defences. To the contrary, defences available as exception clauses in
investment treaties are simply permissions that the parties have agreed to as acceptable
derogations by the host states in specific circumstances. The aim of these clauses is
twofold: (i) to ensure that the states have regulatory flexibility that overrides their
obligations in the investment treaty; and (ii) establish clarity for all parties on when such
derogation is permissible. Therefore, while the defences under customary international
law can pose wider discretion on the states, it is of utmost importance that while the

31
William W. Burke-White and Andreas von Staden, "Investment Protection in Extraordinary Times: The
Interpretation and Application of Non-Precluded Measures Provisions in Bilateral Investment Treaties
(2008) 48 VJIL 309.
 Page 10 of 18

tribunals interpret exception clauses in the investment treaties, they consider the objective
of the treaty and the intent of the parties while drafting the exception clause.

C. Source of Law

International customary law is a secondary source of law that can be invoked post
occurrence of an event, treaty law is in fact a primary legal source that defines the conduct
of the parties, including when derogation of specific obligations is permitted.32 Exception
clauses act as lex specialis rules between the parties of a treaty.33

When the above factors are taken into consideration, it can be established that the scope
of exception clauses in treaties differ significantly from the defences available to the states
under customary international law. It is also pertinent to understand that the exception
clauses are heavily negotiated clauses, that are consented by all the parties to the
investment treaty. The consent of parties, and agreement on derogation of states from
their obligations in specific circumstances makes it a permissive clause to begin with. If
exception clauses were to be viewed as defences, it would make very little sense, as
these rights are already available to the host states under customary law. The Appellate
Body rightly held that “interpretation must give meaning and effect to all the terms of a
treaty. An interpreter is not free to adopt a reading that would result in reducing whole
clauses or paragraphs of a treaty to redundancy or in utility.” To give effect to the
investment treaty disregarding the motive of protecting foreign investment would make
the whole process of executing an investment treaty redundant.34

VI. Structure & Framework of Exception Clauses

While the drafting of an exception clause varies in each treaty, it is very important to
analyse the framework of these clauses by analysisng the nexus between the measures
undertaken by the state and the objectives that are permissible under the exception
clause in a relevant treaty.

32
Ibid.
33
ILC Draft Articles (n 27) Art 55.
34
White and Staden, (n 31).
 Page 11 of 18

A. Nexus Requirement

The nexus requirement establishes the need for a state to undertake measures, that are
otherwise considered a breach of their obligations (if not for the exception clause), to be
in nexus or in relation with the permissible objectives specified. Interpretation of the extent
of nexus requirement in an exception clause would depend on the language used to draft
the clause. This differs across treaties. For instance, usage of language such as
“measures necessary for”35, “except for measures”36, “required” to undertake or “have to
be” undertaken to achieve specified permissible measures would connote a stricter
requirement of establishing a potent reasoning for the state to have undertaken such
measure.37

B. Permissible Objectives

To protect a state’s right to regulate, host states include certain permissible objectives in
exception clauses, which if applicable, would allow the state to deflect from its obligations
towards the investor(s). Therefore, due to the power these permissible objectives confer
on the states, in the interest of foreign investors and for general purposes of clarity, it is
important that the boundaries for these objectives are clearly identified. Of course, each
state has different objectives that it would want to include, however some of the most
commonly included permissible objectives are that of public order, public health, public
morality, and security and emergency measures.38

VII. Case Laws Analysis: As a Tool for Interpretation

Tribunals deciding investment cases never really delved into interpreting the analytical
characterisation of the exception clauses in an investment treaty, however based on the

35
Treaty between the United States of America and the Republic of Panama concerning and protection of
the Investment (United States of America – Panama) (adopted on 27 October 1982, entered into force on
30 May 1991) Art X
36
Agreement between the Belgo-Luxemburg Economic Union and the United Mexican States on the
Reciprocal Promotion and Protection of Investments (BLEU – Mexico) (adopted on 27 August 1998, entered
into force on 20 March 2003)
37
White and Staden, (n 31).
38
Ibid.
 Page 12 of 18

holdings in majority of the cases, it seems like the tribunals are inclined towards treating
exception clauses as ex – post facto defences for the host states.39

