Describe the overview of state defences and counterclaims.
International law provides for exonerating circumstances known as ‘State defences’ that can
preclude State responsibility for breach of their international obligations. They may be
categorised either as: (a) Calling into question the existence/continued existence of the
underlying obligation (BIT express security exceptions); or (b) Seeking to justify non-
performance of the underlying obligation at a given point in time (customary international
law of necessity). These two categories are often invoked concurrently for a given set of
facts1, particularly by Argentina. Other defences argued by States include procedural
defences (time limits, fork in the road clauses, tribunal’s jurisdiction) and defences based on
the obligation’s substantive law. States may also apply counterclaims as a defensive
strategy in investment treaty arbitration.
What are Express Exceptions in investment treaties2?
Exceptions/Reservations
Exceptions/Reservations are commonly used in investment treaties to exclude particular
sectors/subject matters from Host State’s obligations.
‘Exceptions’ generally apply to broad carve-outs from investment treaty obligations.
They form part of the treaty text.
Some treaties contain ‘general exceptions’ for measures necessary to meet specific
objectives, such as public order/environmental protection. These are closely modelled on or
incorporate the general exception provisions contained in Article XX of General Agreement
on Tariffs and Trade (GATT) or Article XIV of General Agreement on Trade and
Services (GATS).
Whereas ‘reservations’ generally refer to narrower limitations towards investment
treaty obligations to exclude specific laws/regulations3. They are unilateral statements
(reservations) by one of the treaty parties4. Other treaties provide that certain obligations do
not apply to specific categories of measures. Article 14(5) of US-Uruguay BIT 2005 and
Article 9(5) of Canada-Peru BIT 2006 commonly provide that the national treatment
obligation does not apply to government grants and subsidies.
Non-Conforming/Non-Precluded Measures
Some BITs, especially in US, refer to these defences as non-conforming/non-precluded
measures.
Exceptions for non-conforming measures act as a ‘grandfather’ provision. They
allow for the continuation, renewal and amendment of existing non-conforming measures,
which may not be compatible with Host State’s treaty obligations, so long as non-conformity
does not increase after the treaty’s entry into force. Article 14 of US-Uruguay BIT 2005 sets
out ‘non-conforming measures’ by its States to which some of the substantive protections do
1
W Michael Reisman and others, 'Chapter 10: Defenses', in Foreign Investment Disputes: Cases, Materials and
Commentary Kluwer Law International 2014) 897
2
Andrew Newcombe and Lluís Paradell, 'Chapter 10 – Defences’, in Law and Practice of Investment Treaties:
Standards of Treatment (Kluwer Law International 2009) 484-485
3
Andrew Newcombe and Lluís Paradell, ‘Chapter 10 – Defences’, in Law and Practice of Investment Treaties:
Standards of Treatment (Kluwer Law International 2009) 482-483
4
Article 2(1)(d) VCLT – “reservation” means a unilateral statement, however phrased or named, made by a
State, when signing, ratifying, accepting, approving or acceding to a treaty, whereby it purports to exclude or to
modify the legal effect of certain provisions of the treaty in their application to that State’.
,not apply. Many of China’s BITs such as Article 3(3) of China-Czech Republic BIT 2005
include such provision in relation to MFN clause.
Exceptions/Reservations may also be made for Host State’s future measures that are
more restrictive than existing measures. Article 14(2) of US-Uruguay BIT 2005 provides
‘Articles 3, 4, 8, and 9 do not apply to any measure that a Party adopts or maintains with
respect to sectors, subsectors, or activities, as set out in its Schedule to Annex II.’
Whereas Article 18(2) uses ‘preclusion’ to create exceptions for the States’ essential
security interests that they consider ‘necessary for the fulfilment of its obligations with
respect to the maintenance or restoration of international peace or security, or the protection
of its own essential security interests.’ This is also included in Article 3(5) and 3(6) of
China-Finland BIT of 2004. They sometimes use self-judging language intended to make
the State the sole arbiter of whether the exception applies and can be invoked, subject to the
State’s obligation to act in good faith. Thus some commentators use ‘non-precluded
measures’ to refer to express exceptions/reservations found in investment treaties 5. Article
13(2) of Japan-Iran BIT 2006 allows Contracting Party to enforce/adopt measures which it
considers necessary for the protection of its essential security measures ‘taken in time of war,
armed conflict, or other emergency in that Contracting Party or in international relations’ or
‘relating to the implementation of national policies or international agreements respecting the
non-proliferation of weapons’.
Describe security exceptions.
BITs and MITs contain express provisions for measures concerning protection of national
security, public order or Host State’s essential security interests.
Article 18 of US Model BITs of 2004 and 2012 (‘Essential Security’) provides that
‘Nothing in this Treaty shall be construed: 1. to require a Party to furnish or allow access to
any information the disclosure of which it determines to be contrary to its essential security
interests; or 2. to preclude a Party from applying measures that it considers necessary for the
fulfilment of its obligations with respect to the maintenance or restoration of international
peace or security, or the protection of its own essential security interests.’ Essential security
interests were also seen in Article XI of US-Argentina BIT 1991, which can include
economic emergencies6. LG&E v Argentina7 directly addressed this and rejected ‘the notion
that Article XI is only applicable in circumstances amounting to military action and war.
