I. Introduction
Implicit and explicit exceptions to rules are commonplace in all fields of law; WTO law and international investment law are no different. By preserving treaty parties’ flexibility to respond to future policy concerns, the inclusion of exceptions in trade and investment agreements functions both as a means of securing parties’ acceptance of the primary rules of the regimeFootnote 1 and as a safety valve to reduce the risk of exit or non-compliance.Footnote 2 Exceptions also signal to internal actors (adjudicators and governments) and external actors (foreign investors, domestic industries and civil society) that the relevant treaty does not subordinate policy concerns such as protecting health and the environment to the primary objectives of the regime.Footnote 3 As such, exceptions serve a potent symbolic function.
Setting the parameters of the rule–exception relationship, policing domestic measures and resolving apparent conflicts between international trade liberalisation and foreign investment protection and domestic regulatory autonomy are crucial elements of trade and investment adjudicators’ authority. Through their interpretation of rules and exceptions, adjudicators ascertain the nature of relevant rules, the circumstances in which those rules are infringed, and the manner in which exceptions intersect with those rules.Footnote 4 Yet despite the obvious significance of exceptions to this field of law, the analytic character of exceptions remains under-theorised. Understanding the analytic character of exceptions from a jurisprudential standpoint can shine light on the nature of the balance between rights and obligations in this field of law—an issue that has both normative and practical implications.
The article builds on existing scholarship concerning the analytic character of exceptions in WTO lawFootnote 5 and international investment law.Footnote 6 Focusing on the general and security exceptions in GATT and GATS and cognate provisions in investment treaties, the article argues that we should view these exceptions as permissions that operate to limit the scope of the commands in the relevant agreements, rather as defences invoked to justify otherwise unlawful conduct. This distinction—between permission and defence (justification)—is familiar to deontic logic, but less familiar to international law.Footnote 7
Part II develops the distinction between permission and defence and considers whether treating exceptions as permissions is supportable by the rules of treaty interpretation. Part III examines how general and security exceptions have been treated by WTO panels and the Appellate Body and by investment tribunals and annulment committees, highlighting the inconsistent treatment of both types of exceptions between and within the two subfields. Part IV argues that characterising exceptions as permissions means that trade and investment adjudicators can consider regulatory purpose at the point of obligation, without causing concerns regarding effectiveness in treaty interpretation. This issue is illustrated by examining the relationship between GATT Articles III (national treatment) and XX (general exceptions). This Part also argues that the question of the applicability of the exception is a question of merits rather than jurisdiction. Part V concludes.
II. Defining, theorising and interpreting exceptions
A. Defining Exceptions
An exception arises from the interrelationship of two deontic operators: (1) a command, including a prohibition; and (2) a derogation from that command in specific circumstances.Footnote 8
This article focusses narrowly on so-called general and security exceptions in GATT and GATS and in investment treaties,Footnote 9 and does not discuss in any detail other types of provisions that plainly exclude certain types of measures from the scope of the relevant treaty obligations, such as carve-outs (which exempt an entire policy area, sector, or existing non-conforming measures from all or some of the treaty obligationsFootnote 10), and so-called reservations (which permit treaty parties to unilaterally nominate a sector or sectors in relation to which they reserve the right to adopt or maintain non-conforming measures.)Footnote 11 However, where relevant, general and security exceptions are compared with these other provisions, which are collectively termed ‘carve-outs’ for ease of reference, in order to illuminate certain aspects of their terminology that might bear upon their analytic character.
The definition of exceptions posited above also does not encompass provisions that clarify the scope of an obligation within the context of the clause itself, in a proximate clause, or in an interpretative annex.Footnote 12 While recognising that the boundaries between these provisions and exceptions may be blurry at the margins, such provisions are not included in the definition because their application involves what Schauer terms an ‘internal defeat’ of the rule before the rule is applied.Footnote 13 For these reasons, exceptions are also distinguished from open-textured norms that permit consideration of all relevant circumstances in determining whether the norm has been complied with.Footnote 14
General exceptionsFootnote 15 typically employ language such as ‘nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures …’,Footnote 16 then impose some restrictions on the design of the measure by specifying a required nexus between the measure and the permissible objective or objectives, such as ‘necessary to’,Footnote 17 ‘related to’,Footnote 18 or ‘designed and applied’Footnote 19 to further the relevant objective. General exceptions also typically contain a proviso (chapeau) that controls the application of measures, requiring that they are applied in a manner that is even-handed and does not subvert the substantive disciplines in the relevant agreement.Footnote 20 Security exceptions, as their name suggests, give treaty parties the flexibility to respond to security-related matters.Footnote 21 Some treaties do not restrict the nature of the security concern ex ante,Footnote 22 while others limit the application of the provision to political or military conflict.Footnote 23 Security exceptions in many treaties also afford greater discretion to governments than general exceptions, by permitting a government to adopt a measure that ‘it considers necessary’ in the circumstances,Footnote 24 or by appearing to make the invocation of the provision entirely self-judging.Footnote 25
B. Theorising Exceptions
Exceptions to norms in international trade and investment law arguably have a dichotomous character: either the exception is a permission or it is a defence.Footnote 26 This distinction is familiar to deontic logic, but to date is relatively unexplored in WTO and international investment law.Footnote 27 If the exception is a permission, the commands set out in the treaty do not apply where a government establishes that it is taking action that comes within the scope of the exception. In other words, the exception functions to limit the scope of the substantive obligations in the treaty,Footnote 28 by nullifying the imperative norm in the relevant circumstances.Footnote 29 If an exception is a defence, a government relying on it would concede that it had failed to observe its obligations, but would seek to justify its conduct (that is, render that conduct lawful)Footnote 30 on the basis that the type of conduct specified in the exception was an overriding consideration that the treaty parties had agreed should have priority.
