Shielding Foreign Investment Screening from Challenge under Investment Treaties
Author: Dr. Joshua Paine (University of Bristol)
Introduction
This post considers how States can design international investment agreements (“IIAs”) to prevent foreign investment screening measures from being subject to successful challenge under such treaties. It will demonstrate that there are a wide variety of strategies for insulating investment screening measures from successful challenge under an IIA. While some of these techniques are specific to investment screening (e.g., excluding investment screening from investor–State dispute settlement (“ISDS”) procedures or listing investment screening frameworks as a non-conforming measure), others are more general techniques for protecting policy space (e.g., security exceptions and general exceptions provisions).
I. Excluding Investment Screening from Investor-State or State-State Dispute Settlement
Some States use exclusions from ISDS and State–State dispute settlement (“SSDS”) to exclude measures taken under their investment screening frameworks from being challenged. For example, Canada’s more recent IIAs include an exclusion from ISDS and SSDS that covers ‘[a] measure adopted or maintained by Canada relating to a review under the Investment Canada Act, R.S.C. 1985, c. 28, as amended, with respect to whether or not to permit an investment that is subject to review’ (Canada–United Arab Emirates (UAE) BIT, Annex III(1); Canada–Indonesia CEPA, Annex 13-A(1)). Similarly, newer Australian IIAs frequently exclude from both ISDS and SSDS ‘[a] decision under Australia’s Foreign Investment Framework’, with the exclusion specifying the pieces of legislation that comprise the Framework (Australia–Indonesia CEPA, Annex 14-C(1); Australia–UAE BIT, Annex III).
On their face, such exclusions from dispute settlement seem to offer a relatively effective means for preventing investment screening measures from being subject to successful challenge under an IIA. However, in a dispute, the scope of such exclusions from ISDS and SSDS would ultimately fall to a tribunal or panel to construe, subject to the ordinary rules on treaty interpretation. For example, in Global Telecom v Canada, although the relevant IIA excluded from ISDS ‘[d]ecisions by either Contracting Party not to permit … acquisition of an existing business enterprise or a share of such enterprise’, a majority of the Tribunal found that the proposed transaction, whereby the investor would gain voting control over the local subsidiary, did not fall within the BIT’s carve-out as it did not involve the acquisition of ownership and hence fall within the reference to ‘acquisition of an existing business enterprise or a share of such enterprise’ (Award, paras. 326–334). Furthermore, it should be emphasised that the vast majority of IIAs in force do not include exclusions from ISDS or SSDS for measures adopted pursuant to investment screening frameworks. For example, in a 2022 study of Australia’s IIAs, Voon and Merriman (2022, pp. 13–14) found that while most of Australia’s modern IIAs include an explicit exclusion from ISDS for Australia’s foreign investment screening policies – and several exclude such policies from SSDS also – Australia’s older IIAs do not include these explicit exclusions and thus Australia would have to rely on other strategies for preventing investment screening measures being challenged.
II. Listing Foreign Investment Screening as a Non-Conforming Measure
Non-conforming measures provisions are common in IIAs that apply investment liberalization obligations to the pre-establishment phase. Essentially non-conforming measures provisions permit treaty parties to maintain listed existing non-conforming measures that do not comply with the investment liberalization obligations in the treaty, and also to reserve the right to adopt future non-conforming measures in particular sectors or policy areas that are listed. Typically, non-conforming measures provisions have one annex for existing non-conforming measures, and another annex where treaty parties can list particular sectors or areas where they reserve the right to adopt future non-conforming measures (see, e.g., Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”), Art. 9.12(1)–(2)).
