Should Investment Treaties Contain Public Policy Exceptions?

The increasing inclusion of exceptions in newly concluded investment treaties, together with the divergent manner in which tribunals and annulment committees have approached these provisions, suggests that a greater understanding of their role and purpose is needed. In particular, the question whether exceptions operate as permissions or as defenses is a crucial but unaddressed issue that has significant implications for both litigation and practice and, in turn, implications for the stability of the regime. This Essay argues that as a starting point, exceptions should be understood as permissions that limit the scope of the substantive treaty obligations, and not as defenses invoked to justify prima facie unlawful conduct. Understanding exceptions as permissions has several advantages, including the avoidance of double-counting a government’s motivation for its conduct or, more problematically, failing to take regulatory purpose into account when determining whether a government has complied with the treaty’s substantive obligations. Understanding exceptions as permissions also sends signals to adjudicators in relation to issues such as the appropriate standard of review. The Essay also explores the desirability of including exceptions in treaties in light of recent innovations that clarify the substantive content of investment obligations. Although the uncertain analytic character of existing exceptions risks constraining rather than preserving regulatory space, they may be an important failsafe in light of current institutional arrangements for investor-state dispute settlement, which effectively preclude review for error of law. The Essay concludes that the relationship between standards of investment protection and exceptions needs further consideration, and suggests that governments negotiating investment treaties ought to more holistically consider the aims of the regime and the role of exceptions therein.