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2016 | OriginalPaper | Chapter

7. Determination of Indirect Expropriation and Doctrine of Police Power in International Investment Law

A Critical Appraisal

Authors: Prabhash Ranjan, Pushkar Anand

Published in: Judging the State in International Trade and Investment Law

Publisher: Springer Singapore

Abstract

The chapter aims at examining the role of the doctrine of police powers in judging a claim of indirect expropriation against a host State. It seeks to answer if the ITA tribunals, while judging if a host State’s regulatory measures amount to indirect expropriation or not, have been able to develop and apply the police power doctrine in a uniform manner? The significance of the inquiry lies in understanding suitability of this doctrine as a benchmark to judge a host State’s regulatory measures. The methodology adopted includes the study of ITA cases where this doctrine has been invoked, followed by studying cases where the doctrine of police power was referred by the parties or used for disputes, related to indirect expropriation, by ITA tribunals and to see whether the approach of different arbitral tribunals was similar or different. The study concludes by observing that the actual scope and application of the police power doctrine remains unclear in ITA and thus its use as a benchmark to judge host State’s regulatory action is questionable.

previous chapter Claims and Counterclaims Under Asian Multilateral Investment Treaties

next chapter Role of Indian Judiciary in the Realm of International Trade and Investment Law

Rudolf Dolzer & Christopher Schreuer, Principles of International Investment Law (OUP, Oxford, 2012) 13; J Salacuse, The Treatification of International Investment Law, 13 Law and Business Review of the Americas (2007) 155, 157.

On standard of review in ITA, see, C Henckels, Indirect Expropriation and the Right to Regulate: Revisiting Proportionality Analysis and the Standard of Review in Investor-State Arbitration, 15(1) J Intl Economic L (2012) 223; J Arato, Margin of Appreciation in International Investment Law, 54 Virginia J Intl L (2014) 545; F Ortino, The Investment Treaty Arbitration as Judicial Review, 24 American Rev Intl Arbitration (2013) 437. See generally, Y Shany, Towards a General Margin of Appreciation Doctrine in International Law? 16 European J Intl L (2005) 907.

The authors do not claim to have identified and examined all ITA cases where the respondent invoked the police power doctrine or where the tribunal referred/used this doctrine in cases pertaining to indirect expropriation. The paper has identified leading cases on this issue and examined them.

Arguably, police power, as an expression of State’s sovereignty, applies in connection with breaches of all BIT provisions, not just expropriation – Jorge E Viñuales, Foreign Investment and Environmental International Law (CUP, Cambridge 2013) 331–334. For a different view on this, see, Suez v Argentina, ICSID Case No ARB/03/17, Decision on Liability, 30 July 2010, para 14. However, for the purpose of this chapter, the doctrine of police power is examined only in connection with expropriation of foreign investment.

For a general discussion on BITs, see, Dolzer and Schreuer, supra note 3; Andrew Newcombe & Luis L Paradell, Law and Practice of Investment Treaties (Kluwer Law International, The Hague, 2009); J Salacuse, The Law of Investment Treaties (Oxford University Press, Oxford, 2010) and K Vandevelde, Bilateral Investment Treaties (Oxford University Press, Oxford, 2009).

Dolzer and Schreuer, supra note 3, 13.

Ibid.

This includes 2923 stand-alone investment treaties and 345 investment chapters in FTAs – see UNCTAD, IIA Issue Note No 1/2015 (2015) <http://unctad.org/en/PublicationsLibrary/webdiaepcb2015d1_en.pdf>. Accessed 21 February 2015.

Ibid.

Metalclad Corporation v United Mexican States, ICSID Case No ARB(AF)/97/1, Award (30 August 2000); Methanex Corporation v United States of America, 44 ILM (2005) 1345.