The choice between permission and defence has important normative implications. As Hart observed, a permission is intuitively ‘something quite different’ to a defence.Footnote 31 Permissions occupy the boundary between conduct that is obligatory and conduct that is forbidden in the relevant normative system, by specifying the conduct that is permitted at the margins. Viewing the exception as a permission is to say that government action falling within the exception is outside of the scope of the treaty obligations, whereas viewing the exception as a defence is to say that all government action negatively impacting on international trade or investment (as the case may be) is proscribed unless it falls within the ambit of the exception, as so judged ex post facto.Footnote 32 By implication, this approach elevates the normative weight of trade liberalisation or investment protection over other public welfare objectives.Footnote 33 This point is discussed below in relation to the object and purpose of trade and investment agreements, but it should be noted here that even though an adjudicator's finding that a government has acted inconsistently with the relevant treaty is a preliminary, defeasible step in the process of reasoning, it nevertheless has significant symbolic value.Footnote 34 One can surmise that it will be more politically acceptable for government action taken in relation to the subject matter of the exception to lie outside the scope of the treaty obligations, rather than to be inconsistent with those obligations until successfully defended.Footnote 35
C. Interpreting Exceptions
1. The ordinary meaning
In order to discern the analytic character of an exception, it is necessary to consider the ordinary meaning of the provision in its context, and in light of the object and purpose of the relevant treaty.Footnote 36 The analytic character of general and security exceptions is not clear on their ordinary meaning, compared with other types of exceptions such as carve-outs, which typically provide that the treaty ‘does not apply’ to certain measures. For example, GATT Article XX provides that ‘nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures …’, which does not clearly tell us whether the exception is a permission or a defence. Nor does the ordinary meaning of security exceptions such as Article XI of the US–Argentina BIT reveal their analytic character: ‘This Treaty shall not preclude the application by either Party of measures …’.
It may be possible to discern the analytic character of general and security exceptions by contrasting them with carve-outs. One distinction between carve-outs and general and security exceptions that might have some bearing on their analytic character is the precision by which the permissible objectives are specified. Carve-outs are usually relatively precise in terms of the types of measures that are excluded from the scope of a treaty (eg taxation, government procurement). However, general and security exceptions are typically more open-textured, preserving fairly broad policy space for future exigencies (eg public morals, human health, essential security interests), and determining whether the exception applies requires a greater level of scrutiny of the purpose, design and application of the measure. This distinction might be understood as suggesting that, in contrast to carve-outs, general and security exceptions ought to operate as defences.
However, the distinction between general and security exceptions on the one hand and carve-outs on the other is not always clear-cut. Some of the enumerated objectives in GATT Article XX refer to specific products or issues and/or have a relatively flexible nexus requirement, such as Article XX(f), which refers to government action ‘imposed for the protection of national treasures’.Footnote 37 These enumerated paragraphs sit closer to the language of carve-outs in terms of both permissible objective and the nexus requirement. Thus, it would appear that the different ways in which these provisions are framed does not, by that fact alone, differentiate their role.
Nor does terming a provision an ‘exception’ necessarily connote a different role than terming it a carve-out, reservation or something else. To be sure, the heading or title of a clause can provide important context for its interpretation. Yet, the heading may be too general to provide much assistance to a treaty interpreter,Footnote 38 and trade and investment agreements use the terms ‘exception’, ‘carve-out’ and ‘reservation’ interchangeably, apparently without regard to the interpretive consequences that may flow from the use of particular terminology.Footnote 39 In any event, many provisions have no headingFootnote 40 or a heading that relates to the subject matter of the provision, such as ‘Taxation’.Footnote 41 Adjudicators, too, can be loose with their terminology, both in terms of the type of provision and its analytic character, referring to terms such as ‘defence’, ‘justify’ and ‘excuse’ apparently without regard to their technical meaning.Footnote 42
An argument can also be made that security exceptions should be distinguished from general exceptions on the basis that general exceptions concern ordinary regulation, whereas security exceptions are engaged only in extraordinary circumstances. In other words, it might be argued that there is something inherent in the nature of a security exception that gives it a special character. This view is buttressed by the fact that many security exceptions contain language that expressly limits the intensity of adjudicatory review, or purports to oust such review. That is, the special nature of security exceptions and the textual limitations on their justiciability, together with the absence of a chapeau such as that found in GATT Article XX, might suggest that security exception exempts conduct taken under its terms from the scope of the agreement. This is intuitively plausible and accords with the manner in which the Russia – Traffic in Transit panel treated GATT's security exception, as discussed in section III.B below. However, there is nothing immediately obvious about the language ‘that it considers’ or provisions that seek to be non-justiciable that differentiates the analytic character of this type of security exception from others. Both types of provision contain the same or similar operative wording (‘nothing in this agreement shall be construed to prevent’). Where the same wording appears in more than one place in a treaty, it should be presumed that the relevant language should be interpreted in the same way, provided there are no contrary indications—particularly where this terminology speaks to the character of the relevant provision.
Thus, there is nothing intrinsic to general and security exceptions that would distinguish their analytic character from that of carve-outs. An argument can be made that security exceptions may operate as permissions—at least those that seek to constrain the role of adjudicatory review through some form of language such as ‘it considers necessary’. The analytic character of general exceptions such as GATT Article XX and provisions based on it is not clear on their face, but the similar language used in both general and security exceptions suggests that they possess the same analytic character.