For instance, in CMS v Argentina40 - CMS, a US corporation, had entered into a bilateral
investment treaty with Argentina for protection of its investment in an Argentinian
company (TGN).41 During the economic crisis in late 1990s, Argentina invoked several
measures that temporarily suspended and eventually terminated TGN’s right to calculate
revenue in US currency and make any inflation adjustments.42 Eventually, CMS raised
claims against Argentina for breach of its substantial obligations under the treaty. The
annulment committee held that if the state invokes and is successfully granted the
defence of “necessity”, the state would be dissolved from paying any compensation to the
plaintiff and further stated that “Article XI (necessity), if and for so long as it applied,
excluded the operation of the substantive provisions of the BIT.”43

In another dispute between CC Devas v India44 the tribunal upheld the decision in the
CMS v Argentina case and stated that application of an exception clause in an investment
treaty excluded the operations of the substantive obligations therein.45

Another case where the tribunals seemed to prioritise states right to regulate over investor
rights was that of Bear Creek v Peru.46 To justify its revocation of mining rights given to
Bear Creek, Peru invoked the defence of police powers. The tribunal was of the view that
the police powers held by the state in fact qualified as an exception to a breach under the
free trade agreement between Canada and the Republic of Peru.47

39
Henckles, “Permission to Act” (n 3).
40
CMS Gas Transmission Company v. The Republic of Argentina, ICSID Case No. ARB/01/8, Decision of
the Ad Hoc Annulment Committee (25 September 2007).
41
Ibid.
42
Sergey Ripinsky and Kevin Williams, “Case summary - CMS Gas Transmission Company v Argentina” in
(Damages in International Investment Law (BIICL,2008))
https://www.biicl.org/files/3913_2005_cms_v_argentina.pdf accessed on 1 January 2024.
43
Ibid.
44
CC Devas v India, PCA Case No. 2013-09, Award on Jurisdiction and Merits (25 July 2016) [293].
45
Ibid; CMS v. Argentina (n 40) [149]
46
Bear Creek Mining Corporation v Republic of Peru, ICSID Case No. ARB/14/2, Award (30 November
2017).
47
Stephanie Schacherer, “Bear Creek v Peru” (2018) (International Investment Law and Sustainable
Development: Key cases from the 2010s) https://www.iisd.org/itn/en/2018/10/18/bear-creek-v-peru/
accessed on 1 January 2024.
 Page 13 of 18

Very relevant to the passage first cited in this paper, on differentiating exceptions from
carve outs, by Caroline Henckels, the tribunal in Mobil v Argentina, actually referred to
the exception clause as a ‘carve out’ that has the effect of limiting the extent of obligations
extended to the states under the treaty and excluding such obligations in cases which
came under the purview of the relevant clause.48

VIII. Implications

A. Normative implications of “permission” v. “defence” debate

Interpretation of exception clauses in holdings of investor – state disputes clearly establish

that the courts and tribunals have not paid much attention to the characterisation of
exception clauses and have based their holdings on whether there was a nexus between
the measures undertaken by the state and the permissible objectives of the relevant
clause. This is perhaps because of the recent development of exception clauses in
investment treaties.49 However, based on the decided cases, it can be inferred that
exception clauses, in most cases have been inclined to be treated as affirmative defences
that limit state obligations towards the foreign investors under legitimate circumstances.50
One may argue that interpreting exception clauses as ‘permissions’ or ‘defences’ is
merely a topic of jurisprudential debate on paper. Perhaps, this could be better explained
with an example: In all the claims raised against Argentina by the United States during
the economic crisis in the late 1990s, the most commonly invoked defence by Argentina
was that of necessity. The tribunals in majority of these disputes were of the opinion that
if the defence of necessity is invoked and justified, the state was automatically excused
from performing its substantial obligations under the treaty, making the exception clause
an ex-post facto defence. However, even if one were to consider the exception clause
being characterised as a permission, the outcome of the cases wouldn’t change. Caroline
Henckels argues in her paper that characterisation of an exception clause as an
affirmative defence would mean that “that all government action negatively impacting on
international trade or investment (as the case may be) is proscribed unless it falls within
the ambit of the exception, as so judged ex post facto.”51 Any measure undertaken by the