Biwater Gauff Ltd v United Republic of Tanzania, ICSID Case No ARB/05/22 (24 July 2008); Grand River Enterprises Six Nations v United States of America, UNCITRAL, Award (12 January 2011); Chemtura Corporation v Government of Canada, NAFTA Tribunal, Award (2 August 2010); Feldman v Mexico, ICSID Case No ARB(AF)/99/1, Award (16 December 2002); Azurix Corporation v The Argentine Republic, ICSID Case No ARB/01/12, Award (23 June 2006).

CMS Gas Transmission Co v Argentina, ICISD Case No ARB/01/8, Award (12 May 2005); CMS Gas Transmission Company v Argentina, ICSID Case No ARB/01/8, Annulment Proceedings (25 September 2007); Enron Corporation v Argentina, ICSID Case No ARB/01/3, Award (22 May 2007); Enron Corporation v Argentina, ICSID Case No ARB/01/3, Annulment Proceeding (30 July 2010); Sempra Energy International v Argentina, ICSID Case No ARB/02/16, Award (28 September 2007); Sempra Energy International v Argentina, ICSID Case No ARB/02/16, Annulment Proceedings (29 June 2010); LG&E Energy Corporation v Argentina, ICISD Case No ARB/02/1; and Continental Casualty Company v Argentina, ICSID Case No ARB/03/9, Decision on Liability (3 October 2006).

Occidental Exploration and Production Co v Republic of Ecuador, LCIA Case No UN 3467, Final Award (1 July 2004); EnCana Corporation v Ecuador, LCIA Case No UN3481, UNCITRAL (3 February 2006); and Feldman supra note 11.

CF Dugan et al., Investor State Arbitration (Oxford University Press, Oxford/New York, 2008) 429.

Salacuse supra note 5, 294; M Sornarajah, The International Law on Foreign Investment (CUP, Cambridge, 2010) 363; Newcombe and Paradell, supra note 5, 323.

For more on this, see, Newcombe and Paradell, supra note 5, 323.

Feldman supra note 11 [100].

The Feldman tribunal recognized the difficulty by saying that direct expropriation was relatively easy whereas “it is much less clear when the governmental action that interferes with broadly-defined property rights…crosses the line from valid regulation to compensable taking’ para 100. See, U Kriebaum, Regulatory Takings: Balancing the Interests of the Investor and the State, 8 J World Investment and Trade (2007) 717; Andrew Newcombe, The Boundaries of Regulatory Expropriation in International Law, 20 ICSID Review – Foreign Investment L J (2005) 1; Yannaca-Small, Catherine, Indirect Expropriation and Right to Regulate in International Investment Law’, OECD Working Papers on International Investment Number 2004/4 (September 2004); S Spears, The Quest for Policy Space in New Generation of International Investment Agreements, 13 J Intl Economic Law (2010) 1037.

Starrett Housing Corporation v Islamic Republic of Iran, 4 Iran-US CTR (1983) 122, 154; See also, Tippetts, Abbett, McCarthy, Stratton and TAMS-AFFA Consulting Engineers of Iran v Islamic Republic of Iran, 6 Iran-US CTR (1984) 219, 225.

See supra note 12.

See, Metalclad supra note 10; Methanex supra note 6.

Biwater Gauff supra note 11.

Occidental supra note 13; Encana supra note 13.

Telenor Mobile v Hungary, ICSID Case No ARB/04/15 (13 September 2006).

Rudolf Dolzer & Felix Bloch Indirect Expropriations – Conceptual Realignments, 5(3) Intl L Forum (2003)155.

Pope and Talbot v Canada, Ad hoc Tribunal (UNCITRAL), Interim Award (26 June 2000) [96].