2. The relevance of the treaty's object and purpose to the analytic character of the exception
As well as playing an essential role in treaty interpretation, a treaty's object and purpose is particularly relevant to the analytic character of exceptions from a theoretical perspective. It has been argued above that an exception arises from the interrelationship of a command and a derogation from that command. Interrogating the principle or principles that underlie the relevant commands and the derogations from them can reveal the character of the exception, since a true exception to a rule (in this article's terminology, a defence) requires that there be a conflict between the principle(s) embodied in the command and the principle(s) embodied in the derogation from it.Footnote 43 A defence has an underlying principle that differs from the command, whereas a permission will share the same underlying principle with the command.Footnote 44 The particular principle or principles that underpin and animate the rule and the exception, therefore, have a bearing on the analytic character of the exception.
On the one hand, it can be argued that derogating from the rules of the regime by adopting measures for non-economic purposes involves a conflict of values: liberalised international trade and the protection of foreign investment versus measures adopted (generally speaking) for purely domestic exigencies. On the other, the regime's ultimate purpose could be seen as achieving sustainable development and greater prosperity—an argument advanced further below. On this account, the role of exceptions—to preserve governments’ ability to address welfare-enhancing objectives such as security, health or environment—would seem to align with this purpose.
The concept of object and purpose has work to do at several levels of analysis: the provision at issue, the part of the agreement in which it appears, the agreement itself (the level at which object and purpose operate with respect to VCLT Article 31(1)), as well as, in the context of the WTO agreements and multi-chapter preferential trade agreements, the regime as a whole. The Appellate Body has relied on the concept of object and purpose at each of these levels.Footnote 45 To the extent that one of the WTO agreements has a more specific meaning than the overarching purposes of the Marrakesh Agreement Establishing the World Trade Organization (Marrakesh Agreement), the provision at issue must be read in the light of the specific agreement. Moreover, the ordinary meaning of the provision being interpreted has priority over the overarching purposes of the regime as a whole: if the meaning of the former is clear, there is no need to have recourse to the latter.
It is uncontroversial that the central object of the international trade and investment regime is, as Kurtz puts it, ‘to extend and safeguard competitive opportunities to foreign traders, service providers and investors’.Footnote 46 Plainly, however, this is not the only objective that the regime seeks to achieve.Footnote 47 In this regard, it is necessary to distinguish between a treaty's object (‘what the treaty is about’) and its purpose (‘what the treaty is for’).Footnote 48 Trade and investment agreements are heterogenous in the sense that each agreement might be said to have a distinct object and purpose depending on its specific wording.
In US – Shrimp, an early case involving GATT Article XX, the Appellate Body famously referred to the preamble to the Marrakesh Agreement, particularly its reference to sustainable development, as adding ‘colour, texture and shading’ to the task of interpreting the provisions of the covered agreements.Footnote 49 This purpose, together with other purposes set out in the preamble, such as ‘to protect and preserve the environment’ and ‘raising standards of living’, underpin the text of many provisions in the WTO agreements. GATT's preamble also refers to the object of reducing trade barriers in pursuit of, inter alia, ‘raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand’, and the preamble to GATS refers to the progressive liberalisation of trade in services ‘as a means of promoting the economic growth of all trading partners and the development of developing countries.’
Modern investment treaty preambles likewise frequently refer to investment protection as a means to sustainable development;Footnote 50 to the achievement of social objectives such as the protection of human rights, labour standards, poverty reduction or corporate social responsibility;Footnote 51 to the achievement of environmental objectives;Footnote 52 and of the regime being protective of the right to regulate.Footnote 53 While it is true that older investment treaties typically make no claim to do anything other than protect capital-exporting countries’ investments from the vagaries of capital-importing countries’ governments, they should be construed in the same way: that treaties between capital-importing and capital-exporting States are premised on the idea that investment protection is being promised in exchange for economic development.Footnote 54
If the exception has the same underlying principle as the command from which it derogates then, as noted above, it should be characterised as a permission. Parsing the objects and purposes of trade and investment agreements suggests that both their commands and the derogations thereto share the same underlying principle: sustainable development and prosperity. As such, it is strongly arguable that both general and security exceptions can and should be interpreted as permissions that limit the scope of the relevant treaty's substantive obligations.
III. The characterisation of exceptions by WTO and investment adjudicators
This Part examines the treatment of general and security exceptions by WTO panels and the Appellate Body and by investment tribunals and annulment committees. This analysis demonstrates that there are inconsistent and incoherent approaches both within and between the two subfields. A striking feature of the decided cases is the near absence of a theoretical foundation upon which adjudicators have drawn the distinction between permission and defence.
The Appellate Body has offered a partial framework for when it will characterise a treaty provision as a defence. From the outset, the Appellate Body referred to the role of GATT Article XX as being justificatory in nature—that it would operate to save an apparent breach of the obligation at issue.Footnote 55 In US – Wool Shirts and Blouses (1997), the Appellate Body elaborated a little further on the rule–exception relationship—not in jurisprudential terms, but rather by framing this analysis in terms of the burden of proof.Footnote 56 It stated that GATT Articles XX and XI:(2)(c)(i)Footnote 57 provided ‘limited exceptions from obligations under certain other provisions of the GATT 1994, not positive rules establishing obligations in themselves’,Footnote 58 and suggested that whether a provision was in a hierarchical relationship with another norm was relevant to whether it was an exception, which would then place the burden of proof on the responding State.Footnote 59
However, neither the positive rule—limited exception dichotomy nor the concept of a hierarchy of norms has been consistently applied.Footnote 60 In EC – Tariff Preferences (2004), the Appellate Body stated that where one provision permits conduct that would otherwise be inconsistent with another provision and one of those provisions refers to the other, the complaining government would bear the burden of proof ‘where one of the provisions suggests that the obligation is not applicable to the said measure’, but in other cases, the burden of proof would rest with the responding government.Footnote 61 The Appellate Body has acknowledged that the distinction between the two categories ‘may not always be evident or readily applicable’,Footnote 62 and this approach has been criticised both for its artificiality and for its inconsistent application.Footnote 63
No investment tribunal or annulment committee has explained how it has arrived at its characterisation of an exception, which might in part be explained by the absence of appellate review in international investment law, which might be expected to generate a coherent approach to this issue. In practice, however, investment tribunals have more often than not, and especially in recent cases, approached exceptions as limiting the scope of the relevant rules.
