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Docteur Inga Martinkute

Lecturer - Vilnius University

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Right to Regulate in the Public Interest: Treaty Practice

I. Definition

1.

The right to regulate in the public interest is one of the customary rights of a sovereign State.1 See further Police Powers. Right to regulate, prescriptive jurisdiction, right to legislate, regulatory freedom, regulatory space or police powers are the terms often used interchangeably.2 In the investment arbitration context, the right to regulate in the public interest is understood as a State’s power and right to regulate certain activities affecting the public interest, which may originate in a duty to regulate such activities.3 Such regulation in some cases may interfere with individual rights. The limitations on a specific State’s authority to regulate private investments in a way that affects investors’ rights depend significantly on the international and domestic obligations of that State.

II. The right to regulate in early BITs

2.

Early bilateral investment treaties (BITs) concluded between 1960 and 2000 usually did not mention a State’s right to regulate explicitly. For example, in the German model BIT of 1991, like in many other model BITs of the era, the right to regulate could only be implied indirectly from the expropriation provision.4 The old BITs had provisions on the protection of investment, but they did not have any language on the State’s right to regulate.5

3.

Probably the hope was that arbitral tribunals would be more successful, than negotiating States, in drawing a line between investors’ rights and the public interests protected by regulations. Various approaches have been developed by arbitral tribunals to distinguish between a compensable indirect expropriation and non-compensable regulation.6 See further Sole Effect Doctrine, Right To Regulate In The Context Of Expropriation, Police Powers.

4.

However, the sole focus of the early BITs on the investment protections and their silence on how these protections interacted with various areas of public interest might have created an impression of the absolute rights and protections accorded to the investments that were not limited by other considerations. The arbitral tribunals hearing investment disputes frequently found that they lack jurisdiction or facts to address other complaints related to public interest regulation.7

5.

Due to the fragmentation of the field and relatively broad interpretation of indirect expropriation, among other reasons, the international investment law became susceptible to the criticism that it prioritizes investment protection over other public interests protected by the democratic legislative process.8

6.

This legal framework for the protection of foreign investment was in contrast to the typical domestic legal framework where the right to manage and dispose of investment in the most profitable way may be limited by the democratic legislative process with public priorities in mind, such as environment and historical heritage protection, health and safety, etc.9

7.

Some authors have argued that the residual power of a State to legislate for the public interest remains sufficient despite the silence of the early BITs on how to resolve a conflict between investment protections and a State’s regulatory power.10

8.

The tide towards an affirmative protection of the State regulatory space began to change with the 2004 US Model BIT’s approach to indirect expropriation, which reflected the US constitutional law jurisprudence on regulatory takings.11 The 2012 US Model BIT continued that trend.12 In their assessment of indirect expropriation claims, which are at the center of the clash between investment protection and a State’s regulatory authority, the tribunals are called to conduct a “case-by-case, fact-based inquiry that considers, among other factors”:

(i) the economic impact of the government action, although the fact that an action or series of actions by a Party has an adverse effect on the economic value of an investment, standing alone, does not establish that an indirect expropriation has occurred;

(ii) the extent to which the government action interferes with distinct, reasonable investment-backed expectations; and

(iii) the character of the government action.

(b) Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.13

9.

The investment arbitration practice also began to acknowledge the right to regulate by articulating expressly the features of legitimate regulation:

as a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alia, a foreign investor or investment is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation.14 

III. Recent treaty practice

10.

According to the data from the UNCTAD, nearly all newly drafted or revised investment treaties limit the scope of treaty protections, provide exceptions from the investment protection, narrow down the fair and equitable treatment obligation or omit indirect expropriation in order to balance investment protection with a State’s right to regulate in favour of public interests.15 The right to regulate continues to be one of the most important issues on the agenda of the UNCTAD and its Working Group III on the reform of the Investor-State Dispute Settlement system.16

11.

International instruments propose a variety of approaches to achieve a better balance between the right to regulate for a public interest and investment protection. The approaches range from including a reference to the right to regulate in the preamble, to explicitly carving out regulatory space in the context of various investment guarantees.

12.

The first and probably the most abstract way to introduce the right to regulate into the equation is to mention it in the preambles17 or elsewhere in the text of international investment agreements, without necessarily providing further guidance on the content of the right. For instance, the EU-Vietnam Investment Protection Agreement reaffirms the State’s right to regulate “to achieve legitimate policy objectives, such as the protection of public health, safety, environment or public morals, social or consumer protection, or promotion and protection of cultural diversity.”18 Just acknowledging the right to regulate in treaty texts allows arbitral tribunals to balance investment protection with the public interest that is behind the general non-discriminatory legislations.19

13.

