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. 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 considered in the assessment of an indirect expropriation claim.1
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”.3 This wording, or alternative formulations in investment treaties, such as “an effect tantamount to”4 or “with a similar effect”5 directed arbitral tribunals to place the effect of the measures in the centre of their analysis.6
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 […]”.7 The sole effects doctrine also found application in the practice of the Iran–United States Claims Tribunal,8 although not on a consistent basis.9
One of the first instances, where an investment tribunal – indirectly – dealt with the sole effect doctrine was in the in the Santa Elena case.10 Tribunals in Siemens v. Argentina,11 Biwater Gauff v. Tanzania,12 and Saipem v. Bangladesh13 have also upheld the application of the sole effects doctrine.
Starrett Housing Corporation, Starrett Systems, Inc. and others v. The Government of the Islamic Republic of Iran, Bank Markazi Iran and others, IUSCT Case No. 24, Interlocutory Award (Award No. ITL 32-24-1), 19 December 1983, para. 66; Tippets, Abbet, McCarthy, Stratton v. TAMS-AFFA, IUSCT Case No. 7, Award (Award No. 141-7-2), 29 June 1984, para. 22; George E. Davidson (Homayounjah) v. Iran, IUSCT Case No. 457, Award (Award No. 585-457-1), 3 May 1998, para. 104.
IV. Limitations on the application of the sole effects doctrine
Limiting the reach of the sole effects doctrine are the ever-growing number of decisions14 that argue that the State’s intention behind an alleged expropriatory regulation should also be given weight in the analysis. 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.
This approach has been described in scholarship as a “balancing” approach,15 “proportionality test”,16 or the “police powers doctrine”.17 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”.18
Methanex Corporation v. United States of America, Final Award on Jurisdiction and Merits, 3 August 2005, Part 4 Chapter D, para 7; Saluka Investments BV v Czech Republic, PCA Case No. 2001-04, Partial Award, 17 March 2006, para. 262; Chemtura Corporation v. Canada, PCA Case No. 2008-1, Award, 2 August 2010, para. 266; Técnicas Medioambientales Tecmed S.A. v. United Mexican States, ICSID Case No. ARB(AF)/00/2, Award, 29 May 2003, para. 119; AWG Group Ltd. v. Argentina, Decision on Liability, 30 July 2010, para. 139.
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.