A. General Exceptions
GATT Article XX has long been treated as a defence. In US – Section 337 (1989), a (pre-WTO) GATT panel held that Article XX ‘provides for a limited and conditional exception from obligations under other provisions … [and] applies only to measures inconsistent with another provision of the General Agreement … If any inconsistencies with Article III:4 were found, the Panel would then examine whether they could be justified under Article XX(d).’Footnote 64 Since then, panels and the Appellate Body have consistently embraced this view.Footnote 65 Indeed, no alternative characterisation seems to ever have been considered. The more recent remarks in Thailand – Cigarettes (Philippines) (2011) emphasise that the Appellate Body understands the exception as justifying a prima facie breach, stating that ‘an analysis of whether a measure infringes an obligation necessarily precedes, and is distinct from, the “further and separate” assessment of whether such measure is otherwise justified’.Footnote 66 The Appellate Body takes the same approach with respect to Article XIV GATS.Footnote 67
To date, only two investment tribunals have examined general exceptions. In contrast to the Appellate Body's approach, both tribunals appeared to characterise the exception as limiting the scope of the treaty obligations. In Copper Mesa Mining v Ecuador (2016), the tribunal referred briefly to an expropriation being established by three factors: the measure permanently depriving the owner of its investment, police powers not being applicable, and the ‘non-application’ of the exception.Footnote 68 This suggests that the tribunal viewed the provision as what criminal law theorists would term a negative rule-element:Footnote 69 requiring the claimant to negative the applicability of the exception rather than requiring the host State to prove a defence (ie, a permission).
In the subsequent case of Bear Creek v Peru (2017), Peru argued that the police powers doctrine referred to in an annex to the treatyFootnote 70 and the treaty's general exceptionFootnote 71 both applied to its conduct. According to the taxonomy employed in this article, the police powers doctrine is an internal qualification that limits the scope of the negative-command of indirect expropriation—so that measures taken in the exercise of police powers do not constitute an indirect expropriation.Footnote 72 The tribunal took the view that the general exception was lex specialis which ousted the applicability of police powers,Footnote 73 seemingly with the view that the exception limited the scope of indirect expropriation in the same way.Footnote 74 As the police powers doctrine limits the scope of the negative-command of indirect expropriation, it appears that the tribunal viewed the exception as similarly limiting the scope of the investment protections in the treaty, on the basis that a lex generalis and a lex specialis would possess the same analytic character. But again, the reasoning is sparse.
B. Security Exceptions
Although GATT's Contracting Parties had invoked GATT's security exceptionFootnote 75 in various disputes prior to the inception of the WTO, the exception was not raised in a WTO dispute until 2016, and it has been raised subsequently in numerous disputes.Footnote 76 The Appellate Body has stated in passing that it regards GATT Article XXI as a defence,Footnote 77 but has yet to decide a case involving the provision. To date, only one of these disputes, Russia – Traffic in Transit (2019),Footnote 78 has been determined by a panel.
The panel appeared to take the view that the security exception functioned as a permission that limited the scope of GATT's substantive obligations—although this may have been at least in part due to the structure of Russia's arguments, which characterised the exception as a self-judging jurisdictional threshold.Footnote 79 The panel held that due to the ‘novel and exceptional features’ of the dispute,Footnote 80 it would first examine the applicability of the exception in order to determine whether and to what extent the provision was justiciable before examining Russia's compliance with its obligations.Footnote 81 The panel continued that it would determine ‘whether there can be no … inconsistency in the circumstances, because the measures were taken in accordance with the conditions set out in the security exception’.Footnote 82
The panel did not directly address the question whether the exception was a defence, even though the complaining government and several of the third parties to the dispute had argued that it was so.Footnote 83 However, the panel drew a distinction between GATT Articles XX and XXI, stating that the security exception ‘involves a fundamental change of circumstances which radically alters the factual matrix in which the WTO-consistency of the measures at issue is to be evaluated’, and that the provision did not, unlike Article XX, require a determination that the measures breached the relevant obligations.Footnote 84 (This reflects the possible distinction referred to in section II:C.1, namely whether there is something inherent in the nature of a security exception that renders its analytic character different to general exceptions.)
