Public interest for a general overview of treaty practice and interpretation on the State’s right to regulate in the public interest.
Although the State’s right to regulate may be taken into account in evaluating a variety of claims, some tribunals have held that the police powers doctrine only applies as an affirmative defense to expropriation claims.2
The police powers doctrine is most often relied upon to distinguish between compensable expropriation and non-compensable regulatory measures.3 In this context, the police powers doctrine may replace or be applied alongside the sole effects doctrine4 or a stand-alone proportionality analysis.5 The doctrine is distinct from, and should not be confused with, the “public purpose,” “public interest” or public necessity”6 requirements for lawful expropriations7 contained in international investment agreements.8
The police powers doctrine has been recognized as a principle of customary international law.9 Tribunals10 frequently note its inclusion in the 1961 Harvard Draft Convention on the International Responsibility of States for Injuries to Aliens,11 and the United States Third Restatement of the Law of Foreign Relations in 1987.12
The Tribunal in Philip Morris v. Uruguay observed that, since 2000, “a range of investment decisions have contributed to develop the scope, content and conditions of the State’s police powers doctrine, anchoring it in international law.”13 Nonetheless, a number of commentators have disputed the customary international law nature of the police powers doctrine.14 Various tribunals have also emphasized the limits of the doctrine,15 in particular where explicit guarantees had been given to the investor.16
Certain treaties explicitly reference the “police powers” exception17 or invoke the doctrine through other language that distinguishes expropriatory measures from non-compensable regulatory measures.18 See Expropriation, Section II. However, if the tribunal considers the doctrine to form part of customary international law, the State will be allowed to rely on the doctrine even if it is not expressly incorporated into the treaty in question.19 See further State regulatory power.
VI. Conditions that must be satisfied in order for a measure to fall within the scope of the police powers doctrine
Although there is no exhaustive test for determining whether a State acted within its legitimate police powers,20 tribunals have posited that its measures should be bona fide, non-discriminatory, proportionate and enacted in due process. Generally, the question of whether a measure crosses the line separating non-compensable regulatory activity from expropriation must be assessed in light of all the circumstances, and “[t]he context within which an impugned measure is adopted and applied is critical to the determination of its validity.”21
To constitute a legitimate exercise of police powers, the measure must be bona fide and enacted for the purpose of protecting public welfare.22 In assessing whether this condition is satisfied, tribunals often analyse contemporaneous evidence of the government’s decision-making process and the information on which the decision to adopt the measure was based.23 The State’s compliance with its internal laws may also be relevant.24
Importantly, the police powers doctrine will only apply to measures adopted in the pursuit of certain types of public welfare objectives.26 Upon reviewing the relevant case law, the Tribunal in Magyar Farming Company Ltd v. Hungary observed that a measure annulling a claimant’s vested rights can only be exempt from the duty to compensate if the measure falls within one of two broad categories, namely:
The Tribunal in Magyar concluded that the measure in question was passed as part of a change to agricultural land holding policy.29 While the measure “purportedly benefitted Hungarian society as a whole,” it did not fall into any of either of the above-mentioned categories and was therefore compensable.30 See also Public interest, Taxation.
The police powers doctrine does not apply to discriminatory measures that cause an investor to be treated less favorably than other investors in like circumstances without reasonable or legitimate justification.31 A majority of tribunals consider that a measure may be discriminatory even if the State did not intend to discriminate against the claimant.32 See further Non-Discrimination (Expropriation), Section VII.
It has been suggested that the police powers doctrine may only apply to regulations of “general application” rather than measures concerning a specific investor.33 However, this limitation on the doctrine is subject to debate, as targeted measures will not necessarily fall foul of the principle of non-discrimination.34
Various different proportionality analyses have been discussed or applied in the context of police powers, including:
Bücheler, G., Proportionality in Investor-State Arbitration, 2015, Oxford Scholarship Online, footnote 11, p. 31.
Burghetto, M. and Lorfing, P., The Evolution and Current Status of the Concept of Indirect Expropriation in Investment Arbitration and Investment Treaties, Indian Journal of Arbitration Law, Vol. VI (2), 2017, pp. 98-123.
Henckels, C., Indirect Expropriation and the Right to Regulate: Revisiting Proportionality Analysis and the Standard of Review in Investor-State Arbitration, 15 Journal of International Economic Law, 2012, pp. 223–55.
Hübner, J., Police Powers in Philip Morris v. Uruguay, in Risse, J. et al. (eds.), SchiedsVZ | German Arbitration Journal, Vol. 16, Issue 5, pp. 288-294.
Marisi, F., Chapter 6: Interpretation Doctrines, in Environmental Interests in Investment Arbitration, 2020, pp. 186-207.
Rajput, A., The Concept of ‘Regulatory Measure’ and ‘Expropriatory Measure’, in Regulatory Freedom and Indirect Expropriation in Investment Arbitration, 2018, pp. 7-20.
Ranjan, P., Police Powers, Indirect Expropriation in International Investment Law, and Article 31(3)(c) of the VCLT: A Critique of Philip Morris v. Uruguay, Asian Journal of International Law, Vol. 9, Issue 1, 2019, pp. 98-124.
Sabahi, B. et al., XVIII. Expropriation, in Investor-State Arbitration, 2nd ed., 2019, pp. 575-630.
Sicard-Mirabal, J. and Derains, Y., Expropriation, in Introduction to Investor-State Arbitration, Kluwer Law International, 2018, pp. 115-132.
Viñuales, J., Sovereignty in Foreign Investment Law, in Douglas, Z. et al. (eds.), The Foundations of International Investment Law: Bringing Theory into Practice, Oxford University Press, 2014, pp. 326-346.
Qian, X., Cross-Regime Harmonization Through Proportionality Analysis: Methods of Review, in Water Services Disputes in International Arbitration: Reconsidering the Nexus of Investment Protection, Environment, and Human Rights, 2020, pp. 115-160.
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