For example, in the CPTPP several Parties list their investment screening frameworks as an existing non-conforming measure (in their Annex I schedule) and also reserve the right to adopt future investment screening measures in their Annex II schedules. For instance, New Zealand’s schedule of existing non-conforming measures includes an entry that covers New Zealand’s ‘overseas investment regime’ and investment activities which require prior approval (pp. 12–13) and, in its schedule of potential future non-conforming measures, New Zealand also ‘reserves the right to adopt or maintain any measure that sets out the approval criteria to be applied to the categories of overseas investment that require approval under New Zealand’s overseas investment regime’ (Annex II schedule, pp. 7–8). Similar entries can be found in the schedules of Australia (Annex I schedule, pp. 3–6; Annex II schedule, pp. 5–6). Voon and Merriman (2022, pp. 15–20), in their review of Australia’s treaty practice, found that many IIAs list Australia’s investment screening policies as a non-conforming measure, although there are important variations in the scope of such entries. Losari (2026, pp. 124–125) also highlights that under the Regional Comprehensive Economic Partnership (“RCEP”), Japan and South Korea have listed existing and potential future investment screening measures in their schedules of non-conforming measures and reservations (see, e.g., Japan Annex III schedule, pp. 4, 13, 15–16, 18–21, 27–28, 44, 47–50, 56–57, 63, 66, 68–69; South Korea Annex III schedule, p. 48).
A key limitation of listing foreign investment screening as an existing and/or potential future non-conforming measure is that non-conforming measures provisions usually only apply to the investment liberalization obligations in an IIA, so they will not help the State where an investment screening measure is challenged under obligations not covered by the non-conforming measures provision, e.g. fair and equitable treatment (“FET”) or indirect expropriation (similarly, Voon and Merriman, 2022, p. 12). To the extent that disputes may arise regarding the interpretation and scope of an entry within a schedule of existing or future non-conforming measures, it should be noted that newer IIAs often include a mechanism whereby such questions, on the request of the respondent State, can be referred to the treaty parties or a treaty-based commission for resolution (e.g., CPTPP, Art. 9.26; DR–CAFTA, Art. 10.23).
III. Excluding Particular Sectors
Some IIAs exclude particular sectors from treaty coverage entirely or from the scope of certain obligations under the IIA. While such exclusions are typically not specific to investment screening measures, where such exclusions exist, they may provide legal cover for States to adopt investment screening measures in the relevant sectors (see also Voon and Merriman, 2022, p. 22, regarding investment screening being covered by exclusions from ISDS for public health or public welfare measures). For example, European Union (“EU”) IIAs tend to exclude certain sectors from the investment liberalization commitments in the agreement, including ‘audio-visual services’, ‘national maritime cabotage’ and ‘domestic and international air services’ (e.g., EU–Chile Interim FTA, Art. 10.1(2); EU–New Zealand FTA, Art. 10.2(3)). It is also common to exclude government procurement and subsidies from the scope of certain non-discrimination obligations (e.g., CPTPP, Art. 9.12(6); CETA, Art. 8.15(5)). Another technique is to exclude particular sectors from the definition of an ‘investment’ under the IIA, thereby denying treaty coverage. For example, United Arab Emirates (“UAE”) IIAs typically exclude from the definition of ‘investment’ an interest arising from a concession ‘for the exploration and exploitation of natural resources’ (e.g. Canada–UAE BIT, Art. 1(f); India–UAE BIT, Art 1.4(f)).
IV. Security Exceptions
A significant minority of IIAs include security exceptions which are often partly modelled on Article XXI of the General Agreement on Tariffs and Trade (“GATT”), but broader in that many IIAs do not include the subparagraphs further specifying the type of ‘essential security interests’ covered by such exceptions (similarly Henckels, 2024, p. 114; Abel, 2026, pp. 58, 61). For example, UNCTAD’s IIA Mapping Project finds that of 2808 mapped IIIAs, 594 treaties include some form of essential security exception. The same UNCTAD tool finds that 335 of 2808 mapped IIAs include self-judging language within a security exception.