48
Henckels, “Scope Limitation or Affirmative Defence” (n 5) 372.
49
Ibid.
50
Ibid.
51
Henckels, “Permission to Act” (n 3) 562.
 Page 14 of 18

state that is disputed by the investors, is in fact judged ex-post facto by the tribunals.
However, it is important to note that while a case may be justified as both “permission” or
a “defence”, the analytical characterisation becomes important to assess how the courts
are to interpret the exception clauses. This is where differentiating the scope of defences
under treaties as against customary international law becomes important. The tribunals
will be required to read the exception clause, keeping in mind the objective of foreign
investment protection of the treaty. She further states that “one can surmise that it will be
more politically acceptable for government action taken in relation to the subject matter
of the exception to lie outside the scope of the treaty obligations, rather than to be
inconsistent with those obligations until successfully defended.”52 One cannot deny the
fact that a liberal interpretation of an exception clause will result in nullifying the
preliminary objective of the treaty in the first place. Considering that both the investors
and host states could be potentially impacted and need to be equally cautious, the ideal
way for courts to interpret exception clauses in investment treaties would be by
interpreting these exception clauses in line with the objective of the treaty and assessing
whether the deviation by states in fact forms part of such agreed exception between the
parties.

B. Burden of Proof

The author is in complete agreement with Caroline Henckels argument that “Viewing an
exception as an affirmative defence (or as a lex specialis manifestation of the necessity
defence) would place the burden on the respondent state to prove that the exception
applied.”53 It is a de facto principle of common law, that the burden of proof in most cases
rests on the plaintiff. Given the special circumstances of exception clauses in investment
law, it seems highly unfair to place the burden of proof on the investors. It is pertinent to
note that even when characterised as a “permission”, the investors having to prove that
there is no nexus between the measures undertaken by the state and permissible
objectives given in the treaty is a difficult position to be in. However, when a measure is
so extreme that it may qualify as an affirmative defence mechanism that is completely in
contradiction with the treaty, it becomes even more difficult for the investor to prove so.
One of the most commonly invoked defence by the state is that of “necessity”, and as

52
Ibid.
53
Henckels, “Scope Limitation or Affirmative Defence” (n 5) 372.
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discussed above, one of the factors of interpreting necessity is that it has to be the “only
way” that the state could have resolved the relevant issue. It seems bizzare for an
investor, who probably has no access to confidential information or alternative ways in
which the state could have tackled the issue to prove so. To counter this complexity,
depending on the circumstances of the case, either the burden of proof should be placed
on the states as was done in Continental v Argentina54 or employ a mechanism wherein
they set lower standard of evidence to be submitted by the investors, sufficiency of which
could then trigger the state justifying its actions.

IX. Conclusion

The interpretation by the courts of exception clauses seem to indicate that they are being
used as affirmative defence mechanisms for the host states. This is probably because the
courts haven’t delved into understanding the normative and practical implications of the
interpretation of these exception clauses. The ultimate aim of the investment treaties is to
protect foreign investments, in order to promote economic efficiency of the states.
However, the obligations on host states in favour of investors, of course cannot limit the
states from regulating their authority in legitimate circumstances, and exception clauses
under investment treaties are aimed to create an equilibrium between these two
objectives. Exception clauses are agreed to by the parties before executing an investment
treaty. Therefore, they act as “permissions” to deviate from their obligations under certain
circumstances that have been consented to by the parties. Considering the importance
of these deviation clauses, the parties should try and clarify the language in an exception
clause to define exactly what is permissible. However, as we know that the idea behind
exception clauses is to protect states right to regulate in unforeseen circumstances, the
clauses may not be able to capture each situation and extent of deviation permitted. In
such cases, courts should be the best judges to see whether such a deviation was
warranted and if the exception clause permits such deviation based on the objective of
the investment treaty and the intent of the parties that drafted such clause.

