The sole effects doctrine is a school of thought in investment law jurisprudence and scholarship that prescribes that in the assessment of indirect expropriation claims, tribunals should primarily – or exclusively – base their findings on the effect that the disputed measure had on the investment.1 According to the sole effects doctrine, additional factors, such as the intention of the government or the purpose of the disputed measure, should not be considered2 or are less important3 in the assessment of an indirect expropriation claim.
II. Treaty practice
Historically, bilateral investment treaties did not include detailed provisions on the definition of (indirect) expropriation. Most definitions, however, did include a reference to the effects of the disputed measures. For example, the Energy Charter Treaty and other bilateral investment treaties describe indirect expropriation as “measures having effect equivalent to nationalization or expropriation”.5 This wording, or alternative formulations in investment treaties, such as “an effect tantamount to”6 or “with a similar effect”7 directed arbitral tribunals to place the effect of the measures in the centre of their analysis.8
III. Origins of the sole effects doctrine in jurisprudence
The origins of the doctrine date back to the Norwegian Shipowners’ Claims arbitration, where the arbitral tribunal held that “[…] whatever the intentions may have been, the United States took […] the contracts […]”.9 Other tribunals have followed the same approach.10 The sole effects doctrine also found application in the practice of the Iran–United States Claims Tribunal,11 although not on a consistent basis.12
IV. Limitations on the application of the sole effects doctrine
Limiting the reach of the sole effects doctrine are the ever-growing number of decisions that argue that the State’s intention behind an alleged expropriatory regulation should also be given weight in the analysis.17 The rationale behind these decisions is that a State’s exercise of its regulatory powers for a good faith objective in a non-discriminatory manner might act as a bar from a finding on indirect expropriation, or have an impact on whether compensation should be granted to the investor.18 (See further Right to regulate and Bona fide principle and Indirect Expropriation (Section IV))
This approach has been described in scholarship as a “balancing” approach,19 “proportionality test”,20 or the “police powers doctrine”.21 In a recent decision, the arbitral tribunal held that there was a “consistent trend” in awards and treaty practice in differentiating the exercise of police powers from indirect expropriation, and that this trend “reflect[s] the position under general international law”.22
V. Modern investment treaty provisions
The 2012 U.S. Model BIT (Annex B Section 4.a), the 2018 Netherlands Model BIT (Article 12(4)) and the CETA (Annex 8-A) include a non-exhaustive list of factors to be considered in the determination whether a measure constitutes an indirect expropriation: these factors include the economic impact of the measure, the duration and the character of the measure. As the list is non-exhaustive, tribunals are presumably free to introduce additional elements on a case-by-case basis. These same investment treaties also include provisions stipulating that good faith regulation by the state to protect legitimate public interest will not, as a general rule, qualify as an indirect expropriation.
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