Certainly, the conditions in Argentina in December 2001 called for immediate, decisive
action to restore civil order and stop the economic decline. To conclude that such a severe
economic crisis could not constitute an essential security interest is to diminish the havoc that
the economy can wreak on the lives of an entire population and the ability of the Government
to lead. When a State’s economic foundation is under siege, the severity of the problem can
equal that of any military invasion.’ Yet there has been no agreement on the degree of
severity that would justify the use of this exception.
Article 24(3) of ECT provides that ‘The provisions of this Treaty other than those
referred to in paragraph (1) shall not be construed to prevent any Contracting Party from
taking any measure which it considers necessary: (a) for the protection of its essential
security interests including those (i) relating to the supply of Energy Materials and Products
to a military establishment; or (ii) taken in time of war, armed conflict or other emergency in
5
William Burke-White and Andreas von Standen, ‘Investment Protection in Extraordinary Times: The
Interpretation and Application of Non-Precluded Measures Provisions in Bilateral Investment Treaties’ (2008)
48 VJIL 307 or Amit Kumar Sinha, ‘Non-Precluded Measures Provisions in Bilateral Investment Treaties of
South Asian Countries’ (2017) 7 Asian Journal of International Law 227
6
CMS v Argentina, ICSID Case No. ARB/01/8, Award (12 May 2005) at paras 359-365
7
LG&E v Argentina, ICSID Case No. ARB/02/1, Decision on Liability (3 October 2006) at para 238
, international relations; (b) relating to the implementation of national policies respecting the
non-proliferation of nuclear weapons or other nuclear explosive devices or needed to fulfil its
obligations under the Treaty on the Non-Proliferation of Nuclear Weapons, the Nuclear
Suppliers Guidelines, and other international nuclear non-proliferation obligations or
understandings; or (c) for the maintenance of public order.’
BITs may also contain security exceptions closely modelled on/incorporating Article
XXI of GATT along with relevant interpretations under WTO agreements, or Article XIV
of GATS similar to GATT but also including a clause for supply of services (plus goods and
materials) in provisioning a military establishment8.
BITs have used terms to describe States’ objectives when taking measures falling
with the security exception. These include the protection of States’ essential security
interests9, essential interests10 and national security interests11, and the maintenance of
international peace and security12 and public order13. Measures can also be taken ‘in
circumstances of extreme emergency’. Article 12(2) of Croatia-India BIT 2002 provides
that ‘nothing in this Agreement precludes the host Contracting Party from taking action for
the protection of its essential security interests or in circumstances of extreme emergency,
provided such actions have been prescribed by its laws which are applied normally and
reasonably, on a non discriminatory and a non arbitrary basis.’ However, BITs generally do
not include a definition of all these terms.
Self-judging
BITs often incorporate language suggesting the Host State is the final arbiter of whether its
measures are justified under the security exceptions. US Model BITs provide that ‘Nothing in
this Treaty shall be construed: 1. to require a Party to furnish or allow access to any
information the disclosure of which it determines to be contrary to its essential security
interests; or 2. to preclude a Party from applying measures that it considers necessary for the
fulfilment of its obligations with respect to the maintenance or restoration of international
peace or security, or the protection of its own essential security interests.’ Article XXI(b) of
GATT provides that ‘Nothing in this Agreement shall be construed [...] (b) to prevent any
contracting party from taking any action which it considers necessary for the protection of its
essential security interests [...] (i) relating to fissionable materials or the materials from which
they are derived; (ii) relating to the traffic in arms, ammunition and implements of war and to
such traffic in other goods and materials as is carried on directly or indirectly for the purpose
of supplying a military establishment; (iii) taken in time of war or other emergency in
international relations’.
Commentators have disagreed on whether this is completely self-judging or it also has
objective limits14. In Russia-Traffic in Transit case15 between Russia and Ukraine, a WTO
8
Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties: Standards of Treatment,
(Kluwer Law International 2009) 491, citing Article 21(3) of the Korea Singapore FTA of 2005 and Article 169
of the Japan Mexico Economic Partnership Agreement of 2004
9
Article 15 of the Australia-India BIT of 1999
10
Article 8 of the Hong Kong-New Zealand BIT of 1995
11
Article XVII of the CARICOM-Cuba BIT of 1997
12
Article XVI of the United States-Mozambique BIT of 1998
13
Article 16 of the Japan-South Korea BIT of 2002
14
Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties: Standards of Treatment,
(Kluwer Law International 2009) 492, citing Matsushita and others, The World Trade Organization: Law,
Practice, and Policy, (OUP 2006) at 594-598 and Akande and Williams, ‘International Adjudication on National
Security Issues: What Role for the WTO?’ (2003) 43 VJIL 365
15
Russia – Measures Concerning Traffic in Transit, WT/DS512/R, Report of the Panel (5 April 2019), paras
7.82 and 7.101