In international investment law, disputes involving security exceptions have for the most part arisen in under the Argentina–US BIT, concerning measures adopted by Argentina in response to its economic crisis of 2001–2002. Much has been written about these disputes; the focus here is on the approach taken to the analytic character of the exception in tribunal and annulment committee decisions. More recent decisions generally characterise the exception as a permission, although the first tranche of tribunal decisions—CMS v Argentina (2005),Footnote 85Enron v Argentina (2007),Footnote 86 and Sempra v Argentina (2007)Footnote 87 took the view that the provision was an affirmative defence, based on a false analogy with the defence of necessity in customary international law. These decisions were heavily criticised by annulment committeesFootnote 88 and in the literature.Footnote 89
Two other tribunals—LG&E v Argentina (2006)Footnote 90 and El Paso v Argentina (2011)Footnote 91 also took the view that the exception reflected the defence of necessity.Footnote 92 This defence presupposes that there has been a breach of the applicable treaty, which seems to have been the position of the tribunal in LG&E v Argentina when it said that the exception operated ‘as a ground for exclusion from wrongfulness of an act of the State’.Footnote 93 However, neither tribunal offered an explanation for this approach, and the argument is not a strong one.Footnote 94
Other investment adjudicators have characterised security exceptions as permissions. The CMS v Argentina annulment committee decision (2007) heralded this change in approach, finding that the exception was a ‘threshold requirement: if it applies, the substantive obligations under the Treaty do not apply’.Footnote 95 The Continental Casualty v Argentina tribunal (2008) noted that the security exception recognised that certain State interests ‘may justify setting aside or suspending an obligation or preventing liability from its breach’, referred to the provision as a ‘carve-out’Footnote 96 and concluded that measures coming within the exception would ‘lie outside the scope of the Treaty’ and that the treaty would be ‘inapplicable’ to those measures.Footnote 97 The annulment committee in Sempra v Argentina (2010) likewise held that ‘the terms of the treaty itself exclude the protection to the investor that the treaty would otherwise have provided’ and that the treaty ‘permits conduct adverse to the investor in specific circumstances’.Footnote 98 And the El Paso tribunal also suggested (seemingly in the alternative to the lex specialis interpretation discussed above) that measures necessary for the protection of essential security interests ‘are not in breach of the relevant BIT … all the acts considered necessary by the Tribunal to cope with this situation are excluded from the scope of the BIT.’Footnote 99
However, this approach has not been uniform. In Mobil v Argentina (2013),Footnote 100 the tribunal emphasised the differences between the security exception and the necessity defence,Footnote 101 referring to the exception as a ‘carve-out’,Footnote 102 ‘a specific provision limiting the general investment protection obligations’,Footnote 103 and as ‘exclud[ing] from the scope of the BIT’ measures falling within the exception.Footnote 104 In a separate opinion, one of the arbitrators similarly held that the provision ‘excludes the application of the Treaty's substantive provisions’ and ‘defines the operational scope of the Treaty's material obligations’.Footnote 105 Somewhat curiously, however, the tribunal also held that the security exception was a lex specialis reflecting the defence of necessity and, citing El Paso, thought that the State must not have contributed to or created the emergency situation.Footnote 106 This approach was strongly rejected by the arbitrator rendering the separate opinion.Footnote 107
Two other tribunal decisions also treat the exception as a permission. In CC Devas v India (2016), although the tribunal did not clearly express a view on the character of the security exception in the Mauritius–India BITFootnote 108 it did quote both the CMS annulment committee decision, which stated that the application of the security exception ‘excluded the operation of the substantive provisions of the BIT’,Footnote 109 and the Continental decision, where the tribunal stated that the treaty was ‘inapplicable’ to measures coming within the purview of the exception.Footnote 110 In Deutsche Telekom v India (2017), the tribunal treated the applicability of the security exception in the Germany–India BIT as a preliminary objection and, citing the CMS annulment decision, thought that if the clause applied, ‘the substantive obligations of the treaty do not apply’.Footnote 111 Since it found that the exception was inapplicable, the tribunal concluded that ‘the BIT's substantive standards apply to DT's investment’.Footnote 112
C. Summary
At an early stage, the Appellate Body locked itself into the position that GATT's general exceptions should be construed as defences. As discussed in Part IV below, this jurisprudential move has had significant, but perhaps unanticipated, implications for the way in which the Appellate Body has interpreted the relationship between the exceptions and GATT's substantive obligations. By contrast, investment tribunals have regarded general exceptions as permissions. Although there is no Appellate Body jurisprudence in relation to the security exceptions in GATT and GATS, the panel in Russia – Traffic in Transit and some recent investment tribunal decisions view security exceptions as permissions, but vestiges of the earlier, problematic approaches based on the defence of necessity remain.
IV. Implications arising from the characterisation of exceptions
One might argue that the distinction between permission and defence may not be hugely significant to litigation practice. For example, the burden of proof ought only to be important in hard cases where the question to be decided is finely balanced, and the standard of review employed by an adjudicator is dependent on many considerations apart from the character of the exception. However, while the Appellate Body has a settled approach to these issues, the practice of investment tribunals is highly variable and may, in some cases, prove decisive. These issues have been examined elsewhere.Footnote 113
The same might be said for the importance of the distinction between permission and defence in deontic logic. Arguably, the very existence of permissions presupposes the existence of commands from which they deviate.Footnote 114 In other words, regardless of whether an exception takes the form of a permission or a defence, its existence ‘proves the rule’, meaning that the distinction between permission and defence is not perhaps especially resonant.Footnote 115 Perhaps the distinction between permission and defence is most relevant to philosophical questions concerning the nature of the trade and investment regime, and to governments’ perceptions that having to mount a defence to a prima facie breach is a more onerous exercise than demonstrating that a particular measure falls outside the scope of the commands in the treaty.Footnote 116 Be that as it may, this section considers two issues arising from characterising exceptions as permissions: the relationship between the exception and the substantive obligations with regard to the role of regulatory purpose, and whether exceptions are properly characterised as limiting the jurisdiction of adjudicators or are instead a question of the merits.