PSEG v Turkey, ICSID Case No ARB/02/5, Award (19 January 2007) [278–280]; CMS supra note 12 Decision on Liability [262]; Also see, other Argentina cases that have endorsed the “substantial deprivation” test to determine indirect expropriation – LG&E supra note 14 [194]; Sempra supra note 12 [284–285]; BG Group v Argentina, UNCITRAL (24 December 2007) [258–266]; Enron supra note 12 [245]; Also see, Tecmed v United Mexican States, ICSID Case No ARB(AF)/00/2 (29 May 2003) [115]; CME v Czech Republic, UNCITRAL, Final Award (14 March 2003) [604]. This test was also repeated in Corn Products International v Mexico, ICSID Case No ARB(AF)/04/01, (NAFTA), Decision on Responsibility (15 January 2008) [91] stating that in cases where there is no physical taking of the property or forcible transfer of title, “taking” must be a substantially complete deprivation of the economic use and enjoyment of rights to property. Also see, R Higgins, The Taking of Property by the State: Recent Developments in International Law, 176 Recueil Des Cours (1982) 259, 324.

AWG Group Ltd v The Argentine Republic, UNCITRAL, Decision on Liability (30 July 2010) [134]; Also see, Chemtura supra note 7 [242]; Tokois Tokeles v Ukraine, ICSID Case No ARB/02/18 (26 July 2007) [120].

Total SA v Argentina, ICSID Case No ARB/04/01, Decision on Liability (27 December 2010).

Ibid, [195].

Maurizio Brunetti, Indirect Expropriation in International Law, 5(3) Intl L Forum (2003) 151.

B Mostafa, The Sole Effects Doctrine, Police Powers and Indirect Expropriation under International Law, 15 Australian Intl L J (2008)267, 272–273.

Allen S Weiner, Indirect Expropriation: The Need for a Taxonomy of Legitimate Regulatory Purposes, 5(3) Intl L Forum (2003) 170.

Also see, Newcombe and Paradell, supra note 5, who argue that police power exists as part of customary international law. Also see Henckels supra note 2, 225.

Jorge E Viñuales, Sovereignty in Foreign Investment Law, in, Zachary Douglas et al. (eds) The Foundations of International Investment Law: Bringing Theory into Practice (OUP, Oxford, 2014) 326–328; Viñuales supra note 4, 367.

See, George H Aldrich, What Constitutes a Compensable Taking of Property? The Decisions of the Iran United States Claims Tribunal, 88 American J Intl L (1994) 585, 609; I Brownlie, Principles of Public International Law (OUP, Oxford, 2008) 532; GC Christie, What Constitutes a Taking of Property under International Law? 33 British Yrbk Intl L (1962) 307; J Wagner, International Investment, Expropriation and Environmental Protection, 29 Golden Gate University L Rev (1999) 465, 517–519.

Emanuel Too v Greater Modesto Insurance (1989-III) 23 Iran-US CTR 378.

Ibid, [275].

Sedco Inc v National Iranian Oil Co, 9 Iran-US CTR (1985) 248, 275.

See, Brown v Maryland 25 US (12 Wheat) (1827) 419, 443; Prigg v Pennsylvania, 41 (16 Pet) US (1842) 539, 625; Proprietors of Charles River Bridge v Proprietors of Warren Bridge, 36 U.S. (11 Pet) (1837) 420, 552; License Cases 46 U.S. (5 How) (1847) 504, 583. Also see, Santiago Legarre, The Historical Background of the Police Power, 9(3) J Constitutional L (2007) 745; American Law Institute, Restatement (Second) of the Law of Foreign Relations of the United States, 1965, Section 197 (1) (a); American Law Institute, Restatement (Third) of the Law of Foreign Relations of the United States, 1986, Section 712, commentary, letter (g).

Feldman supra note 11.

Feldman supra note 11 [103].

Methanex supra note 10.

Also see, Tecmed supra note 27 [119].

Methanex supra note 10 Award, Part IV, Ch D, 4 [7].

Saluka Investments BV v The Czech Republic, UNCITRAL, Partial Award (17 March 2006).

Ibid, [255].

Ibid, [262].

Ibid, [276]; See also, Feldman supra note 11, [103, 105, 112].

Chemtura supra note 11.

