Environmental Concerns In International Investment Treaty Arbitration ' The Role Of Carve-Out Clauses

• Published date: 05 July 2023
• Subject Matter: Environment, Litigation, Mediation & Arbitration, Environmental Law, Arbitration & Dispute Resolution
• Law Firm: Victoria Associates
• Author: Rita de Carvalho

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...