A. Implications for the Rule–Exception Relationship
1. The problem of redundancy
As foreshadowed in the Introduction, the characterisation of an exception has implications for the relationship between the exception and the treaty's substantive obligations and, in turn, for the balance of rights and obligations in the relevant treaty. As a matter of treaty interpretation, the context of the exception includes the commands that the exception derogates from; as such, one must be able to read both provisions in a manner that gives effect to each of them. This is encapsulated in the principle of effectiveness, which obliges a treaty interpreter to give effect to all of the terms in the treaty in order to avoid redundancy.Footnote 117
Characterising exceptions as permissions permits consideration of regulatory purpose at the point of obligation, where the relevant provision allows such an interpretation. This can be illustrated by the relationship between GATT Articles III and XX. While the literature has long recognised the problems that attend the Appellate Body's interpretation of Article III, characterising the exception as a permission would more clearly support an interpretation of Article III that requires consideration of regulatory purpose, without raising concerns regarding the principle of effectiveness—an approach that has not been considered to date. This argument, moreover, has broader relevance to other open-textured commands found in WTO and international investment law where regulatory purpose is relevant, such as the fair and equitable treatment standard in international investment law.
It has been suggested above that exceptions vary in specificity. This is also true for the commands found in the WTO agreements and investment treaties. As such, various permutations of the rule–exception relationship appear on two axes that are both bounded by high degrees of precision and high degrees of ambiguity. WTO and international investment adjudicators’ interpretation of the rule–exception dyad may be influenced, to some extent, by the vagueness of the command vis-à-vis the relevant exception.
The Appellate Body's approach to the role of regulatory purpose in relation to national treatment under Article III GATT, a provision of some complexity and ambiguity, is informed by its characterisation of Article XX as a defence. According to this characterisation, the application of the principle of effectiveness suggests that adjudicators should consider the purpose and tailoring of the challenged measure only in the context of determining whether an exception applies, rather than in the context of determining compliance with the substantive obligations, in order to avoid such redundancy.Footnote 118
Before discussing the Appellate Body's approach, a brief discussion of pre-WTO GATT cases is in order. Two GATT panels, US—Alcoholic and Malt Beverages (1992)Footnote 119 and US—Automobiles (1994)Footnote 120 had developed an approach to interpreting Article III whereby regulatory purpose was taken into consideration in the determination of whether products were ‘like’ (the ‘aims and effects’ approach).Footnote 121 This approach, grounded in the general test set out in Article III:1 (measures ‘should not be applied … so as to afford protection to domestic production’), required that for a breach of Article III:2 (tax measures) or Article III:4 (regulatory measures) to be made out, the challenged measure must have both a protectionist objective (‘aim’) and a protective effect. As Hudec noted, considering regulatory purpose at the point of obligation avoids the ‘excessively rigorous treatment given to claims of regulatory justification under Article XX’.Footnote 122
However, the Appellate Body jettisoned the aims and effects approach at the first opportunity. In Japan – Alcoholic Beverages, the Appellate Body upheld the panel's determination that Article III:1 related only to the effect of the measure and did not call for analysis of the measure's aim under Article III:2. In EC – Bananas III (1997), the Appellate Body added that it would not apply the aims and effects approach to Article III:4 (or to national treatment under GATS).Footnote 123 Although the Appellate Body did not give much space to the issue in its report, three concerns had led the Japan – Alcoholic Beverages panel to depart from aims and effects. Most importantly for our purposes was the panel's view that aims and effects would render Article XX inutile.Footnote 124
Many argue that the abandonment of aims and effects was both doctrinally unsatisfactory and excessively formalistic.Footnote 125 As Howse has argued, ‘there are dangers in impugning as “discrimination” legitimate public policies simply based upon market disadvantage, which are blind to policy considerations, even if the policies could eventually be held to be justified under Article XX.’Footnote 126 The upshot of the Appellate Body's approach is that Article III is an overinclusive test that captures measures with a legitimate objective that happen to treat imported products less favourably, with Article XX serving a corrective function after prima facie breach has been established.Footnote 127 Article XX is a demanding assessment with stringent nexus requirements, conditions on the application of measures, and an exhaustive list of permissible objectives, which may fail to accommodate contemporary regulatory concerns such as measures to attenuate climate changeFootnote 128 or consumer information about product origin.Footnote 129 Likewise, the security exceptions in GATT and GATS are limited in their scope, appearing to exclude security-related concerns such as cybersecurity, energy security and food security. While no case has yet arisen that has required WTO adjudicators to consider this issue, it would seem to be only a matter of time before such a case arises.
To be sure, the Appellate Body has, over time, developed an approach to Article XX that gives a greater degree of flexibility to responding governments in establishing that the exception applies, by tinkering with the burden of productionFootnote 130 and permitting novel measures to satisfy the nexus of ‘necessary’ within the meaning of Article XX, based on the predicted effect of the measure.Footnote 131 One may surmise that the Appellate Body developed this approach with an eye to the need to soften what would otherwise be a very high threshold for a responding government to meet.