Even where an IIA includes a security exception with self-judging language, the existing case law suggests that the invocation of such exceptions will be subject to a form of good faith review by an international tribunal. For example, in Seda v Colombia, a case under the US–Colombia TPA, the security exception provided that nothing in the Agreement shall be construed ‘to preclude a Party from applying measures that it considers necessary for … the protection of its own essential security interests’, and a footnote further clarified that ‘[f]or greater certainty, if a Party invokes [the security exception] … the tribunal or panel hearing the matter shall find that the exception applies’ (Art. 22.2(b)). Notwithstanding this wording, the Seda v Colombia Tribunal held that the invocation of the exception was subject to ‘a “light-touch” good faith review’ involving a requirement of plausibility ‘between the measures adopted by the State and the essential security interest sought to be protected’ (Seda v Colombia, Award, para. 655; see also paras. 748, 783). Similarly, in Riverside Coffee v Nicaragua, a case under the Dominican Republic–Central America FTA, where the security exception also contained self-judging language, the Tribunal held that it had ‘the power to determine whether’ the provision had been invoked ‘in good faith’, which in turn required asking ‘(i) whether the CAFTA Party in question has invoked the provision in due time, in order to put the other CAFTA Parties and their investors on notice of the non-applicability of DR–CAFTA to such measures; and (ii) whether the measures in question are reasonably or plausibly related to the alleged essential security interests’ (Riverside Coffee v Nicaragua, Award, paras. 264, 271). The key point is that even where a security exception includes self-judging language, its invocation will be subject to a form of good faith review, which typically requires a plausible connection between the measures adopted and the alleged national security interests.
V. General Exceptions Provisions
Some IIAs include general exceptions provisions based on Article XX of the GATT and Article XIV of the General Agreement on Trade in Services (“GATS”). While these provisions are not specific to investment screening measures, investment screening measures could conceivably be covered by general exceptions provisions. For example, Abel (2026, p. 64) notes that ‘[i]n EU – Energy Package … the WTO Panel upheld screening of foreign investment into energy services as a measure protecting public order due to the risks for security of EU energy supply’ and thus falling provisionally within the reference to ‘measures necessary … to maintain public order’ in Article XIV(a) of the GATS (see EU – Energy Package, Panel Report, 2018, para. 7.1208; and generally paras. 7.1203–7.1240). Voon and Merriman (2022, p. 35) also note that ‘foreign investment screening that is related to health or the environment might be justified under … general exceptions’. A key limitation of general exceptions provisions as a strategy for protecting investment screening measures is that several ISDS tribunals have held that even where a general exceptions provision applies, it does not remove the obligation to pay compensation in relation to the relevant treaty breach, e.g. a breach of FET (see Eco Oro v Colombia, Decision on Jurisdiction, Liability, and Directions on Quantum, 2021, paras. 829–830, 836–837; Montauk Metals v Colombia, Award, 2024, paras. 976, 978, 981–982). Even if a future tribunal were not to follow such reasoning, general exceptions provisions are typically more challenging for a State to satisfy compared to security exceptions, as they generally require a measure to be shown to be ‘necessary’ to fulfil the permissible policy objective – a potentially demanding least restrictive means test – and the measure must also comply with the ‘chapeau’ requirements from Article XX of the GATT and Article XIV of the GATS (Abel, 2026, pp. 64–65).
Conclusion
This post has considered a variety of techniques whereby States exclude investment screening measures from ISDS (and sometimes SSDS) procedures or otherwise seek to shield investment screening measures from successful challenge under an IIA. As we have seen, while some of these techniques are specific to investment screening (e.g. exclusions from ISDS/SSDS and listing investment screening as a non-conforming measure), others are more general techniques for protecting policy space that may conceivably cover investment screening measures (e.g. security exceptions, general exceptions provisions, and excluding particular sectors from treaty coverage).
Some of these techniques seem likely to be more effective than others. For example, relying on general exceptions provisions to shield investment screening measures would not be wise, given how such provisions have been interpreted by investment treaty tribunals to date. Listing investment screening as a non-conforming measure is not by itself sufficient, given that non-conforming measures provisions typically only cover investment liberalization obligations and do not prevent challenge under other standards such as FET and indirect expropriation. Expressly excluding measures adopted pursuant to an investment screening framework from ISDS and SSDS appears to be a relatively effective option, however, ultimately, disputes over the interpretation of such exclusions would fall for ISDS or SSDS tribunals or panels to decide, as an issue of jurisdiction.
More generally, most of the techniques considered in this post would still fall to tribunals or panels to construe where disputes arise over their interpretation and application. It is only non-conforming measures provisions that often include a dedicated mechanism whereby questions concerning the interpretation of entries in the relevant schedules can be referred to the treaty parties to determine jointly.