Ibid, [266].

El Paso v Argentina, ICSID Case No ARB/03/15, Award (31 October 2011).

Ibid, [240].

Kurtz has argued that these tribunals, especially the Methanex tribunal, didn’t take “seriously the task of locating authority in support of” police power rule being part of customary international law – See, Jürgen Kurtz, Building Legitimacy through Interpretation, in Zachary Douglas et al. (eds) The Foundations of International Investment Law: Bringing Theory into Practice (Oxford University Press, Oxford, 2014) 293.

See, Vandevelde supra note 5 (“indirect expropriations usually arise from the exercise of the State’s police power”).

T Weiler, Methanex Corp v USA – Turning the Page on NAFTA Chapter Eleven? 6(6) J World Investment and Trade (2005) 903.

In this regard it has also been argued that it is not right to put all cost of a bonafide regulation on the foreign investor – see, CH Brower, Obstacles and Pathways to Consideration of the Public Interest in Investment Treaty Disputes, 1 Yrbk Intl Investment L and Policy (2009) 347.

Azurix supra note 11 [310].

Pope and Talbot supra note 26 [99]; Also see, Feldman supra note 11 [110].

Vivendi II (Compania de Aguas del Aconquija SA and Vivendi Universal v Argentine Republic), ICSID Case No ARB/97/3, Award (20 August 2007) [7.5.21]; Also see, Santa Elena v Costa Rica, ICSID Case No ARB/96/1, Final Award (17 February 2000) [72]; ADC v Hungary, ICSID Case No ARB/03/16, Award of the Tribunal (2 October 2006). Also see, 4.2 of the chapter.

Brownlie supra note 36, 531–532; Dolzer and Schreuer, supra note 1, 98–100; Also see, AMCO v Indonesia (Merits), ICSID Case No ARB/81/1 (20 November 1984).

Mostafa supra note 32, 273–274; Henckels supra note 2, 225.

Kurtz supra note 54, 292.

Vandevelde supra note 5, 302.

See, AK Hoffmann, Indirect Expropriation, in, A Reinisch (ed) Standards of Investment Protection (Oxford University Press, Oxford, 2008) 151; Vandevelde supra note 5; Fireman Fund Insurance v Mexico, ICSID Case No ARB(AF)/02/1, Award (17 July 2006) [174]; Corn Products supra note 27) [89]; See also, Siemens v Argentina, ICSID Case No. ARB/02/8, Award (6 February 2007) [270], which said that purpose is a criterion to determine whether expropriation is in accordance with the BIT and not for determining whether expropriation has taken place. The arbitral tribunal in Chemtura adopted the same approach as tribunals in Fireman Fund Insurance and Corn Products supra note 27. See, Chemtura supra note 11 [257].

See also, Azurix supra note 11 [311]; A Kulick, Global Public Interest in International Investment Law (Cambridge University Press, Cambridge, 2012); Kurtz supra note 54, at 291–292.

Harvard Draft Convention on the International Responsibility of States for Injuries to Aliens, 1961.

See, Art 10.5.

Christie supra note 36, 331 Wagner supra note 36, 521, Aldrich, supra note 36, 609.

Brownlie supra note 36.

Newcombe and Paradell, supra note 5, 358.

Newcombe and Paradell, supra note 5.

See, Link-Trading v Moldova, UNCITRAL, Final Award (18 April 2002) [64] (As a general matter, fiscal measures only become expropriatory when they are found to be an abusive taking. Abuse arises where it is demonstrated that the State has acted unfairly or inequitably towards the investment, where it has adopted measures that are arbitrary or discriminatory in character or in their manner of implementation, or where the measures taken violate an obligation undertaken by the State in regard to the investment).

See, part 4.2 of the chapter. Also see, the discussion in Vandevelde supra note 5.

Simon Baughen, Expropriation and Environmental Regulation: The Lessons of NAFTA Chapter Eleven, 18 J Env L (2006) 207, 211.