Some had hoped that the Appellate Body would reconsider its position with respect to aims and effects under GATT Article III following three cases decided in 2012 concerning the Agreement on Technical Barriers to Trade (TBT), in which the Appellate Body interpreted TBT Article 2.1 as permitting de facto discrimination between domestic and imported products where the differential treatment ‘stems exclusively from legitimate regulatory distinctions’.Footnote 132 Such treatment would not, on this analysis, amount to ‘treatment no less favourable’. In EC – Seal Products (2014), the EU argued that the Appellate Body should follow its TBT approach with respect to origin-neutral measures in GATT, so as to avoid incoherence between national treatment under GATT and TBT.Footnote 133 This approach would also have resulted in a consistent interpretation of the term ‘less favourable treatment’ across both instruments.Footnote 134
However, the Appellate Body declined to revisit its prior jurisprudence, instead stating that the presence of the general exceptions in the GATT meant that it would scrutinise the measure's purpose and tailoring only in the context of Article XX and not Article III.Footnote 135 As such, a responding government cannot rely on arguments pertaining to regulatory purpose in the context of determining whether Article III has been complied with, but rather only in the context of determining whether the exception applies.Footnote 136
While it would have been open to the Appellate Body to interpret Article XX as a permission, which would have avoided the problems arising from its relationship with Article III and other commands where this issue arises, it is not suggested that there is any real prospect that WTO adjudicators would deviate from this approach in future. Be that as it may, there are two reasons why critiquing this interpretive choice is important. First, the interpretation of other exceptions (such as GATT Article XXI) in the trade and investment regime is not settled. Second, following the current demise of the Appellate Body and in light of questions about the future of the WTO, any institution or institutions that are tasked with interpreting the WTO agreements or any new agreements in the field should give serious consideration to characterising these provisions (and other exceptions) as permissions. Third, this analysis aims to nudge investment adjudicators toward interpreting the rules of the relevant treaty in a manner that involves consideration of regulatory purpose at the point of obligation. As discussed in the paragraphs immediately below, it is not just WTO adjudicators that have grappled with the issue of the proper role for regulatory purpose in the presence of an exception. Characterising investment treaty exceptions as defences (particularly those that incorporate GATT Article XX by referenceFootnote 137) risks creating the same issues that have plagued GATT jurisprudence.Footnote 138
This problem is illustrated by the decision in LG&E v Argentina. The tribunal found that Argentina's emergency measures were prima facie in breach of fair and equitable treatment, but that the security exception operated to exonerate Argentina.Footnote 139 It appears that the tribunal viewed the exception as the only appropriate locus of consideration of regulatory purpose. The effect of this approach—not to consider regulatory purpose at the point of obligation—diverges from the approach to fair and equitable treatment taken in the overwhelming majority of investment cases, in which tribunals consider whether, in all the circumstances, the government actions were fair and equitable (analysing factors such as whether the relevant conduct was arbitrary or discriminatory). Moreover, the effect of the tribunal's approach to regulatory purpose was to apply a more stringent test (here, ‘necessary for the protection of … essential security interests’) than would otherwise have been applied: typically, investment tribunals do not employ a least-restrictive means test in determining compliance with fair and equitable treatment.
2. Characterising the exception as a permission avoids redundancy
Viewing exceptions as permissions would avoid the redundancy problem identified by the panel in Japan – Alcohol, while permitting analysis of regulatory purpose at the point of obligation. If the exception limits the scope of the treaty's commands, logically its applicability should be determined before adjudicators consider the question of compliance with the treaty's substantive obligations.Footnote 140 That is, whether a challenged measure comes within the scope of the exception—whether it is directed to the subject matter of the exception and any restrictions on the design of the measure (such as ‘necessary to’ and/or controls on how the measure has been applied)—is distinct from the question whether the State's conduct would otherwise be inconsistent with its treaty obligations.
In other words, regulatory purpose is considered in terms of the exception at the outset (where raised by the responding government), and if the exception is not made out, regulatory purpose is then considered in the context of the treaty's substantive obligations, where it is possible to do so. This order of analysis was taken by the panel in Russia – Traffic in Transit and, for example, by the Continental Casualty v Argentina tribunal.Footnote 141 I outline how this approach would operate by considering three hypothetical scenarios in relation to GATT Articles III and XX:
1. An environmental measure affords less favourable treatment to imported products than like domestic products. However, the measure complies with GATT Article XX(b)—it is necessary to protect plant life and complies with the chapeau. Examining Article XX first, we find that as the requirements of the exception are made out, the treaty obligations (namely, GATT Article III) do not apply.
2. A variation on the above measure that does not comply with the ‘necessary’ requirement in Article XX(b). However, the measure clearly has a rational connection to the objective of protecting plant life. As the exception does not apply, we then consider regulatory purpose when determining whether the measure complies with Article III. Here, regulatory purpose has work to do in a manner similar to TBT Article 2.1: whether the measure ‘stems exclusively from a legitimate regulatory distinction’.Footnote 142
3. A variation on the above measure that has an objective that does not come within the purview of Article XX—say, a measure that aims to attenuate the effects of climate change. The exception does not apply. Again, we go to Article III and consider regulatory purpose in the determination of breach.
One objection to this approach is that it could result in more measures being upheld as compliant with WTO law than is currently the case—that is, that it might be under-inclusive by failing to capture all instances of breach that the prevailing approach would capture. However, whether this should be regarded as problematic depends on one's view as to the desirability of the current approach, which can capture instances of de facto discrimination that arguably ought not to be unlawful.Footnote 143 The risk of under-inclusiveness might suggest that the ‘necessary for’ test should be applied in the context of the substantive obligation (here, GATT Article III). However, this approach would result in the rule being in some instances be stricter than the exception to it (eg Article XX(g), ‘relating to the conservation of exhaustible natural resources’).Footnote 144
Writing in 2008, DiMascio and Pauwelyn argued that consideration of regulatory purpose in the context of discrimination claims under GATT and GATS should not have any predetermined nexus requirement: rather, the nexus could vary depending on the ‘relative importance’ of the objective,Footnote 145 following the variegated rigour with which the Appellate Body says it deploys the necessity test in terms of the general exceptions.Footnote 146 This approach would require a more rigorous nexus in relation to a claim that a measure is de jure discriminatory, as opposed to de facto discrimination.Footnote 147 (This distinction is found in other legal systems, such as in the US in relation to interstate commerce.)Footnote 148 However, a legal test that varies according to the tribunal's perception of the importance of an objective is inherently uncertain. In this regard, the TBT approach (‘stems exclusively from a legitimate regulatory distinction’) seems to be appropriate in situations where the exception does not apply; as noted above, this test would appear to incorporate the strictures imposed by the chapeau to Article XX.Footnote 149
To conclude, viewing the exception as a permission that limits the scope of the commands in the treaty could solve the redundancy problem and deal with the constraints imposed by the exhaustive list of regulatory objectives in general exception clauses. Having disposed of the applicability of the exception at a preliminary stage (if relevant to the particular dispute), the adjudicator can consider the government's compliance with the relevant substantive norm or norms, including examining regulatory purpose where permitted by the relevant norm, without regard to the confines of the particular exception.
