Right to Regulate in the Context of Expropriation

The right to regulate entitles the State to act in the public interest.¹ Depending on the manner in which such right is exercised, arbitral tribunals have held that regulatory measures that lead to the taking of property may or may not constitute a compensable expropriation.² In the context of a regulatory taking, a State’s right to regulate has been often used interchangeably with the doctrine of “police powers”. See also Public interest, State Regulatory Power, Police powers doctrine.

Many tribunals have recognized that States have a right to regulate under customary international law regardless of whether such right is provided in the applicable investment treaty.³ A number of recent investment treaties further specify that legitimate measures adopted in the public interest do not constitute expropriation,⁴ except in rare circumstances.⁵ 

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

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

Regulatory expropriation for background on this type of indirect expropriation.

Police powers for specific analysis on the conditions required for non-compensable takings.

Illegitimate exercises of the right to regulate can amount to regulatory expropriation.⁶ There has yet to be a comprehensive test to distinguish a valid exercise of the right to regulate from regulatory expropriation.⁷ Thus, the assessment of whether a regulatory measure is a legitimate exercise of the right to regulate is context-specific and depends on the facts of each case.⁸ Some factors identified by tribunals as indicative of a compensable expropriation having taken place include an assessment of whether the measure was:

1. bona fide for the purpose of protecting public welfare (see further below),⁹
2. non-discriminatory,¹⁰
3. proportionate¹¹ and
4. enacted according to due process.¹² 

See further Police powers doctrine.

There is yet to be a consensus on whether the State’s purpose behind the measure should be considered in assessing whether it constitutes expropriation. Some tribunals held that the purpose of the measure should be taken into account.¹³ Other tribunals have applied the “sole effects” doctrine and held that one should look at the effects of the measure solely and not the purpose behind it.¹⁴ See Sole Effect Doctrine. A third approach allows the purpose to be considered, but accords it only secondary importance.¹⁵

Tribunals have identified the following types of measures as valid exercises of the State’s right to regulate:

1. cancelling a license or concession because the investor failed to comply with the legal requirements to maintain it;¹⁶
2. revoking a bank’s license where the bank was in serious financial distress;¹⁷
3. forced administration of a bank in serious financial distress;¹⁸
4. banning the sale and use of a gasoline additive to protect public health and the environment;¹⁹
5. terminating the use of lindane (a type of pesticide) based products to protect public health and the environment;²⁰
6. restricting the marketing and packaging of cigarettes to protect public health;²¹
7. financial and monetary measures to cope with a severe economic crisis;²²
8. introducing taxation measures;²³ and
9. depriving an investor of its mining rights for the protection of the environment.²⁴

Cox, J., Chapter 7: Regulatory Expropriation, in Cox, J. (ed.), Expropriation in Investment Treaty Arbitration, Oxford University Press, 2019, pp. 152-210.

Escarcena, S.L., Chapter 7: The Applicable Standard, in Escarcena S.L. (ed.), Indirect Expropriation in International Law, Edward Elgar, 2014, pp. 184-224.

Henckels, C., Indirect Expropriation and the Right to Regulate: Revisiting Proportionality Analysis and the Standard of Review in Investor-State Arbitration, 15(1) Journal of International Economic Law, 2012, pp. 223-255.

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

OECD, “Indirect Expropriation” and the “Right to Regulate”, in International Investment Law, OECD Working Papers on International Investment, 2004/04, OECD Publishing, 2004.

Pellet, A., Chapter 32: Police Powers or the State’s Right to Regulate, in Kinnear, M., Fischer, G. et al. (eds.), Building International Investment Law: The First 50 Years of ICSID, Kluwer Law International, 2015, pp. 447-462.

Rajput, A., Regulatory Freedom and Indirect Expropriation in Investment Arbitration, Kluwer Law International, 2018.

Titi, A., The Right to Regulate in International Investment Law, Nomos, 2014.

UNCTAD, Expropriation: A Sequel, 2012, pp. 78-109.