54
Continental Casualty Company v The Argentina Republic, ICSID Case No. ARB/03/9 (Award on 5
September 2008)
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X. Bibliography

A. Journal Articles

1. Brew R, “Exception Clauses in International Investment Agreements as a Tool

for Appropriately Balancing the Right to Regulate with Investment Protection”
(2019) 25 CLR 205.
2. Henckels C, “Permission to Act: The Legal Character of General and Security
Exceptions in International Trade and Investment Law” (2020) 69 British
Institute of International and Comparative Law 557.
3. Henckels C, “Scope Limitation or Affirmative Defence? The Purpose and Role
of Investment Treaty Exception Clauses” (2020) in Lorand Bartels, and
Federica Paddeu (eds), Exceptions in International Law (Oxford Online edition
Oxford Academic, 20 Aug. 2020)
4. Bahmaei MA and Sabzevari H, “Self-Judging Security Exception Clauses as a
kind of Carte Blanche in Investment Treaties: Nature, Effect and Proper
Standard of Review” [2022] 13 AJIL, 97 – 123.
5. Gagliani G, “The Interpretation of General Exceptions in International Trade and
Investment Law: Is Sustainable Development Interpretive Approach Possible?”
(2015) 43 DJILP 559.
6. White WWB and Staden AV, "Investment Protection in Extraordinary Times:
The Interpretation and Application of Non-Precluded Measures Provisions in
Bilateral Investment Treaties" (2008) 48 VJIL 309.

B. Treaties

1. Treaty between the United States of America and the Argentine Republic
concerning the Reciprocal Encouragement and Protection of Investment
(Argentina – United States) (adopted on 14 November 1991, entered into force
on 20 October 1994).
2. Agreement between Canada and The Slovak Republic for the Promotion and
Protection of Investments (Canada – Slovakia) (adopted on 20 July 2010,
entered into force on 14 March 2012).
 Page 17 of 18

3. Draft Articles on Responsibility of States for Internationally Wrongful Acts, with

commentaries (adopted in 2001) ILC.
4. Treaty between the United States of America and the Republic of Panama
concerning and protection of the Investment (United States of America –
Panama) (adopted on 27 October 1982, entered into force on 30 May 1991).
5. Agreement between the Belgo-Luxemburg Economic Union and the United
Mexican States on the Reciprocal Promotion and Protection of Investments
(BLEU – Mexico) (adopted on 27 August 1998, entered into force on 20 March
2003).

C. Internet Sources

1. Newcombe A, “General Exceptions in International Investment Agreements”

(2008) (Draft Discussion Paper, BIICL Eighth Annual WTO Conference)
https://www.biicl.org/files/3866_andrew_newcombe.pdf accessed on 7th
January 2024.
2. Sabanogullari L, “The Merits of General Exception Clauses in Contemporary
Investment Treaty Practice” (International Institute for Sustainable
Development, 2015) https://www.iisd.org/itn/en/2015/05/21/the-merits-and-
limitations-of-general-exception-clauses-in-contemporary-investment-treaty-
practice/#:~:text=The%20rationales%20for%20including%20general,internatio
nal%20liability%20for%20their%20actions accessed 31st December 2024.
3. Oliveira ISD, “Corporate restructuring and abuse of rights: PCA tribunal deems
Philip Morris’s claims against Australia’s tobacco plain packaging rules
inadmissible” (International Institute for Sustainable Development, 2016)
https://www.iisd.org/itn/en/2016/08/10/philip-morris-asia-limited-v-the-
commonwealth-of-australia-pca-case-no-2012-12/ accessed 31st December
2024.
4. Ripinsky S and Williams K, “Case summary - CMS Gas Transmission Company
v Argentina” in (Damages in International Investment Law (BIICL,2008))
https://www.biicl.org/files/3913_2005_cms_v_argentina.pdf accessed on 1
January 2024
5. Schacherer S, “Bear Creek v Peru” (2018) (International Investment Law and
Sustainable Development: Key cases from the 2010s)
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https://www.iisd.org/itn/en/2018/10/18/bear-creek-v-peru/ accessed on 1
January 2024

D. Cases

1. Philip Morris Asia Limited v. The Commonwealth of Australia, PCA Case No.
2012-12, Award (17 December 2015).
2. Enron Corp v Argentina, ICSID ARB/01/3 (Award on 22 May 2007)
3. CMS Gas Transmission Company v. The Republic of Argentina, ICSID Case
No. ARB/01/8, Decision of the Ad Hoc Annulment Committee (25 September
2007)
4. CC Devas v India, PCA Case No. 2013-09, Award on Jurisdiction and Merits
(25 July 2016) [293].
5. Bear Creek Mining Corporation v Republic of Peru, ICSID Case No. ARB/14/2,
Award (30 November 2017).
6. Continental Casualty Company v The Argentina Republic, ICSID Case No.
ARB/03/9 (Award on 5 September 2008).