Indirect expropriation and the “police powers” problem of international investment arbitration: Considering the merits of a “mitigated” approach

Abstract

A host state has the sovereign right to expropriate property, including that belonging to aliens, granted that such expropriation is subject to the complementary customary international law duty to pay the expropriated alien compensation. Through the mechanism of investment treaties, capital-exporting states have sought to regulate this process of expropriation and codify the duty to compensate in respect of their citizens’ investments in foreign lands. When expropriation occurs, compensation is therefore required. However, where regulation is pursued in the public interest, host states are said to possess the right under their so-called “police powers” to regulate without the need to tender compensation even if such regulation has an expropriatory effect. The police powers doctrine, which has come to be accepted by various international investment tribunals, has proven controversial, as it has been used to exempt states from their international law duty to compensate investors for such regulatory expropriations. In its current formulation, the doctrine places the burden of the public interest wholly upon the investor without the state’s needing to shoulder the same. Several authors have proposed frameworks that attempt to balance the application of the doctrine. This article examines one such framework – the so-called mitigated police powers – and explores its ability to address the problems created by strict applications of the police powers doctrine. The article concludes that the mitigated police powers framework provides a reasonable, fair and arguably defensible basis for adjudicating the competing interests involved.