Also see, Richard A Epstien, Takings: Private Property and the Power of Eminent Domain (Harvard University Press, 1985).

Baughen supra note 75.

Santa Elena supra note 60 [71].

Jason Gudofsky, Shedding Light on Article 1110 of the North American Free Trade Agreement (NAFTA) Concerning Expropriation: An Environmental Case Study, 21 North Western J Intl L and Business (2000) 243 (“A major reason behind the confusion surrounding the police power exception has been the failure of either international or municipal law to offer a comprehensive and widely accepted grounding for identifying its nature or scope”); L Yves Fortier & Stephen Drymer Indirect Expropriation in the Law of International Investment: I Know It When I See It, or Caveat Investor, 19 ICSID Review – Foreign Investment L J (2004) 293.

Saluka supra note 46 [263]. Also see, Fortier and Drymer supra note 79; Mostafa supra note 32, 273–274.

Saluka supra note 46 [263].

Saluka supra note 46 [265].

Indian Model BIT 2015 available at http://finmin.nic.in/reports/ModelTextIndia_BIT.pdf. Also see, Article 4 (b) of Annex B of the US Model BIT 2012.

On this point, see, Newcombe and Paradell, supra note 5 (“Although the extent to which regulatory powers may be used to deprive investors of their investments is unclear”).

Saluka supra note 46 [276].

Burlington v Ecuador, ICSID Case No ARB/08/5, Decision on Liability (14 December 2012) [52–62]. These regulatory measures included seizure of the assets of the investors and the subsequent auction thereof as a consequence of the so-called coactiva proceedings to enforce the payment of taxes under different Ecuadorian laws.

Ibid, [472–485].

These set of regulatory measures included intervention and taking physical possession of the oilfield blocks allotted to investors and the subsequent termination (caducidad) of the production sharing contract (PSCs) entered with the investors. See, Burlington supra note 86 [63–66].

Burlington supra note 86 [537].

Ibid, [506].

Ibid, [508] The tribunal found that the context in this case was the Ecuadorian Law under which the intervention and caducidad was not valid as the claimants have all the rights to suspend the operations of the oil blocks allotted to them for the period of 30 days.

See, Ibid, [519–529].

For another convoluted application of the police power doctrine, see, Tza Yup Shum v Peru, ICSID Case No ARB/07/6, Award (7 July 2011) [171–182].

Link-Trading supra note 73 [64].

Viñuales supra note 4, 329.

Chemtura supra note 11 [265].

Ibid, [266].

For discussion on proportionality review in ITA, see, Henckels supra note 2; B Kingsbury & Stephan W Schill, Public Law Concepts to Balance Investors’ Rights with State Regulatory Actions in the Public Interest – The Concept of Proportionality, in, Stephan W Schill (ed) International Investment Law and Comparative Public Law (Oxford University Press, Oxford, 2010); Kriebaum, supra note 18; Kulick supra note 66; AS Sweet, Investor-State Arbitration: Proportionality’s New Frontier, 4 Law and Ethics of Human Rights (2010) 47.

100

EnCana supra note 13.

101

Ibid, [177]; See also, AR Albrecht, The Taxation of Aliens under International Law, 29 British Yrbk Intl L (1952) 145; Ali Lazem & Ilias Bantekas, The Treatment of Tax as Expropriation under International Investor-State Arbitration, Arbitration Intl (2015) doi: 10.1093/arbint/aiv030; Thomas Wälde & Abba Kolo, Investor-State Disputes: The Interface between Treaty-Based International Investment Protection and Fiscal Sovereignty, 35 Intertax (2007) 441.

102

Also see, Occidental supra note 13 [85], where it was said, “Taxation can result in expropriation as can other types of regulatory measures”; Ros Invest Co UK Ltd v The Russian Federation, SCC Case No ARBV079/2005, Final Award (12 September 2010) [629(e)]; Link-Trading supra note 73.