B. Jurisdiction or Merits?
Where the exception is characterised as a permission, an issue that arises is whether its applicability should be treated as a question of jurisdiction or a question of the merits. This issue has practical implications for investment disputes, where proceedings are frequently bifurcated for efficiency reasons. Still, the distinction is relevant in WTO law for doctrinal reasons and due to the increasing cross-fertilisation of WTO and international investment law.
It is intuitively temping to argue that viewing an exception as a permission means that the applicability of the exception ought to be considered as a preliminary question of jurisdiction. Alschner and Hui argue that it is possible to interpret an ‘exclusion’ in an investment treaty (in this article's terminology, a permission) as a ‘jurisdictional threshold question that determines the scope of an arbitral trbunal's competence.'Footnote 150 The argument here seems to be that a permission limits the jurisdiction of the adjudicator ratione materiae.
In international investment law, apart from the obvious point that dealing with exceptions at the jurisdictional stage may reduce the cost of the proceedings, one reason why a government might want to argue that the applicability of the exception is a question of jurisdiction pertains to the powers of a reviewing court or annulment committee, in the event that the government loses the case. An excess of jurisdiction would amount to an ‘excess of authority’ under the New York Convention,Footnote 151 permitting an award to be set aside by the reviewing court, or a ‘manifest excess of powers’ in terms of the powers of annulment committees to annul the award under the ICSID Convention.Footnote 152 In Deutsche Telekom, India unsuccessfully sought to have the award set aside in the Swiss Federal Court under the New York Convention on the basis that the tribunal acted in excess of jurisdiction by rendering an award.Footnote 153 The Court agreed with the claimant that the exception was a question of the merits rather than a jurisdictional issue, noting that India had not characterised the issue as a jurisdictional one when the matter was first heard. As the applicability of the exception was a question of the merits, the Court had no authority to review the decision on this basis.
Viewing the applicability of an exception as an issue of jurisdiction is inconsistent with the approach taken by the International Court of Justice (ICJ) to security exceptions in US treaties of friendship, commerce and navigation,Footnote 154 which are materially similar to security exceptions found in GATT, GATS, and investment treaties. In Military and Paramilitary Activities in and against Nicaragua (Nicaragua v US), the ICJ held that the exception was covered by the compromissory clause in the treaty, which provided that that any dispute about the ‘interpretation or application’ of the Treaty came within the Court's jurisdiction and would be dealt with on the merits.Footnote 155 The ICJ has followed this approach in the three subsequent disputes in which a security exception has been raised.Footnote 156
The ICJ's approach is correct.Footnote 157 The existence of adjudicatory power over a particular matter or, in other words, the competence of the tribunal to give a ruling (jurisdiction ratione personae, materiae, temporis, loci) should be distinguished from the exercise of adjudicatory power over that matter (the merits).Footnote 158 In international investment law, for example, jurisdiction concerns the threshold question whether the State has consented to jurisdiction and an investment has been made by a national of another treaty party, whereas in WTO law, Article 1.1 of the Dispute Settlement Understanding gives the WTO dispute settlement system jurisdiction over any dispute between WTO members pertaining to one or more of the covered agreements—including whether an exception applies, as observed by the Russia – Traffic in Transit panel.Footnote 159
V. Conclusion
The inconsistent treatment of general and security exceptions by WTO and international investment adjudicators suggests that a greater understanding of their analytic character is needed. This article has argued that for both normative and practical reasons, we should view general and security exceptions as permissions rather than defences, where the rules of treaty interpretation permit such a construction. Characterising exceptions in this way accords, in a general sense, with the goals of the trade and investment regime—the product of a negotiated compromise between the regime's primary objectives of trade liberalisation and investment protection, and its broader purposes of sustainable development and prosperity. This approach would also lessen the perceived burden on responding governments in international trade and investment disputes: that mounting a defence is something more onerous than making an argument that the measure or measures at issue are outside the scope of the treaty.
From a practical perspective, characterising exceptions as permissions would permit consideration of regulatory purpose at the point of obligation. This structure of argumentation would be a way to address the problematic manner in which the Appellate Body has construed the relationship between rule and exception under GATT and GATS, not to mention other trade and investment agreements that employ the same dyadic treaty structure, combining open-textured commands with specific exceptions thereto. Finally, although it might be intuitively temping to argue that viewing an exception as a permission means that its applicability is a question of jurisdiction, the article argues that the applicability of exceptions is properly a question of merits.
By shining some light on the analytic character of exceptions, examining the approaches of WTO and international investment adjudicators to these provisions, and discussing the implications that flow from characterising exceptions as permissions, the article has illuminated both implications for litigation practice and some deeper questions that emerge from what would at first glance appear to be a narrow and somewhat esoteric question.
