Self-judging “essential security interest” clauses permit a state to act as “it considers necessary” for the protection of such interests. This Perspective examines trends in their diffusion and scope, and outlines suggestions for treaty drafters to consider when balancing the desire for regulatory sovereignty with the need for legal stability

Lama, Katherine

Ong, Mevelyn

Petersen, Thorvald Johann

Sauvant, Karl P.

English

Columbia University Academic Commons

  Columbia FDI Perspectives Perspectives on topical foreign direct investment issues No. 188   December 5, 2016 Editor-in-Chief: Karl P. Sauvant (Karl.Sauvant@law.columbia.edu)  Managing Editor: Daniel Allman (daniel.allman@columbia.edu)   The rise of self-judging essential security interest clauses in international investment agreements by Karl P. Sauvant and Mevelyn Ong, with Katherine Lama and Thor Petersen *  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 below.) 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 2 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 review6 (which can be explicitly required7), 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.  3 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 (karlsauvant@gmail.com) is Resident Senior Fellow, Columbia Center on Sustainable Investment, Columbia University; Mevelyn Ong (mso2121@columbia.edu) is a graduate of the Masters of Law (LL.M.) 2016 degree program at Columbia Law School; Katherine Lama (kal2208@columbia.edu) is a graduate of the Master in Public Administration (MPA) 2016 degree program at Columbia’s School of International and Public Affairs; Thor Petersen (tjp2141@columbia.edu) 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). 4 Figure 1. Cumulative number of IIAs signed with self-judging ESI clauses,  1992 - early 2016     Source: UNCTAD IIA database for number of IIAs (http://investmentpolicyhub.unctad.org/IIA) and own research. 5 Figure 2. Number of IIAs signed per year and number of IIAs per year with self-judging ESI clauses,  1992 - 2016     Source: UNCTAD IIA database for number of IIAs (http://investmentpolicyhub.unctad.org/IIA) and own research.   Figure 3. Percentage of IIAs signed with self-judging ESI clauses, by year,  1992 - early 2016     Source: UNCTAD IIA database for number of IIAs (http://investmentpolicyhub.unctad.org/IIA) and own research. 7 Figure 4. Cumulative number of countries with self-judging ESI clauses,  1992 - 2015    Source: UNCTAD IIA database for number of IIAs (http://investmentpolicyhub.unctad.org/IIA) and own research.  8 Table. Self-judging ESI clauses, by scope and strength     Very strong self-judging element Strong self-judging element Conditional self-judging element Broad ESI scope 10 102 15 Narrow ESI scope 5 88 2  Source: Own research. 9 The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “Karl P. Sauvant and Mevelyn Ong, with 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 ccsi@law.columbia.edu.  For further information, including information regarding submission to the Perspectives, please contact: Columbia Center on Sustainable Investment, Daniel Allman, daniel.allman@columbia.edu.  The Columbia Center on Sustainable Investment (CCSI), a joint center of Columbia Law School and the Earth Institute at Columbia University, is a leading applied research center and forum dedicated to the study, practice and discussion of sustainable international investment. Our mission is to develop and disseminate practical approaches and solutions, as well as to analyze topical policy-oriented issues, in order to maximize the impact of international investment for sustainable development. The Center undertakes its mission through interdisciplinary research, advisory projects, multi-stakeholder dialogue, educational programs, and the development of resources and tools. For more information, visit us at http://www.ccsi.columbia.edu.  Most recent Columbia FDI Perspectives  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.  No. 184, Lukas Linsi, “Less compelling than it seems: rethinking the relationship between aggregate FDI inflows and national competitiveness,” October 10, 2016.  No. 183, Karl P. Sauvant and Güneş Ünüvar, “Can host countries have legitimate expectations?,” September 26, 2016.  All previous FDI Perspectives are available at http://ccsi.columbia.edu/publications/columbia-fdi- perspectives/.  

The rise of self-judging essential security interest clauses in international investment agreements

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The rise of self-judging essential security interest clauses in international investment agreements

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