Police Powers Doctrine

The police powers doctrine provides that a State possesses an inherent right to regulate in protection of the public interest and does not act wrongfully when, pursuant to this power, it enacts bona fide, non-discriminatory and proportionate regulations in accordance with due process.¹

State regulatory power on the relationship between the State’s right to regulate and different standards of protection, including fair and equitable treatment, full protection and security, etc.

Public interest for a general overview of treaty practice and interpretation on the State’s right to regulate in the public interest.

Right to regulate in expropriation and Regulatory expropriation for additional analysis of the State’s right to regulate in expropriation.

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.

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

Arbitral jurisprudence suggests that, while the government’s conduct subsequent to the adoption of the measure may be taken into account, the focus of the inquiry is on the government’s contemporaneous motivation: a post-hoc public welfare justification will not suffice.²⁵

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:

1. “generally accepted measures of police powers that aim at enforcing existing regulations against the investor’s own wrongdoings, such as criminal, tax and administrative sanctions, and revocation of licenses and concessions”;²⁷ and
2. “regulatory measures aimed at abating threats that the investor’s activities may pose to public health, environment or public order [. . .] such as the prohibition of harmful substances, tobacco plain packaging, or  the imposition of emergency measures in times of political or economic crises."²⁸

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

In line with the growing recognition of proportionality as a general principle of international law,³⁵ some tribunals consider that the police powers doctrine only encompasses measures whose impacts on investors are proportionate to the pursued policy objectives.³⁶ 

Various different proportionality analyses have been discussed or applied in the context of police powers, including:

1. an enquiry as to whether the measure is “obviously disproportionate”;³⁷
2. the requirement of a “reasonable relationship of proportionality” between the measure and aim sought to be realized by the measure;³⁸ and
3. an analysis of whether the measure is (a) suitable for achieving its legitimate public purpose, (b) necessary for achieving that purpose in that no less burdensome measure would suffice, and (c) not excessive in that its advantages are outweighed by its disadvantages.³⁹ However, it is clear that tribunals accord States a greater degree of deference in relation to matters involving the protection of public health or other “highly specialized domains involving scientific and public policy determinations.”⁴⁰

A regulatory measure must be enacted in accordance with due process in order to constitute a legitimate exercise of police powers.⁴¹ See further Due process in Expropriation.

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.

Mostafa, B., The Sole Effects Doctrine, Police Powers and Indirect Expropriation under International Law, Australian International Law Journal Vol. 15, 2008, pp. 267-296.

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, 2^nd 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.

Sweet Stone, A., Investor-State Arbitration: Proportionality’s New Frontier, Law and Ethics of Human Right, Vol. 4, Issue 1, 2010, p. 76.

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.