Investment Treaty Arbitration has been criticized for posing a threat to host states' regulatory authority, especially concerning environmental protection. One of the solutions for balancing these interests (investment protection vs public policy) proposed by scholars passes through the inclusion of environmentally aware carve-out clauses in future and present IIAs.
Carve-out clauses can be defined as treaty provisions by which the parties exclude certain claims or remedies from their arbitration clause. By making use of this mechanism, host states can effectively restrict substantive treaty obligations' applicability1. The rationale for the use of this treaty device lies in the assumption that investment treaties and investment treaty arbitration therein originate the states' consent to the international agreement as an exercise of their sovereignty. As a result of this sovereign act as a "legal representative" of its citizens, each party is subjected to the treaties' discipline, as an international commitment, even when exercising its sovereign right to regulate business and their activities. In this sense, the consent of a state to investment treaties as a sovereign act involves some surrender of domestic sovereignty to international obligations.
To avoid regulatory concerns in certain areas, such as environmental law, states may have to carve-out areas involving their vital regulatory concerns from the scope of international obligations in advance of the exercise of their sovereign choice. Based on this rationale, these clauses can attain the legal certainty that international investment treaties were lacking, for predictability is a crucial attribute to the substantive reform of investment treaty policy by both host states and foreign investors.
In this way, carve-out clauses have the power to explicitly cut out environmental measures from their commitment to investment disciplines when negotiating, which can result in host states not needing to fear investors' claims when they take regulatory action which is considered to fall within the scope of said carve-out. If the carve-out is phrased clearly, the likelihood of confusion as to the scope of the investment treaty would be low, therefore both investors and host states will have certainty about their mutual rights and obligations.
If states desire to avoid regulatory concerns in certain areas while also protecting investors from abuse of powers and securing the possibility to legislate bona fide, it is imperial to draw the line between the two different behaviours, which is attainable using carve-out clauses2. This way states can carve-out a certain subject, in this case, environmental regulation, from the scope of the treaty, without incurring in a duty to compensate the investor.
On the other hand, these clauses can also provide foreign investors with a cost-effective and simple guideline as to the scope of the protection to which they are entitled. In other words, foreign investors would not anticipate asserting their right to protection if they decided to invest in an area carved out after an investment treaty.
The carve-out system also conforms to political acceptability because it can become a political inducement to a state party which resists the conclusion of an investment treaty due to the concern over a specific regulatory area as well as the other party which is willing to concede the carve-out of the specific area in exchange for subjecting the resisting party to other investment disciplines.
One classic example of a carve-out clause is the one included in Article 3(2) of the 2005 China-Madagascar BIT. It expressly excludes measures dealing with issues of security, public policy, public health and ethics and environmental protection from the scope of the BIT.
A more recent example is the 2014 Hong Kong-ASEAN FTA, which includes a carve-out in its Expropriation and Compensation Section, which states:
Non-discriminatory regulatory actions by a Party that are designed and applied to achieve legitimate public welfare objectives, such as the protection of public health, safety, and the environment, do not constitute expropriation of the type referred to in subparagraph 2 (b)3.
With the inclusion of these clauses, it becomes unlikely that non-discriminatory state's measures aimed at protecting the environment are considered compensable expropriation. Notwithstanding, this being an advanced example of treaty drafting, it is possible to argue that it constitutes a specific carve-out to the expropriation provisions and not a carve-out from the scope of the treaty as its whole4.
To sum up, it is possible to say that even considering the arguments against the inclusion of carve-out clauses in investment treaties, they are expected to be adopted by the new version of investment treaties as an effective instrument for alleviating regulatory concerns in terms of legal certainty, predictability, and political acceptability.
Footnotes
1. Marisi, Environmental Interests in Investment Arbitration., 112.
2. Ahn, 'The Utility of Carve-out Clauses in Addressing Regulatory Concerns in Investment Treaty Arbitration', 65–76., 70 to 74
3. Agreement on Investment among the Governments of the Hong Kong Special Administrative Region of the People's Republic of China and the Member States of the ASEAN (2017).
4. Marisi, Environmental Interests in Investment Arbitration., 116.
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