103

BG Group supra note 27 [268].

104

See, Suez supra note 4.

105

For facts of this dispute, see, Ibid, [26–57].

106

Ibid, [134].

107

Ibid, [145].

108

H Xiuli, The Application of the Principle of Proportionality in Tecmed v Mexico, 6 Chinese J Intl L (2007) 635, 636–637; Kingsbury and Schill supra note 99, [85–88]; Kulick supra note 66,

109

Erlend M Leonhardsen, Looking for Legitimacy: Exploring Proportionality Analysis in Investment Treaty Arbitration, 3(1) J Intl Dispute Settlement (2012) 95–136; Jan H Jans, Proportionality Revisited, 27 Legal Issues of Economic Integration (2000) 239, 240–241.

110

Ibid.

111

Kingsbury and Schill supra note 99, 86–87; Jans supra note 109.

112

Kingsbury and Schill supra note 99, 87–88; Jans supra note 109.

113

Kingsbury and Schill supra note 99, 87–88; Kulick supra note 66; Sweet supra note 109.

114

Prabhash Ranjan, Using Public Law Concept of Proportionality to Balance Investment Protection with Regulation in International Investment Law – A Critical Appraisal, 3(3) Cambridge J Intl and Comparative L (2014) 853.

115

Tecmed supra note 27.

116

Mellacher and Others v Austria App no 10522/83, 11011/84, 11070/84) (1989) Series A no169, 24; Pressos Compañía Naviera and Others v Belgium (App no 17849/91) (1995) Series A no 332, 19; James and Others (App no 8793/79) (1986), 19–20.

117

Tecmed supra note 27 [115].

118

Ibid, [122].

119

Henckels supra note 2, 232.

120

Ibid, [233].

121

Ibid, [232]; See also, Tecmed supra note 27 [133–48].

122

LG&E supra note 12 [194, 195].

123

Ibid, [195].

124

Ibid, [198–200].

125

El Paso supra note 52 [243].

126

Ibid, [244–256].

127

Sempra supra note 12 [277].

128

Ibid, [284–285].

129

Enron supra note 8 [239].

130

Ibid, [244–246].

131

EDF v Argentine Republic, ICSID Case No ARB/03/23, Award (11 June 2011).

132

Ibid, [428].

133

Ibid, [1113–1117].

134

ECE v The Czech Republic, UNCITRAL, PCA Case No. 2010-5, Award (19 September 2013).

135

Mamidoil v Albania, ICSID Case No ARB/11/24, Award (30 March 2015).

136

The police powers must be understood as encompassing a State’s “full regulatory dimension” and includes “[…] implementing control regimes through licences, concessions, registers, permits and authorizations; protecting the environment and public health; regulating the conduct of corporations; and others”.

137

Mamidoil supra note 135 [527–529].

138

Ibid, [531].

139

Ibid, [539].

140

Perenco Ecuador Limited v The Republic of Ecuador, ICSID Case No ARB/08/6, Decision on Remaining Issues of Jurisdiction and on Liability (11 August 2015).

141

Ibid, [241, 261, 262, 650–651].

142

Ibid, [672–674, 680–690].

143

Ibid, [650].

144

Ibid, [672].

145

With regard the police power doctrine in international investment, another major issue is whether it is a “defence” or an “exception”. For more on this, see, Viñuales (2014) supra note 35.

Title: Determination of Indirect Expropriation and Doctrine of Police Power in International Investment Law
Authors: Prabhash Ranjan
Pushkar Anand
Publisher: Springer Singapore
Book: Judging the State in International Trade and Investment Law
Print ISBN: 978-981-10-2358-3

Electronic ISBN: 978-981-10-2360-6

Copyright Year: 2016
DOI: https://doi.org/10.1007/978-981-10-2360-6_7

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7. Determination of Indirect Expropriation and Doctrine of Police Power in International Investment Law

A Critical Appraisal

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