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Columbia FDI Perspectives
Perspectives on topical foreign direct investment issues
No. 188 December 5, 2016
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Daniel Allman ([log in to unmask])
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A network of bilateral treaties and other international investment agreements (IIAs) has constructed a predictable and enforceable international investment regime.
Since 1992, however, the protections offered by this regime have potentially been limited by the inclusion in IIAs of self-judging essential security interest (ESI) clauses. These clauses expressly allow a government to take measures—unilaterally—that “it considers
necessary”[1] to evade treaty obligations.
This Perspective presents a study of 1,861 IIAs concluded by 90 countries before early 2016.[2]
The study sought to identify the geographic and temporal spread of self-judging ESI clauses in IIAs and trends in drafting styles. It found 222 IIAs containing self-judging ESI clauses, with the United States (US) being the first to introduce them. The US,
Canada and Japan remain the leading users, followed by a growing number of Asian and Latin American countries.
While the number of self-judging ESI clauses is small compared to the total number of IIAs, the proportion of IIAs with such clauses concluded in a given year has increased from negligible in 2000 to over 60% of IIAs concluded in 2015. (See charts in the online
version of this Perspective.) By early 2016, at least 134 countries, accounting for 99% of world outward FDI flows and stock, were bound by such clauses.
Self-judging ESI clauses can be classified along two dimensions:
Scope
- “Broad clauses” (127 IIAs) refer to “essential security interests” without further definition or limitation, giving governments wide discretion to determine what constitutes their ESI. For
example: “Nothing in this Agreement … preclude[s] a Party from applying measures that it considers necessary for … the protection of its own [ESI].”[3]
- “Narrow clauses” (95 IIAs) limit self-judgment to specific subjects, typically related to furnishing certain information, but also to matters such as war or other emergencies. Occasionally,
narrow clauses incorporate, by reference, or replicate, GATT art. XXI and/or GATS art. XIV bis.
Strength
- “Very strong clauses” (15 IIAs) include a footnote prescribing that arbitral tribunals must respect a government’s determination of its ESI: “For greater certainty, if a Party invokes [ESI]
… the tribunal or panel hearing the matter shall find that the exception applies.”[4]
- “Strong clauses” (190 IIAs) state simply that they are self-judging.
- “Conditional clauses” (17 IIAs) subject self-judgment to a requirement that measures are not applied, for example, in an arbitrary or unjustifiably discriminatory manner, or so as to avoid
treaty obligations.[5] This leaves the door open for arbitral
review[6] (which can be explicitly required[7]),
especially when treaties require reasons for invoking the exception.
The most far-reaching clauses, conferring maximum discretion on governments to determine their own compliance with treaty obligations, are “broad” and “very strong.” Ten IIAs containing such clauses were identified, followed by 102 with broad/strong clauses
and 88 with narrow/strong clauses.
Except perhaps when clauses are “very strong,” most self-judging clauses could arguably be challenged on the basis of “good faith.”[8]
Nonetheless, arbitral tribunals must give great deference to the judgment of governments.[9]
Overall, the proliferation of self-judging ESI clauses makes IIA protections uncertain, subordinating treaty disciplines to governments’ self-restraint. They are likely to spread further, as governments seek to protect ESI concerns and regulatory sovereignty,
and could extend beyond security to cover financial and other regulation. Broad/strong self-judging ESI clauses are quite sweeping, creating the risk of abuses by governments.
Abuses could perhaps be limited by more narrow definitions of “essential security interests” and clearer delineations of when exceptions can be invoked (for example, limiting them solely to national security concerns, and/or expressly providing that they cannot
apply to broader interests and economic issues); explicitly stipulating “good-faith” requirements; incorporating a last-resort condition; requiring notification or prior reasons given to a joint committee; and/or providing for consultations with treaty counterparties
before invoking an ESI clause. Ultimately, however, the clauses remain self-judging.
Although the trend described in this Perspective might be part of the much-needed rebalancing of the investment regime toward greater rights for governments, care must be taken not to undermine the rule of international investment law in the process.
* Karl P. Sauvant
([log in to unmask]) is Resident Senior Fellow, Columbia Center
on Sustainable Investment, Columbia University; Mevelyn Ong ([log in to unmask])
is a graduate of the Masters of Law (LL.M.) 2016 degree program at Columbia Law School; Katherine Lama ([log in to unmask])
is a graduate of the Master in Public Administration (MPA) 2016 degree program at Columbia’s School of International and Public Affairs; Thor Petersen ([log in to unmask])
is a J.D. candidate at Columbia Law School. The details of the study’s methodology, contained in a “Methodology Note,” are available on request from Karl P. Sauvant. The authors are grateful to Louis-Alexis Bret, Pakwan Chuensuwankul, Katerina Florou, Camilla
Gambarini, Jo En Low, Amanda Jiménez Pintón, Shawn Lim, and Carl Lundeholm for their research assistance during various stages of the project, to a great number of colleagues and officials of governments and investment promotion agencies for specific help,
and to Manfred Schekulin and Stephan Schill for their comments. The authors are also grateful to Mark Kantor, Michael W. Reisman and Kenneth Vandevelde for their helpful peer reviews.
The views expressed by the authors of this Perspective do not necessarily reflect the opinions of Columbia University or its partners and supporters.
Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed series.
[1] Or similar formulations
establishing subjective self-judgment.
[2] The review drew
on various databases and direct contacts with countries, but not all countries and IIAs were reviewed.
[3] US-Australia
FTA, art. 22.2(b).
[4]
See, e.g., US-Peru FTA, art. 22.2. Whereas the US discontinued use of such a footnote since 2007, other countries have not.
[5]
See, e.g., Korea-Japan BIT, art. 16.
[6]
See, e.g., Japan-Mozambique BIT, art. 18.
[7]
See, e.g., China-Peru FTA, art. 141.
[8]
See, e.g., Kenneth Vandevelde, “Of politics and markets: the shifting ideology of the BITs,”
International Tax & Business Lawyer, vol. 11 (1993), at p. 159; Stephan Schill and Robyn Briese, “‘If the state considers’: self-judging clauses in international dispute settlement,”
Max Planck Yearbook of United Nations Law, vol. 13 (2009), pp. 61-140.
[9] Tribunals
in investor-state arbitrations have not yet considered self-judging ESI clauses. The effect of self-judging provisions in other legal instruments (e.g., ICJ Statute, art. 36(2)) remains uncertain.
See, also, Interhandel (Switzerland v. US) [1959] I.C.J. Rep. 6 (Judgment).
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The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “Karl P. Sauvant, Mevelyn Ong,
Katherine Lama, and Thor Petersen, ‘The rise of self-judging essential security interest clauses in international investment agreements,’ Columbia FDI Perspectives, No. 188, December 5, 2016. Reprinted with permission
from the Columbia Center on Sustainable Investment (www.ccsi.columbia.edu).”
A copy should kindly be sent to the Columbia Center on Sustainable Investment at
[log in to unmask]. |
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For further information, including information regarding submission to the
Perspectives, please contact: Columbia Center on Sustainable Investment, Daniel Allman,
[log in to unmask].
- No. 187, Jan Knoerich, “Why some advanced economy firms prefer to be taken over by Chinese acquirers,” November 21, 2016.
- No. 186, Jose Guimon, “From export processing to knowledge processing: upgrading the FDI promotion toolkit,” November 7, 2016.
- No. 185, Frank J. Garcia, “Investment treaties are about justice,” October 24, 2016.
| | Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212)
854-0689
Fax: (212)
854-7946
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