The second approach to expand regulatory space for a State is through the limitation of the earlier investment protection standards or excluding some areas of public interest from the scrutiny of investment arbitration altogether.20 For example, the EU-Singapore Investment Protection Agreement recognizes that regulation for legitimate public policy objectives that negatively affect investments per se will not be treated as a breach of the agreement.21 To that end the CETA also limits the scope of fair and equitable treatment and limits legitimate expectations to situations where a specific promise or representation was made by the State.22

14.

There is a difficulty associated with the inclusion of a specific list of legitimate public welfare objectives in the international investment agreement. Such a list of public interests may be interpreted exhaustively, thus requiring compensation for any regulatory changes outside of such a list. The tribunal in Bear Creek adopted exactly such interpretation in its reading of the regulatory exceptions permitted under the Canada-Peru FTA.23 This difficulty illustrates a conceptual question pertaining to the whole field of international investment law: whether regulatory powers are exceptions to the investment protection or vice versa investment protection is an exception to the customary and residual State’s right to regulate in the public interest? Different legal traditions, societies and states will be approaching this question from very different perspectives depending on the prevailing political economy and historical circumstances.

15.

The third method, to expand regulatory space in investment agreements are variations of the US model BIT approach providing a separate annex explaining what constitutes indirect expropriation and what does not.24 Other treaty standards, however, are not explicitly covered by this guidance on interpretation. Furthermore, different instruments attach safeguards of varying degrees requiring public regulation: to be bona fide, be “designed and applied to protect or enhance legitimate public welfare objectives,” or be proportional and reasonable.25

16.

International investment agreements usually employ a combination of the abovementioned approaches. The United States–Mexico–Canada Agreement (USMCA) (2018) provides an example of a mixed approach. It acknowledges in the preamble the State’s right to regulate in different areas of public interest. Article 14.16 of the USMCA provides a self-judging clause that investment protection cannot be construed as preventing a State from taking regulatory measures that a State considers appropriate. The USMCA also contains Annex 14-B that is similar to the US earlier model BITs, providing that non-discriminatory regulatory actions do not constitute indirect expropriations, except in rare circumstances. The USMCA further expands regulatory space by excluding permits, licences and similar administrative acts that could be affected by regulatory measures from the definition of investment.26 The transfers related to covered investment also can be delayed and prevented due to a number of regulatory measures.27

17.

A balance between private and public interests in the context of investment protection and regulation is often hard to reach, considering a rather dynamic nature of the public interest. The societies and the list of public welfare objectives continuously evolve. At the beginning of the twentieth century, the list included health and safety.28 Nowadays, the list includes preservation of the “environment or public morals, social or consumer protection or the promotion and protection of cultural diversity” and probably other public interests, such as historical heritage, financial stability, etc.29 See also Public Interest, Section II.

Bibliography

Douglas, Z., The International Law of Investment Claims, Cambridge University Press, 2009.

Kulick, A., Global Public Interest in International Investment Law, Cambridge University Press, 2012. 

Titi, C., The Right to Regulate in International Investment Law, Vol. 10, Nomos, 2014

Mouyal, L.W., International Investment Law and the Right to Regulate: A Human Rights Perspective, Routledge, 2016.

Sornarajah, M., The International Law on Foreign Investment, 4th ed., Cambridge University Press, 2017.

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

Vadi, V., Proportionality, Reasonableness and Standards of Review in International Investment Law and Arbitration, Edward Elgar Publishing, 2018.

Been, V. and Beauvais, J.C., The Global Fifth Amendment? NAFTA’s Investment Protections and the Misguided Quest for an International “Regulatory Takings” Doctrine, New York University Law Review, 2003

Ratner, S.R., Regulatory Takings in Institutional Context: Beyond the Fear of Fragmented International Law, The American Journal of International Law, Vol. 102, No. 3, 2008.

Parvanov, P.P. and Kantor, M., Comparing U.S. law and recent U.S. investment agreements: Much more similar than you might expect, Yearbook on International Investment Law and Policy 2010-2022, 2011

Titi, C., The Right to Regulate, in Mbengue, M.M. and Schacherer, S. (eds.), Foreign Investment Under the Comprehensive Economic and Trade Agreement (CETA), Studies in European Economic Law and Regulation, Vol. 15. Springer, Cham, 2019.

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